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WBS > SEC Filings for WBS > Form 10-Q on 2-Nov-2012All Recent SEC Filings

Show all filings for WEBSTER FINANCIAL CORP

Form 10-Q for WEBSTER FINANCIAL CORP


2-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S 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 nine months ended September 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 September 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 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.


Table of Contents

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. 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 its yet to be written implementing rules and regulations will have on the Company, including any regulations promulgated by the Consumer Financial Protection Bureau. 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 (OCC) and the Federal Deposit Insurance Corporation (FDIC) 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.
On October 9, 2012 the FDIC finalized the definitions of "higher-risk" consumer and C&I loans and securities used under Large Bank Pricing (LBP) of deposit insurance assessments adopted February 25, 2011 for banks with $10 billion or more of assets. The final rule, among other things, renames leveraged loans "higher-risk C&I loans and securities"; renames subprime consumer loans "higher-risk consumer loans"; clarifies when an asset must be identified as higher risk; and clarifies the way securitizations are identified as higher risk. The Company is still in the process of assessing the impact of the final rule on the overall FDIC assessment rate. The new definitions will be incorporated in the LBP assessment effective April 1, 2013.
On October 9, 2012 the FDIC, the OCC, and the Federal Reserve Board issued separate but similar Dodd-Frank Act-mandated final rules requiring covered banks and bank holding companies with more than $10 billion in total consolidated assets to conduct annual company-run stress tests. The final rules require banks with more than $50 billion in assets to begin conducting annual stress tests this year, although both agencies reserve the authority to allow them to delay implementation on a case-by-case basis where warranted. The agencies anticipate releasing stress-testing scenarios in November and those $50 billion-plus institutions will use their data as of September 30, 2012 to conduct the stress tests. Results are due in January 2013. The agencies' rules also delay implementation until October 2013 for covered institutions with total consolidated assets between $10 billion and $50 billion.


Table of Contents

RESULTS OF OPERATIONS
Summary of Performance
Webster's income from continuing operations was $45.0 million, or $0.48 per diluted share for the three months ended September 30, 2012 an increase of $2.8 million when compared to $42.2 million or $0.45 per diluted share for the three months ended September 30, 2011. Income from continuing operations was $125.2 million or $1.34 per diluted share for the nine months ended September 30, 2012, an increase of $16.2 million when compared to $109.0 million or $1.15 per diluted share for the nine months ended September 30, 2011. The $2.8 million increase in income from continuing operations in the three months ended September 30, 2012 is due to a $3.2 million increase in net interest income, a $3.8 million increase in non-interest income, partially offset by a $3.6 million increase in income tax expense. The $16.2 million increase in income from continuing operations in the nine months ended September 30, 2012 is due to a $9.9 million increase in net interest income, a $6.0 million decrease in provision for loan and lease losses, a $5.0 million increase in non-interest income, a $5.5 million decrease in non-interest expense, partially offset by a $10.3 million increase in income tax expense.
Selected financial highlights are presented in the following table:

                                                    At or for the                             At or for the
                                          three months ended September 30,           nine months ended September 30,
(In thousands, except per share and
ratio data)                                   2012                 2011                 2012                 2011
Earnings:
Net interest income                    $       144,890       $       141,685     $       432,636       $       422,759
Provision for loan and lease losses              5,000                 5,000              14,000                20,000
Total non-interest income                       48,479                44,691             139,818               134,796
Total non-interest expense                     123,887               123,218             378,879               384,404
Income from continuing operations               44,993                42,231             125,171               108,999
Income from discontinued operations,
net of tax                                           -                     -                   -                 1,995
Net loss attributable to
noncontrolling interests                             -                     -                   -                    (1 )
Net income attributable to Webster
Financial Corporation                           44,993                42,231             125,171               110,995
Net income available to common
shareholders                                    44,378                41,400             123,326               108,502
Per Share Data:
Weighted-average common shares -
diluted                                         91,884                91,205              91,754                91,954
Net income from continuing operations
per common share - diluted (a)         $          0.48       $          0.45     $          1.34       $          1.15
Net income available to common
shareholders per common share -
diluted (a)                                       0.48                  0.45                1.34                  1.17
Dividends declared per common share               0.10                  0.05                0.25                  0.11
Book value per common share                      22.24                 20.65               22.24                 20.65
Tangible book value per common share             16.13                 14.47               16.13                 14.47
Dividends declared per Series A
preferred share                                  21.25                 21.25               63.75                 63.75
Dividends declared per subsidiary
preferred share                                      -                0.2156                   -                0.6468
Selected Ratios:
Return on average assets (b)                      0.92 %                0.94 %              0.87 %                0.82 %
Return on average shareholders' equity
(b)                                               9.18                  9.14                8.70                  8.11
Net interest margin                               3.28                  3.49                3.32                  3.48
Efficiency ratio                                 62.25                 62.22               63.86                 64.90
Tangible equity ratio                             7.54                  7.32                7.54                  7.32
Tier 1 common equity to risk weighted
assets                                           11.10                 11.01               11.10                 11.01

(a) For the three and nine months ended September 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.


Table of Contents

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

(Dollars in thousands)                        For the three months ended  September 30,         For the nine months ended September 30,
Efficiency ratio (Non GAAP)                        2012                        2011                     2012                    2011
Non interest expense (GAAP)              $            123,887         $            123,218     $           378,879         $    384,404
Less: Foreclosed property (income)
expense                                                  (291 )                          4                    (982 )              2,077
Intangible assets amortization                          1,384                        1,397                   4,178                4,191
Severance                                                 136                        1,555                     863                2,615
Debt prepayment penalties                                 391                            -                   4,040                    -
Write-down for expedited asset
disposition                                                 -                            -                       -                5,073
Warrant registration                                        -                            -                       -                  350
Loan repurchase and unfunded commitment
reserve benefit, net                                        -                            -                       -               (1,436 )
Branch and facility optimization                           69                        2,183                     150                3,315
Litigation                                                  -                         (254 )                     -                  232
Non interest expense (Non GAAP)                       122,198                      118,333                 370,630              367,987
Net interest income (before provision)
(GAAP)                                                144,890                      141,685                 432,636              422,759
FTE adjustment                                          3,740                        3,798                  11,271               11,486
Non interest income (GAAP)                             48,479                       44,691                 139,818              134,796
Less: Net gain on securities                              810                            -                   3,347                2,024
Income (Non GAAP)                        $            196,299         $            190,174     $           580,378         $    567,017
Efficiency ratio (Non GAAP)                             62.25 %                      62.22 %                 63.86 %              64.90 %


(Dollars in thousands)                                               At September 30,
Tangible equity ratio (Non GAAP):                                  2012             2011
Shareholders equity (GAAP)                                    $  1,983,678     $  1,845,846
Less: Non controlling interests (GAAP)                                   -            9,577
Less: Goodwill and other intangible assets (GAAP)                  541,399          546,974
Add back: DTL related to other intangible assets (GAAP)              4,123            5,980
Tangible equity (Non GAAP)                                       1,446,402        1,295,275
Total Assets                                                    19,729,662       18,224,011
Less: Goodwill and other intangible assets (GAAP)                  541,399          546,974
Add back: DTL related to other intangible assets (GAAP)              4,123            5,980
Tangible assets (Non GAAP)                                    $ 19,192,386     $ 17,683,017
Tangible equity ratio (Non GAAP)                                      7.54 %           7.32 %


Table of Contents

(Dollars in thousands)                                            At September 30,
Tangible book value per common share (Non GAAP):                2012             2011
Shareholders equity (GAAP)                                 $  1,983,678     $  1,845,846
Less: Non controlling interests (GAAP)                                -            9,577
Less: Preferred equity (GAAP)                                    28,939           28,939
Less: Goodwill and Other intangible assets (GAAP)               541,399          546,974
Add back: DTL related to other intangibles (GAAP)                 4,123            5,980
Tangible common equity (Non - GAAP)                        $  1,417,463     $  1,266,336
Common shares outstanding                                        87,899           87,507
Tangible book value per common share (Non GAAP)            $      16.13     $      14.47

                                                                  At September 30,
Tier 1 common equity/ risk weighted assets (Non GAAP):          2012             2011
Shareholders equity (GAAP)                                 $  1,983,678     $  1,845,846
Less: Non controlling interests (GAAP)                                -            9,577
Less: Preferred equity (GAAP)                                    28,939           28,939
Less: Goodwill and Other intangible assets (GAAP)               541,399          546,974
Less: Disallowed mortgage servicing asset (regulatory)              878                -
Add back: Accumulated other comprehensive loss (GAAP)            29,277           33,127
DTL (DTA) related to goodwill and other intangibles
(regulatory)                                                     11,694            4,536
Tier 1 common equity (regulatory)                          $  1,453,433     $  1,298,019
Risk-weighted assets (regulatory)                          $ 13,090,000     $ 11,788,034
Tier 1 common equity/ risk weighted assets (Non GAAP)             11.10 %          11.01 %

Net Interest Income
Net interest income is the difference between interest income on earning assets, such as loans and securities, and interest expense on liabilities, such as deposits and borrowings, which are used to fund those assets. Net interest income is the Company's largest source of revenue, representing 75.6% of total revenue during the first nine months of 2012. Net interest margin is the ratio of taxable-equivalent net interest income to average earning assets for the period. The level of interest rates and the volume and mix of earning assets and interest-bearing liabilities impact net interest income and net interest margin. 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. Four main tools are used for managing interest rate risk: (1) the size and duration of the investment portfolio, (2) the size, duration and credit risk 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. See the "Asset/Liability Management and Market Risk" section for further discussion of Webster's interest rate risk position.


Table of Contents

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 September 30,               Nine months ended September 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                   $     (6,192 )     $    6,237     $     45     $    (15,719 )    $  13,546     $  (2,173 )
Loans held for sale              (76 )            465          389             (387 )        1,332           945
Investment securities         (9,859 )          7,079       (2,780 )        (23,701 )       19,015        (4,686 )
Total interest income   $    (16,127 )     $   13,781     $ (2,346 )   $    (39,807 )    $  33,893     $  (5,914 )
Interest on
interest-bearing
liabilities:
Deposits                $     (5,184 )     $      797     $ (4,387 )   $    (18,586 )    $     747     $ (17,839 )
Borrowings                    (5,551 )          4,387       (1,164 )        (13,686 )       15,734         2,048
Total interest expense       (10,735 )          5,184       (5,551 )        (32,272 )       16,481       (15,791 )
Net change in net
interest income         $     (5,392 )     $    8,597     $  3,205     $     (7,535 )    $  17,412     $   9,877

Net interest income totaled $144.9 million for the three months ended September 30, 2012 compared to $141.7 million for the three months ended September 30, 2011, an increase of $3.2 million. The increase in net interest income during the three months ended September 30, 2012 was primarily related to an increase in average interest earning assets, partially offset by a decrease in the net interest margin. Average interest-earning assets for the three months ended September 30, 2012 increased $1.4 billion from the three months ended September 30, 2011. The net interest margin decreased 21 basis points from 3.49% during the three months ended September 30, 2011 to 3.28% during the three months ended September 30, 2012. The decrease in net interest margin is due to a greater decline in the yield of interest-earning assets than the decline in cost on interest-bearing liabilities, primarily due to growth in the average investment portfolio at lower yields and lower yields in the loan portfolio, partially offset by a decline in the cost of deposits and borrowings. The average yield on interest-earning assets decreased 39 basis points from 4.27% during the three months ended September 30, 2011 to 3.88% during the three months ended September 30, 2012. The average yield on interest-earning assets is primarily impacted by changes in market interest rates as well as changes in the volume and relative mix of interest-earning assets. Market interest rates have remained at historically low levels during the reported periods. Net interest income totaled $432.6 million for the nine months ended . . .

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