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WBS > SEC Filings for WBS > Form 10-Q on 5-Nov-2013All Recent SEC Filings

Show all filings for WEBSTER FINANCIAL CORP

Form 10-Q for WEBSTER FINANCIAL CORP


5-Nov-2013

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, 2012, included in its 2012 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, 2013 are not necessarily indicative of the results for the full year ending December 31, 2013 or any future period.
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 ("Dodd-Frank") 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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Application of Critical Accounting Policies and Accounting Estimates The Company's significant accounting policies are described in Note 1 to the Consolidated Financial Statements included in its 2012 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 practices generally applicable to 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 OTTI, (iii) valuation of goodwill, (iv) income taxes and (v) pension and other post retirement benefits as the Company's most critical accounting policies 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 and estimates, including the nature of the estimates and types of assumptions used, are described throughout 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 Webster's 2012 Form 10-K.
Recent Legislation
The following section should be read in conjunction with the Supervision and Regulation section in Webster's 2012 Form 10-K.
On July 2, 2013, the Federal Reserve Board issued final rules, and on July 9, 2013, the OCC issued final rules that revise the existing regulatory capital requirements to incorporate certain revisions to the Basel capital framework, including Basel III, and to implement certain provisions of Dodd-Frank. The final rules seek to strengthen the components of regulatory capital, increase risk-based capital requirements, and make selected changes to the calculation of risk-weighted assets. The final rules; among other things:
revise minimum capital requirements and adjust prompt corrective action thresholds;

revise the components of regulatory capital, add a new minimum common equity Tier 1 capital ratio of 4.5% of risk-weighted assets, increase the minimum Tier 1 capital ratio requirement from 4% to 6%;

retain the existing risk-based capital treatment for 1-4 family residential mortgage exposures;

permit most banking organizations, including the Company, to retain, through a one-time permanent election, the existing capital treatment for accumulated other comprehensive income;

implement a new capital conservation buffer of common equity Tier 1 capital equal to 2.5% of risk-weighted assets, which will be in addition to the 4.5% common equity Tier 1 capital ratio and be phased in over a three year period beginning January 1, 2016 which buffer is generally required to make capital distributions and pay executive bonuses;

increase capital requirements for past-due loans, high volatility commercial real estate exposures, and certain short-term loan commitments;

require the deduction of mortgage servicing assets and deferred tax assets that exceed 10% of common equity Tier 1 capital in each category and 15% of common equity Tier 1 capital in the aggregate; and

remove references to credit ratings consistent with Dodd-Frank and establish due diligence requirements for securitization exposures.

Under the final rules, compliance is required beginning January 1, 2015, for most banking organizations including the Company, subject to a transition period for several aspects of the final rules, including the new minimum capital ratio requirements, the capital conservation buffer, and the regulatory capital adjustments and deductions. We are still in the process of assessing the impacts of these complex final and interim final rules; however, we believe we will continue to exceed all estimated well-capitalized regulatory requirements on a fully phased-in basis.
In April 2013, the Securities and Exchange Commission and the Commodity Futures Trading Commission (together, the "Commissions") jointly issued final rules and guidelines to require certain regulated entities to establish programs to address risks of identity theft. The rules and guidelines implement provisions of Dodd-Frank. These provisions amended Section 615(e) of the Fair Credit Reporting Act and directed the Commissions to adopt rules requiring entities that are subject to the Commissions' jurisdiction to address identity theft in two ways. First, the rules require financial institutions and creditors to develop and implement a written identity theft prevention program that is designed to detect, prevent, and mitigate identity theft in connection with certain existing accounts or the opening of new accounts. The rules include guidelines to assist entities in the formulation and maintenance of programs that would satisfy the requirements of the rules. Second, the rules establish special requirements for any credit and


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debit card issuers that are subject to the Commissions' jurisdiction, to assess the validity of notifications of changes of address under certain circumstances. Webster implemented an ID Theft Prevention Program, approved on April 25, 2013 by its Board of Directors, to address these requirements.

RESULTS OF OPERATIONS
Summary of Performance
Webster's net income available to common shareholders was $44.7 million, or $0.49 per diluted share, for the three months ended September 30, 2013, an increase of $0.3 million compared to $44.4 million, or $0.48 per diluted share, for the three months ended September 30, 2012. The $0.3 million increase is due to a $5.1 million increase in net interest income, a decrease of $1.6 million in non-interest expense, and a $1.3 million decrease in income tax expense, partially offset by an increase of $3.5 million in provision for loan and lease losses, a $2.2 million decrease in non-interest income and a $2.0 million increase in preferred stock dividends.
For the nine months ended September 30, 2013, Webster's net income available to common shareholders was $127.6 million, or $1.41 per diluted share, an increase of $4.3 million compared to $123.3 million, or $1.34 per diluted share, for the nine months ended September 30, 2012. The $4.3 million increase is due to a $10.2 million increase in net interest income, a $7.0 million increase in non-interest income, and a decrease of $7.5 million in non-interest expense, partially offset by an increase of $10.5 million in provision for loan and lease losses, a $3.5 million increase in income tax expense and an increase of $6.3 million in preferred stock dividends.


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Selected financial highlights are presented in the following table:

                                                 At or for the three months       At or for the nine months
                                                     ended September 30,             ended September 30,
(In thousands, except per share and ratio data)      2013           2012             2013           2012
Earnings:
Net interest income                             $   149,987     $   144,890     $   442,844     $   432,636
Provision for loan and lease losses                   8,500           5,000          24,500          14,000
Total non-interest income                            46,257          48,479         146,786         139,818
Total non-interest expense                          122,281         123,887         371,420         378,879
Net income attributable to Webster Financial
Corporation                                          47,305          44,993         135,795         125,171
Net income available to common shareholders          44,666          44,378         127,631         123,326
Per Share Data:
Weighted-average common shares - diluted (a)         90,423          91,884          90,193          91,754
Net income available to common shareholders per
common share - diluted                          $      0.49     $      0.48     $      1.41     $      1.34
Dividends declared per common share                    0.15            0.10            0.40            0.25
Dividends declared per Series A preferred share       21.25           21.25           63.75           63.75
Dividends declared per Series E preferred share      400.00               -        1,248.89               -
Book value per common share                           22.34           22.24           22.34           22.24
Tangible book value per common share                  16.40           16.08           16.40           16.08
Selected Ratios:
Return on average assets (b)                           0.93 %          0.92 %          0.90 %          0.87 %
Return on average common shareholders' equity          8.93            9.19            8.58            8.71
Return on average tangible common shareholders'
equity                                                12.43           13.03           12.00           12.70
Net interest margin                                    3.23            3.28            3.24            3.32
Efficiency ratio                                      60.07           62.25           60.73           63.86
Tangible common equity ratio                           7.37            7.37            7.37            7.37
Tier 1 common equity to risk-weighted assets          11.38           11.10           11.38           11.10

(a) For the three and nine months ended September 30, 2013 and 2012, the effect of the Series A 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 following tables for reconciliations of these non-GAAP financial measures with financial measures defined by GAAP:
(Dollars in thousands)

                                          Three months ended September 30,          Nine months ended September 30,
                                              2013                2012                  2013                2012
Return on average tangible common
shareholders' equity (non-GAAP):
Net income available to common
shareholders (GAAP)                   $          44,666    $          44,378     $        127,631    $        123,326
Intangible assets amortization,
tax-affected at 35% (GAAP)                          807                  900                2,421               2,716
Net income adjusted for amortization
of intangibles (non-GAAP)             $          45,473    $          45,278     $        130,052    $        126,042
Annualized net income used in the
return on average tangible common
shareholders' equity                  $         181,892    $         181,112     $        173,403    $        168,056
Average shareholders' equity
(non-GAAP)                            $       2,151,667    $       1,960,483     $      2,135,433    $      1,895,549
Less: Average Preferred stock
(non-GAAP)                                      151,649               28,939              151,649              28,939
Average Goodwill and other intangible
assets (non-GAAP)                               537,038              542,075              538,270             543,461
Average tangible common equity
(non-GAAP)                            $       1,462,980    $       1,389,469     $      1,445,514    $      1,323,149
Return on average tangible common
shareholders' equity (non-GAAP)                   12.43 %              13.03 %              12.00 %             12.70 %

                                          Three months ended September 30,          Nine months ended September 30,
                                              2013                2012                  2013                2012
Efficiency ratio (non-GAAP):
Non-interest expense (GAAP)           $         122,281    $         123,887     $        371,420    $        378,879
Less: Foreclosed property expense
(GAAP)                                              432                  118                  938                 761
Intangible assets amortization (GAAP)             1,242                1,384                3,726               4,178
Other expense (non-GAAP)                            950                  187                2,989               3,310
Non-interest expense (non-GAAP)       $         119,657    $         122,198     $        363,767    $        370,630
Net interest income (GAAP)            $         149,987    $         144,890     $        442,844    $        432,636
Add back: FTE adjustment (non-GAAP)               3,211                3,740               10,071              11,271
Non-interest income (GAAP)                       46,257               48,479              146,786             139,818
Less: Net gain on sale of investment
securities (GAAP)                                   269                  810                  708               3,347
Income (non-GAAP)                     $         199,186    $         196,299     $        598,993    $        580,378
Efficiency ratio (non-GAAP)                       60.07 %              62.25 %              60.73 %             63.86 %

                                                                                            At September 30,
                                                                                        2013                2012
Tangible common equity ratio
(non-GAAP):
Shareholders' equity (GAAP)                                                      $      2,167,659    $      1,983,678
Less: Preferred stock (GAAP)                                                              151,649              28,939
     Goodwill and other intangible
assets (GAAP)                                                                             536,431             541,399
Tangible common shareholders' equity
(non-GAAP)                                                                       $      1,479,579    $      1,413,340
Total Assets (GAAP)                                                              $     20,609,554    $     19,729,662
Less: Goodwill and other intangible
assets (GAAP)                                                                             536,431             541,399
Tangible assets (non-GAAP)                                                       $     20,073,123    $     19,188,263
Tangible common equity ratio
(non-GAAP)                                                                                   7.37 %              7.37 %


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(Dollars and shares in thousands, except per share data)
                                                                       At September 30,
                                                                      2013           2012
Tangible book value per common share (non-GAAP):
Shareholders' equity (GAAP)                                      $  2,167,659   $  1,983,678
Less: Preferred equity (GAAP)                                         151,649         28,939
     Goodwill and other intangible assets (GAAP)                      536,431        541,399
Tangible common equity (non-GAAP)                                $  1,479,579   $  1,413,340
Common shares outstanding                                              90,245         87,899
Tangible book value per common share (non-GAAP)                  $      16.40   $      16.08

                                                                       At September 30,
                                                                      2013           2012
Tier 1 common equity to risk-weighted assets (non-GAAP):
Shareholders' equity (GAAP)                                      $  2,167,659   $  1,983,678
Less: Preferred equity (GAAP)                                         151,649         28,939
     Goodwill and other intangible assets (GAAP)                      536,431        541,399
Disallowed excess servicing assets (regulatory)                             -            878
Add back: Accumulated other comprehensive loss (GAAP)                 (58,941 )      (29,277 )
DTL (DTA) related to goodwill and other intangibles (regulatory)       10,441         11,694
Tier 1 common equity (regulatory)                                $  1,548,961   $  1,453,433
Risk-weighted assets (regulatory)                                $ 13,607,826   $ 13,090,000
Tier 1 common equity to risk-weighted assets (non-GAAP)                 11.38 %        11.10 %


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The following tables summarize the Company's average balances (average balances are daily averages), interest and yields on major categories of Webster's interest-earning assets and interest-bearing liabilities on a fully-tax equivalent basis.

                                                              Three months ended September 30,
                                                       2013                                      2012
                                         Average                     Average       Average                     Average
(Dollars in thousands)                   Balance      Interest (1)    Yields       Balance      Interest (1)    Yields
Assets
Interest-earning assets:
Loans and leases                      $ 12,302,467   $     123,664     3.97 %   $ 11,608,334   $     121,367     4.14 %
Securities (2)                           6,293,453          49,854     3.17        6,145,414          53,010     3.48
Federal Home Loan and Federal Reserve
Bank stock                                 158,878             863     2.16          142,595             879     2.45
Interest-bearing deposits                   14,039              10     0.28           91,502              45     0.19
Loans held for sale                         65,207             573     3.52           82,006             655     3.19
Total interest-earning assets           18,834,044         174,964     3.68       18,069,851         175,956     3.88
Noninterest-earning assets               1,507,532                                 1,420,460
Total assets                          $ 20,341,576                              $ 19,490,311

Liabilities and equity
Interest-bearing liabilities:
Demand deposits                       $  2,999,991   $           -        - %   $  2,726,790   $           -        - %
Savings, checking & money market
deposits                                 9,690,140           4,580     0.19        8,935,878           5,137     0.23
Time deposits                            2,286,380           6,328     1.10        2,677,939           9,406     1.40
Total deposits                          14,976,511          10,908     0.29       14,340,607          14,543     0.40

Securities sold under agreements to
repurchase and other borrowings          1,293,074           5,283     1.60        1,171,787           5,594     1.87
Federal Home Loan Bank advances          1,506,120           3,753     0.98        1,433,037           3,942     1.08
Long-term debt                             229,525           1,822     3.18          361,468           3,247     3.59
Total borrowings                         3,028,719          10,858     1.41        2,966,292          12,783     1.70
Total interest-bearing liabilities      18,005,230          21,766     0.48       17,306,899          27,326     0.62
Noninterest-bearing liabilities            184,679                                   222,929
Total liabilities                       18,189,909                                17,529,828

Preferred Stock                            151,649                                    28,939
Common shareholders' equity              2,000,018                                 1,931,544
Webster Financial Corp. shareholders'
equity                                   2,151,667                                 1,960,483
Total liabilities and equity          $ 20,341,576                              $ 19,490,311
Tax-equivalent net interest income                         153,198                                   148,630
Less: tax equivalent adjustments                            (3,211 )                                  (3,740 )
Net interest income                                  $     149,987                             $     144,890
Net interest margin                                                    3.23 %                                    3.28 %

(1)On a fully tax-equivalent basis.
(2)Average balances and yields of securities available for sale are based upon the historical amortized cost.


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                                                               Nine months ended September 30,
                                                       2013                                      2012
                                         Average                     Average       Average                     Average
(Dollars in thousands)                   Balance      Interest (1)    Yields       Balance      Interest (1)    Yields
Assets
Interest-earning assets:
Loans and leases                      $ 12,130,553   $     366,445     4.01 %   $ 11,435,430   $     363,487     4.21 %
Securities (2)                           6,249,115         151,146     3.25        6,076,750         164,187     3.63
Federal Home Loan and Federal Reserve
. . .
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