10-K 1 wbs-12312012x10k.htm 10-K WBS-12.31.2012-10K
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
_______________________________________________________________________________
FORM 10-K
_______________________________________________________________________________
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Fiscal Year Ended December 31, 2012
Commission File Number: 001-31486
_______________________________________________________________________________
WEBSTER FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
 _______________________________________________________________________________
Delaware
 
06-1187536
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
145 Bank Street (Webster Plaza), Waterbury, Connecticut 06702
(Address and zip code of principal executive offices)
Registrant's telephone number, including area code: (203) 578-2202
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of exchange on which registered
Common Stock, $.01 par value
 
New York Stock Exchange
Depository Shares, Each Representing 1/1000th Interest in a Share of 6.40% Series E Non-Cumulative Perpetual Preferred Stock
 
New York Stock Exchange
Warrants (Expiring November 21, 2018)
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
______________________________________________________________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of 1933. þ  Yes    ¨  No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.  ¨  Yes    þ  No
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 Website, 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
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.
Large accelerated filer
þ
 
Accelerated filer
¨
 
Non-accelerated filer
¨
 
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).    ¨  Yes    þ  No
The aggregate market value of common stock held by non-affiliates of Webster Financial Corporation was approximately $1.8 billion, based on the closing sale price of the common stock on the New York Stock Exchange on June 29, 2012, the last trading day of the registrant's most recently completed second quarter.
The number of shares of common stock, par value $.01 per share, outstanding as of January 31, 2013 was 85,340,995.
Documents Incorporated by Reference
Part III: Portions of the Definitive Proxy Statement for the Annual Meeting of Shareholders to be held on April 25, 2013.

 




INDEX

 
 
Page No.
 
 
 
 
Item 1.
Business
 
 
 
Item 1A.
Risk Factors
 
 
 
Item 1B.
Unresolved Staff Comments
 
 
 
Item 2.
Properties
 
 
 
Item 3.
Legal Proceedings
 
 
 
Item 4.
Mine Safety Disclosures
 
 
 
 
 
 
Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
 
 
Item 6.
Selected Financial Data
 
 
 
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
 
 
 
Item 8.
Financial Statements and Supplementary Data
 
 
 
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 
 
 
Item 9A.
Controls and Procedures
 
 
 
Item 9B.
Other Information
 
 
 
PART III
 
 
 
 
Item 10.
Directors, Executive Officers and Corporate Governance
 
 
 
Item 11.
Executive Compensation
 
 
 
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
 
 
Item 13.
Certain Relationships and Related Transactions, and Director Independence
 
 
 
Item 14.
Principal Accountant Fees and Services
 
 
 
PART IV
 
 
 
 
Item 15.
Exhibits and Financial Statement Schedules
 
 
 
 
 


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PART I

ITEM 1. BUSINESS
Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. For a discussion of forward-looking statements, see the section captioned “Forward-Looking Statements” in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Company Overview
Webster Financial Corporation (collectively, 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. At December 31, 2012 Webster Financial Corporation’s principal asset was all of the outstanding capital stock of Webster Bank, National Association (“Webster Bank”). Webster had assets of $20.1 billion and shareholders' equity of $2.1 billion at December 31, 2012. Webster’s common stock is traded on the New York Stock Exchange under the symbol “WBS”.
Webster, through Webster Bank and non-banking financial services subsidiaries, delivers financial services to individuals, families and businesses primarily from Westchester County, N.Y. to Boston, MA. Webster provides commercial, small business and consumer banking, mortgage lending, financial planning, trust and investment services through 167 banking offices, 293 owned ATMs, telephone banking, mobile banking and its Internet website (www.websterbank.com). Webster Bank provides health savings account trustee and administrative services on a nationwide basis through its HSA Bank division and its internet website (www.hsabank.com). Webster also offers equipment financing, commercial real estate lending, and asset-based lending.
The core of our company's value proposition is the service quality model that we refer to as the “Type W Personality”, which promises knowledgeable and reliable relationship-based bankers who know their markets and make decisions at the local level. The Company operates with a local market orientation as a community focused, values guided regional bank. Operating objectives include acquiring and developing customer relationships through marketing, onboarding and cross-sale efforts to fuel organic growth and expanding contiguously. The Company is in the process of strategically reconfiguring its approach to retail banking with the goal of focusing primarily on customer preferences rather than product sets. This process is expected to bring together our consumer banking services and products, including deposits, investment services, consumer finance and distribution planning under the umbrella of a Personal Bank.
In 2012, we focused on improving the customer experience by aligning Webster’s delivery channels and capital investment in line with our customers' shifting preference to utilize electronic and mobile channels to transact more of their banking business. This strategic decision to significantly increase investment in electronic infrastructure is in response to meeting customers' high expectations for access to convenience while lowering our service delivery costs. In 2012, the Company completed a year-long investment in technology to upgrade its ATMs by implementing customized settings, touchscreens, and speech capabilities, in order to provide a best-in-class experience for customers. All 293 Webster-owned ATMs across the four state footprint are now personalized, simpler, faster and more convenient. Also, for its 251 deposit-taking ATMs, the Company implemented envelope-free and image capture enhancements.
The Company also upgraded its mobile banking capabilities during 2012 with the introduction of an application for smart phones, which allows WebsterOnline customers to check balances, view transactions, pay bills and transfer money on their mobile devices. In addition, the Company launched "eChecking", a low cost product for both customers and Webster, designed for those who prefer to conduct banking using electronic channels. We believe that the shift to electronic infrastructure provides customers with more convenience, while giving branch personnel greater opportunity to build broader, deeper relationships with customers across all lines of business.
In 2012, the continued move from transaction-based to relationship-based banking was clearly evident as growth was driven by an increased focus on the customer experience, product enhancements, and an expanded sales force. Branch managers completed Webster's Business Banking certification program early in 2012. The success of the continued focus on relationship-based banking is evident in the 2012 Business and Professional Banking results. Business and Professional Banking recorded loan originations of $312.0 million for the year ended December 31, 2012, a 15.8% increase from prior year. Business and Professional Banking loan originations were accompanied by $194.8 million, or 12.4%, net deposit growth from December 31, 2011 to December 31, 2012 with the majority of this increase concentrated in Transaction/Demand Deposit account products. A pilot of Webster's Universal Banker program was launched late in 2012 with a full rollout of this new branch staffing model planned to occur throughout 2013. Under this program, branch bankers are trained to assist customers with a wider variety of banking matters and are more focused on financial advisory activities as transactions continue to migrate to Webster's electronic and mobile delivery

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channels. During 2012, Consumer Finance doubled the loan originator sales force, with an emphasis on jumbo mortgages as a key to relationship building. As a result, Consumer Finance loan originations were $1.2 billion for the year ended December 31, 2012, an 11.8% increase from prior year. The Company implemented a strategy of selling a higher percentage of conforming fixed-rate loans, which contributed to a $18.1 million increase in mortgage banking activity in 2012 as compared to 2011.
The Commercial Bank also benefited from the investment in relationship-based banking as Middle Market loan originations in 2012 were $1.3 billion, a 60.5% increase from prior year. The Commercial Real Estate portfolio also saw significant growth, generating $680.6 million in loan originations during the year ended December 31, 2012, a 67.1% increase from the prior year. During 2012, the Commercial Bank also formed a new Treasury and Payment Solutions group that brings together all of the Commercial Bank's cash management services and features automated capabilities that will enable the Company to best meet customers' cash management needs.
The Private Banking and HSA business segments also experienced significant growth during 2012. In the Private Bank, the Company added new relationship managers resulting in coverage in six of the Company's seven regional markets. In the first quarter of 2013, the Company opened a full service branch and Private Banking facility in Greenwich, CT. During 2012, the Private Bank had an 88.9% increase in deposits and a 16.1% increase in loans, as compared to prior year. The HSA segment experienced a 21.8% increase in deposit balances from prior year, driven by increased penetration into the midsize and larger group employer segment and differentiating value-added services.
On December 4, 2012, the Company closed the public offering of 5,060,000 depositary shares pursuant to an Underwriting Agreement, dated November 27, 2012, between the Company and Deutsche Bank Securities Inc., as representative for the underwriters listed therein. Each Depositary Share represents a 1/1000th interest in a share of the Company's Series E Non-Cumulative Perpetual Preferred Stock, with a liquidation preference of $25,000 per share (equivalent to $25 per depositary share). Dividends accrue and are payable on the liquidation amount of $25,000 per share of Series E Preferred Stock in arrears at 6.40% per annum only when, as, and if declared by the Board of Directors of Webster and to the extent Webster has legally available funds to pay dividends.
On December 6, 2012, Webster announced that its Board of Directors authorized a $100 million common stock repurchase program under which shares may be repurchased from time to time in open market or privately negotiated transactions, subject to market conditions and other factors. 
On December 7, 2012, the Company, Warburg Pincus Private Equity X, L.P. and Warburg Pincus X Partners, L.P. and Barclays Capital Inc. entered into an underwriting agreement pursuant to which the Warburg entities as selling stockholders, agreed to sell 10,000,000 shares of Webster's common stock, $0.01 par value per share, to the underwriter. The transaction closed on December 12, 2012. Webster purchased 2,518,891 shares of its common stock in the offering at a price per share equal to $19.85, the price per share paid by the underwriter to the selling stockholders pursuant to the underwriting agreement.
Business Segments
Webster’s operations are managed along four business segments consisting of Commercial Banking, Retail Banking, Consumer Finance and Other. Other includes the HSA Bank, or HSA, and Private Banking operating segments. 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, or the type of customer served, and they reflect the way that financial information is currently evaluated by management. A description of each of the Company’s business segments is included in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, and financial statement results for each of the Company’s business segments are included in Note 21 - Business Segments in the Notes to Consolidated Financial Statements, which is located elsewhere in this report.
Competition
Webster is subject to strong competition from banks and other financial institutions, including savings and loan associations, finance companies, credit unions, consumer finance companies and insurance companies. Certain of these competitors are larger financial institutions with substantially greater resources, lending limits, larger branch systems and a wider array of commercial banking services than Webster. Competition could intensify in the future as a result of industry consolidation, the increasing availability of products and services from non-banks, greater technological developments in the industry, and banking regulatory reform.
Webster faces substantial competition for deposits and loans throughout its market areas. The primary factors in competing for deposits are interest rates, personalized services, the quality and range of financial services, convenience of office locations, automated services and office hours. Competition for deposits comes primarily from other commercial banks, savings institutions, credit unions, mutual funds and other investment alternatives. The primary factors in competing for commercial and business

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loans are interest rates, loan origination fees, the quality and range of lending services and personalized service. Competition for origination of mortgage loans comes primarily from savings institutions, mortgage banking firms, mortgage brokers, other commercial banks and insurance companies. Factors which affect competition include the general and local economic conditions, current interest rate levels and volatility in the mortgage markets.
Supervision and Regulation
Webster, Webster Bank and certain of its non-banking subsidiaries are subject to extensive regulation under federal and state laws. The regulatory framework applicable to bank holding companies and their subsidiary banks is intended to protect depositors, federal deposit insurance funds, consumers and the banking system as a whole, and not necessarily investors in bank holding companies such as Webster.
Set forth below is a description of the significant elements of the laws and regulations applicable to Webster and its subsidiaries. The description that follows is qualified in its entirety by reference to the full text of the statutes, regulations and policies that are described. Also, such statutes, regulations and policies are continually under review by Congress and state legislatures and federal and state regulatory agencies. A change in statutes, regulations or regulatory policies applicable to Webster and its subsidiaries could have a material effect on the results of the Company.
Regulatory Agencies
Webster is a legal entity separate and distinct from Webster Bank and its other subsidiaries. As a bank holding company and a financial holding company, Webster is regulated under the Bank Holding Company Act of 1956, as amended (“BHC Act”), and is subject to inspection, examination and supervision by the Federal Reserve Board ("FRB"). Webster is also under the jurisdiction of the United States Securities and Exchange Commission ("SEC") and is subject to the disclosure and regulatory requirements of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, as administered by the SEC. Webster's common stock is listed on the New York Stock Exchange (“NYSE”) under the trading symbol “WBS” and is subject to the rules of the NYSE for listed companies.
Webster Bank is organized as a national banking association under the National Bank Act. It is subject to broad regulation and examination by the Office of the Comptroller of the Currency (“OCC”) as its primary supervisory agency, as well as by the Federal Reserve, and Federal Deposit Insurance Corporation (“FDIC”). As noted below, on July 21, 2011 supervision of Webster's and Webster Bank's compliance with federal consumer financial protection laws was transferred to the Bureau of Consumer Financial Protection, or CFPB. The Company may also be subject to increased scrutiny and enforcement efforts by state attorneys general in regard to consumer protection laws. Webster Bank's deposits are insured by the FDIC.
Many of the Company's non-bank subsidiaries also are subject to regulation by the FRB and other federal and state agencies. Other non-bank subsidiaries are subject to both federal and state laws and regulations.
Bank Holding Company Regulation
In general, the BHC Act limits the business of bank holding companies to banking, managing or controlling banks and other activities that the Federal Reserve Board has determined to be so closely related to banking as to be a proper incident thereto. Bank holding companies that are financial holding companies may engage in any activity, or acquire and retain the shares of a company engaged in any activity that is either (i) financial in nature or incidental to such financial activity (as determined by the FRB in consultation with the Secretary of the Treasury) or (ii) complementary to a financial activity, and that does not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally (as solely determined by the Federal Reserve Board). Activities that are financial in nature include securities underwriting and dealing, insurance underwriting and making merchant banking investments.
If a bank holding company seeks to engage in the broader range of activities that are permitted under the BHC Act for financial holding companies, (i) all of its depository institution subsidiaries, and the holding company must be “well capitalized” and “well managed,” as defined in the FRB's Regulation Y, and (ii) it must file a declaration with the Federal Reserve Board that it elects to be a “financial holding company”.
In order for a financial holding company to commence any activity that is financial in nature, incidental thereto, or complementary to a financial activity, or to acquire a company engaged in any such activity permitted by the BHC Act, each insured depository institution subsidiary of the financial holding company must have received a rating of at least “satisfactory” in its most recent examination under the Community Reinvestment Act. See the section captioned “Community Reinvestment Act and Fair Lending Laws” included elsewhere in this item.
The BHC Act generally limits acquisitions by bank holding companies that are not qualified as financial holding companies to commercial banks and companies engaged in activities that the FRB has determined to be so closely related to banking as to be

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a proper incident thereto. Financial holding companies like Webster are also permitted to acquire control of non-depository institution companies engaged in activities that are financial in nature and in activities that are incidental and complementary to financial activities without prior FRB approval. However, the BHC Act, as amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), requires prior written approval from the Federal Reserve or prior written notice to the Federal Reserve before a financial holding company may acquire control of a company with consolidated assets of $10 billion or more.
The BHC Act, the Federal Bank Merger Act and other federal and state statutes regulate acquisitions of commercial banks. The BHC Act requires the prior approval of the FRB for the direct or indirect acquisition of 5.0% or more of the voting shares of a commercial bank or its parent holding company. Under the Bank Merger Act, the prior approval of the OCC is required for a national bank to merge with another bank or purchase the assets or assume the deposits of another bank. In reviewing applications seeking approval of merger and acquisition transactions, the bank regulatory authorities will consider, among other things, the competitive effect and public benefits of the transactions, the capital position of the combined organization, the applicant's performance record under the Community Reinvestment Act (see the section captioned “Community Reinvestment Act and Fair Lending Laws” included elsewhere in this item) and the effectiveness of the subject organizations in combating money laundering activities.
Regulatory Reforms
The Dodd-Frank Act, enacted on July 21, 2010, significantly changed the bank regulatory landscape and has impacted and will continue to impact the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new rules and regulations and to prepare various studies and reports for Congress. Certain provisions of the Dodd-Frank Act applicable to Webster are discussed herein.
International reforms, such as the Basel III capital requirements, have also been proposed to be implemented in the United States. In June 2012, the FRB, the OCC and the FDIC issued three proposals that would amend the existing capital adequacy requirements of banks and bank holding companies. The three proposals, discussed in more detail below, 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 place greater emphasis on common equity. The Basel II standardized proposal would modify the risk weights for various asset classes for purposes of calculating capital ratios. The U.S. rules are still pending with regulators, and the Company is still in the process of assessing the impacts of these complex proposals. We believe, however, that we will continue to exceed all expected well capitalized regulatory requirements over the course of the proposed phase-in period, and on a fully phased-in basis.
On December 20, 2011, the FRB issued a notice of proposed rulemaking on enhanced prudential requirements required by the Dodd-Frank Act. Although most of the enhanced prudential requirements only apply to bank holding companies with more than $50 billion in assets, the proposed rule, as directed by the Dodd-Frank Act, contains certain requirements that apply to bank holding companies with more than $10 billion in assets, including an annual company-run stress test requirement and a requirement to use a risk committee of the Company's board of directors for enterprise-wide risk management practices. Webster meets these requirements.
On October 9, 2012, the FDIC, the OCC, and the Federal Reserve 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 required banks with more than $50 billion in assets to begin conducting annual stress tests in 2012 and requires banks with between $10 billion and $50 billion in assets to begin conducting annual stress tests in October 2013.
In June 2011, the Federal Reserve approved a final debit card interchange rule pursuant to the Dodd-Frank Act that would cap an issuer's base fee at 21 cents per transaction and allow an additional amount equal to 5 basis-points of the transaction's value. The FRB separately issued an interim final rule that also allows a fraud-prevention adjustment of 1 cent per transaction conditioned upon an issuer developing, implementing and updating reasonably designed fraud prevention policies and procedures. The FRB also adopted requirements in the final rule that issuers include two unaffiliated networks for routing debit transactions.
The requirements of the Dodd-Frank Act and other regulatory reforms continue to be implemented. It is difficult to predict at this time what specific impact certain provisions and yet to be finalized implementing rules and regulations will have on the Company, including any regulations promulgated by the CFPB. Financial reform legislation and rules 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 regulatory reform, including the Dodd-Frank Act and any implementing rules, which may increase our costs of operations and adversely impact our earnings.

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Dividends
The principal source of Webster's liquidity is dividends from Webster Bank. The prior approval of the OCC is required if the total of all dividends declared by a national bank in any calendar year would exceed the sum of the bank's net profits for that year and its net retained profits for the preceding two calendar years, less any required transfers to surplus. Federal law also prohibits national banks from paying dividends that would be greater than the bank's undivided profits after deducting statutory bad debt in excess of the bank's allowance for loan and lease losses. At December 31, 2012, there were $128.4 million of retained earnings available for the payment of dividends by Webster Bank to the Company. Webster Bank paid the Company $140.0 million in dividends during the year ended December 31, 2012.
In addition, Webster and Webster Bank are subject to other regulatory policies and requirements relating to the payment of dividends, including requirements to maintain adequate capital above regulatory minimums. The appropriate federal regulatory authority is authorized to determine, under certain circumstances relating to the financial condition of a bank holding company or a bank, that the payment of dividends would be an unsafe or unsound practice and to prohibit payment thereof. The appropriate federal regulatory authorities have indicated that paying dividends that deplete a bank's capital base to an inadequate level would be an unsafe and unsound banking practice and that banking organizations should generally pay dividends only out of current operating earnings.
Federal Reserve System
FRB regulations require depository institutions to maintain non-interest-earning reserves against their transaction accounts (primarily interest-bearing and regular checking accounts). Webster Bank's required reserves can be in the form of vault cash and, if vault cash does not fully satisfy the required reserves, in the form of a balance maintained with the Federal Reserve Bank of Boston. The FRB regulations currently require that reserves be maintained against aggregate transaction accounts except for transaction accounts up to $12.4 million, which are exempt. Transaction accounts greater than $12.4 million up to $79.5 million have a reserve requirement of 3%, and those greater than $79.5 million have a reserve requirement of $2.013 million plus 10% of the amount over $79.5 million. The FRB generally makes annual adjustments to the tiered reserves. Webster Bank is in compliance with these requirements.
As a member of the Federal Reserve System, the Bank is required to hold capital stock of the Federal Reserve Bank of Boston. The shares may be adjusted up or down based on changes to Webster Bank's common stock and paid-in surplus. Webster Bank is in compliance with the FRB's capital stock requirement.
Federal Home Loan Bank System
The Federal Home Loan Bank System consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank System provides a central credit facility for member institutions. The Bank is a member of the Federal Home Loan Bank of Boston (“FHLB”). Webster Bank is required to purchase and hold shares of capital stock in the FHLB in an amount equal to 0.35% of the aggregate principal amount of its unpaid residential mortgage loans and similar obligations at the beginning of each year up to a maximum of $25.0 million. Webster Bank is also required to hold shares of capital stock in the FHLB in amounts that vary from 3.0% to 4.5% of its advances (borrowings), depending on the maturities of the advances. Webster Bank was in compliance with this requirement with a total investment in FHLB stock of $104.9 million at December 31, 2012. At December 31, 2012, Webster Bank had approximately $1.8 billion in FHLB advances.
The FHLB restored its quarterly dividend in March 2011, and Webster Bank received $0.5 million and $0.3 million in 2012 and 2011, respectively.
Source of Strength Doctrine
FRB policy, now codified under the Dodd-Frank Act, requires bank holding companies to act as a source of financial and managerial strength to their subsidiary banks. As a result, Webster is expected to commit resources to support Webster Bank, including at times when Webster may not be in a financial position to provide such resources. Any capital loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary banks. The Federal bankruptcy code provides that, in the event of a bank holding company's bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to priority of payment.
In addition, under the National Bank Act, if the capital stock of Webster Bank is impaired by losses or otherwise, the OCC is authorized to require payment of the deficiency by assessment upon Webster. If the assessment is not paid within three months, the OCC could order a sale of the Webster Bank stock held by Webster to make good the deficiency.
Capital Adequacy and Prompt Corrective Action
Federal law requires, among other things, that federal bank regulatory authorities take “prompt corrective action” with respect

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to banks that do not meet minimum capital requirements. For these purposes, the law establishes five capital categories:
Well capitalized - at least 5% leverage capital, 6% Tier 1 risk-based capital and 10% total risk-based capital.
Adequately capitalized - at least 4% leverage capital, 4% Tier 1 risk-based capital and 8% total risk-based capital.
Undercapitalized - less than 4% leverage capital, 4% tier one risk-based capital and less than 8% total risk-based capital. “Undercapitalized” banks must adhere to growth, capital distribution (including dividend) and other limitations and are required to submit a capital restoration plan. A bank's compliance with such a plan is required to be guaranteed by any company that controls the undercapitalized institution in an amount equal to the lesser of 5% of the institution's total assets when deemed undercapitalized or the amount necessary to achieve the status of adequately capitalized.
Significantly undercapitalized - less than 3% leverage capital, 3% Tier 1 risk-based capital and less than 6% total risk-based capital. “Significantly undercapitalized” banks must comply with one or more of a number of additional restrictions, including, but not limited to, an order by the FDIC to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets, cease receipt of deposits from correspondent banks or dismiss directors or officers, and restrictions on interest rates paid on deposits, compensation of executive officers and capital distributions by the parent holding company.
Critically undercapitalized - less than 2% tangible capital. “Critically undercapitalized” institutions are subject to additional measures including, subject to a narrow exception, the appointment of a receiver or conservator within 270 days after it obtains such status.
As of December 31, 2012, Webster and Webster Bank exceeded the regulatory requirements for the classification as “well capitalized”. On May 8, 2012, Webster Bank was notified by the OCC that the previously disclosed individual minimum capital ratios applicable to the Bank were terminated effective May 3, 2012. Webster Bank's Tier 1 leverage, total risk-based, and Tier 1 capital ratios were 8.1%, 12.9%, and 11.6% respectively, at December 31, 2012. See Note 14 - Regulatory Matters in the Notes to Consolidated Financial Statements for additional information regarding Webster and Webster Bank's regulatory capital levels.
At December 31, 2012, $75.0 million in trust preferred securities have been included in the Tier 1 capital of Webster Financial Corporation for regulatory reporting purposes pursuant to the Federal Reserve's capital adequacy guidelines. Certain provisions of the Basel III proposal will require the Company to exclude all trust preferred securities from the Company's Tier 1 capital. Excluding trust preferred securities from the Tier 1 capital at December 31, 2012 would not affect the Company'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.
On August 5, 2011, Standard & Poor's rating agency lowered the long-term rating of the U.S. government and federal agencies from AAA to AA+. In response, the federal banking agencies have indicated that for risk-based capital purposes, the risk weights for Treasury securities and other securities issued or guaranteed by the U.S. government, government agencies, and government sponsored entities are not affected.
Basel III Proposed Amendments to Capital Adequacy Requirements
The current U.S. federal bank regulatory agencies' risk-based capital guidelines are based upon the 1988 capital accord (“Basel I”) of the Basel Committee on Banking Supervision (“Basel Committee”). The Basel Committee is a committee of central banks and bank supervisors/regulators from the major industrialized countries that meet under the auspices of the Bank for International Settlements in Basel, Switzerland to develop broad policy guidelines for use by each country's supervisors in determining the supervisory policies they apply.
In 2010, the Basel Committee released its final framework for strengthening international capital and liquidity regulation, now officially identified by the Basel Committee as “Basel III.” Basel III, when implemented by the U.S. bank regulatory agencies and fully phased-in, will require bank holding companies and their bank subsidiaries to maintain substantially more capital, with a greater emphasis on common equity.
While the Basel Committee initially called for the implementation of the Basel III final framework to commence January 1, 2013, final rules have not yet been implemented in the United States.

“CET1” or “Common Equity Tier 1” is a new capital measure introduced by the Basel III capital framework. In June 2012, the Federal Banking Agencies issued a notice of proposed rulemaking (“NPR”) to implement Basel III in the United States. The Basel III NPR closely followed the Basel Committee's Basel III proposal in most respects. Although the NPR calls for

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implementation to begin in 2013, the Federal Banking Agencies have not yet finalized the proposal. The NPR would initially require banks and bank holding companies to meet the following minimum requirements:
3.5% CET1 to risk-weighted assets;
4.5% Tier 1 capital to risk-weighted assets; and
8.0% Total capital to risk-weighted assets.

Under the Basel III NPR, the minimum capital requirements would increase in 2019 to the following:
4.5% CET1 to risk-weighted assets;
6.0% Tier 1 capital to risk-weighted assets; and
8.0% Total capital to risk-weighted assets.
The Basel III final framework and the NPR provide for a number of new deductions from and adjustments to CET1. These include, for example, the requirement that mortgage servicing rights, deferred tax assets and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1.
In addition to the Basel III NPR, the federal banking regulators also released an NPR to implement the Basel II Standardized Approach in the United States and make it applicable to almost all banking organizations in the United States. It incorporates aspects of the Basel Committee's Basel II standardized framework and provides alternatives to credit ratings for the treatment of certain exposures, consistent with the Dodd-Frank Act. The Standardized Approach NPR would increase the risk sensitivity of the Federal Banking Agencies' general risk-based capital requirements for determining risk-weighted assets (i.e., the denominator of a banking organization's risk-based capital ratios) by proposing revised methodologies for determining risk-weighted assets for:
Residential mortgage exposures by applying a more risk-sensitive treatment that would risk-weight an exposure based on certain loan characteristics, underwriting standards, and its loan-to-value ratio in a range between 35% and 200%, compared to current classification at 50%;
Certain commercial real estate credit facilities that finance the acquisition, development, or construction of real property by assigning a higher 150% risk weight;
Exposures that are more than 90 days past due or on nonaccrual (excluding sovereign and residential mortgage exposures) by assigning a higher 150% risk weight;
Exposures to foreign sovereigns, foreign banks, and foreign public sector entities by basing the risk weight for each exposure type on the Organisation for Economic Co-operation and Development's ("OECD") country risk classification of the sovereign entity so as to follow the Dodd-Frank Act's requirement not to use credit ratings; and
More favorable capital treatment for derivatives and repo-style transactions cleared through central counterparties.
The Standardized Approach NPR would also generally replace the use of credit ratings for securitization exposures with a formula-based approach under the existing gross up approach, or a new simplified supervisory formula approach ("SSFA"). The Standardized Approach NPR notes that the SSFA would generally result in relatively higher capital requirements for the more risky junior tranches of securitizations and relatively lower capital requirements for the most senior tranches. The Standardized Approach NPR would also provide greater recognition of credit risk mitigants, such as collateral and guarantees. For assets with newly eligible guarantees and eligible collateral, this will result in lower capital requirements. The changes in the Standardized Approach NPR are proposed to take effect January 1, 2015; however, banking organizations may choose to comply with the proposed requirements prior to that date.
The Dodd-Frank Act requires the Federal Reserve to adopt regulations imposing a continuing “floor” of the Basel I-based capital requirements in cases where the Basel II-based capital requirements and any changes in capital regulations resulting from Basel III otherwise would permit lower requirements. In June 2011, the Federal Reserve finalized regulations implementing this requirement.
Given that the Basel III rules remain subject to implementation and change, and the scope and content of capital regulations that U.S. federal banking agencies may adopt under the Dodd-Frank Act is uncertain, we cannot be certain of the impact new capital regulations will have on our capital ratios; however, Webster believes it is already fully compliant with Basel III, including the conservation buffers.
Transactions with Affiliates & Insiders
Under federal law, transactions between depository institutions and their affiliates are governed by Sections 23A and 23B of the Federal Reserve Act (“FRA”). In a holding company context, at a minimum, the parent holding company of a bank, and any

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companies which are controlled by such parent holding company, are affiliates of the bank. Generally, sections 23A and 23B are intended to protect insured depository institutions from losses arising from transactions with non-insured affiliates, by limiting the extent to which a bank or its subsidiaries may engage in covered transactions with any one affiliate and with all affiliates of the bank in the aggregate, and by requiring that such transactions be on terms that are consistent with safe and sound banking practices.
Further, Section 22(h) of the FRA restricts loans to directors, executive officers, and principal stockholders (“insiders”). Under Section 22(h), loans to insiders and their related interests may not exceed, together with all other outstanding loans to such persons and affiliated entities, the institution's total capital and surplus. Loans to insiders above specified amounts must receive the prior approval of the board of directors. Further, under Section 22(h), loans to directors, executive officers and principal stockholders must be made on terms substantially the same as offered in comparable transactions to other persons, except that such insiders may receive preferential loans made under a benefit or compensation program that is widely available to the bank's employees and does not give preference to the insider over the employees. Section 22(g) of the FRA places additional limitations on loans to executive officers.
Consumer Protection and Financial Privacy Laws
The Company is subject to a number of federal and state laws designed to protect borrowers and promote lending to various sectors of the economy and population. These laws include the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act, various state law counterparts, and the Consumer Financial Protection Act of 2010, which constitutes part of the Dodd-Frank Act and establishes the CFPB, as described above.
On January 10, 2013, the CFPB issued a final rule implementing the ability-to-repay and qualified mortgage (QM) provisions of the Truth in Lending Act, as amended by the Dodd-Frank Act (the “QM Rule”). The ability-to-repay provision requires creditors to make reasonable, good faith determinations that borrowers are able to repay their mortgages before extending the credit based on a number of factors and consideration of financial information about the borrower from reasonably reliable third-party documents. Under the Dodd-Frank Act and the QM Rule, loans meeting the definition of “qualified mortgage” are entitled to a presumption that the lender satisfied the ability-to-repay requirements. The presumption is a conclusive presumption/safe harbor for prime loans meeting the QM requirements, and a rebuttable presumption for higher-priced/subprime loans meeting the QM requirements. The definition of a “qualified mortgage” incorporates the statutory requirements, such as not allowing negative amortization or terms longer than 30 years. The QM Rule also adds an explicit maximum 43% debt-to-income ratio for borrowers if the loan is to meet the QM definition, though some mortgages that meet GSE, FHA and VA underwriting guidelines may, for a period not to exceed seven years, meet the QM definition without being subject to the 43% debt-to-income limits. The QM Rule will become effective January 10, 2014.
In addition, federal law and certain state laws currently contain client privacy protection provisions. These provisions limit the ability of banks and other financial institutions to disclose non-public information about consumers to affiliated companies and non-affiliated third parties. These rules require disclosure of privacy policies to clients and, in some circumstance, allow consumers to prevent disclosure of certain personal information to affiliates or non-affiliated third parties by means of "opt out" or "opt in" authorizations. Pursuant to the Gramm-Leach-Bliley Act ("GLBA") and certain state laws, companies are required to notify clients of security breaches resulting in unauthorized access to their personal information.
Depositor Preference
The Federal Deposit Insurance Act (FDIA) provides that, in the event of the “liquidation or other resolution” of an insured depository institution, the claims of depositors of the institution, including the claims of the FDIC as subrogee of insured depositors, and certain claims for administrative expenses of the FDIC as a receiver, will have priority over other general unsecured claims against the institution. If an insured depository institution fails, insured and uninsured depositors, along with the FDIC, will have priority in payment ahead of unsecured, non-deposit creditors, including the parent bank holding company, with respect to any extensions of credit they have made to such insured depository institution.
Deposit Insurance
Substantially all of the deposits of Webster Bank are insured up to applicable limits by the Deposit Insurance Fund (“DIF”) of the FDIC and are subject to deposit insurance assessments to maintain the DIF. The FDIC utilizes a risk-based assessment system that imposes insurance premiums based upon a risk matrix that takes into account a bank's capital level and supervisory rating (“CAMELS rating”). The risk matrix utilizes four risk categories which are distinguished by capital levels and supervisory ratings.
In February 2011, the FDIC issued rules to implement changes to the deposit insurance assessment base, and risk-based assessments mandated by the Dodd-Frank Act. The base for insurance assessments changed from domestic deposits to consolidated assets less tangible equity. Assessment rates are calculated using formulas that take into account the risk of the

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institution being assessed. The rule was effective April 1, 2011. On September 28, 2011, the FDIC issued notification to insured depository institutions that the transition guidance for reporting certain leveraged and subprime loans on the Call Report had been extended from October 1, 2011 to April 1, 2012. Under the Dodd-Frank Act, the FDIC may review the definitions of subprime and leveraged loans. 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.
The Bank's FDIC deposit insurance assessment expenses totaled $22.7 million, $20.9 million and $24.5 million, for the years ended December 31, 2012, 2011, and 2010, respectively. FDIC insurance expense includes deposit insurance assessments and Financing Corporation (“FICO”) assessments related to outstanding FICO bonds. The FICO is a mixed-ownership government corporation established by the Competitive Equality Banking Act of 1987 whose sole purpose was to function as a financing vehicle for the now defunct Federal Savings & Loan Insurance Corporation.
Under the FDIA, the FDIC may terminate deposit insurance upon a finding that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. Webster's management is not aware of any practice, condition or violation that might lead to the termination of deposit insurance.
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley) implemented a broad range of corporate governance and accounting measures to increase corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies, and to protect investors by improving the accuracy and reliability of disclosures under federal securities laws. We are subject to Sarbanes-Oxley because we are required to file periodic reports with the SEC under the Securities and Exchange Act of 1934. Among other things, Sarbanes-Oxley and/or its implementing regulations have established new membership requirements and additional responsibilities for our audit committee, imposed restrictions on the relationship between us and our outside auditors (including restrictions on the types of non-audit services our auditors may provide to us), imposed additional responsibilities for our external financial statements on our Chief Executive Officer and Chief Financial Officer, expanded the disclosure requirements for our corporate insiders, required our management to evaluate our disclosure controls and procedures and our internal control over financial reporting, and required our auditors to issue a report on our internal control over financial reporting. The NYSE has imposed a number of additional corporate governance requirements as well.
Incentive Compensation
The Dodd-Frank Act requires publicly traded companies to give stockholders a non-binding vote on executive compensation at their first annual meeting taking place six months after the date of enactment and at least every three years thereafter and on so-called “golden parachute” payments in connection with approvals of mergers and acquisitions. The legislation also authorizes the SEC to promulgate rules that would allow stockholders to nominate their own candidates using a company's proxy materials. Additionally, the Dodd-Frank Act directs the federal banking regulators to promulgate rules requiring the reporting of incentive-based compensation and prohibiting excessive incentive-based compensation paid to executives of depository institutions and their holding companies with assets in excess of $1.0 billion, regardless of whether the company is publicly traded or not. In April 2011, the FRB, along with other federal banking supervisors, issued a joint notice of proposed rulemaking implementing those requirements. The Dodd-Frank Act gives the SEC authority to prohibit broker discretionary voting on elections of directors, executive compensation matters and any other significant matter. At the 2011 Annual Meeting of Shareholders, Webster's shareholders voted on a non-binding, advisory basis to hold a non-binding, advisory vote on the compensation of named executive officers of Webster annually. In light of the results, the Board of Directors determined to hold the vote annually.
Community Reinvestment Act and Fair Lending Laws
Webster Bank has a responsibility under the Community Reinvestment Act of 1977 (“CRA”) to help meet the credit needs of its communities, including low and moderate-income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. In connection with its examination, the OCC assesses Webster Bank's record of compliance with the CRA. In addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit discrimination in lending practices on the basis of characteristics specified in those statutes. Webster Bank's failure to comply with the provisions of the CRA could, at a minimum, result in regulatory restrictions on its activities and the activities of Webster. Webster Bank's failure to comply with the Equal Credit Opportunity Act and the Fair Housing Act could result in enforcement actions against it by the OCC, as well as other federal regulatory agencies, including the CFPB and the

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Department of Justice. The Bank's latest OCC CRA rating was “satisfactory.”

USA PATRIOT Act
Under Title III of the USA PATRIOT Act, all financial institutions are required to take certain measures to identify their customers, prevent money laundering, monitor customer transactions and report suspicious activity to U.S. law enforcement agencies. Financial institutions also are required to respond to requests for information from federal banking regulatory authorities and law enforcement agencies. Information sharing among financial institutions for the above purposes is encouraged by an exemption granted to complying financial institutions from the privacy provisions of GLBA and other privacy laws. Financial institutions that hold correspondent accounts for foreign banks or provide private banking services to foreign individuals are required to take measures to avoid dealing with certain foreign individuals or entities, including foreign banks with profiles that raise money laundering concerns, and are prohibited from dealing with foreign “shell banks” and persons from jurisdictions of particular concern. The primary federal banking regulators and the Secretary of the Treasury have adopted regulations to implement several of these provisions. All financial institutions also are required to establish internal anti-money laundering programs. The effectiveness of a financial institution in combating money laundering activities is a factor to be considered in any application submitted by the financial institution under the Bank Merger Act. Webster has in place a Bank Secrecy Act and USA PATRIOT Act compliance program and engages in very few transactions of any kind with foreign financial institutions or foreign persons.
Office of Foreign Assets Control Regulation
The United States has imposed economic sanctions that affect transactions with designated foreign countries, nationals and others. These are typically known as the “OFAC” rules based on their administration by the U.S. Treasury Department Office of Foreign Assets Control (“OFAC”). The OFAC-administered sanctions targeting countries take many different forms. Generally, they contain one or more of the following elements: i) restrictions on trade with or investment in a sanctioned country, including prohibitions against direct or indirect imports from and exports to a sanctioned country and prohibitions on “U.S. persons” engaging in financial transactions relating to making investments in, or providing investment-related advice or assistance to, a sanctioned country; and ii) a blocking of assets in which the government or specially designated nationals of the sanctioned country have an interest, by prohibiting transfers of property subject to U.S. jurisdiction (including property in the possession or control of U.S. persons). Blocked assets (e.g., property and bank deposits) cannot be paid out, withdrawn, set off or transferred in any manner without a license from OFAC. Failure to comply with these sanctions could have serious legal and reputational consequences.
Other Legislative Initiatives
From time to time, various legislative and regulatory initiatives are introduced in Congress and state legislatures, as well as by regulatory agencies. Such initiatives may include proposals to expand or contract the powers of bank holding companies and/or depository institutions or proposals to substantially change the financial institution regulatory system. Such legislation could change banking statutes and the operating environment of the Company in substantial and unpredictable ways. If enacted, such legislation could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings associations, credit unions, and other financial institutions. The Company cannot predict whether any such legislation will be enacted, and, if enacted, the effect that it or any implementing regulations would have on the financial condition or results of operations of the Company. A change in statutes, regulations or regulatory policies applicable to Webster or any of its subsidiaries could have a material effect on the business of the Company.
Risk Management Framework
Webster utilizes an enterprise-wide approach to identifying, assessing, monitoring and managing risk within the Board-approved risk appetite framework. The Audit and Risk Committees of the Board of Directors, comprised of independent directors, oversee all Webster's risk-related matters and provide input and guidance as appropriate. Webster's Enterprise Risk Management Committee (“ERMC”), which reports directly to the Risk Committee of the Board, is chaired by Webster's President and is comprised of members of Webster's Executive Management Committee and Senior Risk Officers who oversee risk management activities.
The Chief Risk Officer is responsible for oversight of the bank's credit risk, operational risk management, compliance programs, and loan workout and recovery activities. The Corporate Treasurer, who reports to the Chief Financial Officer, is responsible for overseeing market, liquidity and capital risk management activities.
Webster's risk appetite framework includes a risk appetite statement and supporting policy, along with board-level scorecards for monitoring Webster's risk positions relative to its established risk appetite.
Credit Risk

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Webster Bank manages and controls risk in its loan and investment portfolios through established underwriting practices, adherence to consistent standards and utilization of various portfolio and transaction monitoring activities. Written credit policies are in place that include underwriting standards and guidelines, provide limits on exposure and establish various other standards as deemed necessary and prudent. Additional approval requirements and reporting are implemented to ensure proper identification, rationale and disclosure of policy exceptions.
Credit Risk Management policies and transaction approvals are managed under the supervision of the Chief Credit Officer and are independent of the loan production and Treasury areas. The independent credit risk function oversees the underwriting, approval and portfolio management process, establishes and ensures adherence to credit policies and manages the collections and problem asset resolution activities in order to control and reduce classified and non-performing assets.
As part of the Credit Risk Management process, there is a Credit Risk Management Committee ("CRMC") that meets regularly to report and discuss key credit risk topics, issues and policy recommendations affecting Webster Bank. Included in the CRMC process is the periodic review of Webster's credit risk scorecard, which covers key risk indicators and limits established as part of the Company's risk appetite framework. The CRMC consists of a group of senior managers responsible for lending as well as senior managers from the Credit Risk Management function and is chaired by Webster's Chief Credit Officer. Important findings regarding credit quality and trends within the loan and investment portfolios are regularly reported by the Chief Credit Officer to the ERMC and the Risk Committee of the Board of Directors.
In addition to the Credit Risk Management team, there is an independent Credit Risk Review function that assesses risk ratings and credit underwriting process for all areas of the organization that incur credit risk. Credit Risk Review findings are reported to the CRMC, ERMC and the Risk Committee of the Board. Corrective measures are monitored and tested to ensure risk issues are mitigated or resolved. The head of Credit Risk Review reports directly to the Risk Committee of the Board and administratively to the Chief Risk Officer.
Market Risk
Market risk refers to the risk of loss arising from adverse changes in interest rates, foreign currency exchange rates, commodity prices and other relevant market rates and prices, such as equity prices. The risk of loss can be assessed from the perspective of adverse changes in fair values, cash flows and future earnings. Due to the nature of its operations, Webster is primarily exposed to interest rate risk. Accordingly, Webster's interest rate sensitivity is monitored on an ongoing basis by its Asset and Liability Committee (“ALCO”). ALCO's primary goals are to manage interest rate risk to maximize earnings and net economic value in changing interest rate and business environments within Board of Director approved risk appetite limits. ALCO is chaired by Webster's Corporate Treasurer who, as a Senior Risk Officer, regularly reports ALCO findings to the ERMC, the Risk Committee of the Board and the Board of Directors.
Liquidity Risk
Liquidity risk refers to the ability of Webster Bank to meet a demand for funds by converting assets into cash or cash equivalents and by increasing liabilities at acceptable costs. Liquidity management involves maintaining the ability to meet day-to-day and longer-term cash flow requirements of customers, whether they are depositors wishing to withdraw funds or borrowers requiring funds to meet their credit needs. Liquidity sources include the amount of unencumbered or “free” investment portfolio securities the Company owns.
The Company requires funds for dividends to shareholders, payment of debt obligations, repurchase of shares, potential acquisitions, and for general corporate purposes. Its sources of funds include dividends from Webster Bank, income from investment securities, the issuance of equity and debt from capital markets.
Both Webster Bank and the Company will maintain a level of liquidity necessary to achieve their business objectives under both normal and stressed conditions. Liquidity risk is monitored and managed by ALCO and reviewed regularly with ERMC, the Risk Committee of the Board and the Board of Directors.
Capital Risk
Webster needs to maintain adequate capital in both normal and stressed environments to support its business objectives and risk appetite. ALCO monitors regulatory and tangible capital levels according to regulatory requirements and management targets and recommends capital conservation, generation and/or deployment strategies to the Risk Committee of the Board and the Board of Directors. ALCO also has responsibility for the annual capital plan, contingency planning and quarterly stress testing, which are all reviewed and approved by the Risk Committee of the Board and the Board of Directors at least annually.
Operational Risk

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As defined by the Basel Committee, operational risk is “the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events”. The definition includes the risks stemming from failure to comply with applicable laws and regulations, reputational damage due to lapse in compliance with industry ethical standards and governance norms, and the lack of required risk identification or mitigation pertaining to business processes and utilized systems of operation.
The Operational Risk function is responsible for establishing processes and tools to identify, manage and aggregate operational risk across the organization; providing guidance and advice on operational risk matters; and educating the organization on operational risks. Specific programs and functions have been established to manage the risks associated with numerous legal and regulatory requirements, suppliers and other third-parties, information security, business disruption, fraud, models, and new products and services.
Webster has established an Operational Risk Management Committee (ORMC), which consists of Senior Risk Officers and senior managers responsible for human resources, legal, information security and operations to periodically review the aforementioned programs, key operational risk trends, concerns and mitigation best practices. The ORMC is chaired by the Director of Operating Risk Management, who is responsible for overseeing Webster's enterprise risk management program and operational risk management framework.
Internal Audit
Internal Audit provides an independent assessment of the quality of internal controls for all major business units and operations throughout Webster. Results of Internal Audit reviews are reported to management and the Audit Committee of the Board. Corrective measures are monitored to ensure risk issues are mitigated or resolved. The General Auditor reports directly to the Audit Committee and administratively to the Chief Risk Officer.
Additional information on risks and uncertainties and additional factors that could affect the results anticipated in these forward-looking statements or from historical performance can be found in Item 1A and elsewhere within this Form 10-K for the year ended December 31, 2012 and in other reports filed by Webster with the SEC.
Regional Expansion and Related Activities
Webster Bank operates seven regional offices located in Boston, Providence, White Plains, Stamford, Waterbury, New Haven and Hartford.
The Company’s growth and increased market share have been achieved through internal growth and also, in prior periods, through acquisitions. Acquisitions typically involve the payment of a premium over book and market values and commonly result in one-time charges against earnings for integration and similar costs. Cost-savings, especially incident to in-market acquisitions, are achieved and revenue growth opportunities may be enhanced through acquisitions. No acquisitions were undertaken during 2012 or 2011.
Subsidiaries of Webster Financial Corporation
Webster’s direct subsidiaries as of December 31, 2012 included Webster Bank, Fleming, Perry & Cox, Inc., and Webster Licensing, LLC. Webster also owns all of the outstanding common stock of Webster Statutory Trust, an unconsolidated financial vehicle that has issued or may in the future issue trust preferred securities. The Company completed the redemption at par of all the outstanding principal amount of Webster Capital Trust IV fixed to floating-rate trust preferred securities on July 18, 2012 using cash on hand.
Webster Bank's direct subsidiaries include Webster Mortgage Investment Corporation, Webster Business Credit Corporation (“WBCC”) and Webster Capital Finance, Inc. (“WCF”). Webster Bank is the primary source of retail activity within the consolidated group. Webster Bank provides banking services through 167 banking offices, 293 owned ATMs, telephone banking, mobile banking and its Internet websites. Residential mortgage origination activity is conducted through Webster Bank. Webster Mortgage Investment Corporation is a passive investment subsidiary whose primary function is to provide servicing on passive investments, such as residential real estate and commercial mortgage real estate loans transferred from Webster Bank. Various commercial lending products are provided through Webster Bank and its subsidiaries to clients within the region from Westchester County, NY to Boston, MA. WBCC provides asset-based lending services. WCF provides equipment financing for end users of equipment. Additionally, Webster Bank has various other subsidiaries that are not significant to the consolidated group.

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Employees
At December 31, 2012, Webster had 2,826 employees, including 2,730 full-time and 96 part-time and other employees. None of the employees were represented by a collective bargaining group. Webster maintains a comprehensive employee benefit program providing, among other benefits, group medical and dental insurance, life insurance, disability insurance, and an employee 401(k) investment plan. Management considers relations with its employees to be good. See Note 19 - Pension and Other Postretirement Benefits in the Notes to Consolidated Financial Statements contained elsewhere within this report for additional information on certain benefit programs.
Available Information
Webster makes available free of charge on its websites (www.websterbank.com or www.wbst.com) its Annual Report on Form 10-K, its quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934 as soon as practicable after it electronically files such material with, or furnishes it to, the Securities and Exchange Commission. Information on Webster’s website is not incorporated by reference into this report.

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ITEM 1A. RISK FACTORS
Our financial condition and results of operations are subject to various risks inherent in our business. The material risks and uncertainties that management believes affect us are described below. If any of the events or circumstances described in the following risks actually occurs, our business, financial condition or results of operations could suffer. You should consider all of the following risks together with all of the other information in this Annual Report on Form 10-K.
Changes in interest rates and spreads could have an impact on earnings and results of operations which could have a negative impact on the value of our stock.
Our consolidated earnings and financial condition are dependent to a large degree upon net interest income, which is the difference between interest earned from loans and investments and interest paid on deposits and borrowings. The narrowing of interest rate spreads could adversely affect our earnings and financial condition. We cannot predict with certainty or control changes in interest rates. Regional and local economic conditions and the policies of regulatory authorities, including monetary policies of the Federal Reserve Board, affect interest income and interest expense. While we have ongoing policies and procedures designed to manage the risks associated with changes in market interest rates, changes in interest rates still may have an adverse effect on our profitability. For example, high interest rates could affect the amount of loans that we can originate because higher rates could cause customers to apply for fewer mortgages, or cause depositors to shift funds from accounts that have a comparatively lower cost to accounts with a higher cost, or experience customer attrition due to competitor pricing. If the cost of interest-bearing deposits increases at a rate greater than the yields on interest-earning assets increase, net interest income will be negatively affected. Changes in the asset and liability mix may also affect net interest income. Similarly, lower interest rates cause higher yielding assets to prepay and floating or adjustable rate assets to reset to lower rates. If we are not able to reduce our funding costs sufficiently, due to either competitive factors or the maturity schedule of existing liabilities, then our net interest margin will decline.
The possibility of the economy’s return to recessionary conditions and the possibility of further turmoil or volatility in the financial markets would likely have an adverse effect on our business, financial position and results of operations.
The economy in the United States and globally began to recover from severe recessionary conditions in mid-2009 and is currently in the midst of a moderate economic recovery. The sustainability of the moderate recovery is dependent on a number of factors that are not within our control, such as a return to private sector job growth and investment, strengthening of housing sales and construction, continuation of the economic recovery globally, and the timing and impact of changing governmental policies. We continue to face risks resulting from the aftermath of the severe recession generally and the moderate pace of the current recovery. A slowing or failure of the economic recovery would likely aggravate the adverse effects of these difficult economic and market conditions on us and on others in the financial services industry.
In particular, we may face the following risks in connection with the current economic and market environment:
investors may have less confidence in the equity markets in general and in financial services industry stocks in particular, which could place downward pressure on our stock price and resulting market valuation;
economic and market developments may further affect consumer and business confidence levels and may cause declines in credit usage and adverse changes in payment patterns, causing increases in delinquencies and default rates;
our ability to assess the creditworthiness of our customers may be impaired if the models and approaches we use to select, manage, and underwrite our customers become less predictive of future behaviors;
we could suffer decreases in customer desire to do business with us, whether as a result of a decreased demand for loans or other financial products and services or decreased deposits or other investments in accounts with us;
competition in our industry could intensify as a result of the increasing consolidation of financial services companies in connection with current market conditions, or otherwise;
we may expect to face increased regulation of our industry, and compliance with such regulation may increase our costs and limit our ability to pursue business opportunities; and
we may be required to pay significantly higher FDIC deposit insurance premiums.
Compliance with the Dodd-Frank Act and other regulatory reforms may increase our costs of operations and adversely impact our earnings and capital ratios.
On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) into law. The Dodd-Frank Act represents a significant overhaul of many aspects of the regulation of the financial services industry. Among other things, the Dodd-Frank Act creates a new federal financial consumer protection agency, increases capital standards, imposes clearing and margining requirements on many derivatives activities, and generally increases oversight and regulation of financial institutions and financial activities. It requires bank holding companies with assets greater than $500 million to be subject to minimum leverage and risk-based capital requirements and phases out the ability of such bank holding companies to count certain securities, such as trust preferred securities, as Tier 1 capital. Other regulatory proposals, if adopted, would increase

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minimum levels of required capital, narrow the definition of capital, place greater emphasis on common equity, and modify risk weights for various asset classes for purposes of calculating capital ratios.
In addition to the self-implementing provisions of the statute, the Dodd-Frank Act calls for many administrative rulemakings by various federal agencies to implement various parts of the legislation. We cannot be certain when final rules affecting us will be issued through such rulemakings and what the specific content of such rules will be. 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. We will have to apply resources to ensure that we are in 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.
We are subject to extensive government regulation and supervision, which may interfere with our ability to conduct our business and may negatively impact our financial results.
We, primarily through Webster Bank and certain non-bank subsidiaries, are subject to extensive federal and state regulation and supervision. Banking regulations are primarily intended to protect depositors’ funds, federal deposit insurance funds and the banking system as a whole, not shareholders. These regulations affect our lending practices, capital structure, investment practices, dividend policy and growth, among other things. Congress and federal regulatory agencies continually review banking laws, regulations and policies for possible changes. Changes to statutes, regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies, could affect us in substantial and unpredictable ways. Such changes could subject us to additional costs, limit the types of financial services and products, and/or limit pricing able to be charged on certain banking services, among other things. Failure to comply with laws, regulations or policies could result in sanctions by regulatory agencies, civil money penalties and/or reputation damage, which could have a material adverse effect on our business, financial condition and results of operations. While we have policies and procedures designed to prevent any such violations, there can be no assurance that such violations will not occur. See the section captioned “Supervision and Regulation” in Item 1 of this report for further information.
We may be subject to more stringent capital requirements.
Webster and Webster Bank are each subject to capital adequacy guidelines and other regulatory requirements specifying minimum amounts and types of capital which each of Webster and Webster Bank must maintain. From time to time, the regulators implement changes to these regulatory capital adequacy guidelines. If we fail to meet these minimum capital guidelines and other regulatory requirements, our financial condition would be materially and adversely affected. In light of proposed changes to regulatory capital requirements contained in the Dodd-Frank Act and the regulatory accords on international banking institutions formulated by the Basel Committee and implemented by the Federal Reserve and OCC, we likely will be required to satisfy additional, more stringent, capital adequacy standards. The ultimate impact of the new capital and liquidity standards on us cannot be determined at this time and will depend on a number of factors, including the treatment and final implementation by the U.S. banking regulators. These requirements, however, and any other new regulations, could adversely affect our ability to pay dividends, or could require us to reduce business levels or to raise capital, including in ways that may adversely affect our financial condition or results of operations. For more information concerning our compliance with capital requirements, see the “Liquidity” section of Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Annual Report on Form 10-K.
If all or a significant portion of the unrealized losses in our portfolio of investment securities were determined to be other-than-temporarily impaired, we would recognize a material charge to our earnings and our capital ratios would be adversely impacted.
Market values for certain securities in our portfolio declined moderately during 2011 and 2012 as liquidity and pricing continue to be disrupted for certain securities. When the fair value of a security declines, management must assess whether that decline is other-than-temporary. When management reviews whether a decline in fair value is other-than-temporary, it considers numerous factors, many of which involve significant judgment. Generally, market conditions remain strained for certain classes of securities. Accordingly, no assurance can be provided that the amount of the unrealized losses will not increase.
To the extent that any portion of the unrealized losses in our portfolio of investment securities is determined to be other-than-temporarily impaired, we will recognize a charge to our earnings in the quarter during which such determination is made and our capital ratios will be adversely impacted. If any such charge is deemed significant, a rating agency might downgrade our credit rating or put us on a credit watch. A downgrade or a significant reduction in our capital ratios might adversely impact our ability to access the capital markets or might increase our cost of capital. Even if we do not determine that the unrealized losses associated with the investment portfolio require an impairment charge, increases in such unrealized losses adversely impact the tangible common equity ratio, which may adversely impact credit rating agency and investor sentiment. Such negative perception also may adversely impact our ability to access the capital markets or might increase our cost of capital. See Note 3 – Investment Securities in the Notes to Consolidated Financial Statements for additional information.

15


Our allowance for loan and lease losses may be insufficient.
Our business is subject to periodic fluctuations based on national and local economic conditions. These fluctuations are not predictable, cannot be controlled and may have a material adverse impact on our operations and financial condition. For example, declines in housing activity including declines in building permits, housing starts and home prices may make it more difficult for our borrowers to sell their homes or refinance their debt. Sales may also slow, which could strain the resources of real estate developers and builders. The current economic uncertainty is affecting employment levels and impacting the ability of our borrowers to service their debt. Bank regulatory agencies also periodically review our allowance for loan and lease losses and may require an increase in the provision for loan and lease losses or the recognition of further loan charge-offs, based on judgments different than those of management. In addition, if charge-offs in future periods exceed the allowance for loan and lease losses, we may need, depending on an analysis of the adequacy of the allowance for loan and lease losses, additional provisions to increase the allowance for loan losses. Any increases in the allowance for loan and lease losses will result in a decrease in net income and, possibly, capital, and may have a material adverse effect on our financial condition and results of operations. We may suffer higher loan and lease losses as a result of these factors and the resulting impact on our borrowers.
Changes in local economic conditions could adversely affect our business.
A majority of our mortgage loans are secured by real estate in the State of Connecticut. Our success depends in part upon economic conditions in this and our other geographic markets. Adverse changes in such local markets could reduce our growth in loans and deposits, impair our ability to collect our loans, increase problem loans and charges-offs, and otherwise negatively affect our performance and financial condition.
Our stock price can be volatile.
Stock price volatility may negatively impact the price at which our common stock may be sold, and may also negatively impact the timing of any sale. Our stock price can fluctuate widely in response to a variety of factors including, among other things:
actual or anticipated variations in quarterly operating results;
recommendations by securities analysts;
operating and stock price performance of other companies that investors deem comparable to us;
news reports relating to trends, concerns and other issues in the financial services industry;
new technology used, or services offered, by competitors;
perceptions in the marketplace regarding us and/or our competitors;
significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving us or our competitors;
failure to integrate acquisitions or realize anticipated benefits from acquisitions;
additional investments from third parties;
issuance of additional shares of stock;
changes in government regulations; or
geo-political conditions such as acts or threats of terrorism or military conflicts.
General market fluctuations, industry factors and general economic and political conditions and events, such as economic slowdowns or recessions, interest rate changes, credit loss trends or currency fluctuations, could also cause our stock price to decrease regardless of our operating results.
We operate in a highly competitive industry and market area. If we fail to compete effectively, our financial condition and results of operations may be materially adversely affected.
We face substantial competition in all areas of our operations from a variety of different competitors, many of which are larger and may have more financial resources. Such competitors primarily include national, regional, and community banks within the various markets in which we operate. We also face competition from many other types of financial institutions, including, without limitation, savings and loans, credit unions, finance companies, brokerage firms, insurance companies, factoring companies and other financial intermediaries. The financial services industry could become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation. Banks, securities firms and insurance companies can merge under the umbrella of a financial holding company, which can offer virtually any type of financial service, including banking, securities, underwriting, insurance (both agency and underwriting) and merchant banking. Recent regulatory proposals also impose restrictions on the basis of asset size providing a potential advantage to smaller banking entities. Technology has lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. Additionally, due to their size, many competitors may be able to achieve economies of scale and, as a result, may offer a broader range of products and services than we, as well as better pricing for those products and services.

16


Our ability to compete successfully depends on a number of factors, including, among other things:
the ability to develop, maintain and build upon long-term customer relationships based on top quality service, high ethical standards and safe, sound assets;
the ability to expand market position;
the scope, relevance and pricing of products and services offered to meet customer needs and demands;
the rate at which we introduce new products and services relative to our competitors;
customer satisfaction with our level of service; and
industry and general economic trends.
Failure to perform in any of these areas could significantly weaken our competitive position, which could adversely affect the growth and profitability, which, in turn, could have a material adverse effect on our financial condition and results of operations.
The unsoundness of other financial institutions could adversely affect us.
Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services companies are interrelated as a result of trading, clearing, counterparty or other relationships. We have exposure to many different industries and counterparties, and we routinely execute transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, mutual and hedge funds, and other institutional clients. As a result, defaults by, or even rumors or questions about, one or more financial services companies, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions. Many of these transactions expose us to credit risk in the event of default of our counterparty or client. In addition, our credit risk may be exacerbated if the collateral held by us cannot be realized or is liquidated at prices not sufficient to recover the full amount of the loan or derivative exposure due us. There is no assurance that any such losses would not materially and adversely affect our business, financial condition or results of operations.
We may not be able to attract and retain skilled people.
Our success depends, in large part, on our ability to attract and retain key people. Competition for the best people in most activities in which we engage can be intense and we may not be able to hire people or to retain them. Currently, we do not have employment agreements with any of our executive officers. The unexpected loss of services of one or more of our key personnel could have a material adverse impact on the business because we would lose the employees’ skills, knowledge of the market, and years of industry experience and may have difficulty promptly finding qualified replacement personnel.
If the goodwill that we have recorded in connection with our acquisitions becomes impaired, it could have a negative impact on our profitability.
Applicable accounting standards require that the purchase method of accounting be used for all business combinations. Under purchase accounting, if the purchase price of an acquired company exceeds the fair value of the acquired company’s net assets, the excess is carried on the acquirer’s balance sheet as goodwill. A continuing period of market disruption, or further market capitalization to book value deterioration, may result in the requirement to perform testing for impairment between annual assessments. Management will continue to monitor the relationship of the Company’s market capitalization to its book value, which management attributes primarily to financial services industry-wide factors and to evaluate the carrying value of goodwill. To the extent that testing results in the identification of impairment, the Company may be required to record charges for the impairment of goodwill. Write-downs of the amount of any impairment, if necessary, are to be charged to the results of operations in the period in which the impairment occurs. There can be no assurance that future evaluations of goodwill will not result in findings of impairment and related write-downs, which may have a material adverse effect on our financial condition and results of operations. See Note 7 – Goodwill and Other Intangible Assets in the Notes to Consolidated Financial Statements for further information.
We continually encounter technological change. The failure to understand and adapt to these changes could negatively impact our business.
The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology can increase efficiency and enable financial institutions to better serve customers and to reduce costs. However, some new technologies needed to compete effectively result in incremental operating costs. Our future success depends, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in operations. Many of our competitors, because of their larger size and available capital, have substantially greater resources to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers. Failure to successfully keep pace with technological change affecting the

17


financial services industry could have a material adverse impact on our business and, in turn, our financial condition and results of operations.
Our controls and procedures may fail or be circumvented, which may result in a material adverse effect on our business.
Management regularly reviews and updates our internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of the controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on our business, results of operations and financial condition.
New lines of business or new products and services may subject us to additional risks. A failure to successfully manage these risks may have a material adverse effect on our business.
From time to time, we may implement new lines of business, offer new products and services within existing lines of business or shift focus on our asset mix. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed. In developing and marketing new lines of business and/or new products and services and/or shifting focus of asset mix, we may invest significant time and resources. Initial timetables for the introduction and development of new lines of business and/or new products or services may not be achieved and price and profitability targets may not prove feasible. External factors, such as compliance with regulations, competitive alternatives, and shifting market preferences, may also impact the successful implementation of a new line of business or a new product or service. Furthermore, any new line of business and/or new product or service could have a significant impact on the effectiveness of our system of internal controls. Failure to successfully manage these risks in the development and implementation of new lines of business or new products or services could have a material adverse effect on our business, results of operations and financial condition.
A failure or breach of our systems, or those of our third party vendors and other service providers, including as a result of cyber attacks, could disrupt our businesses, result in the misuse of confidential or proprietary information, damage our reputation, increase our costs and cause losses.
As a large financial institution, we depend on our ability to process, record, and monitor a large number of customer transactions, and customer, public and regulatory expectations regarding operational and information security have increased over time. Accordingly, our operational systems and infrastructure must continue to be safeguarded and monitored for potential failures, disruptions and breakdowns. Our business, financial, accounting, data processing systems or other operating systems and facilities may stop operating properly or become disabled as a result of a number of factors that may be wholly or partially beyond our control. For example, there could be sudden increases in customer transaction volume; electrical or telecommunications outages; natural disasters; pandemics; events arising from political or social matters, including terrorist acts; and cyber attacks. Although we have business continuity plans and believe we have robust information security procedures and controls in place, disruptions or failures in the physical infrastructure or operating systems that support our businesses and customers, or cyber attacks or security breaches of the networks, systems or devices on which customers’ personal information is stored and that our customers use to access our products and services could result in customer attrition, regulatory fines, penalties or intervention, reputational damage, reimbursement or other compensation costs, and/or additional compliance costs, which could materially adversely affect our results of operations or financial condition.
Third parties with whom we do business or that facilitate our business activities, including exchanges, clearing houses, financial intermediaries or vendors that provide services or security solutions for our operations, could also be sources of operational and information security risk to us, including from breakdowns or failures of their own systems or capacity constraints.
Although to date we have not experienced any material losses relating to cyber attacks or other information security breaches, there can be no assurance that we will not suffer such losses in the future. Our risk and exposure to these matters remains heightened and as a result the continued development and enhancement of our controls, processes and practices designed to protect our systems, computers, software, data and networks from attack, damage or unauthorized access remain a priority for us. As an additional layer of protection, we have purchased network and privacy liability risk insurance coverage which includes digital asset loss, business interruption loss, network security liability, privacy liability, network extortion and data breach coverage. As cyber threats continue to evolve, we may be required to expend significant additional resources to modify our protective measures or to investigate and remediate any information security vulnerabilities.
We may not pay dividends if we are not able to receive dividends from our subsidiary, Webster Bank.
We are a separate and distinct legal entity from our banking and non-banking subsidiaries and depend on the payment of cash dividends from Webster Bank and our existing liquid assets as the principal sources of funds for paying cash dividends on our common stock. Unless we receive dividends from Webster Bank or choose to use our liquid assets, we may not be able to pay

18


dividends. Webster Bank’s ability to pay dividends is subject to its ability to earn net income and to meet certain regulatory requirements. See “Supervision and Regulation—Dividends” for a discussion of regulatory and other restrictions on dividend declarations.
We are exposed to risk of environmental liabilities with respect to properties to which we obtain title.
A large portion of our loan portfolio is secured by real estate. In the course of our business, we may foreclose and take title to real estate and could be subject to environmental liabilities with respect to these properties. We may be held liable to a government entity or to third parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination, or may be required to clean up hazardous or toxic substances, or chemical releases at a property. The costs associated with investigation and remediation activities could be substantial. In addition, if we are the owner or former owner of a contaminated site, we may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property. These costs and claims could adversely affect our business, results of operations and prospects.

ITEM 1B. UNRESOLVED STAFF COMMENTS
Webster has no unresolved comments from the SEC staff.

ITEM 2. PROPERTIES
The Company's headquarters is located in Waterbury, Connecticut. This facility, which is owned by the Company, houses the Company's executive and primary administrative offices, as well as the principal banking headquarters of Webster Bank.
At December 31, 2012, Webster Bank had 167 banking offices, as follows:
 
Leased
Owned
Total
Connecticut
75

49

124

Massachusetts
9

13

22

Rhode Island
9

4

13

New York
8


8

Total Banking Offices
101

66

167

Lease expiration dates range from 1 to 75 years with renewal options of 2 to 35 years. For additional information regarding leases and rental payments, see Note 22 - Commitments and Contingencies in the Notes to Consolidated Financial Statements.
The following subsidiaries and divisions maintain the following offices: Webster Private Banking, is headquartered in Hartford, Connecticut with offices in Stamford, New Haven, Waterbury and Providence, Rhode Island. Webster Capital Finance is headquartered in Farmington, Connecticut. Webster Business Credit Corporation (WBCC) is headquartered in New York, New York with offices in South Easton, Massachusetts; Radnor, Pennsylvania; and New Milford, Connecticut. HSA Bank is headquartered in Sheboygan, Wisconsin with an office in Milwaukee, Wisconsin.

ITEM 3. LEGAL PROCEEDINGS
From time to time, Webster and its subsidiaries are subject to certain legal proceedings and claims in the ordinary course of business. Management presently believes that the ultimate outcome of these proceedings, individually and in the aggregate, will not be material to Webster or its consolidated financial position. Webster establishes reserves for specific legal matters when it determines that the likelihood of an unfavorable outcome is probable and the loss is reasonably estimable. Legal proceedings are subject to inherent uncertainties, and unfavorable rulings could occur that could cause Webster to adjust its litigation reserves or could have, individually or in the aggregate, a material adverse effect on its business, financial condition, or operating results.

ITEM 4. MINE SAFETY DISCLOSURES
None



19



PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information
The common shares of Webster trade on the New York Stock Exchange under the symbol “WBS”.
On January 31, 2013, the closing market price of Webster common stock was $22.25. On January 30, 2013, Webster’s Board of Directors declared a quarterly dividend of $.10 per share.
The following table sets forth for each quarter of 2012 and 2011 the intra-day high and low sales prices per share of Webster's common stock as reported by the NYSE and the cash dividends declared per share:
2012
High
Low
Dividends
Declared
Fourth quarter
$
24.46

$
19.71

$
0.10

Third quarter
24.98

19.43

0.10

Second quarter
23.11

18.88

0.10

First quarter
23.94

20.15

0.05

2011
High
Low
Dividends
Declared
Fourth quarter
$
21.23

$
14.34

$
0.05

Third quarter
22.42

14.78

0.05

Second quarter
22.03

19.14

0.05

First quarter
23.73

19.16

0.01

Webster had 7,840 holders of record of common stock and 85,340,995 shares outstanding on January 31, 2013. The number of shareholders of record was determined by Computershare, the Company’s transfer agent and registrar.
Dividends
A primary source of liquidity for Webster Financial Corporation is dividend payments from Webster Bank. The Bank’s ability to make dividend payments to Webster is governed by OCC regulations. Without specific OCC approval, and subject to the Bank meeting applicable regulatory capital requirements before and after payment of dividends, the total of all dividends declared by the Bank is limited to net profits for the current year to date as of the declaration date plus net retained profits from the preceding two years. In addition, the OCC has the discretion to prohibit any otherwise permitted capital distribution on general safety and soundness grounds.
The payment of dividends is subject to various additional restrictions, none of which is expected to limit any dividend policy that the Board of Directors may in the future decide to adopt. Payment of dividends to Webster from Webster Bank is subject to certain regulatory and other restrictions. Under OCC regulations, Webster Bank may pay dividends to Webster without prior regulatory approval so long as it meets its applicable regulatory capital requirements before and after payment of such dividends and its total dividends declared do not exceed its net profits for the current year to the date of declaration plus net retained profits from the preceding two years less dividends declared in such years. At December 31, 2012, there were $128.4 million of retained earnings available for the payment of dividends by the Bank to the Company. At December 31, 2012, Webster Bank was in compliance with all applicable minimum capital requirements. The Bank paid the Company $140.0 million in dividends during the year ended December 31, 2012.
If the capital of Webster is diminished by depreciation in the value of its property or by losses, or otherwise, to an amount less than the aggregate amount of the capital represented by the issued and outstanding stock of all classes having a preference upon the distribution of assets, no dividends may be paid out of net profits until the deficiency in the amount of capital represented by the issued and outstanding stock of all classes having a preference upon the distribution of assets has been repaired. See the “Supervision and Regulation” section contained elsewhere within this report for additional information on dividends.
Exchanges of Registered Securities
Registered securities were exchanged as part of employee and director stock compensation plans.

20


Recent Sale of Unregistered Securities
No unregistered securities were sold by Webster during the year ended December 31, 2012, except as described below.
Webster sponsors the Webster Bank Retirement Savings Plan (the “401(k) Plan”), which is available to all eligible employees of Webster Bank. The 401(k) Plan contains a fund consisting primarily of Webster common stock (the “Webster Stock Fund”) and allows participants to allocate a portion of their account balance to interests in the Webster Stock Fund. Webster recently determined that it had inadvertently failed to file with the Securities and Exchange Commission (the “SEC”) a registration statement on Form S-8 relating to securities offered under the 401(k) Plan.
Webster previously filed registration statements on Form S-8 with the SEC registering the sale of Webster common stock under the 401(k) Plan, but the number of shares registered was not sufficient to cover the number of shares purchased in the 401(k) Plan. Between October 1, 2011 and September 12, 2012, a total of approximately 263,909 shares of Webster common stock were purchased by the 401(k) Plan in open market transactions. Even though all of such common stock purchased in the Webster Stock Fund was purchased in the open market, because Webster sponsors the 401(k) Plan, it is required to register certain transactions in the 401(k) Plan involving Webster common stock. On September 13, 2012, Webster filed a Registration Statement on Form S-8 registering the sale of 650,000 shares, in the aggregate, under the 401(k) Plan.
Webster believes that it has provided the participants in the 401(k) Plan with the same information they would have received had the registration statement been timely filed. Webster is implementing monitoring and reporting procedures to ensure that, in the future, Webster's registration statements have a sufficient number of shares to cover the shares of Webster common stock purchased by the 401(k) Plan.
Webster has consistently treated the shares purchased by the 401(k) Plan and held in the Webster Stock Fund as outstanding for financial reporting purposes. The unregistered transactions described above do not represent any additional dilution to stockholders.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
On December 6, 2012, Webster announced that its Board of Directors has authorized a $100 million common stock repurchase program under which shares may be repurchased from time to time in open market or privately negotiated transactions, subject to market conditions and other factors. On December 7, 2012, the Company, Warburg Pincus Private Equity X, L.P. and Warburg Pincus X Partners, L.P., as selling stockholders, and Barclays Capital Inc. entered into an underwriting agreement pursuant to which the selling stockholders agreed to sell 10,000,000 shares of Webster's common stock, $0.01 par value per share, to the underwriter. The transaction closed on December 12, 2012. In connection with the common stock repurchase program, Webster purchased 2,518,891 shares of its common stock in the offering at a price per share equal to $19.85, the price per share paid by the underwriter to the selling stockholders pursuant to the underwriting agreement
The following table provides information with respect to any purchase of shares of Webster common stock made by or on behalf of Webster or any “affiliated purchaser” for the quarter ended December 31, 2012:
 
Period
Total
Number of
Shares
Purchased (1)
Average Price
Paid Per
Share
Total
Number of
Warrants
Purchased (2)
Average Price
Paid Per
Warrant
Total
Number of
Shares
Purchased
as a Part of
Publicly
Announced
Plans or
Programs
Maximum
Number of
Shares That
May Yet Be
Purchased or Dollar Amount Available for Repurchase
Under the
Plans or
Programs (3)
October 1-31, 2012
188

$
23.70


$


2,111,200

November 1-30, 2012


300

7.55


2,111,200

December 1-31, 2012
2,577,843

19.87



2,518,891

$
50,000,000

Total
2,578,031

$
19.87

300

$
7.55

2,518,891

$
50,000,000

(1)
59,140 shares repurchased during the 4th quarter of 2012 were used for employee compensation plans while the remaining 2,518,891 shares were repurchased under the new program authorized by the Board of Directors on December 6, 2012 as described above.
(2)
Warrants to purchase common stock at an exercise price of $18.28 per share, listed on the NYSE under the symbol “WBS WS”.
(3)
The Company’s previous 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. At December 1, 2012 there were 2.1 million shares remaining in the program. The program was reconfigured on December 6, 2012, with the new program authorizing the repurchase of $100 million common stock. The new program will remain in effect until fully utilized or until modified, superseded or terminated. As of December 31, 2012 there was $50 million of repurchase authority remaining.

21



Performance Graph
The performance graph compares Webster’s cumulative shareholder return on its common stock over the last five fiscal years to the cumulative total return of the Standard & Poor’s 500 Index (“S&P 500 Index”), and the Keefe, Bruyette & Woods Regional Banking Index (“KRX”). KRX was chosen as the industry index because Webster believes it provides a better comparison and more appropriate benchmark against which to measure stock performance.
Total shareholder return is measured by dividing total dividends (assuming dividend reinvestment) for the measurement period plus share price change for a period by the share price at the beginning of the measurement period. Webster’s cumulative shareholder return over a five-year period is based on an initial investment of $100 on December 31, 2007.
Comparison of Five Year Cumulative Total Return Among
Webster, S&P 500 Index, KRX


  
Period Ending
Index
12/31/2007
12/31/2008
12/31/2009
12/31/2010
12/31/2011
12/31/2012
Webster Financial Corporation
$
100

$
45

$
39

$
65

$
68

$
70

KRX
$
100

$
81

$
63

$
76

$
72

$
82

S&P 500 Index
$
100

$
63

$
80

$
92

$
94

$
109


22



ITEM 6. SELECTED FINANCIAL DATA
 
At or for the year ended December 31,
(In thousands, except per share data)
2012
2011
2010
2009
2008
BALANCE SHEETS
 
 
 
 
 
Total assets
$
20,146,765

$
18,714,340

$
18,033,881

$
17,737,070

$
17,582,687

Loans and leases, net
11,851,567

10,991,917

10,696,532

10,692,253

11,950,955

Investment securities
6,243,689

5,848,491

5,486,229

4,784,912

3,711,293

Goodwill and other intangible assets, net
540,157

545,577

551,164

556,752

563,926

Deposits
14,530,835

13,656,025

13,608,785

13,632,127

11,884,890

Borrowings
3,238,048

2,969,904

2,442,319

1,989,916

3,594,764

Total equity
2,093,530

1,845,774

1,778,879

1,955,907

1,882,888

STATEMENTS OF OPERATIONS
 
 
 
 
 
Interest income
$
693,502

$
699,723

$
708,647

$
746,090

$
869,494

Interest expense
114,594

135,955

171,376

250,704

363,482

Net interest income
578,908

563,768

537,271

495,386

506,012

Provision for loan and lease losses
21,500

22,500

115,000

303,000

186,300

Other non-interest income
189,411

175,018

185,270

226,682

195,792

Net impairment losses on securities recognized in earnings


(5,838
)
(28,477
)
(219,277
)
Net unrealized (loss) gain on securities classified as trading

(1,799
)
12,045



Net gain (loss) on sale of investment securities
3,347

3,823

9,748

(13,810
)
(6,094
)
Goodwill impairment




198,379

Non-interest expense
501,804

510,976

538,974

507,394

476,790

Income (loss) from continuing operations before income tax expense (benefit)
248,362

207,334

84,522

(130,613
)
(385,036
)
Income tax expense (benefit)
74,665

57,951

12,358

(53,424
)
(66,297
)
Income (loss) from continuing operations
173,697

149,383

72,164

(77,189
)
(318,739
)
Income (loss) from discontinued operations, net of tax

1,995

94

302

(3,073
)
Less: Net (loss) income attributable to non controlling interests

(1
)
3

22

4

Preferred stock dividends
(2,460
)
(3,286
)
(18,086
)
(32,863
)
(12,805
)
Accretion of preferred stock discount and gain on extinguishment


(6,830
)
23,243

(145
)
Net income (loss) available to common shareholders
$
171,237

$
148,093

$
47,339

$
(86,529
)
$
(334,766
)
Per Share Data
 
 
 
 
 
Weighted-average common shares—diluted
91,649

91,688

82,172

63,916

52,020

Net income (loss) per common share from continuing operations—basic
$
1.96

$
1.67

$
0.60

$
(1.43
)
$
(6.39
)
Net income (loss) per common share—basic
1.96

1.69

0.60

(1.42
)
(6.45
)
Net income (loss) per common share from continuing operations—diluted
1.86

1.59

0.57

(2.17
)
(6.39
)
Net income (loss) per common share—diluted
1.86

1.61

0.57

(2.16
)
(6.45
)
Dividends declared per common share
0.35

0.16

0.04

0.04

1.20

Book value per common share
22.75

20.74

19.97

19.43

23.77

Tangible book value per common share
16.47

14.58

13.64

12.33

13.10

Key Performance Ratios
 
 
 
 
 
Return on average assets (a)
0.90
%
0.84
%
0.40
%
(0.44
)%
(1.86
)%
Return on average shareholders’ equity (a)
8.92

8.24

3.86

(4.09
)
(17.61
)
Return on average tangible common shareholders' equity
12.36

11.86

6.08

(7.95
)
(46.44
)
Net interest margin
3.32

3.47

3.36

3.14

3.29

Efficiency ratio
62.78

65.13

66.73

66.10

62.34

Tangible common equity ratio
7.17

7.03

6.80

5.63

4.07

Non-interest income as a percentage of total revenue
24.98

23.90

27.25

27.13

(6.21
)
Average shareholders’ equity to average assets
10.06

10.16

10.47

10.68

10.56

Dividend payout ratio
17.86

9.47

6.67

(3.33
)
(18.60
)
Asset Quality Ratios
 
 
 
 
 
Allowance for loan and lease losses/total loans and leases
1.47
%
2.08
%
2.92
%
3.09
 %
1.93
 %
Net charge-offs/average loans and leases
0.68

1.00

1.23

1.68

1.09

Non-performing loans and leases/total loans and leases
1.62

1.68

2.48

3.38

1.91

Non-performing assets/total loans, leases and OREO
1.65

1.72

2.73

3.63

2.15

(a) Calculated based on net income before preferred dividends.



23



ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated Financial Statements of Webster Financial Corporation and the Notes thereto included elsewhere in this report (collectively, the “Consolidated Financial Statements”).
Forward-Looking Statements
This Annual Report on Form 10-K contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Act”). Forward-looking statements can be identified by words such as “believes”, “anticipates”, “expects”, “intends”, “targeted”, “continue”, “remain”, “will”, “should”, “may”, “plans”, “estimates” and similar references to future periods, however such words are not the exclusive means of identifying such statements. Examples of forward-looking statements include, but are not limited to: (i) projections of revenues, expenses, income or loss, earnings or loss per share, and other financial items; (ii) statements of plans, objectives and expectations of Webster or its management or Board of Directors; (iii) statements of future economic performance; and (iv) statements of assumptions underlying such statements. Forward-looking statements are based on Webster’s current expectations and assumptions regarding its business, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Webster’s actual results may differ materially from those contemplated by the forward-looking statements, which are neither statements of historical fact nor guarantees or assurances of future performance. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to: (1) local, regional, national and international economic conditions and the impact they may have on us and our customers and our assessment of that impact; (2) volatility and disruption in national and international financial markets; (3) government intervention in the U.S. financial system; (4) changes in the level of non-performing assets and charge-offs; (5) changes in estimates of future reserve requirements based upon the periodic review thereof under relevant regulatory and accounting requirements; (6) adverse conditions in the securities markets that lead to impairment in the value of securities in our investment portfolio; (7) inflation, interest rate, securities market and monetary fluctuations; (8) the timely development and acceptance of new products and services and perceived overall value of these products and services by customers; (9) changes in consumer spending, borrowings and savings habits; (10) technological changes and cyber-security matters; (11) the ability to increase market share and control expenses; (12) changes in the competitive environment among banks, financial holding companies and other financial service providers; (13) the effect of changes in laws and regulations (including laws and regulations concerning taxes, banking, securities and insurance) with which we and our subsidiaries must comply, including those under the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Basel III update to the Basel Accords; (14) the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters; (15) 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; and (16) our success at managing the risks involved in the foregoing items. Any forward-looking statement made by the Company in this Annual Report on Form 10-K speaks only as of the date on which it is made. Factors or events that could cause the Company’s actual results to differ may emerge from time to time, and it is not possible for the Company to predict all of them. The Company undertakes no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.

Financial Performance
In 2012 the Company achieved several goals which were part of its overall strategy to operate more efficiently and effectively in a changing regulatory environment. During 2012 net income per common share increased, credit quality steadily improved, capital ratios remained strong, low cost deposits were at record highs, total loans grew, and return on average assets and average shareholders' equity showed continued improvement. In addition, the Company launched an all-encompassing review of operating expenses with a goal to operate at a 60% efficiency ratio, which was achieved during the fourth quarter of 2012. These efforts, coupled with our focus on meeting the changing preferences of our customers, resulted in a significant improvement in earnings during 2012.
Webster’s net income available to common shareholders for the year ended December 31, 2012 was $171.2 million compared to $148.1 million for the year ended December 31, 2011. Net income available to common shareholders per diluted share was $1.86 for the year ended December 31, 2012 compared to $1.61 for the year ended December 31, 2011. The primary factors which led to the increase in net income available to common shareholders in 2012 as compared to 2011 are outlined below.
The factors positively impacting net income available to common shareholders include:
interest expense decreased $21.4 million;
income from mortgage banking activities increased $18.1 million; and
non-interest expense (excluding litigation) decreased $18.7 million.


24


The factors negatively impacting net income available to common shareholders include:
interest income decreased $6.2 million;
deposit service fees decreased $6.2 million; and
the absence in 2012 of the $9.5 million non-recurring litigation benefit that occurred in 2011.
The impact of the items outlined above, after the effect from income taxes, resulted in income from continuing operations of $173.7 million for the year ended December 31, 2012 as compared to $149.4 million for the year ended December 31, 2011.
Credit quality improved as evidenced by improvement in asset quality ratios. Net charge offs to average loans and leases decreased from 1.00% at December 31, 2011 to 0.68% at December 31, 2012 and non-performing loans to total loans, leases and Other Real Estate Owned ("OREO") decreased from 1.72% at December 31, 2011 to 1.65% at December 31, 2012. The continued improvement in credit quality in 2012 resulted in a $1.0 million and $92.5 million decrease in the provision for loan and lease losses compared to 2011 and 2010, respectively.
The Company's capital remained strong at December 31, 2012 and well above the requirements to be considered "well capitalized" according to current and proposed regulatory standards. Due to the impact of loan growth on total risk weighted assets, the Tier 1 common equity to risk weighted assets ratio declined to 10.78% at December 31, 2012 from 11.12% at December 31, 2011. The tangible common equity ratio increased to 7.17% at December 31, 2012 from 7.03% at December 31, 2011.
On December 4, 2012, the Company closed the public offering of 5,060,000 depositary shares pursuant to an Underwriting Agreement, dated November 27, 2012, between the Company and Deutsche Bank Securities Inc., as representative for the underwriters listed therein. Each depositary share represents a 1/1000th interest in a share of its Series E Non-Cumulative Perpetual Preferred Stock, with a liquidation preference of $25,000 per share (equivalent to $25 per depositary share). Dividends accrue and are payable on the liquidation amount of $25,000 per share of Series E Preferred Stock in arrears at 6.40% per annum only when, as, and if declared by the Board of Directors of Webster and to the extent Webster has legally available funds to pay dividends.
During 2012, the Company completed several initiatives to improve shareholder return. On January 23, 2012, Webster's Board of Directors declared a quarterly dividend of $0.05 per share and on April 23, 2012, the Company increased its quarterly cash dividend to common shareholders to $0.10 per common share from $0.05 per common share.
In addition, on December 6, 2012, Webster announced that its Board of Directors has authorized a $100 million common stock repurchase program under which shares may be repurchased from time to time in open market or privately negotiated transactions, subject to market conditions and other factors. On December 7, 2012, the Company, Warburg Pincus Private Equity X, L.P. and Warburg Pincus X Partners, L.P., collectively the selling stockholders, and Barclays Capital Inc. entered into an underwriting agreement pursuant to which the Warburg enitities agreed to sell 10,000,000 shares of Webster's common stock, $0.01 par value per share, to the underwriter. The transaction closed on December 12, 2012. In connection with the common stock repurchase program, Webster purchased 2,518,891 shares of its common stock in the offering at a price per share equal to $19.85, the price per share paid by the underwriter to the selling stockholders pursuant to the underwriting agreement



25


Selected financial highlights are presented in the following table:
 
At or for the year ended December 31,
(In thousands, except per share and ratio data)
2012
2011
2010
Earnings:
 
 
 
Net interest income
$
578,908

$
563,768

$
537,271

Provision for loan and lease losses
21,500

22,500

115,000

Total non-interest income
192,758

177,042

201,225

Total non-interest expense
501,804

510,976

538,974

Income from continuing operations
173,697

149,383

72,164

Income from discontinued operations, net of tax

1,995

94

Net (loss) income attributable to noncontrolling interests

(1
)
3

Net income attributable to Webster Financial Corporation
173,697

151,379

72,255

Net income available to common shareholders
171,237

148,093

47,339

Per Share Data:
 
 
 
Weighted-average common shares - diluted
91,649

91,688

82,172

Net income from continuing operations per common share - diluted (a)
$
1.86

$
1.59

$
0.57

Net income available to common shareholders per common share - diluted (a)
1.86

1.61

0.57

Dividends declared per common share
0.35

0.16

0.04

Dividends declared per Series A preferred share
85.00

85.00

85.00

Dividends declared per Series B preferred share


49.86

Dividends declared per subsidiary preferred share

0.83

0.86

Book value per common share
22.75

20.74

19.97

Tangible book value per common share
16.47

14.58

13.64

Selected Ratios:
 
 
 
Return on average assets (b)
0.90
%
0.84
%
0.40
%
Return on average shareholders' equity (b)
8.92

8.24

3.86

Return on average tangible common shareholders' equity
12.36

11.86

6.08

Net interest margin
3.32

3.47

3.36

Efficiency ratio
62.78

65.13

66.73

Tangible common equity ratio
7.17

7.03

6.80

Tier 1 common equity to risk weighted assets
10.78

11.12

9.88

 
(a)
For the years ended December 31, 2012, 2011 and 2010 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)
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.
See the following tables for reconciliations of these non-GAAP financial measures with financial measures defined by GAAP at or for the year ended December 31, 2012, 2011 and 2010.


26


(Dollars in thousands)
 
 
At or for the year ended December 31,
Return on average tangible common shareholders' equity (non-GAAP):
2012
2011
2010
Net income attributable to Webster Financial Corporation
$
173,697

$
151,379

$
72,255

Shareholders' equity (GAAP)
$
2,093,530

$
1,845,774

$
1,778,879

Less: Preferred stock (GAAP)
151,649

28,939

28,939

       Non controlling interests (GAAP)


9,644

       Goodwill and other intangible assets (GAAP)
540,157

545,577

551,164

Add back: DTL related to other intangible assets (GAAP)
3,678

5,619


Tangible common equity (non-GAAP)
$
1,405,402

$
1,276,877

$
1,189,132

Return on average tangible common shareholders' equity (non-GAAP)
12.36
%
11.86
%
6.08
%
 
 
 
 
 
For the year ended December 31,
Efficiency ratio (non-GAAP)
2012
2011
2010
Non-interest expense (GAAP)
$
501,804

$
510,976

$
538,974

Less: Foreclosed property (income) expense
(1,098
)
2,744

10,773

Intangible assets amortization
5,420

5,588

5,588

Severance
1,505

5,100

1,832

Debt prepayment penalties
4,040

5,203


Write-down for expedited asset disposition

6,260


Preferred stock redemption costs

423


Stock registration costs
175



Warrant registration

350


Loan repurchase and unfunded commitment reserve benefit, net

(1,436
)

Branch and facility optimization
168

5,004

4,307

Fraud loss


5,861

Litigation

(9,523
)
22,476

Non-interest expense (non-GAAP)
$
491,594

$
491,263

$
488,137

Net interest income (before provision) (GAAP)
$
578,908

$
563,768

$
537,271

Add back: FTE adjustment
14,751

15,497

14,857

Non-interest income (GAAP)
192,758

177,042

201,225

Less: Net gain on securities
3,347

2,024

21,793

Income (non-GAAP)
$
783,070

$
754,283

$
731,560

Efficiency ratio (non-GAAP)
62.78
%
65.13
%
66.73
%
 
 
 
 
 
At or for the year ended December 31,
Tangible common equity ratio (non-GAAP):
2012
2011
2010
Equity (GAAP)
$
2,093,530

$
1,845,774

$
1,778,879

Less: Preferred stock (GAAP)
151,649

28,939

28,939

         Non controlling interests (GAAP)


9,644

         Goodwill and other intangible assets (GAAP)
540,157

545,577

551,164

Add back: DTL related to other intangible assets (GAAP)
3,678

5,619


Tangible common equity (non-GAAP)
$
1,405,402

$
1,276,877

$
1,189,132

Total Assets
$
20,146,765

$
18,714,340

$
18,033,881

Less: Goodwill and other intangible assets (GAAP)
540,157

545,577

551,164

Add back: DTL related to other intangible assets (GAAP)
3,678

5,619


Tangible assets (non-GAAP)
$
19,610,286

$
18,174,382

$
17,482,717

Tangible equity ratio (non-GAAP)
7.17
%
7.03
%
6.80
%

27


(Dollars and shares in thousands, except per share data)
 
 
 
 
At December 31,
Tangible book value per common share (non-GAAP):
2012
2011
2010
Equity (GAAP)
$
2,093,530

$
1,845,774

$
1,778,879

Less: Preferred equity (GAAP)
151,649

28,939

28,939

         Non controlling interests (GAAP)


9,644

         Goodwill and other intangible assets (GAAP)
540,157

545,577

551,164

Add back: DTL related to other intangibles (GAAP)
3,678

5,619


Tangible common equity (non-GAAP)
$
1,405,402

$
1,276,877

$
1,189,132

Common shares outstanding
85,341

87,600

87,160

Tangible book value per common share (non-GAAP)
$
16.47

$
14.58

$
13.64

 
 
 
 
 
At December 31,
Tier 1 common equity/ risk weighted assets (non-GAAP):
2012
2011
2010
Equity (GAAP)
$
2,093,530

$
1,845,774

$
1,778,879

Less: Preferred equity (GAAP)
151,649

28,939

28,939

          Non controlling interests (GAAP)


9,644

         Goodwill and other intangible assets (GAAP)
540,157

545,577

551,164

Add back: Accumulated other comprehensive loss (GAAP)
32,266

60,204

13,709

DTL (DTA) related to goodwill and other intangibles (regulatory)
11,380

12,795

(36,956
)
Tier 1 common equity (regulatory)
$
1,445,370

$
1,344,257

$
1,165,885

Risk-weighted assets (regulatory)
$
13,409,363

$
12,087,718

$
11,805,871

Tier 1 common equity/ risk weighted assets (non-GAAP)
10.78
%
11.12
%
9.88
%



28


The following table 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.

Table 1: Three-year average balance sheet and net interest margin.
 
Years ended December 31,
 
2012
2011
2010
(Dollars in thousands)
Average
Balance
Interest (a)
Average
Yields
Average
Balance
Interest (a)
Average
Yields
Average
Balance
Interest (a)
Average
Yields
Assets
 
 
 
 
 
 
 
 
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
Loans
$
11,525,233

$
485,666

4.21
%
$
11,054,100

$
486,883

4.40
%
$
10,904,698

$
493,244

4.52
%
Securities (b)
6,100,219

216,513

3.58

5,407,867

223,568

4.16

5,254,314

225,918

4.32

Federal Home Loan and Federal Reserve Bank stock
143,074

3,508

2.45

143,874

3,318

2.31

142,896

2,983

2.09

Interest-bearing deposits
77,265

141

0.18

112,232

216

0.19

151,756

389

0.26

Loans held for sale
73,156

2,425

3.31

28,144

1,235

4.39

21,758

970

4.46

Total interest-earning assets
17,918,947

708,253

3.96
%
16,746,217

715,220

4.28
%
16,475,422

723,504

4.40
%
Noninterest-earning assets
1,427,824

 
 
1,335,374

 
 
1,378,242

 
 
Total assets
$
19,346,771

 
 
$
18,081,591

 
 
$
17,853,664

 
 
Liabilities and equity
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
Demand deposits
$
2,638,025

 
 
$
2,278,419

 
 
$
1,789,161

 
 
Savings, checking & money market deposits
8,824,581

$
21,061

0.24
%
8,534,333

$
33,747

0.40
%
8,458,169

49,251

0.58
%
Time deposits
2,703,414

38,525

1.43

3,031,835

47,061

1.55

3,490,017

63,378

1.82

Total deposits
14,166,020

59,586

0.42

13,844,587

80,808

0.58

13,737,347

112,629

0.82

Securities sold under agreements to repurchase and other short-term borrowings
1,207,623

21,034

1.74

1,053,323

16,173

1.54

899,203

15,900

1.77

Federal Home Loan Bank advances
1,389,999

16,943

1.22

569,987

14,352

2.52

567,711

17,628

3.11

Long-term debt
418,896

17,031

4.07

565,331

24,622

4.36

586,546

25,219

4.30

Total borrowings
3,016,518

55,008

1.82

2,188,641

55,147

2.52

2,053,460

58,747

2.86

Total interest-bearing liabilities
17,182,538

114,594

0.67
%
16,033,228

135,955

0.85
%
15,790,807

171,376

1.09
%
Noninterest-bearing liabilities
217,653

 
 
202,205

 
 
184,264

 
 
Total liabilities
17,400,191

 
 
16,235,433

 
 
15,975,071

 
 
Noncontrolling interests

 
 
9,119

 
 
9,643

 
 
Preferred Stock
38,335

 
 
28,942

 
 
317,659

 
 
Common shareholders' equity
1,908,245

 
 
1,808,097

 
 
1,551,291

 
 
Webster Financial Corp. shareholders' equity
1,946,580

 
 
1,837,039

 
 
1,868,950

 
 
Total liabilities and equity
$
19,346,771

 
 
$
18,081,591

 
 
$
17,853,664

 
 
Tax-equivalent net interest income
 
593,659

 
 
579,265

 
 
552,128

 
Less: tax equivalent adjustments
 
(14,751
)
 
 
(15,497
)
 
 
(14,857
)
 
Net interest income
 
$
578,908

 
 
$
563,768

 
 
$
537,271

 
Net interest margin
 
 
3.32
%
 
 
3.47
%
 
 
3.36
%
 
(a)
On a fully tax-equivalent basis.
(b)
Average balances and yields of securities available for sale are based upon the historical amortized cost.



29


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 75.0% of total revenue for the year ended December 31, 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 interest-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 ("ALCO")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.
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.
Table 2: Net interest income - rate/volume analysis (not presented on a tax-equivalent basis).
 
 
Years ended December 31,
2012 vs. 2011
Increase (decrease) due to
Years ended December 31,
2011 vs. 2010
Increase (decrease) due to
(In thousands)
Rate
Volume
Total
Rate
Volume
Total
Interest on interest-earning assets:
 
 
 
 
 
 
Loans
$
(21,523
)
$
20,306

$
(1,217
)
$
(13,058
)
$
6,697

$
(6,361
)
Loans held for sale
(366
)
1,556

1,190

(15
)
280

265

Investment securities
(29,265
)
23,071

(6,194
)
(7,011
)
4,183

(2,828
)
Total interest income
$
(51,154
)
$
44,933

$
(6,221
)
$
(20,084
)
$
11,160

$
(8,924
)
Interest on interest-bearing liabilities:






Deposits
$
(23,058
)
$
1,836

$
(21,222
)
$
(32,694
)
$
873

$
(31,821
)
Borrowings
(17,668
)
17,529

(139
)
(7,303
)
3,703

(3,600
)
Total interest expense
$
(40,726
)
$
19,365

$
(21,361
)
$
(39,997
)
$
4,576

$
(35,421
)
Net change in net interest income
$
(10,428
)
$
25,568

$
15,140

$
19,913

$
6,584

$
26,497


Net interest income totaled $578.9 million for the year ended December 31, 2012 compared to $563.8 million for the year ended December 31, 2011, an increase of $15.1 million. The increase in net interest income during the year ended December 31, 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 year ended December 31, 2012 increased $1.2 billion from the year ended December 31, 2011. The net interest margin decreased 15 basis points from 3.47% during the year ended December 31, 2011 to 3.32% during the year ended December 31, 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 32 basis points from 4.28% during the year ended December 31, 2011 to 3.96% during the year ended December 31, 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.


30


Average loans increased $471.1 million for the year ended December 31, 2012 as compared to the year ended December 31, 2011. The loan portfolio yield decreased 19 basis points to 4.21% for the year ended December 31, 2012 and comprised 64.3% of the average interest-earning assets at December 31, 2012, compared to the loan portfolio yield of 4.40% for the year ended December 31, 2011 which comprised 66.0% of the average interest-earning assets at December 31, 2011. The decrease in the yield on the average loan portfolio is due to the repayment of higher yielding loans and the origination of lower yielding loans in a low interest rate environment.
The average securities portfolio increased $692.4 million for the year ended December 31, 2012 as compared to the year ended December 31, 2011. The yield on investment securities decreased 58 basis points to 3.58% for the year ended December 31, 2012 and comprised 34.0% of average interest-earning assets at December 31, 2012, compared to the yield on investment securities of 4.16% for the year ended December 31, 2011, which comprised 32.3% of the average interest-earning assets at December 31, 2011. The decrease in the yield on securities is due to principal repayments and lower reinvestment rates. The growth in the securities portfolio is part of the Company's strategy to protect earnings in anticipation of declines in long-term interest rates and a protracted low rate environment.
Average deposits increased $321.4 million for the year ended December 31, 2012 as compared to the year ended December 31, 2011. The increase is due to a $359.6 million increase in non-interest bearing deposits, partially offset by a $38.2 million decrease in interest-bearing deposits. The average cost of deposits decreased 16 basis points to 0.42% for the year ended December 31, 2012 from 0.58% for the year ended December 31, 2011. The decrease in the average cost of deposits is the result of decreased pricing offered on certain deposit products and product mix as the proportion of higher costing certificates of deposits to total interest-bearing deposits decreased from 26.2% for the year ended December 31, 2011 to 23.5% for the year ended December 31, 2012.
Average total borrowings increased $827.9 million for the year ended December 31, 2012 as compared to the year ended December 31, 2011. The increase is due to an $820.0 million increase in average Federal Home Loan Bank advances, a $154.3 million increase in securities sold under agreements to repurchase and other short-term borrowings, partially offset by a $146.4 million decrease in average long-term debt. The increase in short-term borrowings is due to the replacement of long-term funding with short-term, lower cost funding in anticipation of declines in long-term interest rates and a protracted low rate environment. The decrease in average long-term debt is due to 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, which also resulted in a 29 basis point decrease in the cost of long-term debt.

Provision for Loan and Lease Losses
The provision for loan and lease losses was $21.5 million and $22.5 million for the years ended December 31, 2012 and 2011, respectively, a decrease of $1.0 million for the year ended December 31, 2012 compared to the year ended December 31, 2011. The decrease in the provision includes a reduction in net benefit for the Commercial portfolio offset by reduced provisions in the Residential and Consumer portfolios.
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 December 31, 2012, the allowance for loan and lease losses totaled $177.1 million or 1.47% of total loans and leases compared to $233.5 million or 2.08% of total loans and leases at December 31, 2011. For the year ended December 31, 2012, total net charge-offs were $77.9 million compared to $110.7 million for the year ended December 31, 2011.
See the “Allowance for Loan and Lease Losses Methodology” section for further details.

31


Non-Interest Income
Total non-interest income was $192.8 million for the year ended December 31, 2012, an increase of $15.7 million from the year ended December 31, 2011. The increase for the year ended December 31, 2012 is primarily attributable to growth in mortgage banking activities offset partially by lower deposit service and loan related fees.
Table 3: Non-interest income comparison of 2012 to 2011.
 
 
Years ended December 31,
Increase (decrease)
(In thousands)
2012
2011
Amount
Percent
Non-Interest Income:
 
 
 
 
Deposit service fees
$
96,633

$
102,795

$
(6,162
)
(6.0
)%
Loan related fees
18,043

20,237

(2,194
)
(10.8
)
Wealth and investment services
29,515

26,421

3,094

11.7

Mortgage banking activities
23,037

4,905

18,132

369.7

Increase in cash surrender value of life insurance policies
11,254

10,360

894

8.6

Net loss on trading securities

(1,799
)
1,799

100.0

Net gain on sale of investment securities
3,347

3,823

(476
)
(12.5
)
Other income
10,929

10,300

629

6.1

Total non-interest income
$
192,758

$
177,042

$
15,716

8.9
 %
Deposit Service Fees. Deposit service fees were $96.6 million for the year ended December 31, 2012, a decrease of $6.2 million from the comparable period in 2011 primarily due to the Durbin amendment’s reduction of debit card interchange rates that went into effect during the fourth quarter of 2011, partially offset by an increase in HSA service fees driven by an increase in account volume.
Loan Related Fees. Loan related fees were $18.0 million for the year ended December 31, 2012, a decrease of $2.2 million from the comparable period in 2011 due to a decreased volume of amendment fees and increased mortgage servicing right amortization.
Wealth and Investment Services. Wealth and investment services income was $29.5 million for the year ended December 31, 2012, an increase of $3.1 million from the comparable period in 2011 due to an increase in income from Webster Investment Services driven by increased referral activity as a result of the Company's focus on relationship banking, as well as an increase in trust fees at the Private Bank.
Mortgage Banking Activities. Mortgage banking activities net revenue was $23.0 million for the year ended December 31, 2012, an increase of $18.1 million from the comparable period in 2011. The increase for the year ended December 31, 2012 as compared to the year ended December 31, 2011 is primarily due to the doubling of the loan originator sales force and the Company implementing a strategy of selling a higher percentage of conforming fixed-rate loans, combined with favorable pricing in the secondary markets, This increase was partially offset by a negative fair value adjustment on mortgage banking derivatives in the year ended December 31, 2012 as compared to a positive fair value adjustment in the year ended December 31, 2011.
Increase in Cash Surrender Value of Life Insurance Policies. Increase in cash surrender value of life insurance polices was $11.3 million for the year ended December 31, 2012, an increase of $0.9 million from the comparable period in 2011 due primarily to to a $100 million of additional purchases of life insurance policies in September 2012.
Other. Other non-interest income was $10.9 million and $10.3 million for the years ended December 31, 2012 and 2011, respectively. The increase of $0.6 million for the year ended December 31, 2012 as compared to the year ended December 31, 2011 is primarily due to an increase in positive fair value adjustments on treasury derivatives related to increased client swap activity, partially offset by a net impairment loss of $0.7 million on the Company’s investments in private equity funds during the year ended December 31, 2012, as compared to a net gain of $1.6 million for the year ended December 31, 2011 and a $1.0 million write-down on a loan held for sale during the year ended December 31, 2012.

32


Non-Interest Expense
Total non-interest expense was $501.8 million for the year ended December 31, 2012, a decrease of $9.2 million from the year ended December 31, 2011. The Company continues to remain focused on expense control management.

Table 4: Non-interest expense comparison of 2012 to 2011. 
 
Years ended December 31,
Increase (decrease)
 
2012
2011
Amount
Percent
(In thousands)
 
 
 
 
Non-Interest Expense:
 
 
 
 
Compensation and benefits
$
264,101

$
262,647

$
1,454

0.6
 %
Occupancy
50,131

53,866

(3,735
)
(6.9
)
Technology and equipment
62,210

60,721

1,489

2.5

Intangible assets amortization
5,420

5,588

(168
)
(3
)
Marketing
16,827

18,456

(1,629
)
(8.8
)
Professional and outside services
11,348

11,203

145

1.3

Deposit insurance
22,749

20,927

1,822

8.7

Litigation

(9,523
)
9,523

100.0

Other expense
69,018

87,091

(18,073
)
(20.8
)
Total non-interest expense
$
501,804

$
510,976

$
(9,172
)
(1.8
)%
Compensation and Benefits. Compensation and benefits expense was $264.1 million for the year ended December 31, 2012 an increase of $1.5 million from the comparable period in 2011. The increase is primarily due to an increase in commission expense driven by an increase in loan volumes and an increase in pension expense driven primarily by a decrease in the discount rate to determine the Plan's benefit obligation and earnings rate, partially offset by a decrease in group insurance due to a decrease in claim volume.
Occupancy. Occupancy expense was $50.1 million for the year ended December 31, 2012, a decrease of $3.7 million from the comparable period in 2011, primarily due to the consolidation of 16 branches since the beginning of 2011.
Technology and Equipment. Technology and equipment expense was $62.2 million for the year ended December 31, 2012, an increase of $1.5 million from the comparable period in 2011. The increase is 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).
Marketing. Marketing expense was $16.8 million for the year ended December 31, 2012, a decrease of $1.6 million from the comparable period in 2011, primarily due to a decrease in advertising campaigns.
Deposit Insurance. Deposit insurance was $22.7 million for the year ended December 31, 2012, an increase of $1.8 million from the comparable period in 2011 due to a higher assessment base as a result of an increase in average assets.
Other. Other non-interest expense was $69.0 million for the year ended December 31, 2012, a decrease of $18.1 million from the comparable period in 2011 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 as well as a decrease in branch and facility optimization costs. The decrease from the comparable periods is partially offset by $0.4 million in expense related to the redemption of Webster Capital Trust IV, $1.1 million in expense related to a tender offer for subordinated notes, and $2.5 million in prepayment penalties related to the prepayment of FHLB advances all of which occurred during the year ended December 31, 2012.


Income Taxes
Webster recognized income tax expense of $74.7 million in 2012 and $58.0 million in 2011. The effective tax rates were 30.1% and 28.0%, respectively. The increase in the effective rate principally reflects the increased pre-tax income as well as decreased benefits from (i) tax-exempt interest income and (ii) reductions in the Company's deferred tax asset valuation allowance applicable to capital losses.
For more information on Webster's income taxes, including its deferred tax assets and valuation allowance, see Note 8 - Income Taxes in the Notes to Consolidated Financial Statements included elsewhere within this report.

33



Comparison of 2011 and 2010 Years
For the year ended December 31, 2011, Webster’s net income available to common shareholders was $148.1 million compared to $47.3 million for the year ended December 31, 2010. Net income per diluted share was $1.61 for the year ended December 31, 2011 compared to $0.57 for the year ended December 31, 2010. The primary factors which led to the increase in net income available to common shareholders in 2011 as compared to 2010 are outlined below.
The factors positively impacting net income available to common shareholders include:
provision for loan and lease losses was $92.5 million lower;
interest expense decreased $35.4 million;
litigation expense decreased $32.0 million; and
other non-interest expense (excluding litigation and compensation and benefits) decreased $13.3 million.
The factors negatively impacting net income available to common shareholders include:
compensation and benefits increased $17.3 million;
a $1.8 million 2011 loss compared to a $12.0 million 2010 gain on trading securities;
interest income decreased $8.9 million; and
deposit service fees decreased $6.2 million.
The impact of the items outlined above, after the effect from income taxes, resulted in income from continuing operations of $149.4 million for the year ended December 31, 2011 as compared to $72.2 million for the year ended December 31, 2010.
Income from discontinued operations, net of taxes, totaled $2.0 million and $0.1 million for the years ended December 31, 2011 and 2010, respectively, due to contingent consideration within the respective sales contract for Webster Insurance.
A discussion of the significant components of income from continuing operations follows.
Net Interest Income
Net interest income, the difference between interest earned on interest-earning assets and interest expense incurred on deposits and borrowings, totaled $563.8 million for the year ended December 31, 2011, compared to $537.3 million for the year ended December 31, 2010, an increase of $26.5 million. Average interest-earning assets increased to $16.7 billion at December 31, 2011 from $16.5 billion at December 31, 2010 while average interest-bearing liabilities also increased to $16.0 billion at December 31, 2011 from $15.8 billion at December 31, 2010. As a result of the greater decline in the cost of interest-bearing liabilities than the decline in yield on interest-earning assets to interest-bearing liabilities, the net interest margin grew by 11 basis points to 3.47% for the year ended December 31, 2011 from 3.36% for the year ended December 31, 2010. The yield on interest-earning assets declined by 12 basis points for the year ended December 31, 2011, while the cost of interest-bearing liabilities declined 24 basis points for the year ended December 31, 2011.
Interest income decreased $8.9 million to $699.7 million for the year ended December 31, 2011 as compared to 2010. Average loans, excluding loans held for sale, increased by $149.4 million for the year ended December 31, 2011 compared to 2010. Average investment securities increased by $153.6 million for the year ended December 31, 2011 compared to 2010. The 12 basis point decrease in the average yield earned on interest-earning assets for the year ended December 31, 2011 to 4.28% compared to 4.40% for 2010 is a result of repayment of higher yielding loans and securities, origination of lower yielding loans and purchase of lower yielding securities. The loan portfolio yield of 4.40% for the year ended December 31, 2011 and comprised 66.0% of average interest-earning assets at December 31, 2011 compared to the loan portfolio yield of 4.52% and 66.2% of average interest-earning assets for the year ended December 31, 2010. The yield on investment securities decreased by 16 basis points to 4.16% and comprised 32.3% of average interest-earning assets at December 31, 2011 compared to the investment portfolio yield of 4.32% and 31.9% of average interest-earning assets at December 31, 2010. All other interest-earning assets comprised 1.7% and 1.9% at December 31, 2011 and 2010, respectively.

Interest expense for the year ended December 31, 2011 decreased $35.4 million compared to 2010. The average cost of interest-bearing liabilities was 0.85% for the year ended December 31, 2011, a decrease of 24 basis points compared to 1.09% for 2010. The decrease was primarily due to a decline of 24 basis points in the cost of deposits to 0.58% from 0.82% a year ago, an increase in average deposits of $107.2 million compared to 2010, and a decrease in the cost of borrowings to 2.52% from 2.86% for the year ended December 31, 2010.
Provision for Loan and Lease Losses
The provision for loan and lease losses was $22.5 million for the year ended December 31, 2011, a decrease of $92.5 million compared to $115.0 million for the year ended December 31, 2010. The decrease is primarily due to management’s perspective

34


regarding the level of probable losses inherent in Webster’s existing book of business and management’s belief that the overall reserve levels are adequate. For the year ended December 31, 2011, total net charge-offs were $110.7 million compared to $134.5 million in 2010. See Tables 17 through 23 for information on the allowance for loan and lease losses, net charge-offs and non-performing assets.
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 December 31, 2011, the allowance for loan and lease losses totaled $233.5 million, or 2.08%, of total loans compared to $321.7 million, or 2.92%, at December 31, 2010. See the “Allowance for Loan and Lease Losses Methodology” section later in Management’s Discussion and Analysis for further details.
Non-interest Income
Table 5: Non-interest income comparison of 2011 to 2010.
 
  
Years ended December 31,
Increase (decrease)
(In thousands)
2011
2010
Amount
Percent
Non-Interest Income:
 
 
 
 
Deposit service fees
$
102,795

$
108,977

$
(6,182
)
(5.7
)%
Loan related fees
20,237

20,286

(49
)
(0.2
)
Wealth and investment services
26,421

24,925

1,496

6.0

Mortgage banking activities
4,905

4,169

736

17.7

Increase in cash surrender value of life insurance policies
10,360

10,517

(157
)
(1.5
)
Net (loss) gain on trading securities
(1,799
)
12,045

(13,844
)
(114.9
)
Net gain on sale of investment securities
3,823

9,748

(5,925
)
(60.8
)
Total other-than-temporary impairment losses on securities

(14,445
)
14,445

(100.0
)
Portion of the loss recognized in other comprehensive income

8,607

(8,607
)
100.0

Net impairment losses recognized in earnings

(5,838
)
5,838

(100.0
)
Other income
10,300

16,396

(6,096
)
(37.2
)
Total non-interest income
$
177,042

$
201,225

$
(24,183
)
(12.0
)%
Total non-interest income was $177.0 million for the year ended December 31, 2011, a decrease of $24.2 million from the year ended December 31, 2010. The decrease for 2011 is primarily attributable to a $6.2 million decrease in deposit service fees, primarily a result of the implementation of Regulation E and the Durbin amendment, a $13.8 million unfavorable effect of a 2011 net loss as compared to a 2010 net gain on trading securities and a $5.9 million decrease in gain on sale of investment securities, partially offset by the $5.8 million reduction in other-than-temporary impairment losses recorded in 2010.
Deposit Service Fees. Deposit service fees were $102.8 million for the year ended December 31, 2011, a decrease of $6.2 million from the comparable period in 2010, primarily due to a decline in customer overdraft activity associated with the implementation of Regulation E during the third quarter of 2010 and the Durbin amendment’s reduction of debit card interchange rates that went into effect during the fourth quarter of 2011. The impact of these regulatory reductions of fee revenue was partially offset by an increase in checking account service charges as a result of the redesigned line of checking products implemented during the fourth quarter of 2010 and revised overdraft pricing in September of 2011.
Wealth and Investment Services. Wealth and investment services income was $26.4 million for the year ended December 31, 2011, an increase of $1.5 million from the comparable period in 2010, due to an increase in new business originated by the Private Bank.
Mortgage Banking Activities. Net revenue from mortgage banking activities was $4.9 million for the year ended December 31, 2011, an increase of $0.7 million from the comparable period in 2010. After the effect of a $0.8 million gain on commercial loan sale recorded in December 31, 2011, mortgage banking activities are flat year over year. The increase in volume of loans originated and sold to third parties in 2011 was offset by a tightening of secondary market spreads for the loans sold.
Net Gain on Sale of Investment Securities. Net gain on the sale of investments was $3.8 million for the year ended December 31, 2011, a decrease of $5.9 million from the comparable period in 2010. The gain on sale of investment securities for the year ended

35


December 31, 2011 is due to the $7.1 million gain on sale of agency securities and equity securities, offset by $3.3 million in losses on the sale of two trust preferred securities.
Net Impairment Losses on Securities Recognized in Earnings. There were no net impairment losses on securities recognized in earnings for the year ended December 31, 2011, compared to losses of $5.8 million in the comparable period in 2010. This decrease is primarily the result of a reduction in deferrals and defaults on pooled trust preferred securities in 2011 compared to previously impaired book values.
Other. Other non-interest income was $10.3 million for the year ended December 31, 2011 compared to $16.4 million a year ago. The $6.1 million decrease is primarily due to a realized gain of $6.4 million on the sale of the Company’s direct investment in the Higher One Holdings, Inc. recorded in the year ended December 31, 2010.

Non-interest Expense
Table 6: Non-interest expense comparison of 2011 to 2010.
 
  
Years ended December 31,
Increase (decrease)
(In thousands)
2011
2010
Amount
Percent
Non-Interest Expense:
 
 
 
 
Compensation and benefits
$
262,647

$
245,343

$
17,304

7.1
 %
Occupancy
53,866

55,634

(1,768
)
(3.2
)
Technology and equipment expense
60,721

62,855

(2,134
)
(3.4
)
Intangible assets amortization
5,588

5,588



Marketing
18,456

18,968

(512
)
(2.7
)
Professional and outside services
11,203

14,721

(3,518
)
(23.9
)
Deposit insurance
20,927

24,535

(3,608
)
(14.7
)
Litigation
(9,523
)
22,476

(31,999
)
(142.4
)
Other expenses
87,091

88,854

(1,763
)
(2.0
)
Total non-interest expense
$
510,976

$
538,974

$
(27,998
)
(5.2
)%
Total non-interest expense was $511.0 million for the year ended December 31, 2011 compared to $539.0 million for the year ended December 31, 2010. The $28.0 million decrease in non-interest expense is primarily due to a $22.5 million settlement reserve charge recorded in the year ended December 31, 2010, a portion of which ($9.5 million) was reversed in the year ended December 31, 2011 upon successful resolution of this matter, while an increase of $17.3 million in compensation and benefits was primarily offset by a decrease of $13.3 million in all other non-interest expenses.
Compensation and benefits. Compensation and benefits expense was $262.6 million for the year ended December 31, 2011, which represents an increase of $17.3 million compared to $245.3 million for the year ended December 31, 2010. The increase is primarily attributable to an increase in incentive compensation expense as a result of the company exceeding its financial performance targets for the year, an increase in group insurance due to an increase in the quantity and magnitude of claims as the company is self-insured, and higher compensation expense as a result of annual merit increases and an initiative to increase the number of business development officers to support the Company’s Business and Professional Banking and Middle Market divisions. The impact of the compensation expenses was partially offset by an overall decrease in headcount.
Occupancy. Occupancy expense was $53.9 million for the year ended December 31, 2011, a decrease of $1.8 million when compared to the year ended December 31, 2010. The decrease is primarily due to the closure of 16 branches during the year ended December 31, 2011.
Professional and outside services. Professional and outside service expense was $11.2 million for the year ended December 31, 2011, a decrease of $3.5 million when compared to the year ended December 31, 2010. The decrease is primarily due to a decrease in legal fees as a result of the settlement of a significant lawsuit in 2011.
Litigation. Litigation expense was $22.5 million for the year ended December 31, 2010 and encompassed a $19.7 million charge for a litigation reserve related to Broadwin litigation and a settlement charge of $2.8 million related to a class action lawsuit regarding the assessment and collection of overdue fees on customer checking accounts. During the year ended 2011 the Company settled the Broadwin litigation for a net settlement benefit of $9.5 million.
Deposit Insurance. The FDIC deposit insurance assessment for year ended December 31, 2011 was $20.9 million as compared to $24.5 million for the year ended December 31, 2010. This decrease from the comparable period in 2010 reflects lower FDIC rates

36


due to changes in the deposit 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 effective April 1, 2011.
Other Expense. Other expense was $87.1 million for the year ended December 31, 2011, a decrease of $1.8 million when compared to the year ended December 31, 2010. The decrease is primarily due to a $1.8 million decrease in foreclosed and repossessed asset expenses and write-downs, a $2.3 million decrease in loan workout expenses from the comparable period in 2010, and a $5.9 million net fraud loss recorded in the year ended December 31, 2010, partially offset by a $5.2 million prepayment charge on FHLB advances and a $2.0 million charge associated with the transition to a new credit card provider recorded in the year ended December 31, 2011.
Discontinued Operations
For the year ended December 31, 2011, income from discontinued operations was $2.0 million, an increase of $1.9 million from the $0.1 million income from discontinued operations recognized for the year ended December 31, 2010. Income from discontinued operations is primarily related to the sale of Webster Insurance and Webster Risk Services in 2008 and represents the finalization of revenues associated with the contingent earn-out contracts.
Income Taxes
Webster recognized income tax expense of $58.0 million in 2011 and $12.4 million in 2010. The effective tax rates were 28.0% and 14.6%, respectively. The increase in the effective rate principally reflected the significantly increased pre-tax income as well as decreased benefits from (i) tax-exempt interest income and (ii) reductions in the Company's deferred tax asset valuation allowance applicable to capital losses, partially offset by an increase in the tax-deductibility of executive compensation in 2011 associated with Webster's 2010 exit from the U.S. Treasury's Capital Purchase Program.
For more information on Webster’s income taxes, including its deferred tax assets and valuation allowance, see Note 8 - Income Taxes in the Notes to Consolidated Financial Statements included elsewhere within this report.

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 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.
The following tables present the results for Webster’s business segments for the years ended December 31, 2012, 2011 and 2010 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:
 
Table 7: Business Segment performance summary of net income (loss) for years ended December 31,
(In thousands)
2012
2011 (a)
2010 (a)
Net income (loss):
 
 
 
Commercial Banking
$
88,657

$
79,460

$
38,818

Retail Banking
39,217

28,952

13,892

Consumer Finance
25,225

4,897

(22,517
)
Other
12,602

6,377

2,444

Total Business Segments
165,701

119,686

32,637

Corporate and Reconciling
7,996

31,693

39,618

Net income attributable to Webster Financial Corporation
$
173,697

$
151,379

$
72,255

(a) Reclassified to conform to the 2012 presentation.

37


Webster’s business segments results are intended to reflect each segment as if it were a stand-alone business. 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 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.
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 years ended December 31, 2012, 2011 and 2010, 83.7% , 108.8% and 89.9% of the provision expense is specifically attributable to business segments.
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.
Commercial Banking
The Commercial Banking segment includes middle market, asset-based lending, commercial real estate, equipment finance, and treasury and payment services, which includes 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 referral source to Private Banking and Retail Banking.
Table 8: Commercial Banking Results for the years ended December 31,
(In thousands)
2012
2011(a)
2010(a)
Net interest income
$
188,666

$
168,560

$
147,162

(Benefit) provision for loan and lease losses
(7,498
)
(21,213
)
25,618

Net interest income after provision
196,164

189,773

121,544

Non-interest income
29,324

25,869

24,174

Non-interest expense
98,721

105,356

100,253

Income before income taxes
126,767

110,286

45,465

Income tax expense
38,110

30,826

6,647

Net income
$
88,657

$
79,460

$
38,818

 
(In thousands)
At December 31, 2012
At December 31, 2011(a)
At December 31, 2010(a)
Total assets
$
5,113,898

$
4,359,403

$
4,118,178

Total loans
5,037,307

4,289,354

4,088,492

Total deposits
2,633,327

2,396,990

2,471,036

(a) Reclassified to conform to the 2012 presentation.
Net interest income increased $20.1 million in 2012 compared to 2011. The increase is primarily due to continuing lower cost of funds, including an increase in non-interest bearing deposit balances, greater loan volumes, and greater deferred loan fees. The benefit for loan and lease losses decreased $13.7 million in 2012 compared to 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

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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. Commercial Banking has realized continued improvement in asset quality, including a continuing decline in charge-offs and substandard loans, which allows the overall loan loss coverage to decline. Non-interest income increased $3.5 million in 2012 compared to 2011, primarily due to increased revenues from interest rate management services. Non-interest expense decreased $6.6 million in 2012 compared to 2011. The decrease is a result of significantly lower foreclosure and repossessed asset related expenses and greater recoveries. Loans increased $748.0 million from December 31, 2011 primarily due to new originations. Total deposits increased $236.3 million for the period ended December 31, 2012, compared to December 31, 2011 as a result of new business, operating funds maintained for cash management services and a market trend to customers holding more balances at banks.
Net interest income increased $21.4 million in 2011 compared to 2010. The increase is primarily due to wider loan spreads, higher loan balances and growth in demand deposit liability balances. The provision for loan and lease losses decreased $46.8 million in 2011 compared to 2010. Webster continues to provide for losses within the lending portfolios, although the reserve is reallocated between the portfolio segments as a result of the ALLL analysis. 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 expense increased $5.1 million in 2011 compared to 2010, as a result of methodology changes including direct allocation of long-term incentive costs to the business line. Total loans in the commercial banking segment increased $200.9 million at December 31, 2011. The increase reflects Webster’s efforts to focus on lending primarily within the region from Westchester County, New York to Boston and reduced emphasis on equipment finance and asset-based lending, which have shifted from a national to a primarily regional focus. Total deposits decreased $74.0 million for the year ended December 31, 2011, compared to December 31, 2010. The decrease reflects lower deposit balances in the government banking center.

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 293 owned 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 December 31, 2012, Webster had $2.3 billion of assets under administration in its strategic partnership with LPL compared to $2.0 billion for the years ended December 31, 2011 and 2010. These assets are not included in the 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”).
Table 9: Retail Banking Results for the years ended December 31,
(In thousands)
2012
2011(a)
2010(a)
Net interest income
$
235,519

$
233,441

$
211,818

Provision for loan and lease losses
3,796

14,189

10,463

Net interest income after provision
231,723

219,252

201,355

Non-interest income
90,793

98,763

107,761

Non-interest expense
266,441

277,832

292,845

Income before income taxes
56,075

40,183

16,271

Income tax expense
16,858

11,231

2,379

Net income
$
39,217

$
28,952

$
13,892

 

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(In thousands)
At December 31, 2012
At December 31, 2011(a)
At December 31, 2010(a)
Total assets
$
1,651,397

$
1,546,455

$
1,516,193

Total loans
993,855

886,481

848,928

Total deposits
10,147,893

10,009,640

9,968,959

(a) Reclassified to conform to the 2012 presentation.
Net interest income increased $2.1 million in 2012 compared to 2011. The increase is a result of improved deposit mix of higher percentage non-interest bearing deposits and reduced deposit costs that were partially offset by a decline in the funding value of deposits. The provision for loan and lease losses decreased $10.4 million in 2012 compared to 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. The Business and Professional Banking loan portfolio has shown improvements in delinquencies and non-performing loans over the past year, however, classified loan levels remain elevated as the small business marketplace continues to struggle to recover. Non-interest income decreased $8.0 million in 2012 compared to 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 that has been partially offset by an increase in other deposit related and investment service fees. Non-interest expense decreased $11.4 million in 2012 compared to 2011. The decrease is primarily attributable to a decrease in staff related expenses, lower debit card, loan workout and foreclosure costs and $3.5 million of non-recurring charges that were recorded in 2011. Total loans increased $107.4 million for the year ended December 31, 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 $138.3 million for the year ended December 31, 2012 compared to December 31, 2011 primarily due to the growth in consumer and business core transaction balances.
Net interest income increased $21.6 million in 2011 compared to 2010. The increase is a result of an improved deposit mix with a higher percentage of non-interest-bearing deposits and reduced deposit costs. The provision for loan and lease losses increased $3.7 million in 2011 compared to 2010. Webster continues to provide for losses within the lending portfolios, although the reserve is reallocated between the portfolio segments as a result of the ALLL analysis. 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 $9.0 million in 2011 compared to 2010. The decrease is primarily due to a decline in customer overdraft activity associated with the implementation of Regulation E during the third quarter of 2010 and the Durbin amendment’s reduction of debit card interchange rates that went into effect during the fourth quarter of 2011. The impact of these regulatory reductions of fee revenue was partially offset by an increase in checking account service charges as a result of the redesigned line of checking products implemented during the fourth quarter of 2010 and revised overdraft pricing in September of 2011. Non-interest expense decreased $15.0 million in 2011 compared to 2010. The decrease is a result of completing the consolidation of 16 branches throughout 2011. Total loans increased $37.6 million for the year ended December 31, 2011, compared to December 31, 2010. The increase reflects increases in loan originations due to the build-out from the business banker staff additions. Total deposits increased $40.7 million for the year ended December 31, 2011, compared to December 31, 2010, due to growth in consumer and business core transaction balances.

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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.
Table 10: Consumer Finance Results for the years ended December 31,
 
(In thousands)
2012
2011(a)
2010(a)
Net interest income
$
106,902