10-Q 1 d354876d10q.htm FORM 10-Q 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, 2012.

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.)

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   ¨  (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 July 18, 2012 was 87,884,976

 


Table of Contents

INDEX

 

 

          Page No.  

PART I – FINANCIAL INFORMATION

  

Item 1.

  

Financial Statements

     1   

Item 2.

  

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

     48   

Item 3.

  

Quantitative and Qualitative Disclosures about Market Risk

     78   

Item 4.

  

Controls and Procedures

     78   

PART II – OTHER INFORMATION

  

Item 1.

  

Legal Proceedings

     79   

Item 1A.

  

Risk Factors

     79   

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

     79   

Item 3.

  

Defaults Upon Senior Securities

     79   

Item 4.

  

Mine Safety Disclosures

     79   

Item 5.

  

Other Information

     79   

Item 6.

  

Exhibits

     80   

SIGNATURES

     81   

EXHIBIT INDEX

     82   

 

i


Table of Contents

PART I. – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

(In thousands, except share data)

   June 30,
2012
    December 31,
2011
 
     (Unaudited)        

Assets:

    

Cash and due from banks

   $ 197,229      $ 195,957   

Interest-bearing deposits

     73,598        96,062   

Securities available for sale, at fair value

     3,153,580        2,874,764   

Securities held-to-maturity (fair value of $3,234,656 and $3,130,546)

     3,076,226        2,973,727   

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

     142,595        143,874   

Loans held for sale

     89,228        57,391   

Loans and leases

     11,539,997        11,225,404   

Allowance for loan and lease losses

     (198,757     (233,487
  

 

 

   

 

 

 

Loans and leases, net

     11,341,240        10,991,917   

Deferred tax asset, net

     79,011        105,665   

Premises and equipment, net

     137,420        147,379   

Goodwill

     529,887        529,887   

Other intangible assets, net

     12,896        15,690   

Cash surrender value of life insurance policies

     312,117        307,039   

Prepaid FDIC premiums

     27,062        37,946   

Accrued interest receivable and other assets

     257,660        237,042   
  

 

 

   

 

 

 

Total assets

   $ 19,429,749      $ 18,714,340   
  

 

 

   

 

 

 

Liabilities and Equity:

    

Deposits:

    

Non-interest-bearing

   $ 2,611,297      $ 2,473,693   

Interest-bearing

     11,362,630        11,182,332   
  

 

 

   

 

 

 

Total deposits

     13,973,927        13,656,025   

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

     1,203,378        1,164,706   

Federal Home Loan Bank advances

     1,529,102        1,252,609   

Long-term debt

     472,928        552,589   

Accrued expenses and other liabilities

     318,866        242,637   
  

 

 

   

 

 

 

Total liabilities

     17,498,201        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 - 90,721,171 and 90,709,350 shares

     907        907   

Paid-in capital

     1,146,292        1,145,346   

Retained earnings

     928,523        865,427   

Less: Treasury stock, at cost (3,375,355 and 3,493,915 shares)

     (129,235     (134,641

Accumulated other comprehensive loss, net

     (43,878     (60,204
  

 

 

   

 

 

 

Total equity

     1,931,548        1,845,774   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 19,429,749      $ 18,714,340   
  

 

 

   

 

 

 

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 (Unaudited)

 

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

(In thousands, except per share data)

   2012     2011     2012     2011  

Interest Income:

        

Interest and fees on loans and leases

   $ 121,379      $ 122,395      $ 242,120      $ 244,338   

Taxable interest and dividends on securities

     45,662        46,258        91,550        92,751   

Non-taxable interest on securities

     6,935        7,269        13,915        14,620   

Loans held for sale

     657        177        1,155        599   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     174,633        176,099        348,740        352,308   
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest Expense:

        

Deposits

     15,102        21,841        31,158        44,610   

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

     5,360        3,777        9,794        7,339   

Federal Home Loan Bank advances

     4,426        3,295        8,990        6,650   

Long-term debt

     5,367        6,273        11,052        12,635   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     30,255        35,186        60,994        71,234   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     144,378        140,913        287,746        281,074   

Provision for loan and lease losses

     5,000        5,000        9,000        15,000   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan and lease losses

     139,378        135,913        278,746        266,074   
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-interest Income:

        

Deposit service fees

     23,719        26,095        47,082        51,435   

Loan related fees

     3,565        5,590        8,434        10,033   

Wealth and investment services

     7,249        7,454        14,470        14,176   

Mortgage banking activities

     3,624        1,234        8,007        2,487   

Increase in cash surrender value of life insurance policies

     2,561        2,576        5,078        5,109   

Net loss on trading securities

     —          —          —          (1,799

Net gain on sale of investment securities

     2,537        1,647        2,537        3,823   

Other income

     4,098        1,593        5,731        4,841   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest income

     47,353        46,189        91,339        90,105   
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-interest Expense:

        

Compensation and benefits

     63,587        65,592        132,206        132,604   

Occupancy

     12,578        12,856        25,460        27,591   

Technology and equipment

     16,021        15,134        31,603        30,526   

Intangible assets amortization

     1,397        1,397        2,794        2,794   

Marketing

     5,094        4,252        9,194        9,772   

Professional and outside services

     3,387        2,813        6,079        5,243   

Deposit insurance

     5,723        5,918        11,432        11,699   

Litigation

     —          194        —          486   

Other expense

     19,392        23,905        36,224        40,471   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest expense

     127,179        132,061        254,992        261,186   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income tax expense

     59,552        50,041        115,093        94,993   

Income tax expense

     18,312        15,857        34,915        28,225   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     41,240        34,184        80,178        66,768   

Income from discontinued operations, net of tax

     —          —          —          1,995   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     41,240        34,184        80,178        68,763   

Less: Net loss attributable to non controlling interests

     —          —          —          (1
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Webster Financial Corporation

     41,240        34,184        80,178        68,764   

Preferred stock dividends

     (615     (831     (1,230     (1,662
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to common shareholders

   $ 40,625      $ 33,353      $ 78,948      $ 67,102   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per common share:

        

Basic

        

Net income from continuing operations

   $ 0.46      $ 0.38      $ 0.90      $ 0.75   

Net income available to common shareholders

     0.46        0.38        0.90        0.77   

Diluted

        

Net income from continuing operations

     0.44        0.36        0.86        0.70   

Net income available to common shareholders

     0.44        0.36        0.86        0.72   

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

 

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

(In thousands, except per share data)

   2012     2011     2012      2011  

Net income

   $ 41,240      $ 34,184      $ 80,178       $ 68,763   

Other comprehensive income, net of taxes:

         

Securities:

         

Net change in unrealized gain on securities available for sale

     2,104        6,124        13,723         10,432   

Net change in non-credit related other-than-temporary impairment

     —          —          —           746   

Amortization of unrealized loss on securities transferred to held to maturity

     39        22        78         50   

Change in unrealized (loss) gain on derivative instruments

     (553     (4,581     488         (2,716

Defined benefit pension plans:

         

Amortization of net loss

     966        405        2,014         811   

Amortization of prior service cost

     11        12        23         24   

Current year actuarial gain

     —          —          —           365   
  

 

 

   

 

 

   

 

 

    

 

 

 

Other comprehensive income, net of taxes

     2,567        1,982        16,326         9,712   
  

 

 

   

 

 

   

 

 

    

 

 

 

Comprehensive income, net of taxes

     43,807        36,166        96,504         78,475   

Less: comprehensive loss attributable to non controlling interests

     —          —          —           (1
  

 

 

   

 

 

   

 

 

    

 

 

 

Comprehensive income attributable to Webster Financial Corporation

   $ 43,807      $ 36,166      $ 96,504       $ 78,476   
  

 

 

   

 

 

   

 

 

    

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited)

 

     Six months ended June 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

     —           —           —          80,178        —          —          —           80,178   

Other comprehensive income

     —           —           —          —          —          16,326        —           16,326   

Dividends declared on common stock of $.15 per share

     —           —           —          (13,148     —          —          —           (13,148

Dividends declared on Series A preferred stock $42.50 per share

     —           —           —          (1,230     —          —          —           (1,230

Common stock warrants repurchased

     —           —           (337     —          —          —          —           (337

Exercise of stock options

     —           —           (858     —          1,280        —          —           422   

Net shares acquired related to employee share-based compensation plans

     —           —           —          —          (1,677     —          —           (1,677

Stock-based compensation expense

     —           —           1,891        (2,704     5,803        —          —           4,990   

Issuance of common stock

     —           —           250        —          —          —          —           250   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance, June 30, 2012

   $ 28,939       $ 907       $ 1,146,292      $ 928,523      $ (129,235   $ (43,878   $ —         $ 1,931,548   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

     Six months ended June 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)

     —           —           —          68,764        —          —          (1     68,763   

Other comprehensive income

     —           —           —          —          —          9,712        —          9,712   

Dividends declared on common stock of $.06 per share

     —           —           —          (5,243     —          —          —          (5,243

Dividends declared on Series A preferred stock $42.50 per share

     —           —           —          (1,230     —          —          —          (1,230

Subsidiary preferred stock dividends $0.43 per share

     —           —           —          (432     —          —          —          (432

Disolution of joint venture

     —           —           —          —          —          —          (66     (66

Common stock warrants repurchased

     —           —           (14,674     —          —          —          —          (14,674

Exercise of stock options

     —           —           (206       313        —          —          107   

Net shares acquired related to employee share-based compensation plans

     —           —           —          —          (537     —          —          (537

Stock-based compensation expense

     —           —           470        (3,233     5,711        —          —          2,948   

Issuance of common stock

     —           —           117        (313     700        —          —          504   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2011

   $ 28,939       $ 907       $ 1,146,397      $ 800,183      $ (143,275   $ (3,997   $ 9,577      $ 1,838,731   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

4


Table of Contents

WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 

     Six months ended June 30,  

(In thousands)

   2012     2011  

Operating Activities:

    

Net income

   $ 80,178      $ 68,763   

Income from discontinued operations, net of tax

     —          1,995   
  

 

 

   

 

 

 

Income from continuing operations

     80,178        66,768   

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

    

Provision for loan and lease losses

     9,000        15,000   

Deferred tax expense

     18,341        11,341   

Depreciation and amortization

     51,768        39,609   

Stock-based compensation

     4,990        2,948   

Excess tax benefits from stock-based compensation

     (1,076     (35

(Gain) loss on sale and write-down of foreclosed and repossessed assets

     (1,484     5,552   

Loss on sale of premises and equipment

     173        129   

Loss (gain) on fair value adjustment of private equities

     163        (1,397

(Gain) loss on fair value adjustment of derivative instruments

     (217     837   

Net gain on the sale of investment securities

     (2,537     (3,823

Net decrease in trading securities

     —          11,554   

Increase in cash surrender value of life insurance policies

     (5,078     (5,109

Net (increase) decrease in loans held for sale

     (31,837     30,574   

Net decrease in accrued interest receivable and other assets

     (16,503     10,405   

Net decrease in accrued expenses and other liabilities

     (10,281     (4,502
  

 

 

   

 

 

 

Net cash provided by operating activities

     95,600        179,851   
  

 

 

   

 

 

 

Investing Activities:

    

Net decrease (increase) in interest-bearing deposits

     22,464        (5,052

Purchases of available for sale securities

     (634,113     (285,336

Proceeds from maturities and principal payments of available for sale securities

     383,737        289,150   

Proceeds from sales of available for sale securities

     45,855        278,757   

Purchases of held-to-maturity securities

     (459,212     (337,164

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

     366,692        280,205   

Sale of Federal Home Loan Bank and Federal Reserve Board stock

     1,279        —     

Net increase in loans

     (364,202     (62,363

Proceeds from the sale of foreclosed properties and repossessed assets

     5,733        7,789   

Proceeds from the sale of premises and equipment

     887        3,901   

Purchases of premises and equipment

     (7,678     (13,159
  

 

 

   

 

 

 

Net cash (used for) provided by investing activities

     (638,558     156,728   
  

 

 

   

 

 

 

Financing Activities:

    

Net increase in deposits

     317,902        107,742   

Proceeds from Federal Home Loan Bank advances

     1,826,265        45,934   

Repayments of Federal Home Loan Bank advances

     (1,549,064     (410,456

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

     38,672        (11,612

Repayment of long-term debt

     (74,901     (12,380

Cash dividends paid to common shareholders

     (13,148     (5,243

Cash dividends paid to preferred shareholders of consolidated subsidiary

     —          (432

Cash dividends paid to preferred shareholders

     (1,230     (1,230

Exercise of stock options

     422        107   

Excess tax benefits from stock-based compensation

     1,076        35   

Issuance of common stock

     250        504   

Common stock repurchased

     (1,677     (537

Common stock warrants repurchased

     (337     (14,674
  

 

 

   

 

 

 

Net cash provided by (used for) financing activities

     544,230        (302,242
  

 

 

   

 

 

 

Cash Flows from Discontinued Operations:

    

Operating activities

     —          1,995   
  

 

 

   

 

 

 

Net cash provided by discontinued operations

     —          1,995   
  

 

 

   

 

 

 

Net increase in cash and due from banks

     1,272        36,332   

Cash and due from banks at beginning of period

     195,957        159,849   
  

 

 

   

 

 

 

Cash and due from banks at end of period

   $ 197,229      $ 196,181   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Interest paid

   $ 64,831      $ 75,604   

Income taxes paid

     9,793        12,341   

Noncash investing and financing activities:

    

Transfer of loans and leases, net to foreclosed properties and repossessed assets

   $ 3,656      $ 6,973   

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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NOTE 1: Summary of Significant Accounting Policies

Nature of Operations. Webster Financial Corporation (together, with its consolidated subsidiaries, “Webster”, the “Company”, “our company”, “we” or “us”), 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. Webster Financial Corporation’s principal asset at June 30, 2012 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 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 (“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 10 – 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, status of contingencies, valuation of investments for other-than-temporary impairment (“OTTI”), and the goodwill valuation are particularly subject to change.

 

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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 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 June 30, 2011 and the Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2011.

The effects of recording this immaterial correction are as follows:

 

(In thousands, except per share data)

   At or for the three months ended
June 30, 2011
     At or for the six months ended
June 30, 2011
 
     As Filed      As Revised      As Filed      As Revised  

Retained earnings

   $ 804,109       $ 800,183       $ 804,109       $ 800,183   

Interest and fees on loans and leases

     121,599         122,395         242,830         244,338   

Net interest income

     140,117         140,913         279,566         281,074   

Loan related fees

     6,419         5,590         11,248         10,033   

Total non-interest income

     47,018         46,189         91,320         90,105   

Net income before taxes

     50,074         50,041         94,700         94,993   

Net income after taxes

     34,207         34,184         66,507         66,768   

Earnings per common share:

           

Basic

     0.38         0.38         0.76         0.77   

Diluted

     0.36         0.36         0.72         0.72   

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 our 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 respective loss is recorded as a loss 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 Statement 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.

 

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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 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 for other loans primarily 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.

 

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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. 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 handled by the Company’s Restructuring and Recovery group for resolution, which may result in foreclosure.

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.

Accounting Standards Updates

ASU No. 2011-11, “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities.” In December 2011, the FASB issued ASU No. 2011-11 which expands 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 the Company’s financial statements.

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 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 until FASB can adequately evaluate the costs and benefits of this presentation requirement. The Company has deferred this presentation, as permitted, and continues to evaluate the impact of the adoption of this accounting standards update on the Company’s financial statements.

 

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NOTE 2: Investment Securities

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

 

     At June 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

     1,617,938         28,974         (569     1,646,343         —           —          1,646,343   

Corporate debt

     112,427         2,165         (30     114,562         —           —          114,562   

Pooled trust preferred securities (a)

     51,738         —           (22,916     28,822         —           —          28,822   

Single issuer trust preferred securities

     66,331         —           (10,822     55,509         —           —          55,509   

Equity securities-financial institutions (b)

     6,232         1,856         (20     8,068         —           —          8,068   

Mortgage-backed securities (“MBS”) - GSE

     906,851         24,054         (820     930,085         —           —          930,085   

Commercial mortgage-backed securities (“CMBS”)

     345,183         31,385         (6,577     369,991         —           —          369,991   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total available for sale

   $ 3,106,900       $ 88,434       $ (41,754   $ 3,153,580       $ —         $ —        $ 3,153,580   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Held-to-maturity:

                  

Municipal bonds and notes

   $ 622,703       $ —         $ —        $ 622,703       $ 33,636       $ (148   $ 656,191   

Agency CMOs - GSE

     631,162         —           —          631,162         21,056         —          652,218   

MBS - GSE

     1,638,235         —           —          1,638,235         93,544         (1,565     1,730,214   

CMBS

     165,146         —           —          165,146         11,377         —          176,523   

Private Label MBS

     18,980         —           —          18,980         530         —          19,510   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total held-to-maturity

   $ 3,076,226       $ —         $ —        $ 3,076,226       $ 160,143       $ (1,713   $ 3,234,656   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total investment securities

   $ 6,183,126       $ 88,434       $ (41,754   $ 6,229,806       $ 160,143       $ (1,713   $ 6,388,236   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

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

 

     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.

 

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The amortized cost and fair value of debt securities at June 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

   $ 15,425       $ 15,323       $ 28,898       $ 28,902   

Due after one year through five years

     5,169         5,274         11,677         12,316   

Due after five through ten years

     115,236         117,279         246,574         261,581   

Due after ten years

     2,964,838         3,007,636         2,789,077         2,931,857   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt securities

   $ 3,100,668       $ 3,145,512       $ 3,076,226       $ 3,234,656   
  

 

 

    

 

 

    

 

 

    

 

 

 

For the purposes of the maturity schedule, mortgage-backed securities, which are not due at a single maturity date, have been allocated over maturity groupings based on the expected maturity of the underlying collateral. 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. At June 30, 2012, the Company had $607.9 million carrying value of callable securities in its investment portfolio.

The following tables provide information on the gross unrealized losses and fair value of the Company’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:

 

     June 30, 2012  
     Less Than Twelve Months     Twelve Months or Longer     Total  

(Dollars in thousands)

   Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
    # of
Holdings
     Fair
Value
     Unrealized
Losses
 

Available for Sale:

                  

Agency CMOs - GSE

   $ 150,825       $ (569   $ —         $ —          5       $ 150,825       $ (569

Corporate debt

     24,788         (30     —           —          3         24,788         (30

Pooled trust preferred securities

     —           —          28,822         (22,916     8         28,822         (22,916

Single issuer trust preferred securities

     18,732         (611     36,776         (10,211     11         55,508         (10,822

Equity securities-financial institutions

     129         (20     —           —          1         129         (20

MBS - GSE

     258,044         (820     —           —          20         258,044         (820

CMBS

     —           —          17,755         (6,577     1         17,755         (6,577
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total available for sale

   $ 452,518       $ (2,050   $ 83,353       $ (39,704     49       $ 535,871       $ (41,754
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Held-to-maturity:

                  

Municipal bonds and notes

   $ 10,797       $ (72   $ 4,298       $ (76     27       $ 15,095       $ (148

MBS - GSE

     143,908         (1,565     —           —          11         143,908         (1,565
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total held-to-maturity

   $ 154,705       $ (1,637   $ 4,298       $ (76     38       $ 159,003       $ (1,713
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total investment securities

   $ 607,223       $ (3,687   $ 87,651       $ (39,780     87       $ 694,874       $ (43,467
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

     December 31, 2011  
     Less Than Twelve Months     Twelve Months or Longer     Total  

(Dollars in thousands)

   Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
    # of
Holdings
     Fair
Value
     Unrealized
Losses
 

Available for Sale:

                  

Agency CMOs - GSE

   $ 405,318       $ (3,341   $ —         $ —          11       $ 405,318       $ (3,341

Pooled trust preferred securities

     6,526         (8,178     22,472         (15,430     8         28,998         (23,608

Single issuer trust preferred securities

     6,711         (1,521     31,503         (11,292     9         38,214         (12,813

Equity securities-financial institutions

     124         (24     —           —          1         124         (24

MBS - GSE

     90,418         (158     —           —          3         90,418         (158

CMBS

     73,190         (1,924     14,957         (9,318     5         88,147         (11,242
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total available for sale

   $ 582,287       $ (15,146   $ 68,932       $ (36,040     37       $ 651,219       $ (51,186
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Held-to-maturity:

                  

Municipal bonds and notes

   $ 5,405       $ (66   $ 6,117       $ (108     21       $ 11,522       $ (174
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total held-to-maturity

   $ 5,405       $ (66   $ 6,117       $ (108     21       $ 11,522       $ (174
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total investment securities

   $ 587,692       $ (15,212   $ 75,049       $ (36,148     58       $ 662,741       $ (51,360
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

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Securities with a carrying value totaling $2.4 billion at June 30, 2012 and December 31, 2011 were pledged to secure public funds, trust deposits, repurchase agreements and for other purposes, as required or permitted by law. At June 30, 2012 and December 31, 2011, the Company had no investments in obligations of individual states, counties, or municipalities which exceed 10% of consolidated shareholders’ equity.

The following discussion summarizes, by investment security type, the basis for evaluating if the applicable investment securities within the Company’s available for sale portfolio were other-than-temporarily impaired at June 30, 2012. Unless otherwise noted for an investment security type, management does not intend to sell these investments and has determined, based upon available evidence, that it is more likely than not that the Company will not be required to sell the security before the recovery of its amortized cost.

Trust Preferred Securities - Pooled Issuers – At June 30, 2012, the fair value of the pooled trust preferred securities was $28.8 million, a decrease of $0.2 million from the fair value of $29.0 million at December 31, 2011. The slight decrease in fair value is due to the net impact of small improvements in credit and liquidity spreads and principal paydowns. The gross unrealized loss of $22.9 million at June 30, 2012 is attributable to wider credit spreads that management incorporated in order to reflect the inactive and illiquid nature of the trust preferred securities market at this time as well as changes in the underlying credit profile of issuers in each pool over the holding period.

For the three and six months ended June 30, 2012, the Company recognized no credit related OTTI for these securities. As a result, there was no additional non credit related OTTI recognized in OCI during the three and six months ended June 30, 2012. The pooled trust preferred portfolio consists of collateralized debt obligations (“CDOs”) containing predominantly bank and insurance company collateral that are investment grade and below investment grade. The Company employs an internal CDO model for projection of future cash flows and discounting those cash flows to a net present value. An internal model is used to value the securities due to the continued inactive market and illiquid nature of pooled trust preferred securities in the entire capital structure. Each underlying issuer in the pools is rated internally using the latest financial data on each institution, and future deferrals, defaults and losses are then estimated on the basis of continued stress in the financial markets. Further, all current and projected deferrals are not assumed to cure, and all current and projected defaults are assumed to have no recovery value. The resulting net cash flows are then discounted at current market levels for similar types of products that are actively trading. To determine potential OTTI due to credit losses, management compares the amortized cost to the present value of expected cash flows adjusted for deferrals and defaults using the discount margin at the time of purchase. Other factors considered include an analysis of excess subordination and temporary interest shortfall coverage. Based on the valuation analysis as of June 30, 2012, management expects to fully recover the remaining amortized cost of those securities not deemed to be other than temporarily impaired. However, additional interest deferrals, defaults, or ratings changes could result in future OTTI charges.

The following table summarizes pertinent information that was considered by management in evaluating Trust Preferred Securities – Pooled Issuers for OTTI in the current reporting period:

 

Trust Preferred Securities - Pooled Issuers

 

Deal Name

   Class    Amortized
Cost (a)
     Gross
Unrealized
Losses
    Fair
Value
     Lowest Credit
Ratings as of
June 30,

2012 (b)
   Total
Other-Than-
Temporary
Impairment thru
June 30,

2012
    % of
Performing
Bank/
Insurance
Issuers
     Current
Deferrals/
Defaults
(As a % of
Original
Collateral)
 
(Dollars in thousands)                                                  

Security H

   B    $ 3,486       $ (1,789   $ 1,697       B    $ (352     96.6         4.6   

Security I

   B      4,467         (2,289     2,178       CCC      (365     88.2         16.8   

Security J

   B      5,292         (2,906     2,386       CCC      (806     90.6         11.6   

Security K

   A      7,382         (3,649     3,733       CCC      (2,040     69.9         30.9   

Security L

   B      8,724         (4,583     4,141       CCC      (867     92.0         11.6   

Security M

   A      7,268         (4,571     2,697       D      (4,926     54.9         37.8   

Security N

   A      15,119         (3,129     11,990       A      (1,104     90.6         11.6   
     

 

 

    

 

 

   

 

 

       

 

 

      
      $ 51,738       $ (22,916   $ 28,822          $ (10,460     
     

 

 

    

 

 

   

 

 

       

 

 

      

 

(a) For the securities previously deemed impaired, the amortized cost is reflective of previous OTTI recognized in earnings.
(b) The Company utilized credit ratings provided by Moody’s, S&P and Fitch in its evaluation of issuers.

 

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Table of Contents

Trust Preferred Securities - Single Issuers – At June 30 2012, the fair value of the single issuer trust preferred portfolio was $55.5 million, an increase of $17.3 million from the fair value of $38.2 million at December 31, 2011, primarily due to a $15.1 million security addition. The gross unrealized loss of $10.8 million at June 30, 2012 is primarily attributable to changes in interest rates and wider credit spreads over the holding period of these securities. The single issuer portfolio consists of six investments issued by four large capitalization money center financial institutions, which continue to service the debt and showed significantly improved capital levels in recent years and remain well above current regulatory capital standards. Based on the review of the qualitative and quantitative factors presented above, the Company does not consider these securities to be other-than-temporarily impaired at June 30, 2012.

The following table summarizes pertinent information that was considered by management in determining if OTTI existed within the single issuer trust preferred securities portfolio in the current reporting period:

 

Trust Preferred Securities - Single Issuers

 

Deal Name

   Amortized
Cost
     Gross
Unrealized
Losses
    Fair
Value
     Lowest Credit
Ratings as of
June 30,

2012
   Total
Other-Than-
Temporary
Impairment thru
June 30,

2012
 
(Dollars in thousands)                                

Security B

   $ 6,874       $ (837   $ 6,037       BB    $ —     

Security C

     8,655         (1,932     6,723       BBB      —     

Security D

     9,540         (2,392     7,148       B      —     

Security E

     11,742         (2,102     9,640       BBB      —     

Security F

     14,295         (3,457     10,838       BBB      —     

Security G

     15,225         (102     15,123       BBB      —     
  

 

 

    

 

 

   

 

 

       

 

 

 
   $ 66,331       $ (10,822   $ 55,509          $ —     
  

 

 

    

 

 

   

 

 

       

 

 

 

Agency CMOs-GSE – There were $569 thousand in unrealized losses in the Company’s investment in agency CMOs at June 30, 2012 compared to $3.3 million at December 31, 2011. The improvement in unrealized losses at June 30, 2012 was the result of lower overall interest rates and tighter market spreads during the six months ended June 30, 2012, as compared to 2011. The contractual cash flows for these investments are performing as expected. As such, the Company does not consider these securities to be other-than-temporarily impaired at June 30, 2012.

Corporate Debt Securities – There were $30 thousand in unrealized losses in the Company’s investment in senior corporate debt securities at June 30, 2012. There were no investments in senior corporate debt securities as of December 31, 2011. The unrealized loss at June 30, 2012 was the result of higher benchmark rates from the time of purchase. The Company does not consider these securities to be other-than-temporarily impaired at June 30, 2012.

Equity securities – The unrealized losses on the Company’s investment in equity securities were $20 thousand at June 30, 2012 compared to $24 thousand at December 31, 2011. This portfolio consists primarily of investments in the common stock of small capitalization financial institutions based in New England. 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. The Company does not consider these securities to be other-than-temporarily impaired at June 30, 2012.

Mortgage-backed securities - GSE –There were $820 thousand in unrealized losses in the Company’s investment in residential mortgage-backed securities issued by the GSEs at June 30, 2012 compared to $158 thousand in unrealized losses at December 31, 2011. This increase was primarily due to interest rate changes combined with new purchases made during the quarter. The contractual cash flows for these investments are performing as expected. The Company does not consider these securities to be other-than-temporarily impaired at June 30, 2012.

Commercial mortgage-backed securities – The unrealized losses on the Company’s investment in commercial mortgage-backed securities issued by entities other than GSEs decreased to $6.6 million at June 30, 2012 from $11.2 million at December 31, 2011. This decrease in unrealized loss is primarily the result of recent tightening in credit spreads during the six months ended June 30, 2012. Internal and external metrics are considered when evaluating potential OTTI. Internal stress tests are performed on individual bonds to monitor potential loss in either base or high stress scenarios. The high stress scenario resulted in an 8.7% loss for one bond, assuming a severe recession with a peak unemployment rate of 13.6%. In addition, market analytics are performed to validate internal results. Contractual cash flows for the bonds continue to perform as expected. The Company does not consider these securities to be other-than-temporarily impaired at June 30, 2012.

 

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Table of Contents

The following discussion 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, 2012. Unless otherwise noted, under an investment security type, management does not intend to sell these investments and has determined, based upon available evidence, that it is more likely than not that the Company will not be required to sell the securities before the recovery of its amortized cost. There were no significant credit downgrades on held to maturity securities during the six months ended June 30, 2012.

Municipal bonds and notes – There were unrealized losses on the Company’s investment in municipal bonds and notes of $148 thousand at June 30, 2012 compared to $174 thousand at December 31, 2011. This decrease is primarily the result of tighter credit spreads in 2012 compared to 2011. The municipal portfolio is primarily comprised of bank qualified bonds, over 92.7% with credit ratings of A or better. In addition, the portfolio is comprised of 84.1% General Obligation bonds, 15.6% Revenue bonds and 0.3% other bonds. The Company does not consider these securities to be other-than-temporarily impaired at June 30, 2012.

Agency CMOs - GSE – There were no unrealized losses on the Company’s investment in agency CMOs at June 30, 2012 and at December 31, 2011. The contractual cash flows for this investment are performing as expected. With tighter market spreads during the six months ended June 30, 2012, the agency CMO securities are all at unrealized gains.

Mortgage-backed securities - GSE – There were unrealized losses on the Company’s investment in residential mortgage-backed securities issued by the GSEs of $1.6 million at June 30, 2012 compared to no losses at December 31, 2011. The contractual cash flows for these investments are performing as expected. The Company does not consider these securities to be other-than-temporarily impaired at June 30, 2012.

CMBS and Private Label MBS – There were no unrealized losses on the Company’s investment in commercial and residential mortgage-backed securities issued by entities other than GSEs at June 30, 2012 and at December 31, 2011. These securities carry AAA ratings and are currently performing as expected.

The following is a roll forward of the amount of credit related OTTI for the three and six months ended June 30,:

 

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

(In thousands)

   2012      2011     2012      2011  

Balance of credit related OTTI, beginning of period

   $ 10,460       $ 21,326      $ 10,460       $ 26,320   

Reduction for securities sold

     —           (10,850     —           (15,844
  

 

 

    

 

 

   

 

 

    

 

 

 

Balance of credit related OTTI, end of period

   $ 10,460       $ 10,476      $ 10,460       $ 10,476   
  

 

 

    

 

 

   

 

 

    

 

 

 

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. There were no additions to credit related OTTI for the three and six months ended June 30, 2012. There was a reduction in outstanding credit-related OTTI due to the sale of a security in both the first and second quarters of 2011.

The following table summarizes the proceeds from the sale of available for sale securities for the three and six months ended June 30, 2012 and 2011:

 

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

(In thousands)

   2012      2011      2012      2011  

Available for sale:

           

Agency CMOs - GSE

   $ 28,498       $ 94,335       $ 28,498       $ 94,335   

Pooled trust preferred securities

     —           406         —           1,456   

Equity securities

     1,073         —           1,073         2,353   

MBS - GSE

     —           92,095         —           180,613   

CMBS

     16,284         —           16,284         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available for sale

   $ 45,855       $ 186,836       $ 45,855       $ 278,757   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

The following table summarizes the impact of realized gains and losses from the sale of securities and the impact of the recognition of other-than-temporary impairments for the three and six months ended June 30, 2012 and 2011:

 

     Three months ended June 30,  
     2012      2011  

(In thousands)

   Gains      Losses      OTTI
Charges
     Net      Gains      Losses     OTTI
Charges
     Net  

Available for sale:

                      

Agency CMOs - GSE

   $ 893       $ —         $ —         $ 893       $ 1,959       $ —        $ —         $ 1,959   

Pooled trust preferred securities

     —           —           —           —           —           (2,369     —           (2,369

Equity securities

     409         —           —           409         —           —          —           —     

MBS - GSE

              —           2,057         —          —           2,057   

CMBS

     1,235         —           —           1,235         —           —          —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total available for sale

   $ 2,537       $ —         $ —         $ 2,537       $ 4,016       $ (2,369   $ —         $ 1,647   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

     Six months ended June 30,  
     2012      2011  

(In thousands)

   Gains      Losses      OTTI
Charges
     Net      Gains      Losses     OTTI
Charges
     Net  

Available for sale:

                      

Agency CMOs - GSE

   $ 893       $ —         $ —         $ 893       $ 1,959       $ —        $ —         $ 1,959   

Pooled trust preferred securities

     —           —           —           —           —           (3,343     —           (3,343

Equity securities

     409         —           —           409         374         —          —           374   

MBS - GSE

     —           —           —           —           4,833         —          —           4,833   

CMBS

     1,235         —           —           1,235         —           —          —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total available for sale

   $ 2,537       $ —         $ —         $ 2,537       $ 7,166       $ (3,343   $ —         $ 3,823   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Investments in Private Equity Funds – In addition to investment securities, the Company has investments in private equity funds. These investments, which totaled $12.0 million at June 30, 2012, are included in other assets in the Condensed Consolidated Balance Sheets. The Company recognized a gain of $542 thousand and a loss of $163 thousand for the three and six months ended June 30, 2012, respectively, and a gain of $294 thousand and $1.4 million for the three and six months ended June 30, 2011, respectively. Included in the loss of $163 thousand for the six months ended June 30, 2012, is an OTTI charge of $665 thousand on one of the holdings. These amounts are included in other non-interest income on the Condensed Consolidated Statements of Operations.

 

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Table of Contents

NOTE 3: Loans and Leases

Recorded Investment in Loans and Leases. The following table summarizes recorded investment; the principal amounts outstanding, net of unamortized premiums and discounts, net of deferred fees and/or costs, plus accrued interest, in loans and leases, by portfolio segment at June 30, 2012 and December 31, 2011:

 

     At June 30, 2012  

(In thousands)

   Residential      Consumer      Commercial      Commercial
Real Estate
     Equipment
Financing
     Total  

Loans and Leases:

                 

Ending balance (a)

   $ 3,300,617       $ 2,701,960       $ 2,568,338       $ 2,551,427       $ 417,655       $ 11,539,997   

Accrued interest

     10,951         8,454         8,314         7,540         —           35,259   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total recorded investment

   $ 3,311,568       $ 2,710,414       $ 2,576,652       $ 2,558,967       $ 417,655       $ 11,575,256   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total recorded investment: individually evaluated for impairment

   $ 136,729       $ 34,702       $ 82,533       $ 171,405       $ 3,175       $ 428,544   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total recorded investment: collectively evaluated for impairment

   $ 3,174,839       $ 2,675,712       $ 2,494,119       $ 2,387,562       $ 414,480       $ 11,146,712   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     At December 31, 2011  

(In thousands)

   Residential      Consumer      Commercial      Commercial
Real Estate
     Equipment
Financing
     Total  

Loans and Leases:

                 

Ending balance (a)

   $ 3,219,890       $ 2,760,030       $ 2,385,791       $ 2,384,889       $ 474,804       $ 11,225,404   

Accrued interest

     10,992         8,777         6,585         7,186         —           33,540   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total recorded investment

   $ 3,230,882       $ 2,768,807       $ 2,392,376       $ 2,392,075       $ 474,804       $ 11,258,944   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total recorded investment: individually evaluated for impairment

   $ 135,311       $ 36,629       $ 107,218       $ 212,850       $ 3,268       $ 495,276   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total recorded investment: collectively evaluated for impairment

   $ 3,095,571       $ 2,732,178       $ 2,285,158       $ 2,179,225       $ 471,536       $ 10,763,668   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) The ending balance includes net deferred fees and unamortized premiums of $16.7 million and $20.6 million at June 30, 2012 and December 31, 2011, respectively.

As of June 30, 2012, the Company had pledged $4.4 billion of eligible loan collateral to support available borrowing capacity at either the FHLB of Boston or the Federal Reserve discount window.

 

16


Table of Contents

Allowance for Loan and Lease Losses. The following tables summarize the ALLL by portfolio segment for the three and six months ending June 30, 2012 and 2011:

 

     Three months ended June 30, 2012  

(In thousands)

   Residential     Consumer     Commercial     Commercial
Real Estate
    Equipment
Financing
    Unallocated     Total  

Allowance for loan and lease losses:

              

Balance, beginning of period

   $ 32,039      $ 64,263      $ 51,003      $ 40,187      $ 7,796      $ 15,000      $ 210,288   

Provision (benefit) charged to expense

     3,840        6,621        1,763        (2,661     (3,313     (1,250     5,000   

Losses charged off

     (3,952     (11,349     (5,676     (1,066     (165     —          (22,208

Recoveries

     136        2,702        1,678        46        1,115        —          5,677   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ 32,063      $ 62,237      $ 48,768      $ 36,506      $ 5,433      $ 13,750      $ 198,757   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

   $ 17,086      $ 4,568      $ 5,761      $ 5,652      $ 3      $ —        $ 33,070   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

   $ 14,977      $ 57,669      $ 43,007      $ 30,854      $ 5,430      $ 13,750      $ 165,687   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     Three months ended June 30, 2011  

(In thousands)

   Residential     Consumer     Commercial     Commercial
Real Estate
    Equipment
Financing
    Unallocated      Total  

Allowance for loan and lease losses:

               

Balance, beginning of period

   $ 28,239      $ 89,821      $ 68,919      $ 71,162      $ 19,807      $ 20,000       $ 297,948   

Provision (benefit) charged to expense

     3,085        5,171        963        (1,517     (2,702     —           5,000   

Losses charged off

     (2,967     (13,891     (5,361     (3,765     (413     —           (26,397

Recoveries

     119        1,268        1,321        406        1,578        —           4,692   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance, end of period

   $ 28,476      $ 82,369      $ 65,842      $ 66,286      $ 18,270      $ 20,000       $ 281,243   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance: individually evaluated for impairment

   $ 15,132      $ 4,166      $ 10,039      $ 11,533      $ 1      $ —         $ 40,871   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance: collectively evaluated for impairment

   $ 13,344      $ 78,203      $ 55,803      $ 54,753      $ 18,269      $ 20,000       $ 240,372   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

     Six months ended June 30, 2012  

(In thousands)

   Residential     Consumer     Commercial     Commercial
Real Estate
    Equipment
Financing
    Unallocated     Total  

Allowance for loan and lease losses:

              

Balance, beginning of period

   $ 34,565      $ 67,785      $ 60,681      $ 45,013      $ 8,943      $ 16,500      $ 233,487   

Provision (benefit) charged to expense

     4,288        11,096        5,279        (2,739     (6,174     (2,750     9,000   

Losses charged off

     (7,067     (21,400     (20,670     (6,914     (799     —          (56,850

Recoveries

     277        4,756        3,478        1,146        3,463        —          13,120   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ 32,063      $ 62,237      $ 48,768      $ 36,506      $ 5,433      $ 13,750      $ 198,757   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

   $ 17,086      $ 4,568      $ 5,761      $ 5,652      $ 3      $ —        $ 33,070   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

   $ 14,977      $ 57,669      $ 43,007      $ 30,854      $ 5,430      $ 13,750      $ 165,687   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     Six months ended June 30, 2011  

(In thousands)

   Residential     Consumer     Commercial     Commercial
Real Estate
    Equipment
Financing
    Unallocated     Total  

Allowance for loan and lease losses:

              

Balance, beginning of period

   $ 30,792      $ 95,071      $ 74,470      $ 77,695      $ 21,637      $ 22,000      $ 321,665   

Provision (benefit) charged to expense

     3,754        13,696        5,107        (690     (4,867     (2,000     15,000   

Losses charged off

     (6,317     (28,879     (16,472     (11,125     (1,547     —          (64,340

Recoveries

     247        2,481        2,737        406        3,047        —          8,918   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ 28,476      $ 82,369      $ 65,842      $ 66,286      $ 18,270      $ 20,000      $ 281,243   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

   $ 15,132      $ 4,166      $ 10,039      $ 11,533      $ 1      $ —        $ 40,871   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

   $ 13,344      $ 78,203      $ 55,803      $ 54,753      $ 18,269      $ 20,000      $ 240,372   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

17


Table of Contents

Impaired Loans and Leases. The following table summarizes impaired loans and leases by class as of June 30, 2012 and December 31, 2011:

 

     At June 30, 2012  

(In thousands)

   Unpaid
Principal
Balance
     Total
Recorded
Investment
     Recorded
Investment
No Allowance
     Recorded
Investment
With Allowance
     Related
Valuation
Allowance
 

Residential:

              

1-4 family

   $ 136,689       $ 126,010       $ —         $ 126,010       $ 14,506   

Permanent-NCLC

     11,931         10,616         —           10,616         2,575   

Construction

     133         103         —           103         5   

Liquidating portfolio-construction loans

     —           —           —           —           —     

Consumer:

              

Home equity loans

     33,679         30,030         —           30,030         3,654   

Liquidating portfolio-home equity loans

     5,529         4,672         —           4,672         914   

Other consumer

     —           —           —           —           —     

Commercial:

              

Commercial non-mortgage

     98,919         82,334         26,133         56,201         5,761   

Asset-based loans

     2,667         199         199         —           —     

Commercial real estate:

              

Commercial real estate

     147,461         137,269         65,774         71,495         5,601   

Commercial construction

     7,297         7,326         7,326         —           —     

Residential development

     13,459         12,818         5,075         7,743         51   

Equipment Financing

     11,066         3,175         2,972         203         3   

Totals:

              

Residential

     148,753         136,729         —           136,729         17,086   

Consumer

     39,208         34,702         —           34,702         4,568   

Commercial

     101,586         82,533         26,332         56,201         5,761   

Commercial real estate

     168,217         157,413         78,175         79,238         5,652   

Equipment Financing

     11,066         3,175         2,972         203         3   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 468,830       $ 414,552       $ 107,479       $ 307,073       $ 33,070   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     At December 31, 2011  

(In thousands)

   Unpaid
Principal
Balance
     Total
Recorded
Investment
     Recorded
Investment
No Allowance
     Recorded
Investment
With Allowance
     Related
Valuation
Allowance
 

Residential:

              

1-4 family

   $ 133,123         124,461       $ —         $ 124,461       $ 16,611   

Permanent-NCLC

     12,005         10,718         —           10,718         2,747   

Construction

     129         132         —           132         9   

Liquidating portfolio-construction loans

     —           —           —           —           —     

Consumer:

              

Home equity loans

     35,285         31,153         4         31,149         4,116   

Liquidating portfolio-home equity loans

     7,277         5,469         3         5,466         1,050   

Other consumer

     7         7         —           7         1   

Commercial:

              

Commercial non-mortgage

     118,293         105,359         30,207         75,152         12,996   

Asset-based loans

     7,814         1,859         1,859         —           —     

Commercial real estate:

              

Commercial real estate

     195,838         189,575         105,618         83,957         8,514   

Commercial construction

     7,347         7,373         —           7,373         557   

Residential development

     16,495         15,902         15,902         —           —     

Equipment Financing

     11,241         3,268         2,751         517         4   

Totals:

              

Residential

     145,257         135,311         —           135,311         19,367   

Consumer

     42,569         36,629         7         36,622         5,167   

Commercial

     126,107         107,218         32,066         75,152         12,996   

Commercial real estate

     219,680         212,850         121,520         91,330         9,071   

Equipment Financing

     11,241         3,268         2,751         517         4   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 544,854       $ 495,276       $ 156,344       $ 338,932       $ 46,605   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

18


Table of Contents

The following table summarizes interest income recognized by class of impaired loans and leases for the periods presented:

 

    June 30, 2012     Three months ended
June 30, 2012
    Six months ended
June 30, 2012
    June 30, 2011     Three months ended
June 30, 2011
    Six months ended
June 30, 2011
 

(In thousands)

  Average
Recorded
Investment
    Total
Interest
Income
    Total
Interest
Income
    Average
Recorded
Investment
    Total
Interest
Income
    Total
Interest
Income
 

Residential:

           

1-4 family

  $ 125,235      $ 1,251      $ 2,535      $ 117,724      $ 1,241      $ 2,443   

Permanent-NCLC

    10,667        110        216        10,153        106        205   

Construction

    118        2        2        67        2        4   

Liquidating portfolio-construction loans

    —          —          —          1        —          —     

Consumer:

           

Home equity loans

    30,592        352        703        28,938        379        748   

Liquidating portfolio-home equity loans

    5,071        64        131        5,695        86        210   

Other consumer

    3        —          —          7        —          —     

Commercial:

           

Commercial non-mortgage

    93,846        1,073        2,205        118,987        1,101        2,517   

Asset-based loans

    1,029        —          —          11,234        98        190   

Commercial real estate:

            —          —     

Commercial real estate

    163,422        1,250        2,442        199,093        1,667        3,638   

Commercial construction

    7,350        72        146        21,871        282        604   

Residential development

    14,360        82        171        30,884        168        330   

Equipment Financing

    3,221        9        23        12,324        19        41   

Totals:

           

Residential

    136,020        1,363        2,753        127,945        1,349        2,652   

Consumer

    35,666        416        834        34,640        465        958   

Commercial

    94,875        1,073        2,205        130,221        1,199        2,707   

Commercial real estate

    185,132        1,404        2,759        251,848        2,117        4,572   

Equipment Financing

    3,221        9        23        12,324        19        41   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 454,914      $ 4,265      $ 8,574      $ 556,978      $ 5,149      $ 10,930   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Of the total interest income recognized for the three and six months ended June 30, 2012, $0.3 million and $0.7 million, respectively, was recognized on a cash basis method of accounting for the residential and consumer portfolio segments, as compared to $0.5 million and $1.0 million for the comparable periods in 2011, respectively.

 

19


Table of Contents

Loans and Leases Portfolio Aging. The following table summarizes the recorded investment of the Company’s loan and lease portfolio aging by class at June 30, 2012 and December 31, 2011:

 

     At June 30, 2012  

(In thousands)

   30-59 Days
Past Due and
Accruing
     60-89 Days
Past Due and
Accruing
     > 90 Days Past
Due and Accruing
     Non-accrual      Total Past Due      Current      Total Loans
and Leases
 

Residential:

                    

1-4 family

   $ 18,337       $ 8,649       $ —         $ 71,710       $ 98,696       $ 3,153,040       $ 3,251,736   

Permanent-NCLC

     296         —           —           4,206         4,502         15,856         20,358   

Construction

     —           —           —           1,178         1,178         38,291         39,469   

Liquidating portfolio-construction loans

     —           —           —           —           —           5         5   

Consumer:

                    

Home equity loans

     15,128         6,991         —           22,467         44,586         2,487,807         2,532,393   

Liquidating portfolio-home equity loans

     2,416         2,085         —           4,515         9,016         129,445         138,461   

Other consumer

     448         160         —           65         673         38,887         39,560   

Commercial:

                    

Commercial non-mortgage

     4,251         2,287         1,096         29,304         36,938         2,039,218         2,076,156   

Asset-based loans

     —           —           —           270         270         500,226         500,496   

Commercial real estate:

                    

Commercial real estate

     1,907         1,320         —           23,416         26,643         2,385,022         2,411,665   

Commercial construction

     —           —           —           49         49         114,113         114,162   

Residential development

     —           —           —           5,983         5,983         27,157         33,140   

Equipment Financing

     1,307         359         —           5,862         7,528         410,127         417,655   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 44,090       $ 21,851       $ 1,096       $ 169,025       $ 236,062       $ 11,339,194       $ 11,575,256   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     At December 31, 2011  

(In thousands)

   30-59 Days
Past Due and
Accruing
     60-89 Days
Past Due and
Accruing
     > 90 Days Past
Due and Accruing
     Non-accrual      Total Past Due      Current      Total Loans
and Leases
 

Residential:

                    

1-4 family

   $ 15,939       $ 7,245       $ —         $ 75,977       $ 99,161       $ 3,080,870       $ 3,180,031   

Permanent-NCLC

     802         408         —           4,636         5,846         15,656         21,502   

Construction

     292         —           —           1,234         1,526         27,815         29,341   

Liquidating portfolio-construction loans

     —           —           —           —           —           8         8   

Consumer:

                    

Home equity loans

     14,859         5,891         —           25,115         45,865         2,534,998         2,580,863   

Liquidating portfolio-home equity loans

     3,231         1,459         —           5,174         9,864         140,247         150,111   

Other consumer

     346         119         —           117         582         37,251         37,833   

Commercial:

                    

Commercial non-mortgage

     3,267         1,399         162         27,969         32,797         1,905,085         1,937,882   

Asset-based loans

     —           —           —           1,904         1,904         452,590         454,494   

Commercial real estate:

                    

Commercial real estate

     1,330         452         433         32,202         34,417         2,244,357         2,278,774   

Commercial construction

     —           —           —           —           —           73,525         73,525   

Residential development

     —           —           135         6,760         6,895         32,881         39,776   

Equipment Financing

     2,685         2,115         —           7,154         11,954         462,850         474,804   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 42,751       $ 19,088       $ 730       $ 188,242       $ 250,811       $ 11,008,133       $ 11,258,944   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans and Leases on Non-accrual Status. Accrual of interest is discontinued if a loan or lease is placed on non-accrual status. When placed on non-accrual status, unpaid accrued interest is reversed and charged against interest income. Residential and consumer loans are placed on non-accrual status after 90 days past due. All commercial and commercial real estate loans, and equipment financing leases are subject to a detailed review by the Company’s credit risk team when 90 days past due or when payment is uncertain and a specific determination is made to put a loan or lease on non-accrual status.

Interest on non-accrual loans and leases that would have been recorded as additional interest income for the three and six months ended June 30, 2012 and 2011, had the loans and leases been current in accordance with their original terms, totaled $3.8 million and $7.2 million and $4.6 million and $9.8 million, respectively.

 

20


Table of Contents

Troubled Debt Restructurings. The following table summarizes the information for the Company’s TDRs at June 30, 2012 and December 31, 2011:

 

(In thousands)

   At June 30,
2012
    At December 31,
2011
 

Recorded investment of TDRs:

    

Accrual status

   $ 315,530      $ 367,344   

Non-accrual status

     87,583        76,968   
  

 

 

   

 

 

 

Total recorded investment

   $ 403,113      $ 444,312   
  

 

 

   

 

 

 

Accruing TDRs performing under modified terms more than one year

     88.2     76.0

TDR specific reserves included in the balance of allowance for loan losses

   $ 32,630      $ 44,847   

Additional funds committed to borrowers in TDR status (a)

     7,159        7,872   
  

 

 

   

 

 

 

 

(a) This amount may be limited by contractual rights and/or the underlying collateral supporting the loan or lease.

For the three and six months ended June 30, 2012 and 2011, Webster charged off $4.5 million and $23.5 million and $2.9 and $7.2, respectively, the portion of TDRs deemed to be uncollectible.

The following table provides information on loans and leases modified as TDRs during the three and six months ended June 30, 2012 and 2011:

 

     Three months ended June 30,  
     2012     2011  

(Dollars in thousands)

   Number of
Loans and
Leases
     Pre-
Modification
Recorded
Investment
     Post-
Modification
Recorded
Investment
     Post-
Modification
Coupon
Rate
    Number of
Loans and
Leases
     Pre-
Modification
Recorded
Investment
     Post-
Modification
Recorded
Investment
     Post-
Modification
Coupon
Rate
 

Residential:

                      

1-4 family

     26       $ 4,768       $ 4,768         3.4     32       $ 7,087       $ 7,087         4.4

Permanent-NCLC

     —           —           —           —          2         947         947         4.5   

Construction

     1         104         104         6.9        —           —           —           —     

Consumer:

                      

Home equity loans

     15         1,319         1,319         4.0        30         2,835         2,835         4.0   

Liquidating portfolio-home equity loans

     2         35         35         9.2        10         561         561         3.9   

Commercial:

                      

Commercial non-mortgage

     13         5,758         5,758         7.4        18         7,862         7,862         5.3   

Asset-based loans

     —           —           —           —          —           —           —           —     

Commercial real estate:

                      

Commercial real estate

     2         2,167         2,167         4.9        7         5,250         5,250         4.8   

Commercial construction

     —           —           —           —          —           —           —           —     

Residential development

     —           —           —           —          2         719         719         5.3   

Equipment Financing

     4         142         142         7.6        —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL TDRs

     63       $ 14,293       $ 14,293         5.4     101       $ 25,261       $ 25,261         4.7
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

 

     Six months ended June 30,  
     2012     2011  

(Dollars in thousands)

   Number of
Loans and
Leases
     Pre-
Modification
Recorded
Investment
     Post-
Modification
Recorded
Investment
     Post-
Modification
Coupon
Rate
    Number of
Loans and
Leases
     Pre-
Modification
Recorded
Investment
     Post-
Modification
Recorded
Investment
     Post-
Modification
Coupon
Rate
 

Residential:

                      

1-4 family

     50       $ 8,828       $ 8,828         3.7     85       $ 20,764       $ 20,764         4.1

Permanent-NCLC

     —           —           —           —          3         1,158         1,158         4.2   

Construction

     1         104         104         6.9        —           —           —           —     

Consumer:

                      

Home equity loans

     27         2,272         2,272         4.0        76         7,126         7,126         4.3   

Liquidating portfolio-home equity loans

     4         35         35         9.1        16         1,189         1,189         5.4   

Commercial:

                      

Commercial non-mortgage

     25         16,986         16,986         7.2        35         17,426         17,426         6.2   

Asset-based loans

     —           —           —           —          3         2,563         2,563         5.2   

Commercial real estate:

                      

Commercial real estate

     3         2,412         2,412         5.0        16         41,165         41,165         4.0   

Commercial construction

     —           —           —           —          —           —           —           —     

Residential development

     —           —           —           —          2         719         719         5.3   

Equipment Financing

     7         342         342         7.2        —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL TDRs

     117       $ 30,979       $ 30,979         5.8     236       $ 92,110       $ 92,110         4.5
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

 

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TDR loans may be modified by means of extended maturity, below market adjusted interest rates, a combination of rate and maturity, or by other means including covenant modifications, or other concessions. The following table provides information on how loans and leases were modified as TDRs during the three and six months ended June 30, 2012 and 2011:

 

     Three months ended June 30,  
     2012      2011  

(In thousands)

   Extended
Maturity
     Adjusted
Interest
Rates
     Combination
of Rate and
Maturity
     Other (a)      Total      Extended
Maturity
     Adjusted
Interest
Rates
     Combination
of Rate and
Maturity
     Other (a)      Total  

Residential:

                             

1-4 family

   $ 398       $ 723       $ 1,160       $ 2,487       $ 4,768       $ 2,621       $ 56       $ 4,250       $ 160       $ 7,087   

Permanent-NCLC

     —           —           —           —           —           —           —           947         —           947   

Construction

     —           —           104         —           104         —           —           —           —           —     

Consumer:

                             

Home equity loans

     891         —           249         179         1,319         1,396         —           1,278         161         2,835   

Liquidating portfolio-home equity loans

     35         —           —           —           35         54         —           507         —           561   

Commercial:

                             

Commercial non-mortgage

     287         —           —           5,471         5,758         5,319         62         98         2,383         7,862   

Asset-based loans

        —           —           —           —           —           —           —           —           —     

Commercial real estate:

                             

Commercial real estate

     2,068         —           —           99         2,167         834         1         —           4,415         5,250   

Commercial construction

     —           —           —           —           —           —           —           —           —           —     

Residential development

     —           —           —           —           —           —           —           —           719         719   

Equipment Financing

     142         —           —           —           142         —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL TDRs

   $ 3,821       $ 723       $ 1,513       $ 8,236       $ 14,293       $ 10,224       $ 119       $ 7,080       $ 7,838       $ 25,261   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) Other includes covenant modifications, forbearance and/or other concessions.

 

     Six months ended June 30,  
     2012      2011  

(In thousands)

   Extended
Maturity
     Adjusted
Interest
Rates
     Combination
of Rate and
Maturity
     Other (a)      Total      Extended
Maturity
     Adjusted
Interest
Rates
     Combination
of Rate and
Maturity
     Other (a)      Total  

Residential:

                             

1-4 family

   $ 1,030       $ 1,006       $ 3,564       $ 3,228       $ 8,828       $ 5,926       $ 2,706       $ 10,629       $ 1,503       $ 20,764   

Permanent-NCLC

     —           —           —           —           —           —           —           1,158         —           1,158   

Construction

     —           —           104         —           104         —           —           —           —           —     

Consumer:

                             

Home equity loans

     955         107         887         323         2,272         3,736         —           3,043         347         7,126   

Liquidating portfolio-home equity loans

     35         —           —           —           35         517         —           672         —           1,189   

Commercial:

                             

Commercial non-mortgage

     314         —           286         16,386         16,986         5,607         3,217         205         8,397         17,426   

Asset-based loans

     —           —           —           —           —           —           —           2,563         —           2,563   

Commercial real estate:

                             

Commercial real estate

     2,068         —           245         99         2,412         17,029         5,997         309         17,830         41,165   

Commercial construction

     —           —           —           —           —           —           —           —           —           —     

Residential development

     —           —           —           —           —           —           —           —           719         719   

Equipment Financing

     142         —           40         160         342         —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL TDRs

   $ 4,544       $ 1,113       $ 5,126       $ 20,196       $ 30,979       $ 32,815       $ 11,920       $ 18,579       $ 28,796       $ 92,110   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) Other includes covenant modifications, forbearance and/or other concessions.

The Company’s loan and lease portfolio at June 30, 2012 included ten loans with an A Note/B Note structure, with a recorded investment of $35.9 million. The loans were restructured into A Note/B Note structures as a result of evaluating the cash flow of the borrowers to support repayment. Webster immediately charged off the balance of B Notes totaling $14.0 million. TDR classification was removed from two A Notes totaling $14.0 million, as the borrowers have passed the minimum compliance with the modified terms requirements and the restructuring agreement specifies an interest rate equal to that which would be provided to a borrower with similar credit at the time of restructuring. The A Notes are paying under the terms of the modified loan agreements. Seven of the ten A Notes are on accrual status, as the borrowers are paying under the terms of the loan agreements prior to and subsequent to the modification. The remaining A Notes are on non-accrual status due to the continuing financial difficulties of the borrower.

 

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Table of Contents

The following table provides information on loans and leases modified as a TDR within the previous 12 months and for which there was a payment default during the three and six months ended June 30, 2012 and 2011:

 

     Three months ended June 30,  
     2012      2011  

(Dollars in thousands)

   Number of
Loans and
Leases
     Recorded
Investment
     Number of
Loans and
Leases
     Recorded
Investment
 

Residential:

           

1-4 family

     2       $ 441         3       $ 1,172   

Permanent-NCLC

     —           —           1         166   

Construction

     —           —           —           —     

Consumer:

           

Home equity loans

     2         535         7         314   

Liquidating portfolio-home equity loans

     —           —           2         111   

Other consumer

     —           —           —           —     

Commercial:

           

Commercial non-mortgage

     —           —           3         849   

Asset-based loans

     —           —           —           —     

Commercial real estate:

           

Commercial real estate

     —           —           —           —     

Commercial construction

     —           —           —           —     

Residential development

     —           —           —           —     

Equipment Financing

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL

     4       $ 976         16       $ 2,612   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Six months ended June 30,  
     2012      2011  

(Dollars in thousands)

   Number of
Loans and
Leases
     Recorded
Investment
     Number of
Loans and
Leases
     Recorded
Investment
 

Residential:

           

1-4 family

     2       $ 441         10       $ 2,556   

Permanent-NCLC

     —           —           1         166   

Construction

     —           —           —           —     

Consumer:

           

Home equity loans

     2         535         13         713   

Liquidating portfolio-home equity loans

     —           —           3         170   

Other consumer

     —           —           —           —     

Commercial:

           

Commercial non-mortgage

     —           —           5         1,265   

Asset-based loans

     —           —           —           —     

Commercial real estate:

           

Commercial real estate

     —           —           1         269   

Commercial construction

     —           —           —           —     

Residential development

     —           —           —           —     

Equipment Financing

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL

     4       $ 976         33       $ 5,139   
  

 

 

    

 

 

    

 

 

    

 

 

 

The recorded investment in Commercial, Commercial Real Estate and Equipment Financing TDRs segregated by risk rating exposure at June 30, 2012 and December 31, 2011, are as follows:

 

(In thousands)

   At June 30,
2012
     At December 31,
2011
 

(1) - (6) Pass

   $ 44,106       $ 46,524   

(7) Special Mention

     12,674         4,622   

(8) Substandard

     174,624         220,899   

(9) Doubtful

     278         327   

(10) Loss

     —           —     
  

 

 

    

 

 

 

Total

   $ 231,682       $ 272,372   
  

 

 

    

 

 

 

 

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Table of Contents

Credit Risk Management. The Company has certain credit policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. Management reviews and approves these policies and procedures on a regular basis and frequently reviews reports related to loan production, loan quality, concentration of credit, loan delinquencies and non-performing and potential problem loans.

Commercial and industrial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and prudently expand its business. Underwriting standards are designed to promote relationships rather than transactional banking. Once it is determined that the borrower’s management possesses sound ethics and solid business acumen, the Company’s management examines current and projected cash flows to determine the ability of the borrower to repay obligations as agreed. Commercial and industrial loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial and industrial loans are secured by the assets being financed and may incorporate a personal guarantee. However, some loans may be made on an unsecured basis.

Commercial real estate loans are subject to underwriting standards and processes similar to commercial and industrial loans, in addition to those specific to real estate loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is largely dependent on the successful operation of the property securing the loan, the market in which the property is located and the tenants that conduct business at the property securing the loan. Commercial real estate loans may be adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Company’s commercial real estate portfolio are diverse in terms of type and geographic location, which helps reduce its exposure to adverse economic events that may affect any single market or industry. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. The Company also utilizes third-party experts to provide insight and guidance about economic conditions and trends affecting its loan portfolio.

Construction loans on commercial properties have unique risk characteristics and are provided to experienced developers/sponsors with strong track records of successful completion and sound financial condition and are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analysis of absorption and lease rates and financial analysis of the developers and property owners. Construction loans are generally based upon estimates of costs and value associated with the complete project. These estimates may be subject to change as the construction project proceeds. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections by third party professionals and the internal staff.

To monitor and manage consumer loan risk, policies and procedures are developed and modified, as needed, jointly by line and Risk Management personnel. Policies and procedures, coupled with relatively small loan amounts, and predominately collateralized structures spread across many individual borrowers, minimize risk. Trend and outlook reports are reviewed by management on a regular basis. Underwriting factors for mortgage and home equity loans include the borrower’s FICO score, the loan amount relative to property value and the borrower’s debt to income level and are also influenced by statutory requirements.

Credit Quality Indicators. To measure credit risk for the Commercial, Commercial Real Estate and Equipment Financing portfolios, the Company employs a dual grade credit risk grading system for estimating the probability of borrower default and the loss given default. The credit risk grade system assigns a rating to each borrower and to the facility, which together form a Composite Credit Risk Profile (“CCRP”). The credit risk grade system categorizes borrowers by common financial characteristics that measure the credit strength of borrowers and facilities by common structural characteristics. The CCRP has ten grades, with each grade corresponding to a progressively greater risk of default. Grades 1 through 6 are considered pass ratings and 7 through 10 are criticized as defined by the regulatory agencies. The rating model assumptions are actively reviewed and tested against industry data and actual experience. Risk ratings are assigned to differentiate risk within the portfolio and are reviewed on an ongoing basis and revised, if needed, to reflect changes in the borrowers’ current financial position and outlook, risk profiles and the related collateral and structural positions.

 

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Table of Contents

A “Special Mention” (7) credit has the potential weakness that if left uncorrected may result in deterioration of the repayment prospects for the asset. “Substandard” (8) assets have a well defined weakness that jeopardizes the full repayment of the debt. An asset rated “Doubtful” (9) has all the same weaknesses as substandard credit with the added characteristic that the weakness makes collection or liquidation in full, given current facts, conditions, and values, improbable. Assets classified as “Loss” (10) in accordance with regulatory guidelines are considered uncollectible and charged off.

At June 30, 2012 and December 31, 2011, the recorded investment of Commercial and Commercial Real Estate loans and Equipment Financing leases segregated by risk rating exposure are as follows:

 

(In thousands)

   Commercial      Commercial Real Estate      Equipment Financing  
     At June 30,
2012
     At December 31,
2011
     At June 30,
2012
     At December 31,
2011
     At June 30,
2012
     At December 31,
2011
 

(1) - (6) Pass

   $ 2,361,073       $ 2,148,970       $ 2,256,750       $ 2,036,738       $ 369,027       $ 407,943   

(7) Special Mention

     47,671         32,578         78,166         58,238         11,259         15,416   

(8) Substandard

     167,109         208,555         223,368         296,478         37,369         51,445   

(9) Doubtful

     799         2,273         683         621         —           —     

(10) Loss

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,576,652       $ 2,392,376       $ 2,558,967       $ 2,392,075       $ 417,655       $ 474,804   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The Company utilizes the loan portfolio aging migration analysis to estimate reserves for the Consumer and Residential portfolios. Refer to the loan portfolio aging analysis table included in this footnote.

For Consumer and Residential loans, the Company considers factors such as updated FICO scores, unemployment, home prices, loan to value, geography and the status of first lien position loans on second lien position loans, as credit quality indicators. On an ongoing basis, the Company calculates an estimate of the current value of property secured as collateral for both home equity and residential first mortgage lending products (“current LTV”). The estimate is based on home price indices compiled by the S&P/Case-Shiller Home Price Indices. The Case-Shiller data indicates trends for 20 Metropolitan Statistical Areas (“MSA”). The trend data is applied to the loan portfolios taking into account the age of the most recent valuation and geographic area. The Case-Shiller data estimates, using broad MSAs that are informative for regional analysis but are not actionable on an individual loan basis, the amount of loans that may have balances in excess of the underlying collateral.

NOTE 4: Transfers of Financial Assets and Mortgage Servicing Rights

Transfers of Financial Assets

The Company sells financial assets in the normal course of business. The majority of the Company’s financial asset sales are residential mortgage loan sales primarily to government-sponsored enterprises through established programs, commercial loan sales through participation agreements, and other individual or portfolio loan and securities sales. In accordance with the accounting guidance for asset transfers, the Company considers any ongoing involvement with transferred assets in determining whether the assets can be derecognized from the balance sheet. For loans sold under participation agreements, the Company also considers the terms of the loan participation agreement and whether they meet the definition of a participation interest and thus qualify for derecognition. With the exception of servicing and certain performance-based guarantees, the Company’s continuing involvement with financial assets sold is minimal and generally limited to market customary representation and warranty clauses. See a further discussion of the representation and warranties in Note 18 – Commitments and Contingencies.

The net gain on the sale of loans of $3.6 million and $8.0 million for the three and six months ended June 30, 2012, respectively, and $1.2 million and $2.5 million for the three and six months ended June 30, 2011, respectively, is included as mortgage banking revenues in the Condensed Consolidated Statements of Operations. Included in the three and six months ended June 30, 2011 is a $0.8 million gain on a commercial loan sale.

Mortgage Servicing Rights

When the Company sells financial assets, it may retain servicing rights and/or other interests in the financial assets. The gain or loss on sale depends on the previous carrying amount of the transferred financial assets and the consideration received and any liabilities incurred in exchange for the transferred assets. Upon transfer, any servicing assets and other interests held by the Company are initially recognized at fair value. See a further discussion of fair value in Note 14 – Fair Value Measurements.

The Company serviced $1.9 billion of residential mortgage loans for others at June 30, 2012 and December 31, 2011. Loan servicing fees for others, net of mortgage servicing right amortization, was $0.5 million and $1.2 million for the three and six months ended June 30, 2012 as compared to $1.2 million and $2.3 million for the three and six months ended June 30, 2011 and is included as a component of loan related fees in the Condensed Consolidated Statements of Operations.

 

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Table of Contents

NOTE 5: Goodwill and Other Intangible Assets

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

 

(In thousands)

   At June 30,
2012
     At December 31,
2011
 

Balances not subject to amortization:

     

Goodwill allocated to business segments:

     

Retail Banking

   $ 516,560       $ 516,560   

Other (HSA Bank)

     13,327         13,327   
  

 

 

    

 

 

 

Goodwill

     529,887         529,887   

Balances subject to amortization:

     

Core deposits allocated to business segments:

     

Retail Banking

     12,754         15,238   

Other (HSA Bank)

     142         452   
  

 

 

    

 

 

 

Other intangible assets

     12,896         15,690   
  

 

 

    

 

 

 

Total goodwill and other intangible assets

   $ 542,783       $ 545,577   
  

 

 

    

 

 

 

The gross carrying value and accumulated amortization of other intangible assets and the reporting unit to which it relates are as follows:

 

     At June 30, 2012      At December 31, 2011  

(In thousands)

   Gross Carrying
Amount
     Accumulated
Amortization
    Net Carrying
Amount
     Gross Carrying
Amount
     Accumulated
Amortization
    Net Carrying
Amount
 

Core deposits

               

Retail

   $ 49,420       $ (36,666   $ 12,754       $ 49,420       $ (34,182   $ 15,238   

Other (HSA Bank)

     4,699         (4,557     142         4,699         (4,247     452   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 54,119       $ (41,223   $ 12,896       $ 54,119       $ (38,429   $ 15,690   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Amortization of intangible assets for the three and six months ended June 30, 2012 and 2011, totaled $1.4 million and $2.8 million, respectively. Estimated annual amortization expense of current intangible assets with finite useful lives, absent any future impairment or change in estimated useful lives, is summarized below for the current full year and for each of the next four years:

 

(In thousands)

      

Years ending December 31,

  

2012

   $ 5,420   

2013

     4,919   

2014

     2,685   

2015

     1,523   

2016

     1,143   

Webster tests its goodwill for impairment, at least, annually as of August 31st. There was no impairment indicated as a result of the Step 1 test performed at August 31, 2011, as the estimated fair value for the reporting units that carry goodwill exceeded their corresponding carrying values.

NOTE 6: Income Taxes

Unrecognized Tax Benefits

At June 30, 2012, Webster’s total amount of unrecognized tax benefits (“UTBs”) for uncertain tax positions, determined under the provisions of ASC Topic 740, “Income Taxes,” was $2.9 million. If recognized, $1.9 million of that amount would impact the effective tax rate. During the six months ended June 30, 2012, Webster’s UTBs decreased by $1.5 million, from $4.4 million at December 31, 2011, to $2.9 million at June 30, 2012. The $1.5 million net decrease is comprised of (i) $0.4 million of additions as a result of tax positions taken during the current year, (ii) $0.6 million of reductions as a result of tax positions taken during prior years, and (iii) $1.3 million of reductions relating to settlements with taxing authorities.

Additionally, Webster had accrued interest related to UTBs of $1.2 million at June 30, 2012, compared to $1.4 million at December 31, 2011. The Company has determined it is reasonably possible that its UTBs could decrease within the next 12 months by an amount in a range of $0.5 million to $1.3 million as a result of settlements with state taxing authorities and/or lapses in statute-of-limitation periods.

For more information on Webster’s income taxes, see Note 7 of the Notes to Consolidated Financial Statements for the year ended December 31, 2011, included in the Company’s 2011 Form 10-K.

 

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Table of Contents

NOTE 7: Deposits

A summary of deposits by type follows:

 

(In thousands)

   At June 30,
2012
     At December 31,
2011
 

Non-interest-bearing:

     

Demand

   $ 2,611,297       $ 2,473,693   

Interest-bearing:

     

Checking

     1,659,240         1,551,105   

Health savings accounts

     1,203,836         1,027,415   

Money market

     1,934,137         2,021,056   

Savings

     3,850,549         3,748,121   

Time deposits

     2,714,868         2,834,635   
  

 

 

    

 

 

 

Total interest bearing

     11,362,630         11,182,332   
  

 

 

    

 

 

 

Total deposits

   $ 13,973,927       $ 13,656,025   
  

 

 

    

 

 

 

Demand deposit overdrafts reclassified as loan balances

   $ 1,643       $ 1,517   
  

 

 

    

 

 

 

At June 30, 2012, the scheduled maturities of time deposits (certificates of deposit and brokered deposits) were as follows:

 

(In thousands)

      

Years ending December 31:

  

2012

   $ 892,752   

2013

     1,078,173   

2014

     236,094   

2015

     318,017   

2016

     169,059   

Thereafter

     20,773   
  

 

 

 

Total time deposits

   $ 2,714,868   
  

 

 

 

The following table presents additional information about the Company’s brokered deposits:

 

(In thousands)

   At June 30,
2012
     At December 31,
2011
 

Interest-bearing checking obtained through brokers

   $ 41,168       $ 33,632   

Time deposits obtained through brokers

     119,052         119,052   
  

 

 

    

 

 

 

Total brokered deposits

   $ 160,220       $ 152,684   
  

 

 

    

 

 

 

NOTE 8: Securities Sold Under Agreements to Repurchase and Other Short-term Borrowings

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

 

(In thousands)

   At June 30,
2012
     At December 31,
2011
 

Securities sold under agreements to repurchase:

     

Original maturity of one year or less

   $ 321,378       $ 290,856   

Callable at the option of the counterparty

     300,000         400,000   

Non-callable

     450,000         250,850   
  

 

 

    

 

 

 
     1,071,378         941,706   

Other short-term borrowings:

     

Federal funds purchased

     132,000         223,000   
  

 

 

    

 

 

 

Total

   $ 1,203,378       $ 1,164,706   
  

 

 

    

 

 

 

At June 30, 2012 and December 31, 2011, repurchase agreements were used as a primary source of borrowed funds in addition to FHLB advances. Repurchase agreements are primarily collateralized by U.S. Government agency mortgage-backed securities. The collateral for these repurchase agreements is delivered to broker/dealers. Repurchase agreements with broker/dealers are limited to primary dealers in government securities or commercial and municipal customers through Webster’s Treasury Sales desk. Repurchase agreements with dealer counterparties have the right to pledge, transfer or hypothecate purchased securities during the term of the transaction.

 

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NOTE 9: Federal Home Loan Bank Advances

Advances payable to the Federal Home Loan Bank are summarized as follows:

 

     At June 30, 2012     At December 31, 2011  

(In thousands)

   Total
Outstanding
     Weighted
Average Rate
    Total
Outstanding
     Weighted
Average Rate
 

Stated Maturity:

          

2012

   $ 1,076,400         0.42   $ 751,400         0.43

2013

     150,000         1.00        199,000         2.07   

2016

     145,934         1.80        145,934         1.80   

2017-2032

     156,671         1.47        155,470         1.58   
  

 

 

    

 

 

   

 

 

    

 

 

 
     1,529,005         0.72     1,251,804         0.99
     

 

 

      

 

 

 

Unamortized premiums

     97           805      
  

 

 

      

 

 

    

Total advances

   $ 1,529,102         $ 1,252,609      
  

 

 

      

 

 

    

At June 30, 2012, Webster Bank had pledged loans with an aggregate carrying value of $4.0 billion as collateral for borrowings and had additional borrowing capacity from the FHLB of approximately $0.9 billion. At December 31, 2011, Webster Bank had pledged loans with an aggregate carrying value of $3.9 billion as collateral for borrowings and had additional borrowing capacity from the FHLB of approximately $1.0 billion. At June 30, 2012 and December 31, 2011, Webster Bank was in compliance with FHLB collateral requirements.

NOTE 10: Long-Term Debt

Long-term debt consists of the following:

 

(In thousands)

   Maturity
date
     Stated
interest
rate
    At June 30,
2012
    At December 31,
2011
 

Senior fixed-rate notes

     2014         5.125   $ 150,000      $ 150,000   

Subordinated fixed-rate notes (a)

     2013         5.875     102,579        177,480   

Junior subordinated debt related to capital trusts:

         

Webster Capital Trust IV, fixed to floating-rate trust preferred securities (b)

     2037         7.650     136,070        136,070   

Webster Statutory Trust I, floating-rate notes (c)

     2033         3.418     77,320        77,320   
       

 

 

   

 

 

 

Total junior subordinated debt

          213,390        213,390   
       

 

 

   

 

 

 

Total notes and subordinated debt

          465,969        540,870   

Unamortized discount, net

          (206     (192

Hedge accounting adjustments

          7,165        11,911   
       

 

 

   

 

 

 

Total long-term debt

        $ 472,928      $ 552,589   
       

 

 

   

 

 

 

 

(a) The Bank completed the purchase of $74.9 million principal amount of subordinated fixed-rate notes on February 8, 2012 pursuant to a tender offer. The aggregate consideration for the notes accepted under the tender offer, including accrued and unpaid interest, of $77.8 million was paid from cash on hand.
(b) Webster Financial Corporation completed the redemption at par of all the $136.1 million outstanding principal amount of Webster Capital Trust IV 7.65% fixed to floating-rate trust preferred securities on July 18, 2012. The aggregate consideration for the securities, including accrued and unpaid interest, of $137.0 million was paid from cash on hand.
(c) The interest rate on Webster Statutory Trust I floating-rate notes, which varies quarterly based on 3-month LIBOR plus 2.95%, was 3.418% at June 30, 2012 and 3.502% at December 31, 2011.

 

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NOTE 11: Regulatory Matters

Regulatory Capital Requirements. Banks and bank holding companies are subject to various regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weighting and other factors.

Quantitative measures established by regulations to ensure capital adequacy require the maintenance of minimum amounts and ratios (set forth in the following table) of Total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital to adjusted quarterly average assets (as defined).

The Tier 1 and total capital ratios are calculated by dividing the respective capital amounts by risk-weighted assets. Risk-weighted assets are calculated based on regulatory requirements and include total assets, excluding goodwill and other intangible assets, allocated by risk weight category, and certain off-balance-sheet items (primarily loan commitments). The leverage ratio is calculated by dividing Tier 1 capital by adjusted quarterly average total assets, which exclude goodwill and other intangible assets.

The following table provides information on the capital ratios for Webster and Webster Bank:

 

     Actual     Capital Requirements     Well Capitalized  

(Dollars in thousands)

   Amount      Ratio     Amount      Ratio     Amount      Ratio  

At June 30, 2012

               

Webster Financial Corporation

               

Total risk-based capital

   $ 1,817,080         14.1   $ 1,032,210         8.0   $ 1,290,262         10.0

Tier 1 capital

     1,654,441         12.8        516,105         4.0        774,157         6.0   

Tier 1 leverage capital ratio

     1,654,441         8.9        745,151         4.0        931,439         5.0   

Webster Bank, N.A.

               

Total risk-based capital

   $ 1,659,409         12.9   $ 1,029,655         8.0   $ 1,287,069         10.0

Tier 1 capital

     1,497,991         11.6        514,827         4.0        772,241         6.0   

Tier 1 leverage capital ratio

     1,497,991         8.1        743,916         4.0        929,895         5.0   

At December 31, 2011

               

Webster Financial Corporation

               

Total risk-based capital

   $ 1,766,468         14.6   $ 967,017         8.0   $ 1,208,772         10.0

Tier 1 capital

     1,577,991         13.1        483,509         4.0        725,263         6.0   

Tier 1 leverage capital ratio

     1,577,991         8.9        713,319         4.0        891,648         5.0   

Webster Bank, N.A.

               

Total risk-based capital

   $ 1,681,769         14.0   $ 964,184         8.0   $ 1,205,230         10.0

Tier 1 capital

     1,494,529         12.4        482,092         4.0        723,138         6.0   

Tier 1 leverage capital ratio

     1,494,529         8.4        711,572         4.0        889,466         5.0   

Webster is subject to the regulatory capital requirements administered by the Federal Reserve, while Webster Bank is subject to the regulatory capital requirements administered by the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation. Regulatory authorities can initiate certain mandatory actions if Webster or Webster Bank fails to meet minimum capital requirements, which could have a direct material effect on the Company’s financial statements. At December 31, 2011 Webster Bank was required to maintain a Tier 1 leverage ratio of at least 7.5% of adjusted total assets and a total risk-based capital ratio of at least 12% of risk-weighted assets. On May 8, 2012, Webster Bank, N.A. was notified by the Office of the Comptroller of the Currency that the previously disclosed individual minimum capital ratios applicable to the Bank were terminated effective May 3, 2012.

Dividend Restrictions. In the ordinary course of business, Webster is dependent upon dividends from Webster Bank to provide funds for the payment of dividends to shareholders and to provide for other cash requirements. Banking regulations may limit the amount of dividends that may be paid. Approval by regulatory authorities is required if the effect of dividends declared would cause the regulatory capital of Webster Bank to fall below specified minimum levels. Approval is also required if dividends declared exceed the net profits for that year combined with the retained net profits for the preceding two years. In addition, the OCC has the discretion to prohibit any otherwise permitted capital distribution on general safety and soundness grounds. Dividends paid by Webster Bank to Webster Financial Corporation during the six months ended June 30, 2012 and 2011 totaled $90.0 million and $50.0 million, respectively.

Trust Preferred Securities. In accordance with the applicable accounting standard related to variable interest entities, the common stock of trusts which have issued trust preferred securities have not been included in the consolidated financial statements. However, $210.0 million in trust preferred securities issued by Webster Capital Trust IV have been included in the Tier 1 capital of Webster for regulatory capital purposes pursuant to guidance from the Federal Reserve Board. On July 21, 2010, sweeping financial regulatory reform legislation entitled the “Dodd-Frank Wall Street Reform and Consumer Protection Act” (the “Dodd-

 

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Frank Act”) was signed into law. Certain provisions of the Dodd-Frank Act will require Webster to deduct, over a three year period beginning on January 1, 2013, all trust preferred securities from Webster’s Tier 1 capital. Nonetheless, excluding trust preferred securities from Tier 1 capital at June 30, 2012 would not affect Webster’s ability to meet all capital adequacy requirements to which it is subject. Trust preferred securities will continue to be entitled to be treated as Tier 2 capital after they are phased out of Tier 1 capital. Webster Financial Corporation completed the redemption at par of all the $136.1 million outstanding principal amount of Webster Capital Trust IV 7.65% fixed to floating-rate trust preferred securities on July 18, 2012.

NOTE 12: Earnings Per Common Share

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

 

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

(In thousands, except per share data)

   2012     2011     2012     2011  

Earnings from continuing operations for basic and diluted earnings per common share:

        

Net income from continuing operations available to common shareholders

   $ 40,625      $ 33,353      $ 78,948      $ 65,108   

Less dividends declared or accrued:

        

Common shareholders

     (8,742     (4,351     (13,099     (5,222

Participating shares

     (44     (26     (64     (27
  

 

 

   

 

 

   

 

 

   

 

 

 

Total undistributed income available to common shareholders

     31,839        28,976        65,785        59,859   

Add dividends paid to common shareholders

     8,742        4,351        13,099        5,222   

Less income allocated to participating securities

     (160     (172     (320     (304
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income allocated to common shareholders

   $ 40,421      $ 33,155      $ 78,564      $ 64,777   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings from discontinued operations for basic and diluted earnings per common share:

        
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income from discontinued operations available to common shareholders

   $ —        $ —        $ —        $ 1,995   
  

 

 

   

 

 

   

 

 

   

 

 

 

Shares:

        

Weighted average common shares outstanding - basic

     87,291        86,986        87,254        86,940   

Effect of dilutive securities:

        

Stock options and restricted stock

     252        385        274        390   

Warrants - Series A1 and A2

     3,908        4,471        4,031        4,592   

Warrants - other

     92        342        110        446   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding - diluted

     91,543        92,184        91,669        92,368   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings from continuing operations per common share:

        

Basic

   $ 0.46      $ 0.38      $ 0.90      $ 0.75   

Diluted

   $ 0.44      $ 0.36      $ 0.86      $ 0.70   

Earnings from discontinued operations per common share:

        

Basic

   $ —        $ —        $ —        $ 0.02   

Diluted

   $ —        $ —        $ —        $ 0.02   

Earnings per common share:

        

Basic

   $ 0.46      $ 0.38      $ 0.90      $ 0.77   

Diluted

   $ 0.44      $ 0.36      $ 0.86      $ 0.72   

Stock Options

Options to purchase 2.0 million shares for the three and six months ended June 30, 2012 and 1.9 million shares for the three and six months ended June 30, 2011, respectively, were excluded from the calculation of diluted earnings per share because the options’ exercise price was greater than the average market price of the shares for the respective periods.

Restricted Stock

Non-participating restricted stock awards of 149 thousand and 154 thousand shares for the three and six months ended June 30, 2012, respectively, and 11,730 and 15,585 for the three and six months ended June 30, 2011, respectively, whose issuance is contingent upon the satisfaction of certain performance conditions, were deemed to be anti-dilutive and therefore were excluded from the calculation of diluted earnings per share for the respective periods.

Series A Preferred Stock

Series A Preferred Stock represents potential issuable common stock of 1.1 million shares at June 30, 2012 and 2011. The weighted average effect of the potential issuable common stock associated with the Series A Preferred Stock was deemed to be anti-dilutive and therefore was excluded from the calculation of diluted earnings per share for the three and six months ended June 30, 2012 and 2011.

 

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Warrants

Series A1 and A2: The Series A1 and A2 warrants issued in connection with the Warburg investment represent an aggregate 8.6 million potential issuable shares of common stock at June 30, 2012 and 2011. The weighted average dilutive effect of these warrants was included in the calculation of diluted earnings per share because the exercise price of the warrants was less than the average market price of Webster’s common stock for the three and six months ended June 30, 2012 and 2011. The initial exercise price of $10.00 increased to $11.50 for the A1 warrants on July 28, 2011 and for the A2 warrants on October 15, 2011. The exercise price will similarly increase to $13.00 for the A1 warrants on July 28, 2013 and for the A2 warrants on October 15, 2013, unless otherwise exercised on or before the respective dates. As of June 30, 2012, none of the A1 or A2 warrants have been exercised.

Other Warrants: Warrants originally issued to the U.S. Treasury and sold in a secondary public offering on June 8, 2011 represents 0.7 million and 1.0 million potential issuable shares of common stock at June 30, 2012 and 2011, respectively. The weighted average dilutive effect of these warrants was included in the calculation of diluted earnings per share because the exercise price of the warrants was less than the average market price of Webster’s common stock for the three and six months ended June 30, 2012 and 2011.

NOTE 13: Derivative Financial Instruments

Risk Management Objective of Using Derivatives

Webster is exposed to certain risks arising from both its business operations and economic conditions. Webster principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. Webster manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its debt funding and the use of derivative financial instruments. Specifically, Webster enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. Webster’s derivative financial instruments are used to manage differences in the amount, timing, and duration of Webster’s known or expected cash receipts and its known or expected cash payments principally related to its investments and borrowings.

Cash Flow Hedges of Interest Rate Risk

Webster’s primary objective in using interest rate derivatives is to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, Webster uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges are designed to manage the risk associated with a forecasted event or an uncertain variable rate cash flow.

Webster uses forward-starting interest rate swaps to protect the Company against adverse fluctuations in interest rates by reducing its exposure to variability in cash flows relating to interest payments on forecasted debt issuances. All forward settle swaps are expected to be cash settled at debt issuance. The change in fair value of the forward settle swaps is marked through OCI and the OCI gain or loss at the time of debt issuance will be amortized into interest expense over the life of the debt. The valuation balance recorded in OCI related to future settle cash flow swaps was a net $12.3 million loss as of June 30, 2012.

Webster has two $25 million forward settle interest rate swap hedges outstanding as of June 30, 2012, which qualify for cash flow hedge accounting. The swaps, entered into in May and June 2012, protect the Company against adverse fluctuations in interest rates by reducing exposure to variability in cash flows related to interest payments on forecasted issuance of five-year debt. Each $25 million swap will pay a fixed rate and receive 1-month LIBOR indexed floating rate, effective on March 28, 2013, and maturing on March 28, 2018. Cash settlement is expected to occur on the effective date and the forecasted five-year debt issuances are anticipated to occur between December 28, 2012 and September 30, 2013.

Webster also has two $50 million forward settle interest rate swap hedges outstanding as of June 30, 2012, which were entered into in May 2011 to protect the Company against adverse fluctuations in interest rates by reducing exposure to variability in cash flows related to interest payments on forecasted issuance of six-year debt. Each $50 million swap will pay a fixed rate and receive 1-month LIBOR indexed floating rate, effective on September 5, 2012 and September 11, 2012, and maturing on June 5, 2018 and June 11, 2018, respectively. Cash settlement is expected to occur on the effective date and the forecasted six-year debt issuances are anticipated to occur between June 11, 2012 and December 11, 2012.

The Company terminated two $50 million forward settle interest rate swap hedge transactions during March 2012, which qualified for cash flow hedge accounting. The swap terminations were cash settled upon entering into two four-year repurchase agreements effective March 21, 2012 and March 26, 2012. The termination loss of $5.8 million is recorded in OCI and will be amortized into interest expense over the term of the repurchase agreements maturing on March 21, 2016 and March 28, 2016.

 

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Previously terminated forward settle swap losses are recorded in OCI and are amortized into earnings over the respective term of the associated issued debt instrument. At June 30, 2012, the remaining unamortized loss on the termination of cash flow hedges was $30.8 million. Over the next twelve months the Company will reclassify $7.5 million from OCI as an increase to interest expense. There was no hedge ineffectiveness for the three and six months ended June 30, 2012 and 2011.

In addition, the Company has an interest accruing $100 million swap which became effective April 2010 and is designated as a cash flow hedge transaction against the risk of changes in cash flows related to the Company’s $100 million 3-month LIBOR indexed floating rate FHLB advance maturing April 29, 2013. The swap’s change in fair value is marked through OCI and a component of OCI is reclassified to interest expense on a quarterly basis. The balance in OCI related to this cash flow hedge is a $1.1 million loss as of June 30, 2012.

Amounts reported in OCI related to current cash flow derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. During the next twelve months the Company estimates that $3.5 million will be reclassified as an increase to interest expense.

The table below presents the fair value of Webster’s derivative financial instruments designated as cash flow hedges as well as their classification on the Condensed Consolidated Balance Sheets as of June 30, 2012 and December 31, 2011:

 

            At June 30, 2012     At December 31, 2011  

(Dollars in thousands)

   Balance Sheet
Classification
     # of
Instruments
   Notional
Amount
     Estimated
Fair
Value
    # of
Instruments
   Notional
Amount
     Estimated
Fair
Value
 

Interest rate derivatives designated as hedges of cash flow:

                   

Interest rate swap on FHLB advances

     Other liabilities       1    $ 100,000       $ (1,111   1    $ 100,000       $ (1,521

Forward settle interest rate swap on anticipated debt

     Other liabilities       4      150,000         (12,309   4      200,000         (15,050

The net impact on interest expense related to cash flow hedges for the three and six months ended June 30, 2012 and 2011 is presented below:

 

     Three months ended June 30,  
     2012     2011  

(In thousands)

   Interest
Expense
     Realized
Deferred
Loss
(Gain)
    Net
Impact
    Interest
Expense
     Realized
Deferred
Loss
(Gain)
    Net
Impact
 

Impact reported as an increase or (reduction) in interest expense on borrowings

              

Interest rate swaps on FHLB advances

   $ 336       $ 1,139      $ 1,475      $ 388       $ 369      $ 757   

Interest rate swaps on subordinated debt

     —           (22     (22     —           (38     (38

Interest rate swaps repurchase agreement

     —           830        830        —           156        156   

Interest rate swaps on Trust Preferred Securities

     —           (44     (44     —           (45     (45
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net impact on interest expense on borrowings

   $ 336       $ 1,903      $ 2,239      $ 388       $ 442      $ 830   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

     Six months ended June 30,  
     2012     2011  

(In thousands)

   Interest
Expense
     Realized
Deferred
Loss
(Gain)
    Net
Impact
    Interest
Expense
     Realized
Deferred
Loss
(Gain)
    Net
Impact
 

Impact reported as an increase or (reduction) in interest expense on borrowings

              

Interest rate swaps on FHLB advances

   $ 667       $ 2,278      $ 2,945      $ 770       $ 738      $ 1,508   

Interest rate swaps on subordinated debt

     —           (49     (49     —           (75     (75

Interest rate swaps repurchase agreement

     —           1,299        1,299        —           156        156   

Interest rate swaps on Trust Preferred Securities

     —           (89     (89     —           (90     (90
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net impact on interest expense on borrowings

   $ 667       $ 3,439      $ 4,106      $ 770       $ 729      $ 1,499   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

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Fair Value Hedges of Interest Rate Risk

Webster is exposed to changes in the fair value of certain of its fixed rate obligations due to changes in benchmark interest rates. Webster uses interest rate swaps to manage its exposure to changes in fair value on these instruments attributable to changes in the benchmark interest rate. Interest rate swaps designated as fair value hedges involve the receipt of fixed-rate amounts from a counterparty in exchange for Webster making variable-rate payments over the life of the agreements without the exchange of the underlying notional amount. Webster did not have any derivative financial instruments designated as fair value hedges as of June 30, 2012 and December 31, 2011.

For derivatives designated and that qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk is recognized in interest expense. Webster includes the gain or loss from the period end mark to market (“MTM”) adjustments on the hedged items in the same line item as the offsetting loss or gain on the related derivatives. The impact of derivative net settlements, hedge ineffectiveness, basis amortization adjustments and amortization of deferred hedge terminations are also recognized in interest expense. At June 30, 2012, the remaining unamortized gain on the termination of fair value hedges was $7.3 million.

The net impact on interest expense related to fair value hedges for the three and six months ended June 30, 2012 and 2011 is presented in the table below:

 

     Three months ended June 30,  
     2012     2011  

(In thousands)

   Interest
Income
     MTM
Gain
     Realized
Deferred
(Gain)
Loss
    Net
Impact
    Interest
Income
     MTM
Gain
     Realized
Deferred
(Gain)
Loss
    Net
Impact
 

Impact reported as a (reduction) or increase in interest expense on borrowings

                    

Interest rate swaps on senior notes

   $ —         $ —         $ (800   $ (800   $ —         $ —         $ (800   $ (800

Interest rate swaps on subordinated debt

     —           —           (621     (621     —           —           (1,119     (1,119

Interest rate swaps on FHLB advances

     —           —           —          —          —           —           (25     (25
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Net impact on interest expense on borrowings

   $ —         $ —         $ (1,421   $ (1,421   $ —         $ —         $ (1,944   $ (1,944
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

     Six months ended June 30,  
     2012     2011  

(In thousands)

   Interest
Income
     MTM
Gain
     Realized
Deferred
(Gain)
Loss
    Net
Impact
    Interest
Income
    MTM
Gain
    Realized
Deferred
(Gain)
Loss
    Net
Impact
 

Impact reported as a (reduction) or increase in interest expense on borrowings

                  

Interest rate swaps on senior notes

   $ —         $ —         $ (1,599   $ (1,599   $ —        $ —        $ (1,599   $ (1,599

Interest rate swaps on subordinated debt

     —           —           (3,220     (3,220     —          —          (2,239     (2,239

Interest rate swaps on FHLB advances

     —           —           —          —          (61     (144     74        (131
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net impact on interest expense on borrowings

   $ —         $ —         $ (4,819   $ (4,819   $ (61   $ (144   $ (3,764   $ (3,969
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-Hedge Accounting Derivatives / Non-designated Hedges

Derivatives not designated as hedges for accounting are not speculative and are used to manage Webster’s exposure to interest rate movements and other identified risks but do not meet the hedge accounting requirements of ASC 815, “Derivatives and Hedging.” Changes in the fair value of these instruments are recorded as a component of non-interest income in the Condensed Consolidated Statements of Operations. As of June 30, 2012 and December 31, 2011, Webster had the following outstanding interest rate swaps and caps that were not designated for hedge accounting:

 

          At June 30, 2012     At December 31, 2011  

(Dollars in thousands)

   Balance Sheet
Classification
   # of
Instruments
     Notional
Amount
     Estimated
Fair Value
    # of
Instruments
     Notional
Amount
     Estimated
Fair Value
 

Webster with customer position:

                   

Commercial loan interest rate swaps

   Other assets      147       $ 741,923       $ 51,229        127       $ 615,773       $ 45,140   

Commercial loan interest rate swaps with floors

   Other assets      11         23,671         2,102        12         25,217         1,994   

Commercial loan interest rate caps

   Other liabilities      16         122,928         (98     13         119,186         (160

Webster with counterparty position:

                   

Commercial loan interest rate swaps

   Other liabilities      140         726,470         (44,411     119         595,542         (40,269

Commercial loan interest rate swaps

   Other liabilities      1         15,400         2        4         20,180         13   

Commercial loan interest rate swaps with floors

   Other liabilities      11         23,671         (1,738     12         25,217         (1,597

Commercial loan interest rate caps

   Other liabilities      16         122,928         98        13         119,186         160   

 

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Webster reported the changes in the fair value of non-hedge accounting derivatives as a component of other non-interest income in the accompanying Condensed Consolidated Statements of Operations as follows for three and six months ended June 30, 2012 and 2011:

 

     Three months ended June 30,  
     2012     2011  

(In thousands)

   Interest
Income
     MTM
(Loss)
Gain
    Net
Impact
    Interest
Income
     MTM
(Loss)
Gain
    Net
Impact
 

Impact reported in other non-interest income:

              

Visa Swap

   $ —         $ (20   $ (20   $ —         $ (17   $ (17

Commercial loan interest rate derivatives, net

     362         1,321        1,683        216         105        321   

Fed funds futures contracts

     —           61        61        —           (718     (718
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net impact on other non-interest income

   $ 362       $ 1,362      $ 1,724      $ 216       $ (630   $ (414
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

     Six months ended June 30,  
     2012     2011  

(In thousands)

   Interest
Income
     MTM
(Loss)
Gain
    Net
Impact
    Interest
Income
     MTM
(Loss)
Gain
    Net
Impact
 

Impact reported in other non-interest income:

              

Visa Swap

   $ —         $ (472   $ (472   $ —         $ (117   $ (117

Commercial loan interest rate derivatives, net

     677         2,100        2,777        423         266        689   

Fed funds futures contracts

     —           217        217        —           (837     (837
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net impact on other non-interest income

   $ 677       $ 1,845      $ 2,522      $ 423       $ (688   $ (265
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

The weighted average rates paid and received for interest rate swaps outstanding at June 30, 2012 were as follows:

 

     Weighted-Average  
     Interest
Paid Coupon
    Interest
Received Coupon
 

Interest rate swaps:

    

Cash flow hedge interest rate swaps

     1.85     0.50

Non-hedging interest rate swaps

     1.41     1.51
  

 

 

   

 

 

 

The weighted average strike rates for interest rate caps and floors outstanding at June 30, 2012 were as follows:

 

     Strike Rate  

Non-hedging commercial loan interest rate caps

     3.03

Non-hedging commercial loan interest rate floors (embedded in interest rate swaps)

     1.01   
  

 

 

 

Futures Contracts. On March 30, 2010, to hedge against a rise in short term rates over the next twelve months, Webster entered into a $600 million short-selling of a one year strip of Fed funds future contracts with serial maturities between May 2010 and April 2011. Throughout 2010 and into 2012, Webster continued to roll the futures contracts but reduced the notional amount to $400 million beginning with the September 2011 contracts. This transaction is designed to work in conjunction with floating rate assets with interest rate floors which will not be affected if there is an increase in short-term interest rates. The fair value of the contracts is $0.5 million and is reflected as other liabilities on the Condensed Consolidated Balance Sheets and the related income impact as non-interest income on the Condensed Consolidated Statements of Operations. During the three and six months ended June 30, 2012, the Company recognized $61 thousand and $217 thousand, respectively, in mark to market gains. During the three and six months ended June 30, 2011, the Company recognized $718 thousand and $837 thousand, respectively, in mark to market losses.

Mortgage Banking Derivatives. Certain derivative instruments, primarily forward sales of mortgage loans and mortgage-backed securities (“MBS”) are utilized by Webster in its efforts to manage risk of loss associated with its mortgage loan commitments and mortgage loans held for sale. Prior to closing and funding certain single-family residential mortgage loans, an interest rate lock commitment is generally extended to the borrower. During the period from commitment date to closing date, Webster is subject to the risk that market rates of interest may change. If market rates rise, investors generally will pay less to purchase such loans resulting in a reduction in the gain on sale of the loans or, possibly, a loss. In an effort to mitigate such risk, forward delivery sales commitments, under which Webster agrees to deliver whole mortgage loans to various investors or issue MBS, are established. At June 30, 2012, outstanding rate locks totaled approximately $194.9 million and the outstanding commitments to sell residential mortgage loans totaled approximately $225.6 million. Forward sales, which include mandatory forward commitments of approximately $220.0 million at June 30, 2012, establish the price to be received upon the sale of the related mortgage loan,

 

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thereby mitigating certain interest rate risk. There is, however, still certain execution risk specifically related to Webster’s ability to close and deliver to its investors the mortgage loans it has committed to sell. The interest rate locked loan commitments and forward sales commitments are recorded at fair value, with changes in fair value recorded as non-interest income in the Condensed Consolidated Statements of Operations. As of June 30, 2012 and December 31, 2011, the fair value of interest rate locked loan commitments and forward sales commitments totaled $1.5 million and $0.2 million, respectively, and were recorded as a component of other assets in the accompanying Condensed Consolidated Balance Sheets.

Foreign Currency Derivatives. The Company enters into foreign currency forward contracts that are not designated as hedging instruments primarily to accommodate the business needs of its customers. Upon the origination of a foreign currency forward contract with a customer, the Company simultaneously enters into an offsetting contract with a third party to negate the exposure to fluctuations in foreign currency exchange rates. The notional amounts and fair values of open foreign currency forward contracts were not material at June 30, 2012 and December 31, 2011.

Counterparty Credit Risk. Derivative contracts involve the risk of dealing with both bank customers and institutional derivative counterparties and their ability to meet contractual terms. The Company has Master ISDA agreements with all derivative counterparties. Additionally, the Company has executed a Credit Support Annex (CSA) to the Master Agreement with each of its institutional derivative counterparties. The ISDA Master Agreements provide that on each payment date all amounts otherwise owing the same currency under the same transaction are netted so that only a single amount is owed in that currency. The ISDA Master Agreements also provide, if the parties so elect, for such netting of amounts in the same currency among all transactions identified as being subject to such election that have common payment dates and booking offices. Under the CSA daily net exposure in excess of our negotiated threshold is secured by posted collateral. The Company has adopted a zero threshold with the majority of its approved financial institution counterparties. In accordance with Webster policies, institutional counterparties must be fully underwritten and approved through the Company’s credit approval process. The Company’s credit exposure on interest rate swaps is limited to the net favorable value and interest payments of all swaps by each of the counterparties for the amounts up to the established threshold for collateralization. Credit exposure may be reduced by the amount of collateral pledged by the counterparty. The Company’s credit exposure relating to interest rate swaps with bank customers was approximately $53.3 million at June 30, 2012. This credit exposure is partly mitigated as transactions with customers are secured by the collateral, if any, securing the underlying transaction being hedged. The Company’s credit exposure related to derivatives with approved financial institutions is zero as the positions each have a net unfavorable market value. In accordance with our CSA Agreements, approximately $57.0 million of collateral was pledged to those counterparties at June 30, 2012. Collateral levels for approved financial institution counterparties are monitored on a daily basis and adjusted as necessary. In the event of default, should the collateral not be returned, the exposure would be offset by terminating the transactions.

NOTE 14: Fair Value Measurements

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined using quoted market prices. However, in many instances, quoted market prices are not available. In such instances, fair values are determined using various valuation techniques. Various assumptions and observable inputs must be relied upon in applying these techniques. Accordingly, the fair value estimates may not be realized in an immediate transfer of the respective asset or liability.

Fair Value Hierarchy

The three levels within the fair value hierarchy are as follows:

 

   

Level 1: Valuation is based upon 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: Fair value is calculated using inputs other than quoted market prices that are directly or indirectly observable for the asset or liability. The valuation may rely on quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in inactive markets, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit ratings, etc.) or inputs that are derived principally or corroborated by market data by correlation or other means.

 

   

Level 3: Inputs for determining the fair value of the respective assets or liabilities are not observable. Level 3 valuations are reliant upon pricing models and techniques that require significant management judgment or estimation.

Categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

 

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Assets and Liabilities Measured at Fair Value on a Recurring Basis

Securities

When quoted prices are available in an active market, the Company classifies securities within Level 1 of the valuation hierarchy. Level 1 securities include equity securities in financial institutions and U.S. Treasury bills.

If quoted market prices are not available, the Company employs an independent pricing service who utilizes matrix pricing to calculate fair value. Such fair value measurements consider observable data such as dealer quotes, market spreads, cash flows, yield curves, live trading levels, trade execution data, market consensus prepayments speeds, credit information, and respective terms and conditions for debt instruments. The Company employs procedures to monitor pricing services’ assumptions and establishes processes to challenge pricing services’ valuations that appear unusual or unexpected. Level 2 securities include agency CMOs-GSE, corporate debt, single-issuer trust preferred securities, mortgage-backed securities-GSE, CMBS securities and auction rate preferred securities.

When a market is illiquid or there is a lack of transparency around the inputs to valuation, the respective securities are classified as Level 3 and reliance is placed upon internally developed models, and management judgment and evaluation for valuation. Pooled trust preferred securities are currently classified as Level 3.

Due to the continued inactive market and illiquid nature of pooled trust preferred securities in the entire capital structure, an internal cash flow model is used to value these securities on a quarterly basis. The Company employs an internal CDO model for projection of future cash flows and discounting those cash flows to a net present value. Each underlying issuer in the pool is rated internally using the latest financial data on each institution, and future deferrals, defaults and losses are then estimated on the basis of continued stress in the financial markets. Further, all current and projected deferrals are not assumed to cure, and all current and projected defaults are assumed to have no recovery value. The resulting net cash flows are then discounted at current market levels for similar types of products that are actively trading. To determine potential OTTI due to credit losses, management compares the amortized cost to the present value of expected cash flows adjusted for deferrals and defaults using the discount margin at the time of purchase. Other factors considered include an analysis of excess subordination and temporary interest shortfall coverage. Additional interest deferrals, defaults, or ratings changes could result in future OTTI charges.

Investments in Private Equity Funds

The Company generally accounts for its percentage ownership of investments in private equity funds at cost, subject to impairment testing, while certain of the funds are included at fair value based upon the net asset value of the respective fund. At June 30, 2012, investments in private equity funds consisted of $2.2 million recorded at fair value and $9.8 million at cost. These are private investments that cannot be redeemed since the Company’s investment is distributed as the underlying investments are liquidated, which generally takes 10 years. There are currently no plans to sell any of these investments prior to their liquidation. The investments in private equity funds included at fair value are classified within Level 3 of the fair value hierarchy. The investments in private equity funds that are carried at cost are considered to be measured at fair value on a non-recurring basis when there is impairment. The Company has $2.7 million in unfunded commitments remaining for its investments in private equity funds.

Investments Held in Rabbi Trust

The investments held in Rabbi Trust primarily include mutual funds that invest in equity and fixed income securities. Shares of mutual funds are valued based on net asset value, which represents quoted market prices for the underlying shares held in the mutual fund. Therefore, investments held in Rabbi Trust are classified within Level 1 of the fair value hierarchy. The Company has elected to measure the investments in the Rabbi Trust at fair value. The Company consolidates the invested assets of the trust along with the total deferred compensation obligations and includes them in other assets and other liabilities, respectively, including them in the Condensed Consolidated Balance Sheets. Earnings in the Rabbi Trust, including appreciation or depreciation, are reflected as other non-interest income and changes in the corresponding liability are reflected as compensation and benefits in the Condensed Consolidated Statements of Operations. The cost basis of the investments held in the Rabbi Trust is $5.5 million at June 30, 2012.

Derivative Instruments

Derivative instruments are internally valued using observable inputs obtained from third parties. The resulting fair values are validated against valuations performed by independent third parties and are classified within Level 2 of the fair value hierarchy. Fed funds futures contracts are valued based on unadjusted quoted prices in active markets and are classified within Level 1 of the fair value hierarchy. When determining fair value, the Company applies the portfolio exception with respect to measuring counterparty credit risk for all of its derivative transactions subject to a master netting arrangement.

 

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A summary of fair values for assets and liabilities recorded at fair value consisted of the following:

 

     At June 30, 2012  

(In thousands)

   Carrying
Balance
     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:

           

U.S. treasury bills

   $ 200       $ 200       $ —         $ —     

Agency CMOs - GSE

     1,646,343         —           1,646,343         —     

Corporate debt

     114,562         —           114,562         —     

Pooled trust preferred securities

     28,822         —           —           28,822   

Single issuer trust preferred securities

     55,509         —           55,509         —     

Equity securities

     8,068         7,868         200         —     

Mortgage-backed securities- GSE

     930,085         —           930,085         —     

CMBS

     369,991         —           369,991         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available for sale securities

     3,153,580         8,068         3,116,690         28,822   

Derivative instruments:

           

Interest rate swaps

     53,330         —           53,330         —     

Mortgage banking derivatives

     1,502         —           1,502         —     

Investments held in Rabbi Trust

     5,470         5,470         —           —     

Investments in private equity funds

     2,154         —           —           2,154   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial assets held at fair value

   $ 3,216,036       $ 13,538       $ 3,171,522       $ 30,976   
  

 

 

    

 

 

    

 

 

    

 

 

 

Financial liabilities held at fair value:

           

Derivative instruments:

           

Interest rate swaps

   $ 59,568       $ —         $ 59,568       $ —     

Fed Fund futures contracts (a)

     541         541         —           —     

Visa Swap

     2         —           2         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial liabilities held at fair value

   $ 60,111       $ 541       $ 59,570       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     At December 31, 2011  

(In thousands)

   Carrying
Balance
     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:

           

U.S. treasury bills

   $ 200       $ 200       $ —         $ —     

Agency CMOs - GSE

     1,940,242         —           1,940,242         —     

Pooled trust preferred securities

     28,998         —           —           28,998   

Single issuer trust preferred securities

     38,214         —           38,214         —     

Equity securities

     9,447         8,472         —           975   

Mortgage-backed securities- GSE

     527,310         —           527,310         —     

CMBS

     330,353         —           330,353         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available for sale securities

     2,874,764         8,672         2,836,119         29,973   

Derivative instruments:

           

Interest rate swaps

     47,134         —           47,134         —     

Investments in private equity funds

     2,841         —           —           2,841   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial assets held at fair value

   $ 2,924,739       $ 8,672       $ 2,883,253       $ 32,814   
  

 

 

    

 

 

    

 

 

    

 

 

 

Financial liabilities held at fair value:

           

Derivative instruments:

           

Interest rate swaps

   $ 58,424       $ —         $ 58,424       $ —     

Fed Fund futures contracts

     1,365         —           1,365         —     

Visa Swap

     2         —           2         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial liabilities held at fair value

   $ 59,791       $ —         $ 59,791       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) At the end of the period, Fed Fund futures contracts value was transferred from Level 2 to Level 1. These contracts are considered to be valued at Level 1 based upon quoted prices in active markets.

 

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The following table presents the changes in Level 3 assets and liabilities that are measured at fair value on a recurring basis, for the three and six months ended June 30, 2012 and 2011:

 

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

(In thousands)

   2012     2011     2012     2011  

Level 3, beginning of period (a)

   $ 32,062      $ 57,822      $ 32,814      $ 61,098   

Transfers out of Level 3 (b)

     —          —          (975     —     

Change in unrealized loss included in other comprehensive income

     (434     (1,241     692        2,077   

Unrealized gain (loss) included in net income

     98        194        (622     27   

Realized loss on sale of available for sale securities

     —          (2,369     —          (3,343

Purchases/capital calls

     —          85        126        232   

Sales/proceeds

     —          (406     —          (5,487

Accretion/amortization

     22        226        16        275   

Calls/paydowns

     (772     (3,443     (1,075     (4,013

Other

     —          (240     —          (238
  

 

 

   

 

 

   

 

 

   

 

 

 

Level 3, end of period

   $ 30,976      $ 50,628      $ 30,976      $ 50,628   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) The Company has investments in private equity funds included in Level 3 and has adjusted prior period balances to conform to the current period’s presentation. Management believes that these changes are immaterial to Webster’s financial statements and align reporting of such data more closely with reporting requirements resulting from the adoption of ASU 2011-04 Fair Value Measurement (Topic 820) “Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in US GAAP and IFRS”.
(b) As of January 1, 2012, auction rate preferred securities were transferred from Level 3 to Level 2. These securities are considered to be Level 2 based upon observable market activity at full par value for recent transactions.

The following table presents information about quantitative inputs and assumptions for items categorized in Level 3 of the fair value hierarchy:

 

     At June 30, 2012

(In thousands)

   Fair Value      Valuation
Technique
     Unobservable
Input
     Range
(Weighted Average)

Pooled trust preferred securities

   $ 28,822         Discounted cash flow         Discount rate       6.63% - 11.16%
(9.62%)
           Credit spread       413 - 866 bp

(712 bp)

Discount rates are derived for each security depending on the original rating or a notched down rating based on management judgment. The discount represents a market rate used to discount expected cash flows to determine the fair value of the security. Components of the calculated discount rate are published industry credit spreads and 30 year swap rate. When discount rates increase as a result of increase in rate or credit spread, there is a direct inverse correlation with fair value; as discount rates increase, fair value decreases. An increase in credit spreads correlates to an increase in discount rate and therefore a decrease in fair value.

Pooled trust preferred security issuer financials are reviewed on a quarterly basis and an internal credit rating (“shadow rating”) is updated for individual issuers in the model. The shadow rating is correlated to a Moody’s loss table to determine the loss impact on expected cash flows. There is a direct relationship between shadow rating and fair value; as shadow ratings decline the loss probability increases, expected cash flows decline and therefore fair value decreases. There may be instances when a one notch downgrade in credit ratings may not significantly impact the fair value of securities depending on the amount of collateral in the deal that is already rated “D” for which Webster Bank assumes 100% loss.

Assets Measured at Fair Value on a Non-Recurring Basis

Certain assets are measured at fair value on a non-recurring basis; that is, the assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). The following is a description of valuation methodologies used for assets measured on a non-recurring basis.

Loans

Impaired loans for which repayment of the loan is expected to be provided solely by the value of the underlying collateral are considered collateral dependent and are valued based on the estimated fair value of such collateral using Level 3 inputs based on customized discounting criteria.

 

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Loans Held for Sale

Loans held for sale are accounted for at the lower of cost or market and are considered to be recognized at fair value when they are recorded at below cost. The fair value of loans held for sale is based on quoted market prices of similar loans sold in conjunction with securitization transactions, adjusted as required for changes in loan characteristics and are classified within Level 3 of the fair value hierarchy.

Other Real Estate Owned (OREO) and Repossessed Assets

OREO and Repossessed Assets are accounted for at the lower of cost or market and are considered to be recognized at fair value when they are recorded at below cost. The fair value of OREO is based on independent appraisals or internal valuation methods, less estimated selling costs. The fair value of repossessed assets is based on available pricing guides, auction results and price opinions, less estimated selling costs. Certain assets require assumptions that are not observable in an active market in the determination of fair value and are classified as Level 3.

Mortgage Servicing Assets

The Company accounts for mortgage servicing assets at cost, subject to impairment testing. When the carrying value exceeds fair value, a valuation allowance is established to reduce the carrying cost to fair value. Fair value is calculated as the present value of estimated future net servicing income and relies on market based assumptions for loan prepayment speeds, servicing costs, discount rates, and other economic factors. As such, mortgage servicing assets are classified within Level 3 of the fair value hierarchy.

The table below presents the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a non-recurring basis at June 30, 2012:

 

(Dollars in thousands)

                     

Asset

   Fair Value     

Valuation Methodology

  

Unobservable Inputs

   Range of Inputs

Impaired Loans

   $ 27,822      

Appraisals

  

Discount for dated appraisal

   0% - 35%
        

Discount for costs to sell

   3% - 8%
     

Direct Capitalization Method

  

Cap Rate

   8.8% - 9.0%

Other Real Estate

   $ 2,402      

Appraisals

  

Discount for costs to sell

   8%
        

Discount for appraisal type

   15% - 60%

Mortgage Servicing Rights

   $ 9,332      

Discounted cash flow

  

Prepayment speeds

   4.0% - 24.3%
        

Discount Rates

   2.2% - 3.5%

Assets and Liabilities Disclosed at Fair Value

The Company is required to disclose estimated fair value of financial instruments, both assets and liabilities on and off the balance sheet, for which it is practicable to estimate fair value and the following is a description of valuation methodologies used for those assets and liabilities.

Cash, Due from Banks, and Interest-bearing Deposits

The carrying amount of cash, due from banks, and interest-bearing deposits is used to approximate fair value, given the short time frame to maturity and as such assets do not present unanticipated credit concerns. Cash, Due from Banks, and Interest-bearing deposits are classified within Level 1 of the fair value hierarchy.

Loans and Lease Receivables

The Company employs an independent third party to provide fair value estimates for loans and leases held for investment. Such estimates are calculated using discounted cash flow analysis, using market interest rates for comparable loans. The associated cash flows are adjusted for credit and other potential losses. Fair value for impaired loans is estimated using the net present value of the expected cash flows or the fair value of the underlying collateral if repayment is collateral dependent. Loans and lease receivables are classified within Level 3 of the fair value hierarchy.

Deposit Liabilities

The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. Given the short time frame to maturity, deposit liabilities are classified within Level 1 of the fair value hierarchy.

 

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Securities Sold Under Agreements to Repurchase and Other Short Term Borrowings

Carrying value is an estimate of fair value for those securities sold under agreements to repurchase and other short term borrowings that mature within 90 days. The fair values of all other short term borrowings are estimated using discounted cash flow analyses based on current market rates adjusted, as appropriate, for associated credit and option risks. Securities sold under agreements to repurchase and other short term borrowings are classified within Level 2 of the fair value hierarchy.

Long Term Debt

The fair value of long term debt is estimated using a discounted cash flow technique. Discount rates are matched with the time period of the expected cash flow and are adjusted, as appropriate, to reflect credit and option risk. Long term debt is classified within Level 2 of the fair value hierarchy.

A summary of estimated fair values of significant financial instruments consisted of the following:

 

    At June 30, 2012  

(In thousands)

  Carrying
Balance
    Quoted Prices in
Active  Markets for
Identical Assets
(Level 1)
    Significant Other
Observable  Inputs
(Level 2)
    Significant
Unobservable  Inputs

(Level 3)
 

Assets

       

Cash and due from banks

  $ 197,229      $ 197,229      $ —        $ —     

Interest-bearing deposits

    73,598        73,598        —          —     

Securities available for sale

    3,153,580        8,068        3,116,690        28,882   

Securities held-to-maturity

    3,076,226        —          3,234,656        —     

Loans held for sale

    89,228        —          —          89,228   

Loans, net

    11,341,240        —          —          11,409,439   

Mortgage servicing assets (a)

    10,284        —          —          11,163   

Derivative instruments

    53,330        —          53,330        —     

Investments held in Rabbi Trust

    5,470        5,470        —          —     

Investments in private equity funds

    11,957        —          —          11,957   

Liabilities

       

Deposits other than time deposits

  $ 11,259,059      $ 11,259,059      $ —        $ —     

Time deposits

    2,714,868        2,758,130        —          —     

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

    1,203,378        —          1,266,736        —     

FHLB advances and other long-term debt (b)

    2,002,030        —          1,989,915        —     

Derivative instruments

    60,111        —          60,111        —     

 

    At December 31, 2011  

(In thousands)

  Carrying
Balance
    Quoted Prices in
Active  Markets for
Identical Assets
(Level 1)
    Significant Other
Observable  Inputs
(Level 2)
    Significant
Unobservable  Inputs
(Level 3)
 

Assets

       

Cash and due from banks

  $ 195,957      $ 195,957      $ —        $ —     

Interest-bearing deposits

    96,062        96,062        —          —     

Securities available for sale

    2,874,764        8,672        2,836,119        29,973   

Securities held-to-maturity

    2,973,727        —          3,130,546        —     

Loans held for sale

    57,391        —          —          57,391   

Loans, net

    10,991,917        —          —          11,097,390   

Mortgage servicing assets (a)

    7,831        —          —          9,968   

Investments in private equity funds

    12,343        —          —          12,343   

Derivative instruments

    47,134        —          47,134        —     

Liabilities

       

Deposits other than time deposits

  $ 10,821,390      $ 10,619,712      $ —        $ —     

Time deposits

    2,834,635        2,883,006        —          —     

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

    1,164,706        —          1,212,228        —     

FHLB advances and other long-term debt (b)

    1,805,198        —          1,789,506        —     

Derivative instruments

    59,791        —          59,791        —     

 

(a) The carrying amount of mortgage servicing assets is net of $1.3 million and $0.9 million reserves at June 30, 2012 and December 31, 2011, respectively. The estimated fair value does not include such adjustments.
(b) The carrying amount of FHLB advances and other long-term debt is net of $7.1 million and $12.5 million in hedge accounting adjustments and discounts at June 30, 2012 and December 31, 2011, respectively. The estimated fair value does not include such adjustments.

 

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Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the entire holdings or any part of a particular financial instrument. Because no active market exists for a significant portion of Webster’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These factors are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

NOTE 15: Pension and Other Postretirement Benefits

The following table provides the components of net periodic benefit cost (income) for the three and six months ended June 30, as indicated:

 

     Three months ended June 30,  
     Webster Pension     Webster SERP      Other Benefits  

(In thousands)

   2012     2011     2012      2011      2012      2011  

Net Periodic Benefit Cost Recognized in Net Income:

               

Service cost

   $ (29   $ 44      $ —         $ —         $ —         $ —     

Interest cost

     1,838        1,866        78         92         44         54   

Expected return on plan assets

     (2,513     (2,549     —           —           —           —     

Amortization of prior service cost

     —          —          —           —           18         18   

Amortization of net loss

     1,465        675        15         8         25         15   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic benefit cost recognized in net income

   $ 761      $ 36      $ 93       $ 100       $ 87       $ 87   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

 

     Six months ended June 30,  
     Webster Pension     Webster SERP      Other Benefits  

(In thousands)

   2012     2011     2012      2011      2012      2011  

Net Periodic Benefit Cost Recognized in Net Income:

               

Service cost

   $ 15      $ 88      $ —         $ —         $ —         $ —     

Interest cost

     3,653        3,731        158         184         88         108   

Expected return on plan assets

     (5,034     (5,275     —           —           —           —     

Amortization of prior service cost

     —          —          —           —           36         36   

Amortization of net loss

     3,052        1,337        35         16         51         31   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic benefit cost (income) recognized in net income

   $ 1,686      $ (119   $ 193       $ 200       $ 175       $ 175   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

The Webster Bank Pension Plan and the supplemental pension plans were frozen effective December 31, 2007. No additional benefits have been accrued since that time. Additional contributions to the Webster Bank Pension Plan will be made as deemed appropriate by management in conjunction with information provided by the Plan’s actuaries.

The Bank is also a sponsor of a multiple-employer plan, EIN/Pension Plan Number 13-5645888/333, (“the Fund”) administered by Pentegra for the benefit of former employees of a bank acquired by Webster. The Fund does not segregate the assets or liabilities of its participating employers in the ongoing administration of this plan. All benefit accruals were frozen as of September 1, 2004. According to the Fund’s administrators, as of July 1, 2011, the date of the latest actuarial valuation, Webster’s portion of the plan was underfunded by $5.9 million. Webster made $0.4 million and $0.8 million in contributions into the Fund for the three and six months ended June 30, 2012.

NOTE 16: Stock-Based Compensation Plans

Webster has established stock-based compensation plans that cover certain employees and directors, as the Company believes that such awards better align the interests of its employees with those of its shareholders. Shares for awards of restricted stock or the exercise of stock options are expected to come from the Company’s treasury shares or authorized and unissued shares. The cost of the stock-based compensation plans is recognized based upon the grant-date fair value, on a straight-line basis over the requisite service period of such awards, net of estimated forfeitures, as a component of compensation and benefits reflected in non-interest expense. Stock-based compensation expense was $2.4 million and $1.8 million for the three months ended June 30, 2012 and 2011, respectively, consisting of (1) stock options expense of $842.9 thousand and $223.0 thousand, respectively, and (2) restricted stock expense of $1.6 million for each period. Stock-based compensation expense was $4.2 million and $3.1 million for the six months ended June 30, 2012 and 2011, respectively, consisting of (1) stock options expense of $1.1 million and $380.8 thousand and (2) restricted stock expense of $3.1 million and $2.7 million, respectively.

 

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Stock Options

The following table provides a summary of stock option activity under the plans for the three and six months ended June 30, 2012:

 

     Three months ended June 30, 2012      Six months ended June 30, 2012  
     Number of
Shares
     Weighted-Average
Exercise Price
     Number of
Shares
     Weighted-Average
Exercise Price
 

Options outstanding, at beginning of period

     2,887,470       $ 29.29         2,513,327       $ 30.03   

Options granted

     —           —           398,616         23.81   

Options exercised

     12,321         12.85         32,874         12.85   

Options forfeited or expired

     54,864         34.03         58,784         34.26   
  

 

 

    

 

 

    

 

 

    

 

 

 

Options outstanding, at end of period

     2,820,285       $ 29.27         2,820,285       $ 29.27   
  

 

 

    

 

 

    

 

 

    

 

 

 

Options exercisable, at end of period

     2,202,578       $ 31.72         2,202,578       $ 31.72   
  

 

 

    

 

 

    

 

 

    

 

 

 

Options expected to vest, at end of period

     558,672       $ 20.26         558,672       $ 20.26   
  

 

 

    

 

 

    

 

 

    

 

 

 

At June 30, 2012, total options outstanding included 2,528,249 non-qualified and 292,036 incentive stock options. As of June 30, 2012, there was $4.0 million of unrecognized compensation cost related to non-vested options expected to be recognized over a remaining weighted-average vesting period of 2.2 years.

The fair value of each option award is estimated on the date of grant using the Black-Scholes Option-Pricing Model with the following weighted-average assumptions:

 

     2012     2011  

Weighted-average assumptions:

    

Expected term (years)

     6.6        6.5   

Expected dividend yield

     1.00     1.00

Expected forfeiture rate

     9.00        9.00   

Expected volatility

     61.03        57.41   

Risk-free interest rate

     1.30        2.68   
  

 

 

   

 

 

 

Fair value of option at grant date

   $ 11.71      $ 12.74   
  

 

 

   

 

 

 

Restricted Stock

The following tables summarize restricted stock activity, under the plans, for the three and six months ended June 30, 2012:

 

     Three months ended June 30, 2012  
     Time - Based      Performance - Based  
     Number of
Shares
     Weighted-average
Grant Date
Fair Value
     Number of
Shares
     Weighted-average
Grant Date
Fair Value
 

Restricted stock, at beginning of period

     461,735       $ 20.99         141,175       $ 25.44   

Granted

     27,892         22.60         —           —     

Vested

     73,631         19.51         11,898         25.44   

Forfeited

     6,305         21.36         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Restricted stock, at end of period

     409,691       $ 21.36         129,277       $ 25.44   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Six months ended June 30, 2012  
     Time - Based      Performance - Based  
     Number of
Shares
     Weighted-average
Grant Date
Fair Value
     Number of
Shares
     Weighted-average
Grant Date
Fair Value
 

Restricted stock, at beginning of period

     384,385       $ 20.20         —         $ —     

Granted

     184,079         22.41         149,479         25.44   

Vested

     149,940         19.57         20,202         25.44   

Forfeited

     8,833         21.72         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Restricted stock, at end of period

     409,691       $ 21.36         129,277       $ 25.44   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

For the three and six months ended June 30, 2012, there were 2,340 and 4,497 shares of time-based restricted stock, respectively, and for the six months ended June 30, 2012 there were 112,889 performance-based awards granted to senior management, of which all were granted during the first three months of 2012 . The performance-based awards vest after three years in a range from zero to 200% of the target number of shares under the grant. A portion of the shares vest dependent upon Webster’s ranking for total shareholder return versus the KBW Regional Banking Index and the remaining portion vest dependent on Webster’s return on equity over the three year vesting period. As of June 30, 2012, there was $11.6 million of unrecognized compensation cost related to non-vested restricted stock awards expected to be recognized over a remaining weighted-average vesting period of 1.9 years.

NOTE 17: Business Segments

Webster’s operations are divided into four business segments that represent its core businesses - Commercial Banking, Retail Banking, Consumer Finance and Other. Other includes HSA Bank and Private Banking. These segments reflect how executive management responsibilities are assigned by the Chief Executive Officer for each of the core businesses, the products and services provided and the type of customer served, and reflect how financial information is currently evaluated by management. The Company’s Treasury unit and consumer liquidating portfolio are included in the Corporate and Reconciling category along with the results of discontinued operations and the amounts required to reconcile profitability metrics to GAAP reported amounts.

As of January 1, 2012 the Company changed the allocation of FDIC insurance expense to conform to the change in the FDIC insurance assessment system from one that is based on domestic deposits to one that is based on average consolidated total assets minus average tangible equity which took effect in 2011. The 2011 business segment results have been adjusted for comparability to the 2012 segment presentation.

Webster uses an internal profitability reporting system to generate information by operating segment, which is based on a series of management estimates and allocations regarding funds transfer pricing, the provision for loan and lease losses, non-interest expense, income taxes and equity capital. These estimates and allocations, certain of which are subjective in nature, are continually being reviewed and refined. Changes in estimates and allocations that affect the reported results of any operating segment do not affect the consolidated financial position or results of operations of Webster as a whole.

The Company uses a matched maturity funding concept, also known as coterminous funds transfer pricing (“FTP”), to allocate interest income and interest expense to each business while also transferring the primary interest rate risk exposures to the Corporate and Reconciling category. The allocation process considers the specific interest rate risk and liquidity risk of financial instruments and other assets and liabilities in each line of business. The “matched maturity funding concept” considers the origination date and the earlier of the maturity date or the repricing date of a financial instrument to assign an FTP rate for loans and deposits originated each day. Loans are assigned an FTP rate for funds “used” and deposits are assigned an FTP rate for funds “provided.” From a governance perspective, this process is executed by the Company’s Financial Planning and Analysis division, and the process is overseen by the Company’s Asset-Liability Committee.

Webster attributes the provision for loan and lease losses to each segment based on management’s estimate of the inherent loss content in each of the specific loan portfolios. Provision expense, for certain elements of risk that are not deemed specifically attributable to a business segment, such as environmental factors and provision for the consumer liquidating portfolio, are shown as other reconciling. For the three and six months ended June 30, 2012, 65.6% and 59.5% of the provision expense is specifically attributable to business segments and reported accordingly.

Webster allocates a majority of non-interest expense to each business segment using a full-absorption costing process. Costs, including corporate overhead, are analyzed, pooled by process, and assigned to the appropriate business segment and corporate overhead costs are allocated to the business segments. Income tax expense is allocated to each business segment based on the effective income tax rate for the period shown.

The full profitability measurement reports which are prepared for each operating segment reflect non-GAAP reporting methodologies. The differences between the full profitability and GAAP measures are reconciled in the Corporate and Reconciling category.

 

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Table of Contents

Webster’s business segment results are intended to reflect each segment as if it were a stand-alone business. The following table presents the operating results and total assets for Webster’s reportable segments:

 

     Three months ended June 30, 2012  
(In thousands)    Commercial
Banking
    Retail
Banking
     Consumer
Finance
     Other     Total Business
Segments
     Corporate and
Reconciling
     Consolidated
Total
 

Net interest income

   $ 45,575      $ 58,894       $ 27,051       $ 8,379      $ 139,899       $ 4,479       $ 144,378   

(Benefit) provision for loan and lease losses

     (4,529     580         7,489         (262     3,278         1,722         5,000   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Net interest income after provision for loan and lease losses

     50,104        58,314         19,562         8,641        136,621         2,757         139,378   

Non-interest income

     7,281        22,257         4,157         7,280        40,975         6,378         47,353   

Non-interest expense

     24,916        67,215         18,862         10,720        121,713         5,466         127,179   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Income from continuing operations before income taxes

     32,469        13,356         4,857         5,201        55,883         3,669         59,552   

Income tax expense

     9,970        4,089         1,531         1,593        17,183         1,129         18,312   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Income from continuing operations

     22,499        9,267         3,326         3,608        38,700         2,540         41,240   

Income from discontinued operations

     —          —           —           —          —           —           —     
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Income before noncontrolling interests

     22,499        9,267         3,326         3,608        38,700         2,540         41,240   

Less: Net loss attributable to noncontrolling interests

     —          —           —           —          —           —           —     
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Net income attributable to Webster Financial Corporation

   $ 22,499      $ 9,267       $ 3,326       $ 3,608      $ 38,700       $ 2,540       $ 41,240   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 
     Three months ended June 30, 2011  
(In thousands)    Commercial
Banking
    Retail
Banking
     Consumer
Finance
     Other     Total Business
Segments
     Corporate and
Reconciling
     Consolidated
Total
 

Net interest income

   $ 41,657      $ 57,105       $ 27,022       $ 6,028      $ 131,812       $ 9,101       $ 140,913   

Provision (benefit) for loan and lease losses

     (9,116     5,815         5,511         45        2,255         2,745         5,000   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Net interest income after provision for loan and lease losses

     50,773        51,290         21,511         5,983        129,557         6,356         135,913   

Non-interest income

     6,663        25,889         2,148         6,025        40,725         5,464         46,189   

Non-interest expense

     29,337        69,916         19,630         9,789        128,672         3,389         132,061   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Income from continuing operations before income taxes

     28,099        7,263         4,029         2,219        41,610         8,431         50,041   

Income tax expense

     8,748        2,315         1,261         697        13,021         2,836         15,857   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Income from continuing operations

     19,351        4,948         2,768         1,522        28,589         5,595         34,184   

Income from discontinued operations

     —          —           —           —          —           —           —     
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Income before noncontrolling interests

     19,351        4,948         2,768         1,522        28,589         5,595         34,184   

Less: Net loss attributable to noncontrolling interests

     —          —           —           —          —           —           —     
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Net income attributable to Webster Financial Corporation

   $ 19,351      $ 4,948       $ 2,768       $ 1,522      $ 28,589       $ 5,595       $ 34,184   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

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Table of Contents
     Six months ended June 30, 2012  
(In thousands)    Commercial
Banking
    Retail
Banking
     Consumer
Finance
    Other     Total Business
Segments
    Corporate and
Reconciling
     Consolidated
Total
 

Net interest income

   $ 89,483      $ 115,619       $ 54,074      $ 16,298      $ 275,474      $ 12,272       $ 287,746   

(Benefit) provision for loan and lease losses

     (5,439     2,144         8,994        (340     5,359        3,641         9,000   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net interest income after provision for loan and lease losses

     94,922        113,475         45,080        16,638        270,115        8,631         278,746   

Non-interest income

     14,174        44,194         9,879        14,414        82,661        8,678         91,339   

Non-interest expense

     49,727        135,733         37,246        22,282        244,988        10,004         254,992   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Income from continuing operations before income taxes

     59,369        21,936         17,713        8,770        107,788        7,305         115,093   

Income tax expense

     18,011        6,654         5,374        2,660        32,699        2,216         34,915   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Income from continuing operations

     41,358        15,282         12,339        6,110        75,089        5,089         80,178   

Income from discontinued operations

     —          —           —          —          —          —           —     
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Income before noncontrolling interests

     41,358        15,282         12,339        6,110        75,089        5,089         80,178   

Less: Net loss attributable to noncontrolling interests

     —          —           —          —          —          —           —     
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net income attributable to Webster Financial Corporation

   $ 41,358      $ 15,282       $ 12,339      $ 6,110      $ 75,089      $ 5,089       $ 80,178   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 
     Six months ended June 30, 2011  
(In thousands)    Commercial
Banking
    Retail
Banking
     Consumer
Finance
    Other     Total Business
Segments
    Corporate and
Reconciling
     Consolidated
Total
 

Net interest income

   $ 81,299      $ 111,405       $ 54,270      $ 11,674      $ 258,648      $ 22,426       $ 281,074   

Provision (benefit) for loan and lease losses

     (7,241     7,024         13,419        (234     12,968        2,032         15,000   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net interest income after provision for loan and lease losses

     88,540        104,381         40,851        11,908        245,680        20,394         266,074   

Non-interest income

     12,689        50,638         4,189        11,887        79,403        10,702         90,105   

Non-interest expense

     54,979        140,613         38,120        19,858        253,570        7,616         261,186   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Income from continuing operations before income taxes

     46,250        14,406         6,920        3,937        71,513        23,480         94,993   

Income tax expense

     13,742        4,280         2,056        1,170        21,248        6,977         28,225   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Income from continuing operations

     32,508        10,126         4,864        2,767        50,265        16,503         66,768   

Income from discontinued operations

     —          —           —          —          —          1,995         1,995   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Income before noncontrolling interests

     32,508        10,126         4,864        2,767        50,265        18,498         68,763   

Less: Net loss attributable to noncontrolling interests

     —          —           (1     —          (1     —           (1
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net income attributable to Webster Financial Corporation

   $ 32,508      $ 10,126       $ 4,865      $ 2,767      $ 50,266      $ 18,498       $ 68,764   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 
     Total Assets  
(In thousands)    Commercial
Banking
    Retail
Banking
     Consumer
Finance
    Other     Total Business
Segments
    Corporate and
Reconciling
     Consolidated
Total
 

At June 30, 2012

   $ 4,631,216      $ 1,571,089       $ 5,909,865      $ 264,882      $ 12,377,052      $ 7,052,697       $ 19,429,749   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

At December 31, 2011

   $ 4,359,405      $ 1,546,457       $ 5,869,028      $ 245,554      $ 12,020,444      $ 6,693,896       $ 18,714,340   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

NOTE 18: Commitments and Contingencies

Lease Commitments. At June 30, 2012, Webster was obligated under various non-cancellable operating leases for properties used as banking offices and other office facilities. The leases contain renewal options and escalation clauses which provide for increased rental expense based primarily upon increases in real estate taxes over a base year. It is expected that certain leases will be renewed, or equipment replaced with new leased equipment, as these leases expire. Rental expense under leases was $5.1 million and $10.1 million and $5.2 and $10.2 million for the three and six months ended June 30, 2012 and 2011, respectively, and is recorded as a component of occupancy expense in the accompanying Condensed Consolidated Statements of Operations. Webster is also entitled to rental income under various non-cancellable operating leases for properties owned. Rental income was $0.2 million and $0.5 million and $0.3 million and $0.6 million for the three and six months ended June 30, 2012 and 2011, respectively, and is recorded as a component of other non-interest income in the accompanying Condensed Consolidated Statements of Operations. There has been no significant change in future minimum lease payments payable since December 31, 2011. See Webster’s 2011 Form 10-K for additional information regarding these commitments.

Credit-Related Financial Instruments. The Company is a party to credit related financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and commercial letters of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the Condensed Consolidated Balance Sheets. The Company’s exposure to credit loss is represented by the contractual amount of these commitments as it does for on-balance sheet instruments.

 

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The following table summarizes the following outstanding financial instruments whose contract amounts represent credit risk at:

 

(In thousands)

   At June 30,
2012
     At December  31,
2011
 

Commitments to extend credit

   $ 514,192       $ 318,001   

Unfunded commitments under existing lines and loans

     3,359,553         3,390,816   

Standby letters of credit

     154,762         159,930   

Commercial letters of credit

     4,153         3,087   
  

 

 

    

 

 

 

Total financial instruments with off-balance sheet risk

   $ 4,032,660       $ 3,871,834   
  

 

 

    

 

 

 

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The commitments for equity lines of credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if deemed necessary by the Company, is based on management’s credit evaluation of the customer.

The reserve for unfunded credit commitments is reported as a component of accrued expenses and other liabilities in the accompanying Condensed Consolidated Balance Sheets. The following table provides activity details for the Company’s reserve for unfunded credit commitments for the periods presented:

 

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

(In thousands)

   2012      2011     2012     2011  

Beginning balance

   $ 5,204       $ 9,093      $ 5,449      $ 9,378   

Provision

     259         —          259        —     

Reserve release

     —           (3,277     (245     (3,562
  

 

 

    

 

 

   

 

 

   

 

 

 

Ending balance

   $ 5,463       $ 5,816      $ 5,463      $ 5,816   
  

 

 

    

 

 

   

 

 

   

 

 

 

Reserve for Loan Repurchases. In connection with the sale of mortgage loans, the Company enters into agreements containing representations and warranties about certain characteristics of the mortgage loans sold and the Company’s origination process. The Company may be required to repurchase a loan in the event of certain breaches of these representations and warranties or in the event of default of the borrower within 90 days of origination. The reserve for loan repurchases provides for estimated losses associated with the repurchase of loans sold in connection with the Company’s mortgage banking operations. The reserve reflects management’s continual evaluation of loss experience and the quality of loan originations. It also reflects management’s expectation of losses from repurchase requests for which management has not yet been notified. Factors considered in the evaluation process for establishing the reserves include the identity of counterparty, the vintage of the loans sold, the amount of open repurchase requests, specific loss estimates for each open request, current level of loan losses in similar vintages held in the residential loan portfolio, and estimated recoveries on the underlying collateral. While management uses its best judgment and information available, the adequacy of this reserve is dependent upon factors outside the Company’s control including the performance of loans sold and the quality of the servicing provided by the acquirer.

The following table provides detail of activity in the Company’s reserve for loan repurchases for the periods presented:

 

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

(In thousands)

   2012     2011     2012     2011  

Beginning balance

   $ 2,318      $ 4,255      $ 2,269      $ 3,658   

Provision

     239        1,856        581        2,628   

Loss on repurchased loans and settlements

     (163     (3,710     (456     (3,885
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 2,394      $ 2,401      $ 2,394      $ 2,401   
  

 

 

   

 

 

   

 

 

   

 

 

 

The provision recorded at the time of loan sale is netted from mortgage banking activities and is included as a component of non-interest income, while any incremental provision, post loan sale, is recorded in other non-interest expense, in the accompanying Condensed Consolidated Statements of Operations.

 

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Litigation Reserves. Webster is involved in routine legal proceedings occurring in the ordinary course of business and is subject to loss contingencies related to such litigation and claims arising there-from. Webster evaluates these contingencies based on information currently available, including advice of counsel and assessment of available insurance coverage. Webster establishes accruals for litigation and claims when a loss contingency is considered probable and the related amount is reasonably estimable. These accruals are periodically reviewed and may be adjusted as circumstances change. Webster also estimates certain loss contingencies for possible litigation and claims, whether or not there is an accrued probable loss. Webster believes it has defenses to all the claims asserted against it in existing litigation matters and intends to defend itself in all matters.

Based upon its current knowledge, after consultation with counsel and after taking into consideration its current litigation accruals, Webster believes that as of June 30, 2012 any reasonably possible losses in addition to amounts accrued are not material to Webster’s consolidated financial condition. However, in light of the uncertainties involved in such actions and proceedings, there is no assurance that the ultimate resolution of these matters will not significantly exceed the reserves currently accrued by Webster or that the Company’s litigation reserves will not need to be adjusted in future periods. Such an outcome could be material to the Company’s operating results in a particular period, depending on among other factors, the size of the loss or liability imposed and the level of the Company’s income for that period.

NOTE 19: Subsequent Event

On July 18, 2012, Webster Financial Corporation completed the redemption at par of all the outstanding $136.1 million outstanding principal amount of 7.65% fixed to floating-rate trust preferred securities. The aggregate consideration for the securities, including accrued and unpaid interest, was $137.0 million.

 

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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the Company’s Consolidated Financial Statements, and Notes thereto, for the year ended December 31, 2011, included in its 2011 Form 10-K, and in conjunction with the Condensed Consolidated Financial Statements and Notes thereto included in Item 1 of this report. Operating results for the three and six months ended June 30, 2012 are not necessarily indicative of the results for the full year ending December 31, 2012, or any future period.

Certain previously reported information has been corrected to reflect the deferment of certain commercial loan fees. For more information refer to Note 1 in the Notes to Condensed Consolidated Financial Statements included elsewhere in this report for the periods ended June 30, 2012.

Forward-Looking Statements and Factors that Could Affect Future Results

Certain statements contained in this Quarterly Report on Form 10-Q that are not statements of historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Act”), notwithstanding that such statements are not specifically identified as such. In addition, certain statements may be contained in the Company’s future filings with the SEC, in press releases, and in oral and written statements made by or with the approval of the Company that are not statements of historical fact and constitute forward-looking statements within the meaning of the Act. Examples of forward-looking statements include, but are not limited to: (i) projections of revenues, expenses, income or loss, earnings or loss per share, the payment or non-payment of dividends, capital structure and other financial items; (ii) statements of plans, objectives and expectations of Webster or its management or Board of Directors, including those relating to products or services or the impact or expected outcome of various legal proceedings; (iii) statements of future economic performance; and (iv) statements of assumptions underlying such statements. Words such as “believes”, “anticipates”, “expects”, “intends”, “targeted”, “continue”, “remain”, “will”, “should”, “may” and other similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.

Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those in such statements. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to:

 

   

Local, regional, national and international economic conditions and the impact they may have on the Company and its customers and the Company’s assessment of that impact.

 

   

Volatility and disruption in national and international financial markets.

 

   

Government intervention in the U.S. financial system.

 

   

Changes in the level of non-performing assets and charge-offs.

 

   

Changes in estimates of future reserve requirements based upon the periodic review thereof under relevant regulatory and accounting requirements.

 

   

Adverse conditions in the securities markets that lead to impairment in the value of securities in the Company’s investment portfolio.

 

   

Inflation, interest rate, securities market and monetary fluctuations.

 

   

The timely development and acceptance of new products and services and perceived overall value of these products and services by customers.

 

   

Changes in consumer spending, borrowings and savings habits.

 

   

Technological changes.

 

   

The ability to increase market share and control expenses.

 

   

Impairment of the Company’s goodwill or other intangible assets.

 

   

Changes in the competitive environment among banks, financial holding companies and other financial service providers.

 

   

The effect of changes in laws and regulations (including laws and regulations concerning taxes, banking, securities and insurance) with which the Company and its subsidiaries must comply, including under the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Basel III update to the Basel Accords.

 

   

The effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, or the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters.

 

   

The costs and effects of legal and regulatory developments including the resolution of legal proceedings or regulatory or other governmental inquiries and the results of regulatory examinations or reviews.

 

   

The Company’s success at managing the risks involved in the foregoing items.

Forward-looking statements speak only as of the date on which such statements are made. The Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made, or to reflect the occurrence of unanticipated events.

 

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Table of Contents

Critical Accounting Policies

The Company’s significant accounting policies are described in Note 1 to the Consolidated Financial Statements included in its 2011 Form 10-K and in Note 1 to the Condensed Consolidated Financial Statements included in Item 1 of this report. The preparation of the Condensed Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States (“GAAP”) and to general practices within the financial services industry requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and to disclose contingent assets and liabilities. Actual results could differ from those estimates.

Management has identified accounting for (i) the allowance for loan and lease losses, (ii) fair value measurements for valuation of financial instruments and valuation of investments for other-than-temporary impairment OTTI, (iii) valuation of goodwill and other intangible assets, (iv) deferred tax asset valuation allowance and (v) pension and other post retirement benefits as the Company’s most critical accounting policies and estimates in that they are important to the portrayal of the Company’s financial condition and results, and they require management’s subjective and complex judgment as a result of the need to make estimates about the effects of matters that are inherently uncertain. These accounting policies, including the nature of the estimates and types of assumptions used, are described throughout this Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations included in its 2011 Form 10-K.

Recent Legislation

The following section should be read in conjunction with the Supervision and Regulation section in Webster’s 2011 Form 10-K.

It is difficult to predict at this time what specific impact certain provisions the Dodd-Frank Act and the yet to be written implementing rules and regulations will have on the Company, including any regulations promulgated by the CFPB. The financial reform legislation and any implementing rules that are ultimately issued could have adverse implications on the financial industry, the competitive environment, and our ability to conduct business. Management will have to apply resources to ensure compliance with all applicable provisions of the Dodd-Frank Act and any implementing rules, which may increase our costs of operations and adversely impact our earnings.

In June 2012, the Federal Reserve Board, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation approved three proposals that would amend the existing capital adequacy requirements of banks and bank holding companies. The three proposals would, among other things, implement the Basel III capital standards, as well as the Basel II standardized approach for almost all banking organizations in the United States. The Basel III proposal would increase the minimum levels of required capital, narrow the definition of capital, and places greater emphasis on common equity. The Basel II standardized proposal would modify the risk weights for various asset classes. The Company is still in the process of assessing the impacts of these complex proposals, however, we believe we will continue to exceed all estimated well capitalized regulatory requirements over the course of the proposed phase-in period, and on a fully phased-in basis.

RESULTS OF OPERATIONS

Summary of Performance

Webster’s income from continuing operations was $41.2 million for the three months ended June 30, 2012 as compared to $34.2 million for the three months ended June 30, 2011. Net income available to common shareholders was $40.6 million, or $0.44 per diluted share, for the three months ended June 30, 2012 as compared to $33.4 million, or $0.36 per diluted share, for the three months ended June 30, 2011. The $7.2 million increase in net income from the comparable period is significantly attributable to a reduction in interest expense on deposits and a $4.9 million overall reduction in total interest expense. The provision for loan and lease losses for the three months ended June 30, 2012 and 2011 was $5.0 million. Interest expense decreased $4.9 million as the cost of average liabilities declined from 0.89% for the three months ended June 30, 2011 to 0.71% for the three months ended June 30, 2012. This was partially offset by interest income which decreased $1.5 million, or 0.8%, to $174.6 million for the three months ended June 30, 2012 as compared to the three months ended June 30, 2011, due to a lower interest rate environment.

Net interest income increased $3.5 million, or 2.5%, to $144.4 million for the three months ended June 30, 2012 when compared to the three months ended June 30, 2011. Average total interest earning assets increased by $1.2 billion, while the average yield declined by 33 basis points, and average total interest-bearing liabilities increased by $1.2 billion, while the average cost declined by 18 basis points for the three months ended June 30, 2012 as compared to the comparable period in 2011.

Non-interest income increased $1.2 million, or 2.5%, to $47.4 million for the three months ended June 30, 2012 when compared to the three months ended June 30, 2011, primarily attributable to growth in mortgage banking activities offset somewhat by lower deposit service and loan related fees.

Non-interest expense decreased $4.9 million, or 3.7%, to $127.2 million for the three months ended June 30, 2012 when compared to the three months ended June 30, 2011, which is reflective of a decrease in compensation and benefits, in addition to an increase on gain on sale of foreclosed and repossessed assets in 2012 as compared to write downs in 2011.

 

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Webster’s income from continuing operations was $80.2 million for the six months ended June 30, 2012 as compared to $66.8 million for the six months ended June 30, 2011. Net income available to common shareholders was $78.9 million, or $0.86 per diluted share, for the six months ended June 30, 2012 as compared to $67.1 million, or $0.72 per diluted share, for the six months ended June 30, 2011. The $11.8 million increase in net income available to common shareholders from the comparable period is primarily attributable to a reduction in interest expense and provision for loan and lease losses. The provision for loan and lease losses for the six months ended June 30, 2012 was $9.0 million, a reduction of $6.0 million compared to $15.0 million for the six months ended June 30, 2011. Interest expense decreased $10.2 million as the cost of average liabilities declined from 0.90% for the six months ended June 30, 2011 to 0.72% for the six months ended June 30, 2012. This was partially offset by interest income which decreased $3.6 million, or 1.0%, to $348.7 million for the six months ended June 30, 2012 as compared to the six months ended June 30, 2011, due to a lower interest rate environment.

Net interest income increased $6.6 million, or 2.4% to $287.7 million for the six months ended June 30, 2012 when compared to the six months ended June 30, 2011. Average total interest earning assets increased by $1.0 billion, while the average yield declined by 30 basis points, and average total interest-bearing liabilities increased by $1.0 billion, while the average cost declined by 18 basis points for the six months ended June 30, 2012 as compared to 2011.

Non-interest income increased $1.2 million, or 1.4%, to $91.3 million for the six months ended June 30, 2012 when compared to the six months ended June 30, 2011, due to growth in mortgage banking activities offset somewhat by lower deposit and loan related service fees.

Non-interest expense decreased $6.2 million, or 2.4%, to $255.0 million for the six months ended June 30, 2012 when compared to the six months ended June 30, 2011, which is reflective of the Company’s continued focus on expense control, in addition to an increase on gain on sale of foreclosed and repossessed assets in 2012 as compared to write downs in 2011.

Selected financial highlights are presented in the following table:

 

     At or for the
three months ended June 30,
    At or for the
six months ended June 30,
 

(In thousands, except per share and ratio data)

   2012     2011     2012     2011  

Earnings

        

Net interest income

   $ 144,378      $ 140,913      $ 287,746      $ 281,074   

Provision for loan and lease losses

     5,000        5,000        9,000        15,000   

Total non-interest income

     47,353        46,189        91,339        90,105   

Total non-interest expense

     127,179        132,061        254,992        261,186   

Income from continuing operations

     41,240        34,184        80,178        66,768   

Income from discontinued operations, net of tax

     —          —          —          1,995   

Net loss attributable to noncontrolling interests

     —          —          —          (1

Net income attributable to Webster Financial Corporation

     41,240        34,184        80,178        68,764   

Net income available to common shareholders

     40,625        33,353        78,948        67,102   

Per Share Data

        

Net income from continuing operations per common share - diluted (a)

   $ 0.44      $ 0.36      $ 0.86      $ 0.70   

Net income available to common shareholders - diluted (a)

     0.44        0.36        0.86        0.72   

Dividends declared per common share

     0.10        0.05        0.15        0.06   

Book value per common share

     21.66        20.57        21.66        20.57   

Tangible book value per common share

     15.53        14.38        15.53        14.38   

Weighted-average common shares - diluted

     91,543        92,184        91,669        92,368   

Dividends declared per Series A preferred share

   $ 21.25      $ 21.25      $ 42.50      $ 42.50   

Dividends declared per subsidiary preferred share

     —          0.2156        —          0.4312   

Selected Ratios

        

Return on average assets (b)

     0.86     0.76     0.84     0.76

Return on average shareholders' equity (b)

     8.62        7.45        8.46        7.59   

Net interest margin

     3.32        3.48        3.34        3.47   

Efficiency ratio

     63.75        65.02        64.68        66.25   

Tangible equity ratio

     7.38        7.46        7.38        7.46   

Tier 1 common equity to risk weighted assets

     10.97        10.74        10.97        10.74   

 

(a) For the three and six months ended June 30, 2012 and 2011, the effect of preferred stock on the computation of diluted earnings per share was anti-dilutive; therefore, the effect of this security was not included in the determination of diluted average shares.

 

(b) Annualized, based on net income before preferred dividend.

The Company evaluates its business based on certain ratios that utilize tangible equity, a non-GAAP financial measure.

The efficiency ratio, which measures the costs expended to generate a dollar of revenue, is calculated excluding foreclosed property expense, amortization of intangibles, gain or loss on securities and other non-recurring items. Accordingly, this is also a non-GAAP financial measure. The Company believes the use of these non-GAAP financial measures provides additional clarity in assessing the results of the Company. Other companies may define or calculate supplemental financial data differently.

 

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See the table below for reconciliations of these non-GAAP financial measures with financial measures defined by GAAP for the three and six months ended June 30, 2012 and 2011.

 

     For the three months ended June 30,     For the six months ended June 30,  
Efficiency ratio    2012     2011     2012     2011  

Non interest expense (GAAP)

   $ 127,179      $ 132,061      $ 254,992      $ 261,186   

Less: Foreclosed property (income) expense

     (494     1,504        (691     2,073   

Intangible assets amortization

     1,397        1,397        2,794        2,794   

Severance

     727        1,060        727        1,060   

Debt prepayment penalties

     2,515        —          3,649        —     

Write-down for expedited asset disposition

     —          5,073        —          5,073   

Warrant registration

     —          350        —          350   

Loan repurchase and unfunded commitment reserve benefit, net

     —          (1,436     —          (1,436

Branch optimization

     —          859        81        1,132   

Litigation

     —          194        —          486   
  

 

 

   

 

 

   

 

 

   

 

 

 

Non interest expense (Non GAAP)

     123,034        123,060        248,432        249,654   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (before provision) (GAAP)

     144,378        140,913        287,746        281,074   

FTE adjustment

     3,813        3,823        7,531        7,688   

Non interest income (GAAP)

     47,353        46,189        91,339        90,105   

Less: Net gain on securities

     2,537        1,647        2,537        2,024   
  

 

 

   

 

 

   

 

 

   

 

 

 

Non interest income (Non GAAP)

   $ 193,007      $ 189,278      $ 384,079      $ 376,843   
  

 

 

   

 

 

   

 

 

   

 

 

 

Efficiency ratio (Non GAAP)

     63.75     65.02     64.68     66.25
  

 

 

   

 

 

   

 

 

   

 

 

 
     At and
for the three months ended June 30,
    At and
for the six months ended June 30,
 
Tangible equity ratio:    2012     2011     2012     2011  

Shareholders equity (GAAP)

   $ 1,931,548      $ 1,838,731      $ 1,931,548      $ 1,838,731   

Less: Non controlling interests (GAAP)

     —          9,577        —          9,577   

Less: Goodwill and other intangible assets (GAAP)

     542,783        548,370        542,783        548,370   

Add back: DTL related to other intangible assets (GAAP)

     4,618        6,469        4,618        6,469   
  

 

 

   

 

 

   

 

 

   

 

 

 

Tangible equity (Non GAAP)

     1,393,383        1,287,253        1,393,383        1,287,253   

Total Assets

     19,429,749        17,802,881        19,429,749        17,802,881   

Less: Goodwill and other intangible assets (GAAP)

     542,783        548,370        542,783        548,370   

Add back: DTL related to other intangible assets (GAAP)

     4,618        6,469        4,618        6,469   
  

 

 

   

 

 

   

 

 

   

 

 

 

Tangible assets (Non GAAP)

   $ 18,891,584      $ 17,260,980      $ 18,891,584      $ 17,260,980   
  

 

 

   

 

 

   

 

 

   

 

 

 

Tangible equity ratio (Non GAAP)

     7.38     7.46     7.38     7.46
  

 

 

   

 

 

   

 

 

   

 

 

 
     At and
for the three months ended June 30,
    At and
for the six months ended June 30,
 
Tangible book value per common share:    2012     2011     2012     2011  

Shareholders equity (GAAP)

   $ 1,931,548      $ 1,838,731      $ 1,931,548      $ 1,838,731   

Less: Non controlling interests (GAAP)

     —          9,577        —          9,577   

Less: Preferred shares (GAAP)

     28,939        28,939        28,939        28,939   

Less: Goodwill and Other intangible assets (GAAP)

     542,783        548,370        542,783        548,370   

Add back: DTL related to other intangibles (GAAP)

     4,618        6,469        4,618        6,469   
  

 

 

   

 

 

   

 

 

   

 

 

 

Tangible common equity (Non - GAAP)

   $ 1,364,444      $ 1,258,314      $ 1,364,444      $ 1,258,314   

Common shares issued and outstanding

     87,885        87,532        87,885        87,532   
  

 

 

   

 

 

   

 

 

   

 

 

 

Tangible book value per common share (Non GAAP)

   $ 15.53      $ 14.38      $ 15.53      $ 14.38   
  

 

 

   

 

 

   

 

 

   

 

 

 
     At and
for the three months ended June 30,
    At and
for the six months ended June 30,
 
Tier 1 common equity/ risk weighted assets:    2012     2011     2012     2011  

Shareholders equity (GAAP)

   $ 1,931,548      $ 1,838,731      $ 1,931,548      $ 1,838,731   

Qualified non controlling interests

     —          (9,577     —          (9,577

Accumulated other comprehensive income

     43,878        3,997        43,878        3,997   

Non-qualifying Goodwill and other intangible assets

     (542,783     (548,370     (542,783     (548,370

Deferred tax liability (disallowed deferred tax asset) (regulatory)

     12,058        (11,794     12,058        (11,794

Preferred equity

     (28,939     (28,939     (28,939     (28,939
  

 

 

   

 

 

   

 

 

   

 

 

 

Tier 1 common equity (regulatory)

   $ 1,415,762      $ 1,244,048      $ 1,415,762      $ 1,244,048   
  

 

 

   

 

 

   

 

 

   

 

 

 

Risk-weighted assets (regulatory)

   $ 12,902,621      $ 11,580,172      $ 12,902,621      $ 11,580,172   
  

 

 

   

 

 

   

 

 

   

 

 

 

Tier 1 common equity/ risk weighted assets (Non GAAP)

     10.97     10.74     10.97     10.74
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Average balance sheet (average balances are daily averages) and net interest margin:

 

     Three months ended June 30,  
     2012     2011  

(Dollars in thousands)

   Average
Balance
     Interest (a)     Average
Yields
    Average
Balance
     Interest (a)     Average
Yields
 

Assets

              

Interest-earning assets:

              

Loans

   $ 11,420,721       $ 121,379        4.23   $ 10,991,890       $ 122,395        4.44

Securities (b)

     6,122,745         55,497        3.65        5,244,359         56,395        4.34   

Federal Home Loan and Federal Reserve Bank stock

     142,595         881        2.48        143,874         832        2.32   

Interest-bearing deposits

     67,480         32        0.19        212,172         123        0.23   

Loans held for sale

     68,362         657        3.85        14,814         177        4.78   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total interest-earning assets

     17,821,903         178,446        4.00     16,607,109         179,922        4.33

Noninterest-earning assets

     1,383,932             1,313,712        
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total assets

   $ 19,205,835           $ 17,920,821        
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Liabilities and equity

              

Interest-bearing liabilities:

              

Demand deposits

   $ 2,554,873           $ 2,225,819        

Savings, checking & money market deposits

     8,676,206       $ 5,285        0.24     8,675,135       $ 9,554        0.44

Time deposits

     2,732,024         9,817        1.45        3,122,527         12,287        1.58   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total deposits

     13,963,103         15,102        0.43        14,023,481         21,841        0.62   

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

     1,210,234         5,360        1.75        891,344         3,777        1.68   

Federal Home Loan Bank advances

     1,447,347         4,426        1.21        403,223         3,295        3.23   

Long-term debt

     473,602         5,367        4.53        568,868         6,273        4.41   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total borrowings

     3,131,183         15,153        1.92        1,863,435         13,345        2.85   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total interest-bearing liabilities

     17,094,286         30,255        0.71     15,886,916         35,186        0.89

Noninterest-bearing liabilities

     197,224             188,395        
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities

     17,291,510             16,075,311        

Equity

     1,914,325             1,845,510        
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities and equity

   $ 19,205,835           $ 17,920,821        
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Fully tax-equivalent net interest income

        148,191             144,736     

Less: tax equivalent adjustments

        (3,813          (3,823  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net interest income

      $ 144,378           $ 140,913     
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Interest-rate spread

          3.29          3.44

Net interest margin (b)

          3.32          3.48

 

(a) On a fully tax-equivalent basis.
(b) For purposes of this computation, net unrealized gains on available for sale securities of $46.1 million and $47.5 million as of June 30, 2012 and 2011, respectively, are excluded from the average balance for rate calculations.

 

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Table of Contents
     Six months ended June 30,  
     2012     2011  

(Dollars in thousands)

   Average
Balance
     Interest (a)     Average
Yields
    Average
Balance
     Interest (a)     Average
Yields
 

Assets

              

Interest-earning assets:

              

Loans

   $ 11,348,027       $ 242,120        4.25   $ 11,025,481       $ 244,338        4.43

Securities (b)

     6,042,040         111,177        3.71        5,322,767         113,239        4.29   

Federal Home Loan and Federal Reserve Bank stock

     143,073         1,757        2.47        143,874         1,663        2.33   

Interest-bearing deposits

     72,457         62        0.17        137,156         157        0.23   

Loans held for sale

     60,034         1,155        3.85        25,792         599        4.64   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total interest-earning assets

     17,665,631         356,271        4.03     16,655,070         359,996        4.33

Noninterest-earning assets

     1,389,005             1,324,594        
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total assets

   $ 19,054,636           $ 17,979,664        
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Liabilities and equity

              

Interest-bearing liabilities:

              

Demand deposits

   $ 2,495,035           $ 2,193,967        

Savings, checking & money market deposits

     8,652,127       $ 11,079        0.26     8,659,127       $ 20,137        0.47

Time deposits

     2,771,113         20,079        1.46        3,116,638         24,473        1.58   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total deposits

     13,918,275         31,158        0.45        13,969,732         44,610        0.64   

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

     1,188,392         9,794        1.63        942,745         7,339        1.55   

Federal Home Loan Bank advances

     1,353,782         8,990        1.31        478,474         6,650        2.76   

Long-term debt

     490,359         11,052        4.51        575,188         12,635        4.39   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total borrowings

     3,032,533         29,836        1.95        1,996,407         26,624        2.66   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total interest-bearing liabilities

     16,950,808         60,994        0.72     15,966,139         71,234        0.90

Noninterest-bearing liabilities

     208,279             192,356        
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities

     17,159,087             16,158,495        

Equity

     1,895,549             1,821,169        
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities and equity

   $ 19,054,636           $ 17,979,664        
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Fully tax-equivalent net interest income

        295,277             288,762     

Less: tax equivalent adjustments

        (7,531          (7,688  
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net interest income

      $ 287,746           $ 281,074     
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Interest-rate spread

          3.31          3.43

Net interest margin (b)

          3.34          3.47

 

(a) On a fully tax-equivalent basis.
(b) For purposes of this computation, net unrealized gains on available for sale securities of $40.9 million and $40.1 million as of June 30, 2012 and 2011, respectively, are excluded from the average balance for rate calculations.

 

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The following table describes the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have impacted interest income and interest expense during the periods indicated. Information is provided in each category with respect to the impact attributable to changes in volume (change in volume multiplied by prior rate), changes attributable to rates (change in rates multiplied by prior volume) and the total net change. The change attributable to the combined impact of volume and rate has been allocated proportionately to the change due to volume and the change due to rate. The table below is based upon reported net interest income.

 

     Three months ended June 30,     Six months ended June 30,  
     2012 vs. 2011     2012 vs. 2011  
     Increase (decrease) due to     Increase (decrease) due to  

(In thousands)

   Rate     Volume     Total     Rate     Volume     Total  

Interest on interest-earning assets:

            

Loans

   $ (5,774   $ 4,758      $ (1,016   $ (5,443   $ 3,225      $ (2,218

Loans held for sale

     (41     521        480        (27     583        556   

Investment securities

     (7,518     6,588        (930     (7,369     5,463        (1,906
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

   $ (13,333   $ 11,867      $ (1,466   $ (12,839   $ 9,271      $ (3,568
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest on interest-bearing liabilities:

            

Deposits

   $ (6,646   $ (93   $ (6,739   $ (13,287   $ (165   $ (13,452

Borrowings

     (5,270     7,078        1,808        (3,589     6,801        3,212   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     (11,916     6,985        (4,931     (16,876     6,636        (10,240
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net change in net interest income

   $ (1,417   $ 4,882      $ 3,465      $ 4,037      $ 2,635      $ 6,672   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Interest Income

Net interest income totaled $144.4 million for the three months ended June 30, 2012 compared to $140.9 million for the three months ended June 30, 2011, an increase of $3.5 million. Average interest-earning assets were $1.2 billion higher, while average interest-bearing liabilities were $1.2 billion higher, at June 30, 2012 as compared to June 30, 2011. For the three months ended June 30, 2012, the yield on average interest-earning assets declined by 33 basis points, while the cost of average interest-bearing liabilities declined 18 basis points, compared to the same period in 2011. As a result of the greater decline in the yield of interest-earning assets than the decline in cost on interest-bearing liabilities, the net interest margin declined by 16 basis points to 3.32% for the three months ended June 30, 2012, from 3.48% for the three months ended June 30, 2011.

Net interest income totaled $287.7 million for the six months ended June 30, 2012 compared to $281.1 million for the six months ended June 30, 2011, an increase of $6.6 million. Average interest-earning assets were $1.0 billion higher, while average interest-bearing liabilities were $1.0 billion higher, at June 30, 2012 as compared to June 30, 2011. For the six months ended June 30, 2012, the yield on average interest-earning assets declined by 30 basis points, while the cost of average interest-bearing liabilities declined 18 basis points, compared to the same period in 2011. As a result of the greater decline in the yield of interest-earning assets than the decline in cost on interest-bearing liabilities, the net interest margin declined by 13 basis points to 3.34% for the six months ended June 30, 2012, from 3.47% for the six months ended June 30, 2011.

Since net interest income is affected by changes in interest rates, loan and deposit pricing strategies, competitive conditions, the volume and mix of interest-earning assets and interest-bearing liabilities as well as the level of non-performing assets, Webster manages the risk of changes in interest rates on its net interest income through an Asset/Liability Management Committee and through related interest rate risk monitoring and management policies. See the “Asset/Liability Management and Market Risk” section for further discussion of Webster’s interest rate risk position.

Interest Income

Interest income decreased $1.5 million, or 0.8%, to $174.6 million for the three months ended June 30, 2012 as compared to the three months ended June 30, 2011. The decrease in the average yield of 33 basis points was due to a lower interest rate environment and was partially offset by an increase in average interest earning assets of $1.2 billion. The average loan portfolio, excluding loans held for sale, increased by $428.8 million for the three months ended June 30, 2012, compared to the three months ended June 30, 2011. Average securities increased by $878.3 million for the three months ended June 30, 2012, compared to the three months ended June 30, 2011. The 33 basis point decrease in the average yield earned on interest-earning assets for the three months ended June 30, 2012 to 4.00% compared to 4.33% for the three months ended June 30, 2011 is a result of a lower rate environment, the repayment of higher yielding loans, the origination of lower yielding loans, and the purchase of lower yielding securities.

 

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Interest income decreased $3.6 million, or 1.0%, to $348.7 million for the six months ended June 30, 2012 as compared to the six months ended June 30, 2011. The decrease in the average yield of 30 basis points was due to a lower interest rate environment and was partially offset by an increase in average interest earning assets of $1.0 billion. The average loan portfolio, excluding loans held for sale, increased by $322.5 million for the six months ended June 30, 2012, compared to the six months ended June 30, 2011. Average securities increased by $719.3 million for the six months ended June 30, 2012, compared to the six months ended June 30, 2011. The 30 basis point decrease in the average yield earned on interest-earning assets for the six months ended June 30, 2012 to 4.03% compared to 4.33% for the six months ended June 30, 2011 is a result of a lower rate environment, the repayment of higher yielding loans, the origination of lower yielding loans, and the purchase of lower yielding securities.

The loan portfolio yield decreased 21 and 18 basis points, respectively, to 4.23% and 4.25%, respectively, for the three and six months ended June 30, 2012 and comprised 64.2% of the average interest-earning assets at June 30, 2012, compared to the loan portfolio yield of 4.44% and 4.43%, respectively, which comprised 66.2% of the average interest-earning assets at June 30, 2011. Additionally, the yield on investment securities decreased 69 and 58 basis points, respectively, to 3.65% and 3.71%, respectively, for the three and six months ended June 30, 2012 and comprised 34.2% of average interest-earning assets at June 30, 2012, compared to the yield on investment securities of 4.34% and 4.29%, respectively, for the three and six months ended June 30, 2011 which comprised 32.0% of the average interest-earning assets at June 30, 2011. All other interest-earning assets comprised 1.6% and 1.8% of the average interest-earning assets at June 30, 2012 and 2011, respectively.

Interest Expense

Interest expense for the three months ended June 30, 2012 decreased $4.9 million, or 14.0%, to $30.3 million as compared to the three months ended June 30, 2011. The cost of average interest-bearing liabilities was 0.71% for the three months ended June 30, 2012 a decrease of 18 basis points compared to 0.89% for the three months ended June 30, 2011. The decrease was primarily due to the decline in the cost of deposits to 0.43% for the three months ended June 30, 2012, from 0.62% for the three months ended June 30, 2011, and the cost of borrowings to 1.92% for the three months ended June 30, 2012, from 2.85% for the three months ended June 30, 2011.

Interest expense for the six months ended June 30, 2012 decreased $10.2 million, or 14.4%, to $61.0 million as compared to the six months ended June 30, 2011. The cost of average interest-bearing liabilities was 0.72% for the six months ended June 30, 2012 a decrease of 18 basis points compared to 0.90% for the six months ended June 30, 2011. The decrease was primarily due to the decline in the cost of deposits to 0.45% for the six months ended June 30, 2012, from 0.64% for the six months ended June 30, 2011, and the cost of borrowings to 1.95% for the six months ended June 30, 2012, from 2.66% for the six months ended June 30, 2011.

Provision for Loan and Lease Losses

The provision for loan and lease losses was $5.0 million and $9.0 million for the three and six months ended June 30, 2012, respectively, there was no change between the three months ended June 30, 2012 and 2011, while there was a decrease of $6.0 million for the six months ended June 30, 2012 compared to $15.0 million for the six months ended June 30, 2011. The decrease in the provision is generally due to management’s evaluation of the level of inherent losses in Webster’s existing loan portfolio. For the three and six months ended June 30, 2012, total net charge-offs were $16.5 million and $43.7 million, respectively, compared to $21.7 million and $55.4 million, respectively, for the three and six months ended June 30, 2011.

Management performs a quarterly review of the loan portfolio to determine the adequacy of the allowance for loan and lease losses. Several factors influence the amount of the provision, including loan growth, portfolio composition, credit performance changes in the levels of non-performing loans, net charge-offs and the general economic environment. At June 30, 2012, the allowance for loan and lease losses totaled $198.8 million or 1.72% of total loans and leases compared to $233.5 million or 2.08% of total loans and leases at December 31, 2011. See the “Allowance for Loan and Lease Losses Methodology” section for further details.

Non-Interest Income

Total non-interest income was $47.4 million and $91.3 million, respectively, for the three and six months ended June 30, 2012, an increase of $1.2 million from the comparable periods in 2011. The $1.2 million increase for the three and six months ended June 30, 2012 is primarily attributable to growth in mortgage banking activities offset partially by lower deposit service and loan related fees.

 

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The following is a summary of non-interest income by major category for the three and six months ended June 30, 2012 and 2011:

 

     Three months ended
June 30,
     Increase (decrease)     Six months ended
June 30,
    Increase (decrease)  

(In thousands)

   2012      2011      Amount     Percent     2012      2011     Amount     Percent  

Non-Interest Income:

                   

Deposit service fees

   $ 23,719       $ 26,095       $ (2,376     (9.1 )%    $ 47,082       $ 51,435      $ (4,353     (8.5 )% 

Loan related fees

     3,565         5,590         (2,025     (36.2     8,434         10,033        (1,599     (15.9

Wealth and investment services

     7,249         7,454         (205     (2.8     14,470         14,176        294        2.1   

Mortgage banking activities

     3,624         1,234         2,390        193.7        8,007         2,487        5,520        222.0   

Increase in cash surrender value of life insurance policies

     2,561         2,576         (15     (0.6     5,078         5,109        (31     (0.6

Net loss on trading securities

     —           —           —          —          —           (1,799     1,799        100.0   

Net gain on sale of investment securities

     2,537         1,647         890        54.0        2,537         3,823        (1,286     (33.6

Other income

     4,098         1,593         2,505        157.3        5,731         4,841        890        18.4   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total non-interest income

   $ 47,353       $ 46,189       $ 1,164        2.5   $ 91,339       $ 90,105      $ 1,234        1.4
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Deposit Service Fees. Deposit service fees were $23.7 million and $47.1 million for the three and six months ended June 30, 2012, respectively, a decrease of $2.4 million and $4.4 million from the comparable 2011 periods, primarily due to the Durbin amendment’s reduction of debit card interchange rates that went into effect during the fourth quarter of 2011.

Loan Related Fees. Loan related fees were $3.6 million and $8.4 million for the three and six months ended June 30, 2012, respectively, a decrease of $2.0 million and $1.6 million from the comparable 2011 periods, respectively, due to a decreased volume of prepayment fees and increased mortgage servicing right amortization.

Mortgage Banking Activities. Mortgage banking activities net revenue was $3.6 million and $8.0 million for the three and six months ended June 30, 2012, respectively, an increase of $2.4 million and $5.5 million from the comparable 2011 periods, due to an increase in the volume of mortgage loans sold combined with favorable pricing in the secondary markets as well as a positive fair value adjustment on mortgage banking derivatives in the three and six months ended June 30, 2012 as compared to a negative fair value adjustment in the three and six months ended June 30, 2011.

Other. Other non-interest income was $4.1 million and $5.7 million for the three and six months ended June 30, 2012, respectively, compared to $1.6 million and $4.8 million for the three and six months ended June 30, 2011, respectively. The increase of $2.5 million for the three months ended June 30, 2012 as compared to the three months ended June 30, 2011 is primarily due to an increase in positive fair value adjustments on treasury derivatives related to increased client swap activity. The $0.9 million increase for the six months ended June 30, 2012 as compared to the six months ended June 30, 2011 is due to positive fair value adjustments on treasury derivatives related to increased client swap activity, partially offset by a net impairment loss of $0.2 million on the Company’s investments in private equity funds during the six months ended June 30, 2012, as compared to a net gain of $1.4 million for the six months ended June 30, 2011.

Non-Interest Expense

Total non-interest expense was $127.2 million and $255.0 million, respectively, for the three and six months ended June 30, 2012, a decrease of $4.9 million and $6.2 million from the comparable periods in 2011, which is reflective of the Company’s continued focus on expense control.

The following is a summary of non-interest expense by major category for the three and six months ended June 30, 2012 and 2011:

 

     Three months ended
June 30,
     Increase (decrease)     Six months ended
June 30,
     Increase (decrease)  
     2012      2011      Amount     Percent     2012      2011      Amount     Percent  

(In thousands)

                                                    

Non-Interest Expense:

                    

Compensation and benefits

   $ 63,587       $ 65,592       $ (2,005     (3.1 )%    $ 132,206       $ 132,604       $ (398     (0.3 )% 

Occupancy

     12,578         12,856         (278     (2.2     25,460         27,591         (2,131     (7.7

Technology and equipment

     16,021         15,134         887        5.9        31,603         30,526         1,077        3.5   

Intangible assets amortization

     1,397         1,397         —          —          2,794         2,794         —          —     

Marketing

     5,094         4,252         842        19.8        9,194         9,772         (578     (5.9

Professional and outside services

     3,387         2,813         574        20.4        6,079         5,243         836        15.9   

Deposit insurance

     5,723         5,918         (195     (3.3     11,432         11,699         (267     (2.3

Litigation

     —           194         (194     (100.0     —           486         (486     (100.0

Other expense

     19,392         23,905         (4,513     (18.9     36,224         40,471         (4,247     (10.5
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total non-interest expense

   $ 127,179       $ 132,061       $ (4,882     (3.7 )%    $ 254,992       $ 261,186       $ (6,194     (2.4 )% 
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Compensation and Benefits. Compensation and benefits expense was $63.6 million and $132.2 million for the three and six months ended June 30, 2012, respectively, a decrease of $2.0 million and $0.4 million from the comparable 2011 periods. The decrease is due to lower group insurance due to a decrease in the cost of claims, in addition to a decrease in 401k expense due to amendment to the Company 401(k) Plan which resulted in reduced Company matching contributions, as well as an increase in deferred compensation related to an increase in volume of loan originations.

 

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Occupancy. Occupancy expense was $12.6 million and $25.5 million for the three and six months ended June 30, 2012, respectively, a decrease of $0.3 million and $2.1 million from the comparable 2011 periods, primarily due to the net reduction of 14 branches since the beginning of 2011.

Technology and Equipment. Technology and equipment expense was $16.0 million and $31.6 million for the three and six months ended June 30, 2012, respectively, an increase of $0.9 million and $1.1 million from the comparable 2011 periods, reflective of an increase in technology service contracts related to the Company’s data center co-location initiative (i.e. the migration of IT applications to third-party hosted data centers).

Other. Other non-interest expense was $19.4 million and $36.2 million for the three and six months ended June 30, 2012, respectively, a decrease of $4.5 million and $4.2 million from the comparable periods primarily attributable to an increase in gain on sale of foreclosed and repossessed assets in 2012 as compared to write downs to expedite the sale of OREO inventory in 2011, offset by $1.1 million in expense related to the Subordinated Notes Tender Offer and $2.5 million in prepayment penalties related to the prepayment of FHLB advances.

Income Taxes

During the three and six months ended June 30, 2012, Webster recognized income tax expense of $18.3 million and $34.9 million, respectively, applicable to the $59.6 million and $115.1 million, respectively, of pre-tax income from continuing operations. In the comparable 2011 periods, Webster recognized income tax expense of $15.9 million and $28.2 million, respectively, applicable to the $50.0 million and $95.0, respectively, million of pre-tax income from continuing operations.

The $18.3 million and $34.9 million of tax expense for the three and six months ended June 30, 2012, respectively, and the effective tax rates of 30.8% and 30.3%, respectively, reflect (i) the application of an estimated annual effective tax rate of 30.8% for the full year 2012 to the pre-tax income for the six months ended June 30, 2012; and (ii) the recognition of a $0.7 million state tax benefit ($0.5 million, net of U.S. effects) in the three months ended March 31, 2012 related to the resolution of uncertain tax positions in specific tax jurisdictions during the three months ended June 30, 2012.

In the comparable 2011 periods, the $15.9 million and $28.2 million of tax expense for the three and six months ended June 30, 2011, and the effective tax rates for those periods of 31.7% and 29.7%, respectively, reflect (i) the application of an estimated annual effective tax rate of 29.5% for the full year 2011 to the pre-tax income for the six months ended June 30, 2011; and (ii) the recognition of state tax benefits of $0.2 million, net of U.S. effects, for the six months ended June 30, 2011 ($0.9 million expense specific to the three months ended June 30, 2011 and $0.7 million benefit specific to the three months ended March 31, 2011).

The increase in the estimated annual effective tax rate from 29.5% in 2011 to 30.8% in 2012 is primarily due to the increase in estimated pre-tax income and the reduced benefit of tax-exempt income, relative to pre-tax income.

For more information on Webster’s income taxes, see Note 6 – Income Taxes of the Notes to the Condensed Consolidated Financial Statements contained elsewhere in this report and Note 7 of the Notes to Consolidated Financial Statements for the year ended December 31, 2011, included in the Company’s 2011 Form 10-K.

Business Segment Results

Webster’s operations are divided into four business segments that represent its core businesses – Commercial Banking, Retail Banking, Consumer Finance and Other. Other includes Health Savings Accounts HSA Bank and Private Banking. These segments reflect how executive management responsibilities are assigned by the chief executive officer for each of the core businesses, the products and services provided, and the type of customer served, and they reflect the way that financial information is currently evaluated by management. The Company’s Treasury unit is included in the Corporate and Reconciling category along with the results of discontinued operations, the Consumer Liquidating portfolio and the amounts required to reconcile profitability metrics to GAAP reported amounts. As of January 1, 2012 the Company changed the allocation of FDIC insurance expense to conform to the change in the FDIC insurance assessment system from one that is based on domestic deposits to one that is based on average consolidated total assets minus average tangible equity which took effect in 2011. The 2011 business segment results have been adjusted for comparability to the 2012 segment presentation.

 

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Webster’s business segments results are intended to reflect each segment as if it were a stand-alone business. The following tables present the results for Webster’s business segments for the three and six months ended June 30, 2012 and 2011 and incorporate the allocation of the provision for loan and lease losses and income tax expense to each of Webster’s business segments for the periods then ended:

 

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

(In thousands)

   2012      2011      2012      2011  

Net income:

           

Commercial Banking

   $ 22,499       $ 19,351       $ 41,358       $ 32,508   

Retail Banking

     9,267         4,948         15,282         10,126   

Consumer Finance

     3,326         2,768         12,339         4,865   

Other

     3,608         1,522         6,110         2,767   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Business Segments

     38,700         28,589         75,089         50,266   

Corporate and Reconciling

     2,540         5,595         5,089         18,498   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income attributable to Webster Financial Corporation

   $ 41,240       $ 34,184       $ 80,178       $ 68,764   
  

 

 

    

 

 

    

 

 

    

 

 

 

Webster uses an internal profitability reporting system to generate information by operating segment, which is based on a series of management estimates and allocations regarding funds transfer pricing, the provision for loan and lease losses, non-interest expense, income taxes and equity capital. These estimates and allocations, certain of which are subjective in nature, are continually being reviewed and refined. Changes in estimates and allocations that affect the reported results of any operating segment do not affect the consolidated financial position or results of operations of Webster as a whole.

The Company uses a matched maturity funding concept, also known as coterminous funds transfer pricing (“FTP”), to allocate interest income and interest expense to each business while also transferring the primary interest rate risk exposures to the Corporate and Reconciling category. The allocation process considers the specific interest rate risk and liquidity risk of financial instruments and other assets and liabilities in each line of business. The “matched maturity funding concept” considers the origination date and the earlier of the maturity date or the repricing date of a financial instrument to assign an FTP rate for loans and deposits originated each day. Loans are assigned an FTP rate for funds “used” and deposits are assigned an FTP rate for funds “provided.” From a governance perspective, this process is executed by the Company’s Financial Planning and Analysis division, and the process is overseen by the Company’s Asset-Liability Committee.

Webster attributes the provision for loan and lease losses to each segment based on management’s estimate of the inherent loss content in each of the specific loan portfolios. Provision expense, for certain elements of risk that are not deemed specifically attributable to a business segment, such as environmental factors and provision for the consumer liquidating portfolio, are shown as other reconciling. For the three and six months ended June 30, 2012, 65.6% and 59.5% of the provision expense, respectively, is specifically attributable to business segments and reported accordingly. For the three and six months ended June 30, 2011, 45.1% and 86.5% of the provision expense, respectively, is specifically attributable to business segments and reported accordingly.

Webster allocates a majority of non-interest expense to each business segment using a full-absorption costing process. Costs, including corporate overhead, are analyzed, pooled by process and assigned to the appropriate business segment. Income tax expense is allocated to each business segment based on the effective income tax rate for the period shown.

The full profitability measurement reports which are prepared for each operating segment reflect non-GAAP reporting methodologies. The differences between the full profitability and GAAP measures are reconciled in the Corporate and Reconciling category.

Commercial Banking

The Commercial Banking segment includes middle market, asset-based lending, commercial real estate, equipment finance, and government and institutional banking. Webster’s Commercial Banking group takes a direct relationship approach to providing lending, deposit and cash management services to middle market companies in its franchise territory. Additionally, it serves as a primary referral source to Private Banking and Retail Banking.

 

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Commercial Banking Results:

 

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

(In thousands)

   2012     2011     2012     2011  

Net interest income

   $ 45,575      $ 41,657      $ 89,483      $ 81,299   

Benefit for loan and lease losses

     (4,529     (9,116     (5,439     (7,241
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision

     50,104        50,773        94,922        88,540   

Non-interest income

     7,281        6,663        14,174        12,689   

Non-interest expense

     24,916        29,337        49,727        54,979   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     32,469        28,099        59,369        46,250   

Income tax expense

     9,970        8,748        18,011        13,742   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 22,499      $ 19,351      $ 41,358      $ 32,508   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     At June, 30,
2012
     At December  31,
2011
 

Total assets

   $ 4,631,216       $ 4,359,405   
  

 

 

    

 

 

 

Total loans

     4,545,903         4,289,354   
  

 

 

    

 

 

 

Total deposits

     2,161,346         2,396,990   
  

 

 

    

 

 

 

Net interest income increased $3.9 million and $8.2 million in the three and six months ended June 30, 2012 from the comparable period in 2011. The increase is primarily due to wider loan spreads reflecting continuing lower cost of funds, greater loan volumes; greater FASB related deferred fees, and an increase in non-interest bearing deposit balances. The benefit for loan and lease losses decreased $4.6 million and $1.8 million for the three and six months ended June 30, 2012 from the comparable period in 2011. Webster continues to provide for losses within the lending portfolios although the provision is significantly below portfolio charge-offs. The change in provision is primarily due to management’s evaluation of the level of inherent losses in this segment’s existing book of business and management’s belief in the adequacy of the overall reserve levels. Non-interest income increased $0.6 million and $1.5 million in the three and six months ended June 30, 2012 from the comparable period in 2011, due to increased revenues from interest rate management services. Non-interest expense decreased $4.4 million and $5.3 million in the three and six months ended June 30, 2012 from comparable period in 2011, as a result of lower foreclosure and repossessed asset expenses net of write-downs on foreclosed properties. Loans increased $256.5 million from December 31, 2011 primarily due to new originations. Total deposits decreased $235.6 million for the period ended June 30, 2012, compared to December 31, 2011 reflecting lower government and institutional banking deposit balances.

Retail Banking

Retail Banking serves consumers and small businesses primarily throughout southern New England and into Westchester County, New York, with a distribution network of 167 banking offices and 464 ATMs, and a full range of internet and mobile banking services. Retail Banking includes Webster’s branch network, Consumer deposits, Business and Professional Banking (“BPB), Webster Investment Services (“WIS”) and the Customer Care Center.

BPB offers credit and deposit-related products targeted to small businesses and professional service firms with annual revenues up to $10 million. This unit works to build full customer relationships through business bankers based in our branches.

WIS offers investment and securities-related services, including brokerage and investment advice through a strategic partnership with LPL Financial (“LPL”). Webster has employees who are LPL registered representatives, located throughout its branch network, offering customers an array of insurance and investment products including stocks and bonds, mutual funds, annuities and managed accounts. Brokerage and online investing services are available for customers. At June 30, 2012, Webster had $2.2 billion of assets under administration in its strategic partnership with LPL compared to $2.0 billion at December 31, 2011. These assets are not included in the Condensed Consolidated Balance Sheets. LPL, a provider of investment and insurance programs in financial institutions’ branches, is a broker dealer registered with the Securities and Exchange Commission, a registered investment advisor under federal and applicable state laws, a member of the Financial Industry Regulatory Authority (“FINRA”), and a member of the Securities Investor Protection Corporation (“SIPC”).

 

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Retail Banking Results:

 

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

(In thousands)

   2012      2011      2012      2011  

Net interest income

   $ 58,894       $ 57,105       $ 115,619       $ 111,405   

Provision for loan and lease losses

     580         5,815         2,144         7,024   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income after provision

     58,314         51,290         113,475         104,381   

Non-interest income

     22,257         25,889         44,194         50,638   

Non-interest expense

     67,215         69,916         135,733         140,613   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before income taxes

     13,356         7,263         21,936         14,406   

Income tax expense

     4,089         2,315         6,654         4,280   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 9,267       $ 4,948       $ 15,282       $ 10,126   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     At June, 30,
2012
     At December  31,
2011
 

Total assets

   $ 1,571,089       $ 1,546,457   
  

 

 

    

 

 

 

Total loans

     921,335         886,481   
  

 

 

    

 

 

 

Total deposits

     10,163,981         10,009,640   
  

 

 

    

 

 

 

Net interest income increased $1.8 million and $4.2 million in the three and six months ended June 30, 2012 from the comparable period in 2011. The increase is a result of improved deposit mix of higher percentage non-interest bearing deposits and reduced deposit costs. The provision for loan and lease losses decreased $5.2 million and $4.9 million for the three and six months ended June 30, 2012 from the comparable period in 2011. Webster continues to provide for losses within the lending portfolios although the provision is significantly below portfolio charge-offs. The change in provision is primarily due to management’s evaluation of the level of inherent losses in this segment’s existing book of business and management’s belief in the adequacy of the overall reserve levels. Non-interest income decreased $3.6 million and $6.4 million in the three and six months ended June 30, 2012 from the comparable period in 2011. The decrease is attributable to a decline in debit card revenues associated with the Durbin amendment’s cap on interchange fees implemented during the fourth quarter of 2011. Non-interest expense decreased $2.7 million and $4.9 million in the three and six months ended June 30, 2012 from the comparable period in 2011. The decrease is primarily attributable to the net reduction of 14 branches since the beginning of 2011. Total loans increased $34.9 million for the period ended June 30, 2012, compared to December 31, 2011. The increase reflects growth in loan originations from both dedicated Business Bankers and the team of Branch Managers who have recently completed Webster’s Business Banking certification program. Total deposits increased $154.3 million for the period ended June 30, 2012 from December 31, 2011 primarily due to the growth in consumer and business core transaction balances.

Consumer Finance

Consumer Finance offers lending solutions for consumers primarily in southern New England and Westchester County, New York. Products include: residential mortgages, home equity loans and lines of credit, unsecured personal loans as well as credit card options.

Consumer Finance Results:

 

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

(In thousands)

   2012      2011      2012      2011  

Net interest income

   $ 27,051       $ 27,022       $ 54,074       $ 54,270   

Provision for loan and lease losses

     7,489         5,511         8,994         13,419   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income after provision

     19,562         21,511         45,080         40,851   

Non-interest income

     4,157         2,148         9,879         4,189   

Non-interest expense

     18,862         19,630         37,246         38,120   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before income taxes

     4,857         4,029         17,713         6,920   

Income tax expense

     1,531         1,261         5,374         2,056   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before non-controlling interest

     3,326         2,768         12,339         4,864   

Non-controlling interest

     —           —           —           (1
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 3,326       $ 2,768       $ 12,339       $ 4,865   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     At June, 30,
2012
     At December  

Total assets

   $ 5,909,865       $ 5,869,028   
  

 

 

    

 

 

 

Total loans

     5,743,810         5,727,829   
  

 

 

    

 

 

 

Total deposits

     42,250         37,115   
  

 

 

    

 

 

 

 

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Net income improved by $0.6 million and $7.5 million for the three and six months ended June 30, 2012, respectively, from the comparable period in 2011. During this period, net interest income increased $29 thousand for the three months ended June 30, 2012 and decreased $0.2 million for the six months ended June 30, 2012 from the comparable period in 2011. The decrease in net interest income for the six months ended June 30, 2012 is directly related to a slight decrease in loan spreads against a similar level of average earnings assets compared to the six months ended June 30, 2011. The provision for loan and lease losses increased $2.0 million for the three months ended June 30, 2012 and decreased $4.4 million for the six months ended June 30, 2012 from the comparable period in 2011. Webster continues to provide for losses within the lending portfolios although the provision is significantly below portfolio charge-offs. The change in provision is primarily due to management’s evaluation of the level of inherent losses in this segment’s existing book of business and management’s belief in the adequacy of the overall reserve levels. Non-interest income increased $2.0 million and $5.7 million for the three and six months ended June 30, 2012, respectively, from the comparable period in 2011. The increase in non-interest income is related to a combination of balance sheet management strategies and a continued low interest rate environment which increased the amount of mortgage loans sold in the secondary market from the comparable period in 2011. This increased level of loan sales coupled with optimal pricing in the secondary markets resulted in significantly higher gains from loan sales. Non-interest expense decreased $0.8 million and $0.9 million for the three and six months ended June 30, 2012, respectively, from the comparable period in 2011 which is reflective of the Company’s continued focus on expense control. Total loans increased $16.0 million for the period ended June 30, 2012 compared to December 31, 2011, primarily due to a higher level of portfolio loan originations.

Other

Other includes Health Savings Account (HSA) Bank and Private Banking.

HSA Bank is a bank custodian of health savings accounts. These accounts are required for high deductible health plans offered by employers or directly to consumers.

Private Banking provides local full relationship banking that serves high net worth clients, not-for-profit organizations and business clients for asset management, trust, loan and deposit products and financial planning services.

Other Results:

 

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

(In thousands)

   2012     2011      2012     2011  

Net interest income

   $ 8,379      $ 6,028       $ 16,298      $ 11,674   

(Benefit) provision for loan and lease losses

     (262     45         (340     (234
  

 

 

   

 

 

    

 

 

   

 

 

 

Net interest income after provision

     8,641        5,983         16,638        11,908   

Non-interest income

     7,280        6,025         14,414        11,887   

Non-interest expense

     10,720        9,789         22,282        19,858   
  

 

 

   

 

 

    

 

 

   

 

 

 

Income before income taxes

     5,201        2,219         8,770        3,937   

Income tax expense

     1,593        697         2,660        1,170   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income

   $ 3,608      $ 1,522       $ 6,110      $ 2,767   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

     At June, 30,
2012
     At December  31,
2011
 

Total assets

   $ 264,882       $ 245,554   
  

 

 

    

 

 

 

Total loans

     244,142         223,787   
  

 

 

    

 

 

 

Total deposits

     1,330,664         1,139,923   
  

 

 

    

 

 

 

Net interest income increased $2.4 million and $4.6 million for the three and six months ended June 30, 2012, respectively, from the comparable period in 2011. Of this amount, deposit growth, account growth and pricing initiatives in HSA resulted in an increase of $2.0 million and $4.0 million for the three and six months ended June 30, 2012, respectively, while higher loan and deposit balances in Private Banking resulted in growth of $0.3 million and $0.6 million for the three and six months ended June 30, 2012. Non-interest income increased $1.3 million and $2.5 million for the three and six months ended June 30, 2012 from the comparable period in 2011. The increase in non-interest income is primarily due to HSA account growth and servicing fee pricing initiatives and, to a lesser extent, fees from increased Private Banking investment accounts and balances. Non-interest expense increased $0.9 million and $2.4 million for the three and six months ended June 30, 2012, respectively, from the comparable period in 2011. The increase in non-interest expense is primarily a result of higher compensation, as a result of doubling the ranks of private bankers, and processing costs primarily due to growth in deposits. Total deposits increased $190.7 million for the period ended June 30, 2012 compared to December 31, 2011, as a result of growth in both HSA and Private Banking. At June 30, 2012 there were approximately $1.9 billion of client assets under management and administration which is consistent with December 31, 2011.

 

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Reconciliation of reportable segments’ net income to consolidated net income for the periods presented:

 

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

(In thousands)

   2012     2011     2012     2011  

Net income from business segments before income taxes

   $ 55,883      $ 41,610      $ 107,788      $ 71,513   

Adjustments:

        

Corporate Treasury unit

     1,031        4,579        (7,373     7,046   

Allocation of provision for loan and lease losses

     (1,722     (2,745     (3,641     (2,032

Allocation of net interest income

     5,018        8,027        21,749        22,835   

Allocation of non-interest income

     1,635        1,494        1,712        2,309   

Allocation of non-interest expense

     (2,293     (2,924     (5,142     (6,678
  

 

 

   

 

 

   

 

 

   

 

 

 

Total adjustments

     3,669        8,431        7,305        23,480   

Income from continuing operations before income taxes

     59,552        50,041        115,093        94,993   

Income tax expense

     18,312        15,857        34,915        28,225   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     41,240        34,184        80,178        66,768   

Income from discontinued operations, net

     —          —          —          1,995   

Less: Net loss attributable to non-controlling interests

     —          —          —          (1
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Webster Financial Corporation

   $ 41,240      $ 34,184      $ 80,178      $ 68,764   
  

 

 

   

 

 

   

 

 

   

 

 

 

Financial Condition

Webster had total assets of $19.4 billion at June 30, 2012 and $18.7 billion at December 31, 2011, an increase of $0.7 billion, or 3.8%, primarily due to the increase in loans driven by strong levels of loan originations. In addition, the Company utilized deposit growth to increase its holdings in short-duration agency mortgage-backed securities (“MBS”).

Total loans and leases, net, of $11.3 billion, with allowance for loan and lease losses of $0.2 billion at June 30, 2012 increased $349.3 million when compared to total loans and leases, net of $11.0 billion, with allowance for loan and lease losses of $0.2 billion at December 31, 2011. Total deposits of $14.0 billion at June 30, 2012 increased $317.9 million when compared to total deposits of $13.7 billion at December 31, 2011. Non-interest-bearing deposits increased 5.6% and interest-bearing deposits increased 1.6% during the period due to the Company’s strategic focus to increase transaction accounts and overall pricing discipline. Webster’s loan-to-deposit ratio was 82.6% at June 30, 2012, compared to 82.2% at December 31, 2011.

At June 30, 2012, total equity of $1.9 billion increased $85.8 million when compared to total equity of $1.8 billion at December 31, 2011. Changes in equity for the six months ended June 30, 2012 consisted of increases for net income of $80.2 million and $16.3 million of other comprehensive income primarily related to net unrealized gains on securities available for sale, and decreases for $13.1 million of dividends to common shareholders and $1.2 million of dividends to preferred shareholders. The quarterly cash dividend to common shareholders increased to $0.10 per common share on April 23, 2012 from $0.05 per common share since April 26, 2011. At June 30, 2012, the tangible equity ratio was 7.38% compared to 7.18% at December 31, 2011. See Note 11-Regulatory Matters in the Notes to Condensed Consolidated Financial Statements contained elsewhere in this report for information on Webster’s regulatory capital levels and ratios.

Investment Securities Portfolio

Webster Bank may acquire and hold various types of investment securities in accordance with the guidelines of applicable federal regulations and its internal corporate investment policy. The type of investments that it may invest in include: interest-bearing deposits of federally insured banks, federal funds, U.S. government treasury and agency securities, including MBS and collateralized mortgage obligations (“CMOs”), private issue MBSs and CMOs, commercial mortgage backed securities (“CMBS”), municipal securities, corporate debt, commercial paper, banker’s acceptances, trust preferred securities, mutual funds and, subject to restrictions applicable to federally charted institutions, equity securities. The investment securities portfolio is managed within the regulatory guidelines and corporate policy, which includes limitations on aspects such as concentrations in and type of investment and investment grade, to manage risks associated with investing in securities. While there may be no statutory limit on certain categories of investments, the Office of the Comptroller of the Currency (“OCC”) may establish an individual limit on such investments, if the concentration in such investments presents a safety and soundness concern. In anticipation of pending legislation, as a result of the Dodd-Frank Act, the Company has ceased use of trading securities in its investment securities portfolio.

Webster, either directly or through Webster Bank, maintains through its Corporate Treasury Unit, an investment securities portfolio that is primarily structured to provide a source of liquidity for operating needs, to generate interest income and as a means to balance interest-rate sensitivity. The portfolio is classified into two major categories: available for sale and held-to-maturity. At June 30, 2012, Webster Bank’s portfolio consisted primarily of agency CMOs, MBS and municipal securities in held-to-maturity and agency CMOs, MBS and CMBS in available for sale. Webster and Webster Bank’s combined investment securities portfolio totaled $6.2 billion at June 30, 2012 compared to $5.8 billion at December 31, 2011, an increase of $0.4 billion. The available for sale securities portfolio increased by $0.3 billion, primarily due to new purchases of Agency MBS and CMBS, while the held-to-maturity portfolio increased by $0.1 billion, primarily due to the purchases of longer duration Agency MBS. On a tax-equivalent basis, the yield in the securities portfolio for the six months ended June 30, 2012 and 2011 was 3.71% and 4.29%, respectively.

 

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During 2012, the Federal Reserve maintained the Fed Funds rate flat, at or below 0.25%, in response to the economic environment. Concerns about the European debt crisis and slowing momentum in the U.S. economy pushed market yields lower during the six months ended June 30, 2012. Credit spreads generally tightened as the prospects for a sustained low interest rate environment drove investors to take more credit risk. Overall, these developments were generally positive for the investment securities portfolio.

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

 

     At June 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

     1,617,938         28,974         (569     1,646,343         —           —          1,646,343   

Corporate debt

     112,427         2,165         (30     114,562         —           —          114,562   

Pooled trust preferred securities (a)

     51,738         —           (22,916     28,822         —           —          28,822   

Single issuer trust preferred securities

     66,331         —           (10,822     55,509         —           —          55,509   

Equity securities-financial institutions (b)

     6,232         1,856         (20     8,068         —           —          8,068   

Mortgage-backed securities (“MBS”) - GSE

     906,851         24,054         (820     930,085         —           —          930,085   

Commercial mortgage-backed securities (“CMBS”)

     345,183         31,385         (6,577     369,991         —           —          369,991   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total available for sale

   $ 3,106,900       $ 88,434       $ (41,754   $ 3,153,580       $ —         $ —        $ 3,153,580   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Held-to-maturity:

                  

Municipal bonds and notes

   $ 622,703       $ —         $ —        $ 622,703       $ 33,636       $ (148   $ 656,191   

Agency CMOs - GSE

     631,162         —           —          631,162         21,056         —          652,218   

MBS - GSE

     1,638,235         —           —          1,638,235         93,544         (1,565     1,730,214   

CMBS

     165,146         —           —          165,146         11,377         —          176,523   

Private Label MBS

     18,980         —           —          18,980         530         —          19,510   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total held-to-maturity

   $ 3,076,226       $ —         $ —        $ 3,076,226       $ 160,143       $ (1,713   $ 3,234,656   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total investment securities

   $ 6,183,126       $ 88,434       $ (41,754   $ 6,229,806       $ 160,143       $ (1,713   $ 6,388,236   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

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

 

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Table of Contents
     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.

During the three and six months ended June 30, 2012, the Company recorded no write-downs for other-than-temporary impairments of its available for sale securities. The Company held $0.7 billion in investment securities that are in an unrealized loss position at June 30, 2012. Approximately $0.6 billion of this total had been in an unrealized loss position for less than twelve months while the remainder, $0.1 billion, had been in an unrealized loss position for twelve months or longer. The total unrealized loss was $43.5 million at June 30, 2012. These investment securities were evaluated by management and were determined not to be other-than-temporarily impaired. The Company does not have the intent to sell these investment securities, and it is more-likely-than-not that it will not have to sell the security before the recovery of its cost basis. To the extent that changes in interest rates, credit movements and other factors that influence the fair value of investments continue, the Company may be required to record additional impairment charges for other-than-temporary impairment in future periods. At June 30, 2012, one available for sale investment security valued at $2.7 million was placed into a non-accruing status. For additional information on the investment securities portfolio, see Note 2-Investment Securities in the Notes to Condensed Consolidated Financial Statements contained elsewhere in this report.

Webster Bank has the ability to use the investment portfolio, as well as interest-rate financial instruments within internal policy guidelines, to hedge and manage interest-rate risk as part of its asset/liability strategy. See Note 13-Derivative Financial Instruments in the Notes to Condensed Consolidated Financial Statements contained elsewhere in this report for additional information concerning derivative financial instruments.

 

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Loan and Lease Portfolio

The table below provides the Company’s loan and lease portfolio composition for the following periods:

 

     At June 30,
2012
     At December 31,
2011
 

(Dollars in thousands)

   Amount     %      Amount     %  

Residential:

         

1-4 family

   $ 3,235,690        28.0       $ 3,163,465        28.2   

Permanent NCLC

     20,165        0.2         21,265        0.2   

Construction

     39,165        0.3         29,083        0.3   

Liquidating construction

     1        0.0         1        0.0   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total residential

     3,295,021        28.5         3,213,814        28.7   
  

 

 

   

 

 

    

 

 

   

 

 

 

Consumer:

         

Home equity loans

     2,507,974        21.7         2,554,879        22.8   

Liquidating portfolio

     136,306        1.2         147,553        1.3   

Other consumer

     39,203        0.3         37,506        0.3   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total consumer loans

     2,683,483        23.2         2,739,938        24.4   
  

 

 

   

 

 

    

 

 

   

 

 

 

Commercial:

         

Commercial non-mortgage

     2,076,772        18.0         1,939,629        17.3   

Asset-based loans

     500,338        4.3         454,078        4.0   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total commercial loans

     2,577,110        22.3         2,393,707        21.3   
  

 

 

   

 

 

    

 

 

   

 

 

 

Commercial real estate:

         

Commercial real estate

     2,407,052        20.9         2,274,110        20.3   

Commercial construction

     114,306        1.0         73,769        0.6   

Residential development

     33,070        0.3         39,765        0.3   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total commercial real estate

     2,554,428        22.2         2,387,644        21.2   
  

 

 

   

 

 

    

 

 

   

 

 

 

Equipment financing loans and leases

     413,274        3.6         469,679        4.2   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net unamortized premiums

     7,046        0.1         8,132        0.1   

Net deferred costs

     9,635        0.1         12,490        0.1   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total loans

     11,539,997        100.0         11,225,404        100.0   
  

 

 

   

 

 

    

 

 

   

 

 

 

Less: allowance for loan and lease losses

     (198,757        (233,487  
  

 

 

   

 

 

    

 

 

   

 

 

 

Loans and leases, net

   $ 11,341,240         $ 10,991,917     
  

 

 

   

 

 

    

 

 

   

 

 

 

 

(a) Certain previously reported information has been corrected to reflect the deferment of certain commercial loan fees. For more information refer to Note 1 in the Notes to Consolidated Financial Statements.

Total residential loans were $3.3 billion at June 30, 2012, an increase of $81.2 million from December 31, 2011. The growth in the residential portfolio reflects a continued focus on jumbo mortgage lending. Jumbo mortgages represent 39.8% of the residential mortgage portfolio at June 30, 2012 and jumbo mortgage originations were approximately 49.4% of the total residential loan originations for the six months ended June 30, 2012.

Total consumer loans were $2.7 billion at June 30, 2012, a decrease of $56.5 million from December 31, 2011. The decrease is primarily due to loan repayments and lower originations in the continuing portfolio and a reduction of $11.2 million in the liquidating consumer portfolio as a result of charge offs taken during the six months ended June 30, 2012.

Total commercial loans were $2.6 billion at June 30, 2012, an increase of $183.4 million from December 31, 2011. The growth in commercial loans reflects the impact of funding new originations of $578.5 million in commercial non-mortgage for the six months ended June 30, 2012. Commercial non-mortgage consists of middle market, small business and industry segment banking. Asset-based loans increased $46.3 million from December 31, 2011, reflective of $89.3 million in originations for the six months ended June 30, 2012.

Commercial Real Estate loans were $2.6 billion at June 30, 2012, an increase of $166.8 million from December 31, 2011 as a result of the impact of funding new originations of $411.8 million during the six months ended June 30, 2012.

Equipment Finance loans and leases were $413.3 million at June 30, 2012 a decrease of $56.4 million from December 31, 2011. The decrease primarily reflects pay downs and payoffs from non-core regions.

Commercial Loans with Interest Reserves

At June 30, 2012 and December 31, 2011, there were twelve and six construction-related loans, respectively, employing bank-funded interest reserves. Such reserves are established at the time of loan origination. The decision to establish a loan-funded interest reserve is made during the underwriting process and considers the feasibility of the project, the creditworthiness and

 

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expertise of the borrower, and the debt coverage provided by the real estate and other pledged collateral. The commitments on these loans totaled $134.9 million and $67.4 million, and the loans had outstanding balances of $36.1 million and $14.9 million at June 30, 2012 and December 31, 2011, respectively. Contractually committed interest reserves for this loan type totaled $6.0 million and $2.2 million at June 30, 2012 and December 31, 2011, respectively. Interest income $0.3 and $0.5 million was recognized during the three and six months ended June 30, 2012, respectively. The twelve loans are performing under the original terms as of June 30, 2012

It is the Company’s policy to recognize income for this interest component as long as the project is progressing as agreed and if there has been no material deterioration in the financial standing of the borrower or the underlying project. Projects are subject to on-site inspections, as provided for in the loan agreements, throughout the life of the project. Inspections and reviews are performed upon a request for funding, which typically occurs every four to eight weeks. If there is monetary or non-monetary loan default, the Company will cease any interest accrual. At June 30, 2012 and December 31, 2011, there were no situations where additional interest reserves were advanced to keep a loan from becoming non-performing.

Asset Quality

Webster’s lending strategy focuses on direct relationship lending within its primary market area as the quality of assets underwritten is an important factor in the successful operation of a financial institution. Non-performing assets, loan delinquency and credit loss levels are considered to be key measures of asset quality. Management strives to maintain asset quality through its underwriting standards, servicing of loans and management of non-performing assets since asset quality is a key factor in the determination of the level of the allowance for loan and lease losses (“ALLL”). See “Allowance for Loan and Lease Losses” contained elsewhere within this section for further information concerning ALLL policy.

Asset Quality Ratios for the following periods:

 

     At June 30,
2012
    At December 31,
2011
 

Asset Quality Ratios:

    

Non-accrual and restructured loans as a percentage of total loans and leases

     1.47     1.68

Non-performing assets as a percentage of:

    

Total assets

     0.89        1.03   

Total loans and leases plus foreclosed property

     1.50        1.72   

Net charge-offs as a percentage of average loans and leases (1)

     0.77        1.00   

Allowance for loan and lease losses as a percentage of total loans and leases

     1.72        2.08   

Allowance for loan and lease losses to:

    

Net charge-offs (1)

     2.27     2.11

Non-accrual and non-accrual restructured loans and leases

     1.17        1.24   
  

 

 

   

 

 

 

 

(1) Calculated based on year to date net charge offs, annualized

A summary of net charge-offs to average outstanding loans by category follows:

 

     Three months ended June 30,     Six months ended June 30,  
     2012     2011     2012     2011  

Net charge-offs

        

Residential

     0.46     0.36     0.41     0.39

Consumer

     1.27        1.80        1.22        1.87   

Commercial

     0.64        0.73        1.39        1.25   

Commercial real estate

     0.16        0.61        0.47        0.97   

Equipment financing

     (0.88     (0.75     (1.20     (0.46
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net charge-offs to total average loans and leases

     0.58     0.79     0.77     1.00
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Calculated based on quarter to date and year to date net charge offs, annualized

 

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Non-performing Assets

The following table details non-performing assets for the periods presented:

 

     At June 30, 2012      At December 31, 2011  

(Dollars in thousands)

   Amount (1)      % (2)      Amount (1)      % (2)  

Loans:

           

Residential:

           

1-4 family

   $ 72,017         2.23       $ 76,249         2.41   

Permanent NCLC

     4,156         20.61         4,584         21.56   

Construction

     1,163         2.97         1,219         4.19   

Liquidating portfolio - NCLC

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total residential

     77,336         2.35         82,052         2.55   
  

 

 

    

 

 

    

 

 

    

 

 

 

Consumer:

           

Home equity loans

     22,551         0.90         24,943         0.98   

Liquidating portfolio - home equity loans

     4,460         3.27         5,091         3.45   

Other consumer

     65         0.17         116         0.31   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer

     27,076         1.01         30,150         1.10   
  

 

 

    

 

 

    

 

 

    

 

 

 

Commercial:

           

Commercial non-mortgage

     29,271         1.41         27,884         1.44   

Asset-based loans

     262         0.05         1,880         0.41   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     29,533         1.15         29,764         1.24   
  

 

 

    

 

 

    

 

 

    

 

 

 

Commercial real estate:

           

Commercial real estate

     23,408         0.97         32,197         1.42   

Commercial construction

     49         0.04         —           —     

Residential development

     5,982         18.09         6,762         17.01   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial real estate

     29,439         1.15         38,959         1.63   
  

 

 

    

 

 

    

 

 

    

 

 

 

Equipment financing loans and leases

     5,862         1.42         7,154         1.52   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-performing loans and leases (3)

   $ 169,246         1.47       $ 188,079         1.68   
  

 

 

    

 

 

    

 

 

    

 

 

 

Foreclosed and repossessed assets:

           

Residential and consumer

     2,737            2,752      

NCLC/Consumer

     —              132      

Commercial

     1,638            2,084      
  

 

 

    

 

 

    

 

 

    

 

 

 

Total foreclosed and repossessed assets

   $ 4,375          $ 4,968      
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-performing assets

   $ 173,621          $ 193,047      
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Balances exclude the impact of net deferred costs and unamortized premiums.
(2) Represent the principal balance of non-performing loans and leases as a percentage of the outstanding principal balance within the comparable loan and lease category. The percentage excludes the impact of deferred costs and unamortized premiums.
(3) Includes non-accrual restructured loans and leases of $87.3 million and $76.7 million at June 30, 2012 and December 31, 2011, respectively.

It is Webster’s policy that residential and consumer loans 90 or more days past due are placed on non-accrual status and commercial and commercial real estate loans and equipment financing leases are subject to a detailed review by the Company’s credit risk team when payment is uncertain and a specific determination is made to put a loan or lease on non-accrual status. There are, on occasion, circumstances that cause commercial loans to be placed in the 90 days past due and accruing category, for example, loans that are considered to be well secured and in the process of collection or renewal. See “Delinquent Loans” contained elsewhere within this section for further information concerning loans past due 90 days and still accruing. .

Interest on non-accrual loans at June 30, 2012 and 2011, that would have been recorded as additional interest income for the three and six months ended June 30, 2012 and 2011 had the loans been current in accordance with their original terms approximated $3.8 million and $7.2 million and $4.6 million and $9.8 million, respectively. See Note 1-Summary of Significant Accounting Policies in the Notes to Condensed Consolidated Financial Statements for information on the policy for non-accrual loans.

Impaired Loans and Leases

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, primarily residential and consumer, and on an individual loan basis depending on risk rating, accrual status and loan size for other loans, primarily residential and consumer loans. Commercial, commercial real estate and equipment financing loans over a specific dollar amount and all troubled debt restructurings (“TDRs”) are evaluated individually for impairment.

 

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At June 30, 2012, there were 1,234 impaired loans and leases with a recorded investment balance of $414.6 million which included loans and leases of $307.1 million with an impairment allowance of $33.1 million. There were loans and leases of $337.4 million measured using the present value of expected cash flows and $77.2 million measured using the fair value of associated collateral. Approximately 34.0% of the $77.2 million of the collateral dependent loans at June 30, 2012 relied on current third party appraisals to assist in measuring impairment. At December 31, 2011, there were 1,271 impaired loans and leases with a recorded investment balance of $495.3 million which included loans and leases of $338.9 million with an impairment allowance of $46.6 million, There were loans and leases of $404.2 million measured using the present value of expected cash flows and $91.1 million measured using the fair value of associated collateral. Approximately 48.4% of the $91.1 million of the collateral dependent loans at December 31, 2011 relied on current third party appraisals to assist in measuring impairment.

Specific valuation allowances are not necessary for certain impaired loans as a result of either sufficient cash flow or sufficient collateral coverage, or previous charge off amounts that reduced the book value of the loan to an amount equal to or below the fair value of the collateral. General economic conditions influencing cash flow expectations and real estate appraisals impacting fair value of collateral associated with this loan population has remained stable during the period. In addition, there were a number of note payoffs which reduced both the impaired loan balance and specific valuation allowances.

To the extent that the recovery of a loan balance is collateral dependent, the Company obtains an independent appraisal. The appraised value is reduced for selling costs and potentially further for historical experience with foreclosed real estate and repossessed asset sales to determine the estimated fair value of the collateral. Fair value is then compared to the loan balance. Any fair value shortfall is charged against the allowance for loan and lease losses. Since the fair value of the collateral considers selling costs and adjustments for historical experience with foreclosed real estate and repossessed asset sales, charge offs may be incurred that reduce a loan balance below appraised value. Updated appraisals are obtained for a collateral dependent loan upon a borrower credit event (i.e. renewal or modification) or as part of the foreclosure proceedings. For commercial loans, an internal or third party valuation may be used when a loan moves to a substandard classification. Independent appraisals are obtained annually for commercial loans on non-accrual status. New appraisals may not be ordered if the most recent appraisal was obtained in the past twelve months or the loan amount is under $250,000 or other Financial Institutions Reform Recovery and Enforcement Act (“FIRREA”) acceptable real estate evaluations are permitted. Webster’s aims to obtain an appraisal as close to the foreclosure date as possible to ensure compliance with court guidelines, which generally require appraisals not more than 30-90 days old. Appraisals are performed by independent, licensed appraisers. A licensed in-house appraisal officer or qualified reviewer reviews the appraisal for compliance with FIRREA and the Uniform Standards of Professional Appraisal Practice reviews and reports to the risk department the appraisals when there is significant decline in property value, for foreclosed properties, for loans greater than 180 days past due and for loans over a threshold of $4 million for commercial loans and $0.4 million for residential and consumer loans. For certain loans in the equipment financing portfolio, management will look to competitive bids or blue book values to estimate a value of the underlying collateral. Subsequent to an appraisal, it may come to management’s attention that the value has declined further. In cases where this information is deemed reliable, a further impairment is recorded to reflect the reduction, thereby increasing the allowance for loan and lease losses.

Troubled Debt Restructurings

A modified loan is considered a TDR when two conditions are met: 1) the borrower is experiencing financial difficulties and 2) the modification constitutes a concession. 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 by dollar amount include covenant modifications, forbearance and/or other concessions. If the modification agreement is violated, the loan is handled by the Company’s Restructuring and Recovery group for resolution, which may result in liquidation or foreclosure.

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 risk 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.

 

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The following tables provide detail of TDR balance and activity for the periods presented:

 

(In thousands)

   At June 30,
2012
    At December 31,
2011
 

Recorded investment of TDRs:

    

Accrual status

   $ 315,530      $ 367,344   

Non-accrual status

     87,583        76,968   
  

 

 

   

 

 

 

Total recorded investment

   $ 403,113      $ 444,312   
  

 

 

   

 

 

 

Accruing TDRs performing under modified terms more than one year

     88.2     76.0

TDR specific reserves included in the balance of allowance for loan losses

   $ 32,630      $ 44,847   

Additional funds committed to borrowers in TDR status (a)

     7,159        7,872   
  

 

 

   

 

 

 

 

(a) This amount may be limited by contractual rights and/or the underlying collateral supporting the loan or lease.

 

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

(In thousands)

   2012     2011     2012     2011  

TDRs, beginning of period

   $ 410,550      $ 495,152      $ 444,312      $ 450,151   

New TDR status

     14,523        23,058        30,200        87,828   

Paydowns/draws on existing TDRs, net

     (13,829     (36,327     (25,904     (50,909

Charge-offs post modification

     (4,513     (2,916     (23,541     (7,205

Loan sales

     —          —          (7,730     —     

Other reductions (b)

     (3,618     (213     (14,224     (1,111
  

 

 

   

 

 

   

 

 

   

 

 

 

TDRs, end of period

   $ 403,113      $ 478,754      $ 403,113      $ 478,754   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) This amount may be limited by contractual rights and/or the underlying collateral supporting the loan or lease.
(b) Other reductions include change in TDR status (removal of $3.6 million and $14.0 million A Note structures from TDR status in the three and six months ended June 30, 2012, respectively) and transfers to OREO.

The increase in charge offs during the six months ended June 30, 2012 as compared to the six months ended June 30, 2011 is primarily due to one large commercial credit which was modified in 2011. See Note 3-Loans and Leases in the Notes to Condensed Consolidated Financial Statements for a discussion of the amount of modified loans, modified loan characteristics and Webster’s evaluation of the success of its modification efforts.

 

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Delinquent loans

The following table sets forth information regarding over 30-day delinquent loans and leases, excluding loans held for sale and non-accrual loans and leases:

 

     At June 30, 2012      At December 31, 2011  

(Dollars in thousands)

   Principal
Balances  (1)
     % (2)      Principal
Balances  (1)
     % (2)  

Residential

           

1-4 family

   $ 26,677         0.82       $ 22,895         0.72   

Permanent NCLC

     289         1.43         1,183         5.56   

Construction

     —           —           283         0.97   

Liquidating NCLC

     —           —           —           —     

Consumer

           

Home equity loans

     21,571         0.86         20,394         0.80   

Liquidating portfolio-home equity loans

     4,377         3.21         4,538         3.08   

Other consumer

     592         1.51         453         1.21   

Commercial:

           

Commercial non-mortgage

     6,479         0.31         4,619         0.24   

Asset-based loans

     —           —           —           —     

Commercial real estate:

           

Commercial real estate

     3,152         0.13         1,766         0.08   

Residential development

     —           —           —           —     

Equipment financing loans and leases

     1,665         0.40         4,800         1.02   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total loans and leases past due 30-89 days

   $ 64,802         0.56       $ 60,931         0.54   
  

 

 

    

 

 

    

 

 

    

 

 

 

Past due 90 days or more and accruing:

           

Continuing portfolio

           

Commercial non-mortgage

   $ 1,074         0.05       $ 161         0.01   

Commercial real estate

     —           —           428         0.02   

Residential development

     —           —           135         0.34   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total loans past due 90 days and still accruing

   $ 1,074          $ 724      
  

 

 

    

 

 

    

 

 

    

 

 

 

Total over 30-day delinquent loans

   $ 65,876          $ 61,655      
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Other past due loan and lease balances exclude the impact of deferred costs and unamortized premiums.
(2) Represent the principal balance of past due loans and leases as a percentage of the outstanding principal balance within the comparable loan and lease category. The percentage excludes the impact of deferred costs and unamortized premiums.

 

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Allowance for Loan and Lease Losses Methodology

The allowance for loan and lease losses and the reserve for unfunded credit commitments are maintained at a level estimated by management to provide for probable losses inherent within the loan portfolio. Probable losses are estimated based upon a quarterly review of the loan portfolio, which includes historic default and loss experience, specific problem loans, risk rating profile, economic conditions and other pertinent factors which, in management’s judgment, warrant current recognition in the loss estimation process. Webster’s Credit Risk Management Committee meets quarterly to review and conclude on the adequacy of the reserves and to present their recommendation to executive management.

Management considers the adequacy of the ALLL a critical accounting policy. The adequacy of the ALLL is subject to considerable assumptions and judgment used in its determination. Therefore, actual losses could differ materially from management’s estimate if actual conditions differ significantly from the assumptions utilized. These conditions include economic factors in Webster’s market and nationally, industry trends and concentrations, real estate values and trends, and the financial condition and performance of individual borrowers. While management believes the ALLL is adequate as of June 30, 2012, actual results may prove different and the differences could be significant.

Webster’s methodology for assessing the appropriateness of the ALLL includes several key elements. The problem loans analyzed and specifically reserved for are identified and segregated from the portfolio. The remaining loans are segmented into pools that are similar in type and risk characteristic. Historic portfolio performance data is collected over time and analyzed to support the segmentation, and to use in the loss estimation process. This data includes risk ratings, historic delinquency, default, and non-accrual data and loss trend information.

Probable losses in the portfolio are estimated by calculating formula allowances for homogeneous pools of loans and specific allowances for impaired loans. The formula allowances are calculated by applying loss factors to the loan pools that are based on historic default and loss rates, internal risk ratings, and other risk-based characteristics. Changes in risk ratings, and other risk factors, for both performing and non-performing loans affect the calculation of the allowances. Loss factors are based on Webster’s default and loss experience, and may be adjusted for significant conditions that, in management’s judgment, affect the collectability of the portfolio as of the evaluation date. The following is considered when determining probable losses: historic loss experience, borrower and facility risk ratings, industry and borrower concentrations, collateral values, portfolio trends, and current market conditions.

The ALLL incorporates the range of probable outcomes as part of the loss estimation process, as well as an estimate of risk not captured in quantitative modeling and methodologies including, for example; imprecision in loss estimate methodologies, asset quality trends, changes in portfolio characteristics and loan mix, volatility in historic loss experience, uncertainty associated with industry trends, the economy and other external factors.

The table below provides, as of the dates indicated, an allocation of the allowance for loan and lease losses by loan type; however, allocation of a portion of the allowance to one category of loans and leases does not preclude its availability to absorb losses in other categories.

 

(In thousands)

   At June 30,
2012
     At December 31,
2011
     At June 30,
2011
 

Residential

   $ 32,063       $ 34,565       $ 28,476   

Consumer

     62,237         67,785         82,369   

Commercial

     48,768         60,681         65,842   

Commercial real estate

     36,506         45,013         66,286   

Equipment financing

     5,433         8,943         18,270   

Unallocated

     13,750         16,500         20,000   
  

 

 

    

 

 

    

 

 

 

Total

   $ 198,757       $ 233,487       $ 281,243   
  

 

 

    

 

 

    

 

 

 

At June 30, 2012, the allowance for loan and lease losses was $198.8 million, or 1.72% of the total loan portfolio, and 117.4% of total non-performing loans and leases. This compares with an allowance of $233.5 million or 2.08% of the total loan portfolio, and 124.0% of total non-performing loans and leases at December 31, 2011. Net charge-offs for the three and six months ended June 30, 2012 were $16.5 million and $43.7 million respectively and consisted of $3.8 million and $6.8 million, respectively, in net charges for residential loans, $8.6 million and $16.6 million, respectively, for consumer loans, $4.0 million and $17.2 million, respectively for commercial loans, $1.0 million and $5.8 million, respectively, for commercial real estate loans and net recoveries of $(0.9) million and $(2.7) million, respectively, for equipment financing loans. Net charge-offs decreased by $5.2 million and $12.7 million, respectively, during the three and six months ended June 30, 2012 when compared to charge-offs of $21.7 million and $56.4 million, respectively, for the three and six months ended June 30, 2011. The decrease in charge-off activity reflects lower levels of non-performing loans and improved portfolio performance for the three and six months ended June 30, 2012. The decrease in the allowance for loan and lease losses year over year reflects improved portfolio and economic conditions across all lines of business, effectively reducing probable losses.

 

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The reserve associated with loans individually evaluated for impairment ALLL balance decreased at June 30, 2012 when compared to December 31, 2011 and June 30, 2011. The reduction in the reserve is primarily due to a decrease in the balance of impaired loans primarily due to note payoffs and improving risk rating profile of the portfolio, coupled with trends in charge-offs, forecasts of probable losses and a stronger sense of stability in the region indicate the Company’s reserve levels are sufficient.

As of June 30, 2012, the reserve allocated to the residential loan portfolio decreased $2.5 million compared to December 31, 2011 and increased $3.6 million compared to June 30, 2011. The decrease from December 31, 2011 is due to a decrease in non-performing loans as a result of the transfer of non-performing loans to held for sale during the three months ended June 30, 2012 as well as a slight decrease in the twelve month loss projection, partially offset by an increase in the residential loan portfolio. The increase from June 30, 2011 is due to an increase in the projected range of loss primarily due to continued high unemployment and weak real estate prices.

The reserve allocated to the consumer portfolio at June 30, 2012 decreased $5.5 million from December 31, 2011 and decreased $20.1 million from June 30, 2011. The decrease from December 31, 2011 and June 30, 2011 is due to reduced levels of delinquencies, non-accruals and charge-offs, partially offset by an increase in the environmental factor applied to the portfolio related to junior lien home equity loans where the Company does not hold the first mortgage.

The reserve allocated to the commercial loan portfolio at June 30, 2012 decreased $11.9 million from December 31, 2011 and decreased $17.1 million from June 30, 2011. The decrease from December 31, 2011 is due to improved portfolio risk ratings which resulted in a decrease in the projected loss range, partially offset by an increase in past due driven by an increase in maturities in the period. The decrease from June 30, 2011 is due to a decrease in non-performing loans and classified loans primarily driven by a large single credit moving to classified rating in the three months ended June 30, 2011 which offset the positive movement in the portfolio in 2011.

The reserve allocated to the commercial real estate portfolio decreased $8.5 million from December 31, 2011 and $29.8 million from June 30, 2011. The decrease from December 31, 2011 is due to a decrease in past due loans as there were no new delinquencies during the six months ended June 30, 2012 and a decline in classified loans which resulted in a reduction in the range of estimated loss at June 30, 2012 as compared to December 31, 2011. The decrease from December 31, 2011 is partially offset by an increase in the portfolio loan balance at June 30, 2012. The decrease from June 30, 2011 is due to improved portfolio risk ratings and reduced levels of non-performing loans, past due loans and net charge offs which resulted in a reduction in the range of estimated loss at June 30, 2012 as compared to June 30, 2011.

As of June 30, 2012, the reserve allocated to the equipment financing portfolio decreased $3.5 million from December 31, 2011 and $12.8 million from June 30, 2011. The decrease from December 31, 2011 is due to a planned decline in the loan portfolio as well as a decline in past due loans and classified assets. There was a significant amount of recoveries in the period, which the Company does not anticipate to continue through the remainder of 2012. The decrease from June 30, 2011 is due to the planned decline in the loan portfolio as well as a decrease in classified assets, in addition to the Company’s use of risk ratings in the equipment financing loss methodology at December 31, 2011 which resulted in a reduced range of loss.

The unallocated portion of the ALLL represents general valuation allowances that are not allocated to a specific loan portfolio. The unallocated portion of the ALLL at June 30, 2012 decreased $2.8 million compared to December 31, 2011 and decreased $6.3 million from June 30, 2011. The decrease from December 31, 2011 and June 30, 2011 is due to continued improvement in the Company’s risk rating accuracy and overall improvements in credit risk management processes in addition to reduced levels of impaired loans with zero reserve balances, combined with a slight improvement in economic factors during the period.

 

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The following table provides detail of activity in the Company’s allowance for loan and lease losses for the three and six months ended June 30, 2012 and 2011:

 

     Three months ended June 30, 2012  

(In thousands)

   Residential     Consumer     Commercial     Commercial
Real Estate
    Equipment
Financing
    Unallocated     Total  

Allowance for loan and lease losses:

              

Balance, beginning of period

   $ 32,039      $ 64,263      $ 51,003      $ 40,187      $ 7,796      $ 15,000      $ 210,288   

Provision (benefit) charged to expense

     3,840        6,621        1,763        (2,661     (3,313     (1,250     5,000   

Losses charged off

     (3,952     (11,349     (5,676     (1,066     (165     —          (22,208

Recoveries

     136        2,702        1,678        46        1,115        —          5,677   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ 32,063      $ 62,237      $ 48,768      $ 36,506      $ 5,433      $ 13,750      $ 198,757   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

   $ 17,086      $ 4,568      $ 5,761      $ 5,652      $ 3      $ —        $ 33,070   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

   $ 14,977      $ 57,669      $ 43,007      $ 30,854      $ 5,430      $ 13,750      $ 165,687   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     Three months ended June 30, 2011  

(In thousands)

   Residential     Consumer     Commercial     Commercial
Real Estate
    Equipment
Financing
    Unallocated      Total  

Allowance for loan and lease losses:

               

Balance, beginning of period

   $ 28,239      $ 89,821      $ 68,919      $ 71,162      $ 19,807      $ 20,000       $ 297,948   

Provision (benefit) charged to expense

     3,085        5,171        963        (1,517     (2,702     —           5,000   

Losses charged off

     (2,967     (13,891     (5,361     (3,765     (413     —           (26,397

Recoveries

     119        1,268        1,321        406        1,578        —           4,692   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance, end of period

   $ 28,476      $ 82,369      $ 65,842      $ 66,286      $ 18,270      $ 20,000       $ 281,243   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance: individually evaluated for impairment

   $ 15,132      $ 4,166      $ 10,039      $ 11,533      $ 1      $ —         $ 40,871   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance: collectively evaluated for impairment

   $ 13,344      $ 78,203      $ 55,803      $ 54,753      $ 18,269      $ 20,000       $ 240,372   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

     Six months ended June 30, 2012  

(In thousands)

   Residential     Consumer     Commercial     Commercial
Real Estate
    Equipment
Financing
    Unallocated     Total  

Allowance for loan and lease losses:

              

Balance, beginning of period

   $ 34,565      $ 67,785      $ 60,681      $ 45,013      $ 8,943      $ 16,500      $ 233,487   

Provision (benefit) charged to expense

     4,288        11,096        5,279        (2,739     (6,174     (2,750     9,000   

Losses charged off

     (7,067     (21,400     (20,670     (6,914     (799     —          (56,850

Recoveries

     277        4,756        3,478        1,146        3,463        —          13,120   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ 32,063      $ 62,237      $ 48,768      $ 36,506      $ 5,433      $ 13,750      $ 198,757   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

   $ 17,086      $ 4,568      $ 5,761      $ 5,652      $ 3      $ —        $ 33,070   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

   $ 14,977      $ 57,669      $ 43,007      $ 30,854      $ 5,430      $ 13,750      $ 165,687   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     Six months ended June 30, 2011  

(In thousands)

   Residential     Consumer     Commercial     Commercial
Real Estate
    Equipment
Financing
    Unallocated     Total  

Allowance for loan and lease losses:

              

Balance, beginning of period

   $ 30,792      $ 95,071      $ 74,470      $ 77,695      $ 21,637      $ 22,000      $ 321,665   

Provision (benefit) charged to expense

     3,754        13,696        5,107        (690     (4,867     (2,000     15,000   

Losses charged off

     (6,317     (28,879     (16,472     (11,125     (1,547     —          (64,340

Recoveries

     247        2,481        2,737        406        3,047        —          8,918   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ 28,476      $ 82,369      $ 65,842      $ 66,286      $ 18,270      $ 20,000      $ 281,243   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

   $ 15,132      $ 4,166      $ 10,039      $ 11,533      $ 1      $ —        $ 40,871   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

   $ 13,344      $ 78,203      $ 55,803      $ 54,753      $ 18,269      $ 20,000      $ 240,372   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

In addition to the ALLL, the Company maintains a reserve for unfunded credit commitments. The allowance for credit losses analysis includes consideration of the risks associated with unfunded loan commitments. The 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 driven by the underlying borrower risk grades. The combination of ALLL and unfunded reserves is calculated in a manner to capture the entirety of the underlying business relationship of the customer. The amounts of unfunded commitments and the associated reserves may be subject to fluctuations due to originations, the timing and volume of loan funding, as well as changes in risk ratings. At June 30, 2012, the reserve for unfunded credit commitments was $5.5 million compared to a reserve for unfunded credit commitments of $5.4 million at December 31, 2011.

Sources of Funds

The primary source of Webster Bank’s cash flows, for use in lending and meeting its general operational needs, is deposits. Additional sources of funds are from Federal Home Loan Bank (“FHLB”) advances and other borrowings, loan and mortgage-backed securities repayments, securities sales proceeds and maturities, and earnings. While scheduled loan and securities repayments are a relatively stable source of funds, loan and investment security prepayments and deposit inflows are influenced by prevailing interest rates and local economic conditions and are inherently uncertain.

Deposits

Webster Bank offers a wide variety of deposit products for checking and savings (including: ATM and check card use, direct deposit, ACH payments, combined statements, automated mobile banking services, Internet-based banking, bank by mail as well as overdraft protection via line of credit or transfer from another deposit account) designed to meet the transactional, savings and investment needs of our consumer and business customers throughout 167 banking offices within our primary market area.

 

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Webster manages the flow of funds in its deposit accounts and provides an assortment of accounts and rates consistent with FDIC regulations. Webster’s Retail Pricing Committee and its Commercial and Institutional Liability Pricing Committee meet regularly to determine pricing and marketing initiatives. Total deposits were $14.0 billion at June 30, 2012 as compared to $13.7 billion at December 31, 2011 and June 30, 2011. Deposits have increased most significantly for health savings accounts and non-interest bearing classifications. See Note 7-Deposits in the Notes to Condensed Consolidated Financial Statements for additional information.

Federal Home Loan Bank and Federal Reserve Bank Stock

The Bank is a member of the Federal Home Loan Bank System, which consists of twelve district Federal Home Loan Banks, each subject to the supervision and regulation of the Federal Housing Finance Agency. Capital stock is required in order for the Bank to access advances and other extensions of credit for liquidity and funding purposes. The capital stock investment is restricted in that there is no market for it, and it can only be redeemed by the Federal Home Loan Bank of Boston (“FHLB”). Based on requirements to hold a certain amount of capital stock for membership and for advances and other extensions of credit, the Bank was required to hold $89.2 million of FHLB stock on June 30, 2012 and $77.9 million on December 31, 2011. At June 30, 2012, the Bank had $91.9 million of capital stock invested in the FHLB. The FHLB most recently declared a cash dividend equal to an annual yield of 0.52% on April 27, 2012.

At June 30, 2012, the Bank had $50.7 million of capital stock invested in the Federal Reserve Bank (FRB). Webster is required to have FRB stock equal to 6% of its capital and surplus of which 50% is paid. The remaining 50% is subject to call when deemed necessary by the Board of Governors of the Federal Reserve System. The capital stock investment is restricted in that there is no market for it, and it can only be redeemed by the FRB. The FRB pays a dividend of 6% annualized.

Borrowings

Total borrowed funds, including long-term debt, increased $235.5 million to $3.2 billion at June 30, 2012 compared to $3.0 billion at December 31, 2011, and $2.0 billion at June 30, 2011. The increase is a result of greater utilization of FHLB advances at lower interest rates somewhat offset by prepayments of long-term debt with higher interest rates. Borrowings represented 16.5% and 15.9% of assets at June 30, 2012 and December 31, 2011, respectively, and 11.5% at June 30, 2011. See Note 8-Securities Sold Under Agreements to Repurchase and Other Short-term Borrowings, Note 9-Federal Home Loan Bank Advances and Note 10-Long-term Debt in the Notes to Condensed Consolidated Financial Statements for additional information.

Liquidity and Capital Resources

Liquidity management allows Webster to meet cash needs at a reasonable cost under various operating environments. Liquidity at Webster and Webster Bank is actively managed and reviewed in order to maintain stable, cost effective funding to promote strength in its balance sheet. Liquidity comes from a variety of sources such as the cash flow from operating activities including principal and interest payments on loans and investments, unpledged securities which can be sold or utilized to secure funding and by the ability to attract new deposits. Webster has a commitment to maintain a strong, increasing base of core deposits to support growth in its loan portfolios.

Webster’s primary sources of liquidity at the parent company level are dividends from Webster Bank, investment income and net proceeds from borrowings, investment sales and capital offerings. The main uses of liquidity are the payment of principal and interest to holders of senior notes and capital securities, the payment of dividends to common and preferred shareholders, repurchases of Webster’s common stock and purchases of available for sale securities. There are certain restrictions on the payment of dividends by Webster Bank to the Company, which are described in the section captioned “Supervision and Regulation” in Item 1 as included in Webster’s 2011 Form 10-K. At June 30, 2012, there were $77.3 million of retained earnings available for the payment of dividends by the Bank to the Company. Webster Bank paid the Company $20.0 million and $90.0 million in dividends during the three and six months ended June 30, 2012.

During the three and six months ended June 30, 2012, a total of 1,628 and 79,663 shares of common stock were repurchased at a cost of approximately $33.9 thousand and $1.7 million respectively. All of the repurchased shares were done in the open market to fund equity compensation plans.

At June 30, 2012 and December 31, 2011, FHLB advances outstanding totaled $1.5 billion and $1.3 billion, respectively. Webster Bank had additional borrowing capacity from the FHLB of approximately $0.9 billion and $1.0 billion at June 30, 2012 and December 31, 2011, respectively. In addition, unpledged securities could have been used to increase borrowing capacity at the FHLB by an additional $2.6 billion at June 30, 2012 or used to collateralize other borrowings, such as repurchase agreements. At June 30, 2012, Webster Bank also had additional borrowing capacity from unused collateral at the Federal Reserve of $0.6 billion. Alternatively, unpledged securities could have been used to increase borrowing capacity at the FRB by an additional $3.2 billion at June 30, 2012

Webster Bank is required by regulations adopted by the OCC to maintain liquidity sufficient to ensure safe and sound operations. Adequate liquidity, as assessed by the OCC, may vary from institution to institution depending on such factors as the overall asset/liability structure, market conditions, competition and the nature of the institution’s deposit and loan customers. At June 30, 2012, Webster Bank exceeded all regulatory requirements.

 

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Applicable OCC regulations require Webster Bank, as a commercial bank, to satisfy certain minimum leverage and risk-based capital requirements. As an OCC regulated commercial institution, it is also subject to a minimum tangible capital requirement. At June 30, 2012, Webster Bank was in full compliance with all applicable capital requirements and met the FDIC requirements for a “well capitalized” institution. On June 7, 2012, the Federal Reserve Board approved three proposals implementing the Basel III capital standards. The Basel III proposals could fundamentally change how bank calculate their regulatory capital requirements. The proposals would increase the minimum levels of required capital, narrow the definition of capital, and increase the risk weights assets for various asset classes. The Company is still in the process of assessing the impacts of these complex proposals, however, we believe we will continue to exceed all estimated well capitalized regulatory requirements on a fully phased-in basis.

The liquidity position of the Company is continuously monitored and adjustments are made to the balance between sources and uses of funds as deemed appropriate. Management is not aware of any events that are reasonably likely to have a material adverse effect on the Company’s liquidity, capital resources or operations. In addition, management is not aware of any regulatory recommendations regarding liquidity, which if implemented would have a material adverse effect on the Company. Webster has a detailed liquidity contingency plan which is designed to respond to liquidity concerns in a prompt and comprehensive manner. It is designed to provide early detection of potential problems and details specific actions required to address liquidity stress scenarios.

Off-Balance Sheet Arrangements

In the normal course of operations, Webster engages in a variety of financial transactions that, in accordance with GAAP, are not recorded in the financial statements, or are recorded in amounts that differ from the notional amounts. These transactions involve to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used for general corporate purposes or for customer needs. Corporate purpose transactions are used to help manage credit, interest rate and liquidity risk or to optimize capital. Customer transactions are used to manage customers’ requests for funding. For the six months ended June 30, 2012, Webster did not engage in any off-balance sheet transactions that would have a material effect on its financial condition.

Asset/Liability Management and Market Risk

An effective asset/liability management process must balance the risks and rewards from both short and long-term interest rate risks in determining management strategy and action. To facilitate and manage this process, Webster has an Asset/Liability Committee (“ALCO”). The primary goal of ALCO is to manage interest rate risk to maximize net income and net economic value over time in changing interest rate environments subject to Board of Director approved risk limits. The Board sets limits for earnings at risk for parallel ramps in interest rates over 12 months of plus and minus 100, 200 and 300 basis points. Economic value or “equity at risk” limits are set for parallel shocks in interest rates of plus and minus 100 and 200 basis points. Based on the historic lows in short-term interest rates as of June 30, 2012 and December 31, 2011, the declining interest rate scenarios for both the earnings at risk for parallel ramps and the equity as risk for parallel shocks have been temporarily suspended per ALCO policy. ALCO also regularly reviews earnings at risk scenarios for non-parallel changes in rates, as well as longer term earnings at risk for up to four years in the future.

Management measures interest rate risk using simulation analyses to calculate earnings and equity at risk. These risk measures are quantified using simulation software from one of the leading firms in the field of asset/liability modeling. Key assumptions relate to the behavior of interest rates and spreads, prepayment speeds and the run-off of deposits. From such simulations, interest rate risk is quantified and appropriate strategies are formulated and implemented.

Earnings at risk is defined as the change in earnings (excluding provision for loan and lease losses and income tax expense) due to changes in interest rates. Interest rates are assumed to change up or down in a parallel fashion and earnings results are compared to a flat rate scenario as a base. The flat rate scenario holds the end of the period yield curve constant over the twelve month forecast horizon. Earnings simulation analysis incorporates assumptions about balance sheet changes such as asset and liability growth, loan and deposit pricing and changes to the mix of assets and liabilities. It is a measure of short-term interest rate risk. Equity at risk is defined as the change in the net economic value of assets and liabilities due to changes in interest rates compared to a base net economic value. Equity at risk analyzes sensitivity in the present value of cash flows over the expected life of existing assets, liabilities and off-balance sheet contracts. It is a measure of the long-term interest rate risk to future earnings streams embedded in the current balance sheet.

Key assumptions underlying the present value of cash flows include the behavior of interest rates and spreads, asset prepayment speeds and attrition rates on deposits. Cash flow projections from the model are compared to market expectations for similar collateral types and adjusted based on experience with Webster Bank’s own portfolio. The model’s valuation results are compared to observable market prices for similar instruments whenever possible. The behavior of deposit and loan customers is studied using historical time series analysis to model future customer behavior under varying interest rate environments.

The equity at risk simulation process uses multiple interest rate paths generated by an arbitrage-free trinomial lattice term structure model. The Base Case rate scenario, against which all others are compared, uses the month-end LIBOR/Swap yield curve as a starting point to derive forward rates for future months. Using interest rate swap option volatilities as inputs, the model creates multiple rate paths for this scenario with forward rates as the mean. In shock scenarios, the starting yield curve is shocked up or down in a parallel fashion. Future rate paths are then constructed in a similar manner to the Base Case.

 

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Cash flows for all instruments are created using product specific prepayment models and account specific system data for properties such as maturity date, amortization type, coupon rate, repricing frequency and repricing date. The asset/liability simulation software is enhanced with a mortgage prepayment model and a Collateralized Mortgage Obligation database. Instruments with explicit options (i.e., caps, floors, puts and calls) and implicit options (i.e., prepayment and early withdrawal ability) require such a rate and cash flow modeling approach to more accurately quantify value and risk. On the asset side, risk is impacted the most by mortgage loans and mortgage-backed securities, which can typically prepay at any time without penalty and may have embedded caps and floors. On the liability side, there is a large concentration of customers with indeterminate maturity deposits who have options to add or withdraw funds from their accounts at any time. Webster Bank also has the option to change the interest rate paid on these deposits at any time.

Webster’s earnings at risk model incorporates net interest income and non-interest income and expense items, some of which vary with interest rates. These items include mortgage banking income, mortgage servicing rights and derivative mark-to-market adjustments.

Four main tools are used for managing interest rate risk: (1) the size and duration of the investment portfolio, (2) the size and duration of the wholesale funding portfolio, (3) off-balance sheet interest rate contracts and (4) the pricing and structure of loans and deposits. ALCO meets at least monthly to make decisions on the investment and funding portfolios based on the economic outlook, the Committee’s interest rate expectations, the risk position and other factors. ALCO delegates pricing and product design responsibilities to individuals and sub-committees but monitors and influences their actions on a regular basis.

Various interest rate contracts, including futures and options, interest rate swaps and interest rate caps and floors can be used to manage interest rate risk. These interest rate contracts involve, to varying degrees, credit risk and interest rate risk. Credit risk is the possibility that a loss may occur if a counter party to a transaction fails to perform according to the terms of the contract. The notional amount of interest rate contracts is the amount upon which interest and other payments are based. The notional amount is not exchanged; therefore, the notional amounts should not be taken as a measure of credit risk. Assets of $53.3 million and $47.1 million and liabilities of $60.1 million and $59.8 million were recognized for the fair value of these derivatives at June 30, 2012 and December 31, 2011, respectively. See Note 1 – Summary of Significant Accounting Policies and Note 13 – Derivative Financial Instruments in the Notes to Condensed Consolidated Financial Statements contained elsewhere within this report for additional information.

Certain derivative instruments, primarily forward sales of mortgage-backed securities, are utilized by Webster Bank in its efforts to manage risk of loss associated with its mortgage banking activities. Prior to closing and funds disbursement, an interest-rate lock commitment is generally extended to the borrower. During such time, Webster Bank is subject to risk that market rates of interest may change impacting pricing on loan sales. In an effort to mitigate this risk, forward delivery sales commitments are established, thereby setting the sales price.

The following table summarizes the estimated impact that gradual parallel changes in interest rates of 100 and 200 basis points over a twelve month period starting June 30, 2012 and December 31, 2011 might have on Webster’s pre-tax, pre-provision earnings for the subsequent twelve month period, compared to earnings assuming no change in interest rates.

 

     -200bp      -100bp      +100bp     +200bp  

June 30, 2012

     N/A         N/A         -0.3     +0.1

December 31, 2011

     N/A         N/A         +1.2     +3.4

Interest rates are assumed to change up or down in a parallel fashion and net income results are compared to a flat rate scenario as a base. The flat rate scenario holds the end of period yield curve constant over a twelve month forecast horizon. Webster is within policy limits for all scenarios. The flat rate scenario at both the end of 2011 and as of June 30, 2012 assumed a federal funds rate of 0.25%. The decrease in sensitivity to higher rates since year end is primarily due to the purchase of fixed rate investment securities, termination of term fixed rate funding, and reduction in duration of derivatives. As the federal funds rate was at 0.25% on June 30, 2012, the -100 and -200 basis point scenarios have been excluded. The interest rate risk position continues to take advantage of the moderately steep yield curve and extended period of short-term interest rates. Webster is well within policy limits for all scenarios.

Webster can also hold futures and options positions to minimize the price volatility of certain assets held as trading securities. Changes in the market value of these positions are recognized in the Condensed Consolidated Statements of Operations.

The following table summarizes the estimated impact that immediate non-parallel changes in interest rates might have on Webster’s net income for the subsequent twelve month period starting June 30, 2012 and December 31, 2011.

 

     Short End of the Yield Curve     Long End of the Yield Curve  
     -100bp      -50bp      +50bp     +100bp     -100bp     -50bp     +50bp     +100bp  

June 30, 2012

     N/A         N/A         -2.6     -4.8     -7.9     -3.9     +2.9     +5.7

December 31, 2011

     N/A         N/A         -2.2     -3.7     -9.1     -4.5     +3.9     +7.6

 

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The non-parallel scenarios are modeled with the short end of the yield curve moving up or down 50 and 100 basis points while the long end of the yield curve remains unchanged and vice versa. The short end of the yield curve is defined as terms less than 18 months and the long end as terms of greater than 18 months. Webster’s earnings generally benefits from a fall in short-term interest rates since more new and existing liabilities than assets are tied to short-term rates. The ultimate benefit Webster derives from this mismatch is dependent on the pricing elasticity of its large managed rate core deposit base and the impact of any rate floors on those deposits. An increase in short-term interest rates has the opposite effect on earnings. Webster’s earnings generally benefit from a rise in long-term interest rates since more new and existing assets than liabilities are tied to long-term rates. The decrease in earnings from a fall in long-term rates is typically greater than the increase in earnings from a rise in long-term rates due to the acceleration of asset prepayment activity as rates fall. These results reflect the annualized impact to earnings of immediate rate changes. The actual impact can be uneven during the year especially in the Short End scenarios where asset yields tied to Prime or LIBOR change immediately while certain deposit rate changes take more time. The increase in earnings at risk to the short end of the yield curve moving up is due to the purchase of fixed rate investment securities, termination of term fixed rate funding, and reduction in duration of derivatives. The decrease in earnings at risk to the long end of the yield curve moving down is due primarily to reduced risk from forecast of purchased securities. Webster is within policy for all scenarios.

The following table summarizes the estimated economic value of assets, liabilities and off-balance sheet contracts at June 30, 2012 and December 31, 2011 and the projected change to economic values if interest rates instantaneously increase or decrease by 100

 

      Book
Value
     Estimated
Economic
Value
     Estimated Economic Value  
           Change  

(Dollars in thousands)

         -100 BP      +100 BP  

June 30, 2012

           

Assets

   $ 19,429,749       $ 19,451,688         N/A       $ (335,357

Liabilities

     17,498,201         17,396,532         N/A         (419,596
  

 

 

    

 

 

       

 

 

 

Total

   $ 1,931,548       $ 2,055,156         N/A       $ 84,239   

Net change as % base net economic value

              4.1

December 31, 2011

           

Assets

   $ 18,714,340       $ 18,716,175         N/A       $ (368,271

Liabilities

     16,868,566         16,781,406         N/A         (409,364
  

 

 

    

 

 

       

 

 

 

Total

   $ 1,845,774       $ 1,934,769         N/A       $ 41,093   
Net change as % base net economic value               2.1 

Changes in economic value can be best described using duration. Duration is a measure of the price sensitivity of financial instruments for small changes in interest rates. For fixed rate instruments it can also be thought of as the weighted average expected time to receive future cash flows. For floating rate instruments it can be thought of as the weighted average expected time until the next rate reset. The longer the duration, the greater the price sensitivity for given changes in interest rates. Floating rate instruments may have durations as short as one day and therefore have very little price sensitivity due to changes in interest rates. Increases in interest rates typically reduce the value of fixed rate assets as future discounted cash flows are worth less at higher discount rates. A liability’s value decreases for the same reason in a rising rate environment. A reduction in value of a liability is a benefit, however, as this is an obligation of Webster.

Duration gap is the difference between the duration of assets and the duration of liabilities. A duration gap near zero implies that the balance sheet is matched and would exhibit no change in estimated economic value for a small change in interest rates. Webster’s duration gap was negative 1.1 years at June 30, 2012. At the end of 2011, the duration gap was negative 0.8 years. A negative duration gap implies that liabilities are longer than assets and therefore, they have more price sensitivity than assets and will reset their interest rates slower than assets. Consequently, Webster’s net estimated economic value would increase when interest rates rise as the increased value of liabilities would more than offset the decreased value of assets. The opposite would occur when interest rates fall. Earnings would also generally be expected to increase when interest rates rise and decrease when rates fall over the longer term absent the effects of new business booked in the future. The change in Webster’s duration gap is due to asset duration decreasing from 1.9 years to 1.6 years and liability duration declining from 2.7 years to 2.6 years for the reasons discussed above.

These estimates assume that management does not take any action to mitigate any positive or negative effects from changing interest rates. The earnings and economic values estimates are subject to factors that could cause actual results to differ. Management believes that Webster’s interest rate risk position at June 30, 2012 represents a reasonable level of risk given the current interest rate outlook. Management, as always, is prepared to act in the event that interest rates do change rapidly.

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Information regarding quantitative and qualitative disclosures about market risk appears under Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, under the caption “Asset/Liability Management and Market Risk”.

ITEM 4. CONTROLS AND PROCEDURES

As of June 30, 2012, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and its Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934). Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2012 for recording, processing, summarizing and reporting the information the Company is required to disclose in the reports it files under the Securities Exchange Act of 1934, within the time periods specified in the SEC’s rules and forms. There was no change in the Company’s internal control over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II. – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Webster is involved in routine legal proceedings occurring in the ordinary course of business. Although the ultimate outcome of any legal matter cannot be predicted with certainty, based on present information and taking into consideration current reserves, we believe that existing litigation matters will not have a material adverse effect on our consolidated financial condition.

ITEM 1A. RISK FACTORS

During the three months ended June 30, 2012, there were no material changes to the risk factors as previously disclosed in Webster’s Annual Report on Form 10-K for the year ended December 31, 2011.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table provides information with respect to any purchase made by or on behalf of Webster or any “affiliated purchaser”, as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934, of shares of Webster common stock.

 

Period

   Total Number of
Shares
Purchased
     Average Price
Paid Per Share
     Total Number of
Shares or Warrants
Purchased as Part
of Publicly Announced
Plans or Programs
     Maximum Number
of Shares that May
Yet Be Purchased
under the Plans or
Programs (1)
 

April 1 – 30, 2012

     —           —           13,400         2,111,200   

May 1-31, 2012

     557       $ 21.25         23,844         2,111,200   

June 1-30, 2012

     1,071       $ 20.60         —           2,111,200   

Total

     1,628       $ 20.82         37,244         2,111,200   
(1) The Company’s current stock repurchase program, which was announced on September 26, 2007, authorized the Company to purchase up to an additional 5% of Webster’s common stock outstanding at the time of authorization, or 2.7 million shares. The program will remain in effect until fully utilized or until modified, superseded or terminated. All 1,628 shares repurchased during the three months ended June 30, 2012 were repurchased outside of the repurchase program in the open market to fund equity compensation plans.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

Not applicable.

 

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ITEM 6. EXHIBITS

      3.1    Third Amended and Restated Certificate of Incorporation (filed as Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, filed with the SEC on May 2, 2012 and incorporated herein by reference).
      3.2    Certificate of Designations establishing the rights of the Company’s 8.50% Series A Non-Cumulative Perpetual Convertible Preferred Stock (filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on June 11, 2008 and incorporated herein by reference).
      3.3    Certificate of Designations establishing the rights of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series B (filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on November 24, 2008 and incorporated herein by reference).
      3.4    Certificate of Designations establishing the rights of the Company’s Perpetual Participating Preferred Stock, Series C (filed as exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on July 31, 2009 and incorporated herein by reference).
      3.5    Certificate of Designations establishing the rights of the Company’s Non-Voting Perpetual Participating Preferred Stock, Series D (filed as exhibit 3.2 to the Company’s Current Report on Form 8-K filed with the SEC on July 31, 2009 and incorporated herein by reference).
      3.6    Bylaws, as amended effective April 26, 2012 (filed as Exhibit 3.6 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, filed with the SEC on May 2, 2012 and incorporated herein by reference).
      10.1    Separation Agreement and General Release by and among the Company, Webster Bank National Association and Jeffery N. Brown, dated April 6, 2012 (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on April 10, 2012 and incorporated herein by reference).*
      31.1    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, signed by the Company’s Chief Executive Officer.
      31.2    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, signed by the Company’s Chief Financial Officer.
      32.1 +    Written Statement pursuant to 18 U.S.C. § 1350, as created by section 906 of the Sarbanes-Oxley Act of 2002, signed by the Company’s Chief Executive Officer.
      32.2 +    Written Statement pursuant to 18 U.S.C. § 1350, as created by section 906 of the Sarbanes-Oxley Act of 2002, signed by the Company’s Chief Financial Officer.
      101++    The following materials from the Webster Financial Corporation Quarterly Report on Form 10-Q for the quarter ended June 30, 2012 formatted in eXtensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Statements of Operations, (ii) the Condensed Consolidated Balance Sheets, (iii) the Condensed Consolidated Statements of Cash Flows and (iv) related notes, detail tagged.

 

+ This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.
++ As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.
* Material Compensatory plan or arrangement.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

    WEBSTER FINANCIAL CORPORATION
   

    Registrant

Date: August 1, 2012     By:   /S/    JAMES C. SMITH        
      James C. Smith
      Chairman and Chief Executive Officer
Date: August 1, 2012     By:   /S/    GLENN I. MACINNES        
      Glenn I. MacInnes
      Executive Vice President and
      Chief Financial Officer
      (Principal Financial Officer)
Date: August 1, 2012     By:   /S/    GREGORY S. MADAR        
      Gregory S. Madar
      Senior Vice President and
      Chief Accounting Officer
      (Principal Accounting Officer)

 

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Table of Contents

EXHIBIT INDEX

 

      3.1    Third Amended and Restated Certificate of Incorporation (filed as Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, filed with the SEC on May 2, 2012 and incorporated herein by reference).
      3.2    Certificate of Designations establishing the rights of the Company’s 8.50% Series A Non-Cumulative Perpetual Convertible Preferred Stock (filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on June 11, 2008 and incorporated herein by reference).
      3.3    Certificate of Designations establishing the rights of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series B (filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on November 24, 2008 and incorporated herein by reference).
      3.4    Certificate of Designations establishing the rights of the Company’s Perpetual Participating Preferred Stock, Series C (filed as exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on July 31, 2009 and incorporated herein by reference).
      3.5    Certificate of Designations establishing the rights of the Company’s Non-Voting Perpetual Participating Preferred Stock, Series D (filed as exhibit 3.2 to the Company’s Current Report on Form 8-K filed with the SEC on July 31, 2009 and incorporated herein by reference).
      3.6    Bylaws, as amended effective April 26, 2012 (filed as Exhibit 3.6 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, filed with the SEC on May 2, 2012 and incorporated herein by reference).
      10.1    Separation Agreement and General Release by and among the Company, Webster Bank National Association and Jeffrey N. Brown, dated April 6, 2012 (filed as exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on April 10, 2012 and incorporated herein by reference).*
      31.1    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, signed by the Company’s Chief Executive Officer.
      31.2    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, signed by the Company’s Chief Financial Officer.
      32.1 +    Written Statement pursuant to 18 U.S.C. § 1350, as created by section 906 of the Sarbanes-Oxley Act of 2002, signed by the Company’s Chief Executive Officer.
      32.2 +    Written Statement pursuant to 18 U.S.C. § 1350, as created by section 906 of the Sarbanes-Oxley Act of 2002, signed by the Company’s Chief Financial Officer.
      101++    The following materials from the Webster Financial Corporation Quarterly Report on Form 10-Q for the quarter ended June 30, 2012 formatted in eXtensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Statements of Operations, (ii) the Condensed Consolidated Balance Sheets, (iii) the Condensed Consolidated Statements of Cash Flows and (iv) related notes, detail tagged.

 

+ This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.
++ As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.
* Material Compensatory plan or arrangement.

 

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