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Webster Financial 10-Q 2009

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Graphic
  7. Graphic
Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2009.

or

 

¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number: 001-31486

 

 

LOGO

WEBSTER FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   06-1187536

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

Webster Plaza, Waterbury, Connecticut   06702
(Address of principal executive offices)   (Zip Code)

(203) 465-4364

(Registrant’s telephone number, including area code)

 

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  Yes    ¨  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    ¨  Yes    ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of shares of common stock, par value $.01 per share, outstanding as of October 20, 2009 was 71,168,321.

 

 

 


Table of Contents

INDEX

 

         Page No.

PART I – FINANCIAL INFORMATION

  
      Item 1.   Financial Statements    3
      Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations    40
      Item 3.   Quantitative and Qualitative Disclosures about Market Risk    63
      Item 4.   Controls and Procedures    64

PART II - OTHER INFORMATION

  
      Item 1.   Legal Proceedings    65
      Item 1A.   Risk Factors    65
      Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds    65
      Item 3.   Defaults Upon Senior Securities    65
      Item 4.   Submission of Matters to a Vote of Security Holders    65
      Item 5.   Other Information    65
      Item 6.   Exhibits    66

SIGNATURES

   67

EXHIBIT INDEX

   68

 

2


Table of Contents

PART I. – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS (Unaudited)

WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

(Dollars in thousands, except share and per share data)

   September 30,
2009
    December 31,
2008
 
     (unaudited)        

Assets:

    

Cash and due from depository institutions

   $ 173,437      $ 259,208   

Short-term investments

     360,618        22,154   

Investment securities:

    

Trading, at fair value

     —          77   

Available for sale, at fair value (amortized cost of $1,916,464 and $1,298,670, respectively)

     1,912,283        1,188,705   

Held-to-maturity, at amortized cost (fair value of $2,806,276 and $2,559,745, respectively)

     2,702,881        2,522,511   
                

Total investment securities

     4,615,164        3,711,293   

Loans held for sale

     37,005        24,524   

Loans, net

     10,995,953        11,952,262   

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

     140,874        134,874   

Goodwill

     529,887        529,887   

Other intangible assets, net

     29,705        34,039   

Cash surrender value of life insurance policies

     286,806        279,807   

Premises and equipment, net

     179,353        185,928   

Deferred tax asset, net

     139,458        189,337   

Accrued interest receivable and other assets

     320,026        260,224   
                

Total assets

   $ 17,808,286      $ 17,583,537   
                

Liabilities:

    

Deposits

   $ 13,600,730      $ 11,884,890   

Federal Home Loan Bank advances

     663,210        1,335,996   

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

     872,030        1,570,971   

Long-term debt

     589,600        687,797   

Accrued expenses and other liabilities

     185,342        220,145   
                

Total liabilities

     15,910,912        15,699,799   
                

Equity:

    

Shareholders’ equity:

    

Preferred stock, $0.01 par value; Authorized - 3,000,000 shares;

    

Series A issued and outstanding - 56,400 and 224,900 shares

     56,400        224,900   

Series B issued and outstanding - 400,000 shares (net of discount; $7,266 and $8,574)

     392,734        391,426   

Common stock, $0.01 par value; authorized - 200,000,000 shares;

    

Issued - 71,936,357 and 56,607,177 shares

     719        566   

Paid in capital:

    

Warrants

     13,002        8,719   

Additional paid in capital

     851,573        722,962   

Retained earnings

     759,683        781,106   

Accumulated other comprehensive loss, net of taxes

     (34,141     (105,910

Less: Treasury stock, at cost; 3,796,701 and 3,723,527 shares

     (152,236     (149,650
                

Total Webster Financial Corporation shareholders’ equity

     1,887,734        1,874,119   

Noncontrolling interests

     9,640        9,619   
                

Total equity

     1,897,374        1,883,738   
                

Total liabilities and equity

   $ 17,808,286      $ 17,583,537   
                

See accompanying Notes to Condensed Consolidated Financial Statements.

 

3


Table of Contents

WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

     Three months ended September 30,     Nine months ended September 30,  

(In thousands, except per share data)

   2009     2008     2009     2008  

Interest Income:

        

Loans including fees

   $ 131,266      $ 175,363      $ 409,566      $ 542,421   

Investments securities

     52,975        39,210        152,601        116,657   

Loans held for sale

     716        54        1,713        1,546   
                                

Total interest income

     184,957        214,627        563,880        660,624   
                                

Interest Expense:

        

Deposits

     41,977        57,731        144,867        193,028   

Borrowings

     16,308        27,715        54,856        87,873   
                                

Total interest expense

     58,285        85,446        199,723        280,901   
                                

Net interest income

     126,672        129,181        364,157        379,723   

Provision for credit losses

     85,000        45,500        236,000        86,300   
                                

Net interest income after provision for credit losses

     41,672        83,681        128,157        293,423   
                                

Non-interest Income:

        

Deposit service fees

     30,844        31,738        88,787        90,114   

Loan related fees

     5,557        7,171        18,389        21,920   

Wealth and investment services

     6,160        7,070        17,991        21,660   

Mortgage banking activities

     1,406        50        5,445        894   

Increase in cash surrender value of life insurance

     2,692        2,606        7,949        7,810   

Impairment losses on investment securities

     (1,290     (33,507     (28,400     (89,684

Net loss on the sale of investment securities

     (4,728     (2,110     (13,863     (1,861

Gain on the exchange of trust preferred securities for common stock

     —          —          24,336        —     

Gain on early extinguishment of subordinated notes

     —          —          5,993        —     

Gain on Visa share redemption

     —          —          1,907        1,625   

Other income

     3,517        2,731        5,117        5,369   
                                

Total non-interest income

     44,158        15,749        133,651        57,847   
                                

Non-interest Expenses:

        

Compensation and benefits

     59,772        61,314        175,430        187,623   

Occupancy

     13,572        12,827        41,461        39,637   

Furniture and equipment

     15,199        14,892        45,627        45,686   

Intangible assets amortization

     1,421        1,464        4,334        4,476   

Marketing

     3,802        2,478        10,104        11,061   

Outside services

     3,628        3,798        10,806        11,657   

FDIC deposit insurance assesment

     5,942        532        16,491        1,230   

FDIC special deposit insurance assesment

     —          —          8,000        —     

Goodwill impairment

     —          1,013        —          9,513   

Severance and other costs

     4,169        1,535        5,722        10,253   

Foreclosed and repossessed asset write-downs

     2,232        1,968        8,354        2,685   

Foreclosed and repossessed asset expenses

     1,733        1,496        4,868        2,844   

Other expenses

     15,616        13,998        43,982        44,061   
                                

Total non-interest expenses

     127,086        117,315        375,179        370,726   
                                

Loss from continuing operations before income tax benefit

     (41,256     (17,885     (113,371     (19,456

Income tax benefit

     (22,014     (1,878     (51,143     (1,860
                                

Loss from continuing operations

     (19,242     (16,007     (62,228     (17,596

Income (loss) from discontinued operations, net of tax

     —          (518     313        (3,081
                                

Consolidated net loss

     (19,242     (16,525     (61,915     (20,677

Less: Net income attributable to noncontrolling interests

     8        14        21        6   
                                

Net loss attributable to Webster Financial Corporation

     (19,250     (16,539     (61,936     (20,683

Preferred stock dividends, accretion of preferred stock discount and excess carrying value over fair value of consideration upon redemption

     (6,850     (5,209     31,082        (5,640
                                

Net loss applicable to common shareholders

   $ (26,100   $ (21,748   $ (30,854   $ (26,323
                                

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS, continued

 

     Three months ended September 30,     Nine months ended September 30,  
(In thousands, except per share data)    2009     2008     2009     2008  

Basic:

        

Loss from continuing operations, per common share

   $ (0.39   $ (0.41   $ (0.55   $ (0.45

Loss income from discontinued operations, net of tax per common share

     —          (0.01     0.01        (0.06
                                

Net loss attributable to Webster Financial Corporation, per common share

   $ (0.39   $ (0.42   $ (0.54   $ (0.51

Diluted:

        

Loss from continuing operations, per common share

   $ (0.39   $ (0.41   $ (1.36   $ (0.45

Loss income from discontinued operations, net of tax per common share

     —          (0.01     0.01        (0.06
                                

Net loss attributable to Webster Financial Corporation, per common share

   $ (0.39   $ (0.42   $ (1.35   $ (0.51

Dividends per common share

   $ 0.01      $ 0.30      $ 0.03      $ 0.90   

See accompanying Notes to Condensed Consolidated Financial Statements.

 

5


Table of Contents

WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

 

     Nine months ended September 30, 2009  

(In thousands, except share and per

share data)

   Preferred
Stock
    Common
Stock
   Paid-in
Capital
    Retained
Earnings
    Treasury
Stock
    Accumulated
Other
Comprehensive
Loss
    Non controlling
interests
   Total  

Balance, December 31, 2008

   $ 616,326      $ 566    $ 731,681      $ 781,106      $ (149,650   $ (105,910   $ 9,619    $ 1,883,738   

Cumulative effect of change in accounting principle

     —          —        —          11,431        —          (11,431     —        —     

Comprehensive (loss) income:

                  

Net (loss) income

     —          —        —          (61,936     —          —          21      (61,915

Other comprehensive income, net of taxes

     —          —        —          —          —          83,200        —        83,200   
                                                              

Comprehensive income

                     21,285   

Dividends paid on common stock of $.03 per share

     —          —        —          (1,736     —          —          —        (1,736

Dividends paid on Series A preferred stock $63.75 per share

     —          —        —          (10,757     —          —          —        (10,757

Dividends incurred on Series B preferred stock $37.50 per share

     —          —        —          (15,006     —          —          —        (15,006

Subsidiary preferred stock dividends $0.65 per share

     —          —        —          (646     —          —          —        (646

Repurchase of 17,774 common shares

     —          —        —          —          (152     —          —        (152

Accretion of preferred stock discount

     1,308        —        —          (1,308     —          —          —        —     

Stock-based compensation expense

     —          —        1,612        —          —          —          —        1,612   

Restricted stock grants and expense

     —          —        7,414        222        (3,129     —          —        4,507   

Conversion of Series A preferred stock

     (168,500     60      48,906        58,792        —          —          —        (60,742

Extinguishment of Trust Preferred Securities

     —          53      36,780        —          —          —          —        36,833   

Issuance of common stock and warrants

     —          40      38,206        (479     695        —          —        38,462   

Series B preferred stock and warrant issuance costs

     —          —        (24     —          —          —          —        (24
                                                              

Balance, September 30, 2009

   $ 449,134      $ 719    $ 864,575      $ 759,683      $ (152,236   $ (34,141   $ 9,640    $ 1,897,374   
                                                              

 

     Nine months ended September 30, 2008  

(In thousands, except share and per

share data)

   Preferred
Stock
   Common
Stock
   Paid-in
Capital
    Retained
Earnings
    Treasury
Stock
    Accumulated
Other
Comprehensive
Loss
    Non
controlling
interests
   Total  

Balance, December 31, 2007

   $ —      $ 566    $ 734,604      $ 1,183,621      $ (166,263   $ (15,896   $ 9,615    $ 1,746,247   

Comprehensive (loss) income:

                   

Net (loss) income

     —        —        —          (20,683     —          —          6      (20,677

Other comprehensive loss, net of taxes

     —        —        —          —          —          (70,285     —        (70,285
                                                             

Comprehensive loss

                      (90,962

Dividends paid on common stock of $.90 per share

     —        —        —          (47,261     —          —          —        (47,261

Dividends paid on Series A Preferred stock $22.19 per share

     —        —        —          (4,994     —          —          —        (4,994

Subsidiary preferred stock dividends $0.65 per share

     —        —        —          (646     —          —          —        (646

Exercise of stock options, including excess tax benefits

     —        —        (228     —          760        —          —        532   

Repurchase of 13,142 common shares

     —        —        —          —          (382     —          —        (382

Stock-based compensation expense

     —        —        1,989        —          —          —          —        1,989   

Restricted stock grants and expense

     —        —        (3,772     —          8,760        —          —        4,988   

Issuance of Series A preferred stock

     225,000      —        (7,398     —          —          —          —        217,602   

EITF 06-4 Adoption

     —        —        —          (923     —          —          —        (923
                                                             

Balance, September 30, 2008

   $ 225,000    $ 566    $ 725,195      $ 1,109,114      $ (157,125   $ (86,181   $ 9,621    $ 1,826,190   
                                                             

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     Nine months ended September 30,  

(In thousands)

   2009     2008  

Operating Activities:

    

Net loss

   $ (61,915   $ (20,677

Income (loss) from discontinued operations, net of tax

     313        (3,081
                

Loss from continuing operations

     (62,228     (17,596

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

    

Provision for credit losses

     236,000        86,300   

Depreciation and amortization

     46,951        42,541   

Gain on early extinguishment of subordinated notes

     (4,504     —     

Gain on exchange of trust preferred securities for common stock

     (24,336     —     

Stock-based compensation

     6,119        6,977   

Foreclosed and repossessed asset write-downs

     8,354        2,685   

Write-down of fixed assets

     661        —     

Goodwill impairment

     —          9,513   

Impairment losses on investment securities

     28,400        89,684   

Net loss on the sale of investment securities

     13,863        1,861   

Decrease in trading securities

     76        1,296   

Increase in cash surrender value of life insurance

     (7,949     (7,810

Death benefits

     (1,106     —     

Net (increase) decrease in loans held for sale

     (12,481     218,321   

Net increase in prepaid expenses and other assets

     (84,992     (28,297

Net decrease in accrued expenses and other liabilities

     (32,115     (10,580
                

Net cash provided by operating activities

     110,713        394,895   
                

Investing Activities:

    

Net increase in short-term investments

     (338,464     (1,337

Purchases of securities, available for sale

     (1,236,643     (428,279

Proceeds from maturities and principal payments of securities, available for sale

     174,989        18,370   

Proceeds from sales of securities, available for sale

     417,317        27,776   

Purchases of held-to-maturity securities

     (355,801     (88,582

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

     375,913        163,929   

Purchases of FHLB and FRB stock

     (6,000     (23,912

Net decrease (increase) in loans

     467,747        (499,038

Life insurance proceeds

     2,056        —     

Proceeds from sale of foreclosed properties

     24,548        9,912   

Net purchases of premises and equipment, net of sales proceeds

     (21,967     (22,671
                

Net cash used for investing activities

     (496,305     (843,832
                

Financing Activities:

    

Net increase (decrease) in deposits

     1,730,915        (580,283

Proceeds from FHLB advances

     9,452,286        77,132,552   

Repayments of FHLB advances

     (10,121,767     (76,826,409

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

     (697,501     451,506   

Repayment of long-term debt

     (15,928     —     

Issuance costs for Series B Preferred Stock

     (24     —     

Issuance of Series A Preferred Stock, net

     —          217,602   

Conversion of Series A Preferred Stock

     (58,975     —     

Cash dividends to common shareholders

     (1,736     (47,261

Cash dividends to preferred shareholders of consolidated affiliate

     (646     (646

Cash dividends paid to preferred shareholders

     (25,426     (4,994

Exercise of stock options

     —          532   

Common stock issued

     38,462        —     

Common stock repurchased

     (152     (382
                

Net cash provided by financing activities

     299,508        342,217   
                

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, continued

 

      Nine months ended September 30,  

(In thousands)

   2009     2008  

Cash Flows from Discontinued Operations:

    

Operating activities

   $ 313      $ (2,659

Proceeds from sale of discontinued operations

     —          23,920   
                

Net cash provided by discontinued operations

     313        21,261   
                

Net decrease in cash and cash equivalents

     (85,771     (85,459

Cash and cash equivalents at beginning of period

     259,208        306,654   
                

Cash and cash equivalents at end of period

   $ 173,437      $ 221,195   
                

Supplemental disclosure of cash flow information:

    

Interest paid

   $ 204,580      $ 282,406   

Income taxes paid

     2,805        25,478   

Noncash investing and financing activities:

    

Mortgage loans securitized and transferred to mortgage-backed securities - government sponsored enterprises (“GSE”) held-to-maturity

   $ 203,030      $ —     

Transfer of loans and leases, net to foreclosed properties

     40,400        27,191   

Issuance of loan to finance sale of subsidiary

     —          18,000   

Gain on early extinguishment of fair value hedge of subordinated debt

     1,489        —     

Transfer of property from premises and equipment to assets held for disposition

     2,057        900   

Transfer of loans and leases, net to assets held for disposition

     3,248        —     

Transfer of deposits to liabilities held for disposition

     15,075        —     

Unsettled trade to sell securities

     —          10,496   

Unsettled trade to acquire brokered deposit

     —          58,500   

Extinguishment of junior subordinated notes through issuance of common stock

    

Carrying value of junior subordinated notes extinguished

     (63,773     —     

Fair value of common stock issued

     39,307        —     

Recognition of deferred gain on cash flow hedge

     (674     —     

Conversion of Series A Preferred Stock:

    

Carrying value of Series A Preferred Stock converted, net of cash paid upon conversion

     (103,979     —     

Fair value of common stock issued

     45,187        —     

Sale transactions:

    

Fair value of noncash assets sold

   $ —        $ 40,833   

Fair value of liabilities extinguished

     —          7,117   

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

NOTE 1: Summary of Significant Accounting Policies

Nature of Operations. Webster Financial Corporation (“Webster” or the “Company”) is a financial holding company and a bank holding company headquartered in Waterbury, Connecticut that delivers, through its subsidiaries, financial services to individuals, families and businesses throughout southern New England and into eastern New York State. Webster also offers equipment financing, asset-based lending, health savings accounts and insurance premium financing on a national basis and commercial real estate lending on a regional basis. The Company sold its insurance premium financing subsidiary on November 2, 2009. See Note 19 – Subsequent Events for additional information.

Basis of Presentation. The condensed consolidated financial statements in this Quarterly Report on Form 10-Q include the accounts of Webster and all other entities in which Webster has a controlling financial interest (collectively referred to as “Webster” or the “Company”). All significant intercompany balances and transactions have been eliminated in consolidation. The accounting and financial reporting policies Webster follows conform, in all material respects, to accounting principles generally accepted in the United States (“GAAP”) and to general practices within the financial services industry.

The condensed consolidated financial statements in this Quarterly Report on Form 10-Q have not been audited by an independent registered public accounting firm, but in the opinion of management, reflect all adjustments necessary for a fair presentation of the Company’s financial position and results of operations. The Company made certain adjustments related to prior periods (See Note 14 - Earnings Per Common Share for additional information). Otherwise, all such adjustments were of a normal and recurring nature. The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q adopted by the Securities and Exchange Commission (“SEC”). Accordingly, the condensed consolidated financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements and should be read in conjunction with the Company’s consolidated financial statements, and notes thereto, for the year ended December 31, 2008, included in Webster’s Annual Report on Form 10-K filed with the SEC on March 2, 2009 (the “2008 Form 10-K”). Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period. Webster has evaluated subsequent events for potential recognition and/or disclosure through November 6, 2009, the date the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q were filed with the SEC.

Use of Estimates. The preparation of the condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements. Actual results could differ from those estimates. The allowance for credit losses, the fair values of financial instruments, the deferred tax asset valuation allowance and the status of goodwill evaluation are particularly subject to change.

Accounting Standards Codification. The Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) became effective on July 1, 2009. At that date, the ASC became FASB’s officially recognized source of authoritative GAAP applicable to all public and non-public non-governmental entities, superseding existing FASB, American Institute of Certified Public Accountants (“AICPA”), Emerging Issues Task Force (“EITF”) and related literature. Rules and interpretive releases of the SEC under the authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. All other accounting literature is considered non-authoritative. The switch to the ASC affects the away companies refer to GAAP in financial statements and accounting policies. Citing particular content in the ASC involves specifying the unique numeric path to the content through the Topic, Subtopic, Section and Paragraph structure.

Comprehensive Income. Comprehensive income includes all changes in equity during a period, except those resulting from transactions with shareholders. Besides net income, other components of Webster’s comprehensive income include the after tax effect of changes in the net unrealized gain/loss on securities available for sale, changes in the net actuarial gain/loss on defined benefit post-retirement benefit plans and changes in the accumulated gain/loss on effective cash flow hedging instruments. Comprehensive income for the nine months ended September 30, 2009 and 2008 is reported in the accompanying condensed consolidated statements of changes in equity.

Earnings Per Share. Effective January 1, 2009, the Company adopted new authoritative accounting guidance under FASB ASC Topic 260, “Earnings Per Share,” which provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. The Company has determined that its outstanding non-vested restricted stock awards are participating securities. Accordingly, effective January 1, 2009, earnings per common share is computed using the two-class method prescribed under FASB ASC Topic 260. All previously reported earnings per common share data has been retrospectively adjusted to conform to the new computation method.

 

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Reclassifications. Certain items previously reported have been reclassified to conform to the current period’s condensed consolidated financial statement presentation.

NOTE 2 - New Authoritative Accounting Guidance

As discussed in Note 1 – Summary of Significant Accounting Policies, on July 1, 2009, the Accounting Standards Codification became FASB’s officially recognized source of authoritative GAAP applicable to all public and non-public non-governmental entities, superseding existing FASB, AICPA, EITF and related literature. Rules and interpretive releases of the SEC under the authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. All other accounting literature is considered non-authoritative. The switch to the ASC affects the way companies refer to U.S. GAAP in financial statements and accounting policies. Citing particular content in the ASC involves specifying the unique numeric path to the content through the Topic, Subtopic, Section and Paragraph structure.

FASB ASC Topic 320, “Investments – Debt and Equity Securities.” New authoritative accounting guidance under FASB ASC Topic 320, “Investments – Debt and Equity Securities,” (i) changes existing guidance for determining whether an impairment is other than temporary to debt securities and (ii) replaces the existing requirement that the entity’s management assert it has both the intent and ability to hold an impaired security until recovery with a requirement that management assert: (a) it does not have the intent to sell the security; and (b) it is more likely than not it will not have to sell the security before recovery of its cost basis. Under FASB ASC Topic 320, declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses to the extent the impairment is related to credit losses. The amount of the impairment related to other factors is recognized in other comprehensive income. The Company adopted the provisions of the new authoritative accounting guidance under FASB ASC Topic 320 during the second quarter of 2009. Adoption of the new guidance resulted in the reclassification of $17.6 million ($11.4 million, net of tax) of non-credit related other-than-temporary impairment to other comprehensive income which had previously been recognized in earnings. See Note 3 – Investment Securities for additional information.

FASB ASC Topic 715, “Compensation – Retirement Benefits.” New authoritative accounting guidance under FASB ASC Topic 715, “Compensation – Retirement Benefits,” provides guidance related to an employer’s disclosures about plan assets of defined benefit pension or other post-retirement benefit plans. Under FASB ASC Topic 715, disclosures should provide users of financial statements with an understanding of how investment allocation decisions are made, the factors that are pertinent to an understanding of investment policies and strategies, the major categories of plan assets, the inputs and valuation techniques used to measure the fair value of plan assets, the effect of fair value measurements using significant unobservable inputs on changes in plan assets for the period and significant concentrations of risk within plan assets. The disclosures required by FASB ASC Topic 715 will be included in the Company’s financial statements beginning with the consolidated financial statements for the year-ended December 31, 2009.

 

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NOTE 3: Investment Securities

The following table presents a summary of the cost and fair value of Webster’s investment securities. For securities classified as available for sale, the following table shows the unrealized gains and losses (pre-tax) in accumulated other comprehensive income, by security type.

 

     As of September 30, 2009    As of December 31, 2008
          Gross               Gross      
     Amortized
Cost (a)(b)(c)
   Unrealized     Fair Value    Amortized
Cost
   Unrealized     Fair Value

(Dollars in thousands)

      Gains    Losses           Gains    Losses    

Trading:

                     

Municipal bonds and notes

           $ —              $ 77
                                                         

Available for Sale:

                     

U.S. Treasury Bills

   $ 200    $ —      $ —        $ 200    $ 1,998    $ 2    $ —        $ 2,000

Agency notes - GSE

     130,215      77      (160     130,132      —        —        —          —  

Agency collateralized mortgage obligations (“CMOs”) - GSE

     97,469      69      (417     97,121      —        —        —          —  

Single issuer trust preferred securities (a)

     55,656      —        (16,069     39,587      55,558      —        (24,737     30,821

Pooled trust preferred securities (b)

     77,610      10,660      (5,519     82,751      104,052      —        (41,355     62,697

Equity securities (c)

     8,625      479      (525     8,579      30,925      2,024      (2,174     30,775

Mortgage-backed securities - GSE

     1,412,806      38,470      (909     1,450,367      972,323      16,592      (152     988,763

Mortgage-backed securities - other

     133,883      36      (30,373     103,546      133,814      —        (60,165     73,649
                                                         

Total available for sale

   $ 1,916,464    $ 49,791    $ (53,972   $ 1,912,283    $ 1,298,670    $ 18,618    $ (128,583   $ 1,188,705
                                                         

Held-to-maturity:

                     

Municipal bonds and notes

   $ 688,481    $ 33,865    $ (321   $ 722,025    $ 700,365    $ 9,627    $ (14,481   $ 695,511

Mortgage-backed securities - GSE

     1,956,713      70,955      (913     2,026,755      1,751,679      43,912      —          1,795,591

Mortgage-backed securities - other

     57,687      —        (191     57,496      70,467      —        (1,824     68,643
                                                         

Total held-to-maturity

   $ 2,702,881    $ 104,820    $ (1,425   $ 2,806,276    $ 2,522,511    $ 53,539    $ (16,305   $ 2,559,745
                                                         

Total Investment Securities

   $ 4,619,345    $ 154,611    $ (55,397   $ 4,718,559    $ 3,821,181    $ 72,157    $ (144,888   $ 3,748,527
                                                         

 

(a) Amortized cost is net of $10.0 million of credit related other-than-temporary impairments at September 30, 2009.
(b) Amortized cost is net of $49.7 million of credit related other-than-temporary impairments at September 30, 2009.
(c) Amortized cost is net of $27.9 million of other-than-temporary impairments at September 30, 2009.

For securities deemed to be other-than-temporarily impaired the amortized cost reflects previous other-than-temporary impairment (“OTTI”) charges recognized in earnings. In accordance with the disclosure requirements of FASB ASC Topic 320, previously recorded impairment charges not related to credit loss should be reclassified from retained earnings and recorded as a component of other comprehensive income (“OCI”). As a result, the Company recorded a cumulative effect adjustment that increased retained earning and decreased OCI by $17.6 million, or $11.4 million net of tax, respectively.

Securities with a carrying value totaling $2.6 billion at September 30, 2009 and $2.5 billion at December 31, 2008 were pledged to secure public funds, trust deposits, repurchase agreements and for other purposes, as required or permitted by law.

The amortized cost and fair value of securities at September 30, 2009, by contractual maturity, are set forth below.

 

     Available for Sale    Held-to-Maturity

(Dollars in thousands)

   Amortized
Cost
   Fair
Value
   Amortized
Cost
   Fair
Value

Due in one year or less

   $ 50,329    $ 50,255    $ 4,799    $ 4,808

Due after one year through five years

     80,086      80,077      3,310      3,351

Due after five through ten years

     24,046      13,220      443,194      463,766

Due after ten years

     1,753,378      1,760,152      2,251,578      2,334,351
                           

Totals

   $ 1,907,839    $ 1,903,704    $ 2,702,881    $ 2,806,276
                           

For the purposes of the maturity schedule, mortgage-backed securities, which are not due at a single maturity date, have been allocated over maturity groupings based on the expected maturity of the underlying collateral. Actual maturities may differ from contractual maturities because certain borrowers have the right to call or prepay obligations with or without call or prepayment penalties. At September 30, 2009, the Company had $763.8 million of callable securities in its investment portfolio.

 

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At September 30, 2009 and December 31, 2008, the Company had no investments in obligations of individual states, counties, or municipalities, which exceed 10% of shareholder’s equity.

Management evaluates securities for OTTI. Consideration is given to, among other qualitative factors; current market conditions, fair value in relationship to cost, extent and nature of change in fair value, issuer rating changes and trends, volatility of earnings, current analysts’ evaluations, all available information relevant to the collectability of debt securities, the Company’s ability and intent to hold investments until a recovery of fair value, which may be maturity, and whether it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost.

The following table provides information on the gross unrealized losses and fair value of the Company’s investment securities with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment security category and length of time that individual investment securities have been in a continuous unrealized loss position at September 30, 2009.

 

          As of September 30, 2009  
          Less Than Twelve Months     Twelve Months or Longer     Total  

(Dollars in thousands)

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

Available for Sale:

                  

Agency notes-GSE

   2    $ 80,056    $ (160   $ —      $ —        $ 80,056      (160

Agency CMOs-GSE

   1      45,366      (417     —        —          45,366      (417

Single issuer trust preferred securities

   11      2,446      (2,551     37,141      (13,518     39,587      (16,069

Pooled trust preferred securities

   8      21,539      (2,067     39,112      (3,452     60,651      (5,519

Equity securities

   75      4,835      (525     —        —          4,835      (525

Mortgage-backed securities-GSE

   19      302,975      (909     —        —          302,975      (909

Mortgage-backed securities-other

   6      —        —          93,476      (30,373     93,476      (30,373
                                                  

Total available for sale

   122    $ 457,217    $ (6,629   $ 169,729    $ (47,343   $ 626,946    $ (53,972
                                                  

Held-to-maturity:

                  

Municipal bonds and notes

   26    $ 874    $ (3   $ 14,324    $ (318   $ 15,198    $ (321

Mortgage-backed securities-GSE

   4      153,651      (913     —        —          153,651      (913

Mortgage-backed securities-other

   3      —        —          56,431      (191     56,431      (191
                                                  

Total held-to-maturity

   33    $ 154,525    $ (916   $ 70,755    $ (509   $ 225,280    $ (1,425
                                                  

Total investment securities

   155    $ 611,742    $ (7,545   $ 240,484    $ (47,852   $ 852,226    $ (55,397
                                                  

 

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The following table provides information on the gross unrealized losses and fair value of Webster’s investment securities with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment security category and length of time that individual investment securities have been in a continuous unrealized loss position at December 31, 2008.

 

(Dollars in thousands)

        As of December 31, 2008  
        Less Than Twelve Months     Twelve Months or Longer     Total  
   # of
holdings
   Fair Value    Unrealized
Losses
    Fair Value    Unrealized
Losses
    Fair Value    Unrealized
Losses
 

Available for Sale:

                  

Single issuer trust preferred securities

   9    $ 2,302    $ (1,734   $ 23,557    $ (23,003   $ 25,859    $ (24,737

Pooled trust preferred securities

   6      2,814      (7,000     26,094      (34,355     28,908      (41,355

Equity securities

   86      9,028      (2,171     15      (3     9,043      (2,174

Mortgage-backed securities-GSE

   3      17,843      (8     45,942      (144     63,785      (152

Mortgage-backed securities-other

   7      50,319      (24,399     23,330      (35,766     73,649      (60,165
                                                  

Total available for sale

   111    $ 82,306    $ (35,312   $ 118,938    $ (93,271   $ 201,244    $ (128,583
                                                  

Held-to-maturity:

                  

Municipal bonds and notes

   358    $ 273,335    $ (10,617   $ 56,820    $ (3,864   $ 330,155    $ (14,481

Mortgage-backed securities-other

   3      —        —          68,643      (1,824     68,643      (1,824
                                                  

Total held-to-maturity

   361    $ 273,335    $ (10,617   $ 125,463    $ (5,688   $ 398,798    $ (16,305
                                                  

Total investment securities

   472    $ 355,641    $ (45,929   $ 244,401    $ (98,959   $ 600,042    $ (144,888
                                                  

The following summarizes, by investment security type, the basis for the conclusion that the applicable investment securities within the Company’s available for sale portfolio were not other-than-temporarily impaired at September 30, 2009. The Company made this determination by reviewing various qualitative and quantitative factors regarding each investment category such as; current market conditions, extent and nature of change in fair value, issuer rating changes and trends, volatility of earnings, and current analysts’ evaluations.

Trust Preferred Securities – Pooled Issuers – At September 30, 2009, the fair value of the pooled trust preferred securities was $82.8 million, an increase of $20.1 million from the fair value of $62.7 million at December 31, 2008. The increase in fair value is directly related to a $43.1 million favorable improvement in the market value of these securities offset by the sale of $23.0 million. The gross unrealized loss of $5.5 million at September 30, 2009 is primarily attributable to increasing levels of deferrals and defaults of the underlying issuers in the pools, as well as changes in interest rates, including a liquidity spread premium to reflect the inactive and illiquid nature of the trust preferred securities market at this time.

The pooled trust preferred portfolio consists of various classes in fourteen collateralized debt obligations (“CDOs”) containing predominantly bank and insurance collateral that are investment grade and below investment grade. The Company employs an internal CDO model for projection of future cash flows and discounting those cash flows to a net present value. An internal model is used to value the securities due to the continued inactive market and illiquid nature of pooled trust preferreds in the entire capital structure. Each underlying issuer in the pools is rated internally using the latest financial data on each institution, and future deferrals, defaults and losses are then estimated on the basis of continued stress in the financial markets. Further, all current and projected deferrals are not assumed to cure, and all current and projected defaults are assumed to have no recovery value. The resulting net cash flows are then discounted at current market levels for similar types of products that are actively trading. To determine potential OTTI due to credit losses, management compares the amortized cost to the present value of expected cash flows adjusted for deferrals and defaults using the purchased discount margin. Other factors considered include an analysis of excess subordination and temporary interest shortfall coverage. Based on the valuation analysis as of September 30, 2009, management expects to fully recover amortized cost. However, additional interest deferrals and /or defaults could result in future OTTI charges. These securities are monitored closely as this sector of the portfolio has been associated with the majority of previously recorded impairment charges.

 

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The following table summarizes pertinent information that was considered by management in determining if OTTI existed in the current reporting period.

 

Trust Preferred Securities - Pooled Issuers   

Deal Name

   Class         Unrealized          Lowest Credit
Ratings as of
   Total
Other-Than-
Temporary
Impairment thru
    Number of
Performing
Banks and
  

Current

Deferrals/

Defaults

(As a % of

 
      Amortized      Fair    September 30,    September 30,     Insurance Cos.    Remaining  
      Cost (b)    Gains    (Losses)     Value    2009 (a)    2009     In Issuance    Collateral)  
(Dollars in thousands)                                                 

Security A

   MEZ    $ 814    $ 568    $ —        $ 1,382    CC    $ (1,866   29    19.5

Security B

   C      918      1,513      —          2,431    CCC      (4,094   17    9.0   

Security C (c)

   B      1,270      —        (255     1,015    CC      (6,254   43    24.7   

Security D (c)

   B      1,986      421      —          2,407    CCC      (7,773   71    17.4   

Security E

   B      2,110      1,656      —          3,766    CC      (7,909   40    22.3   

Security F

   C      2,492      5,438      (119     7,811    C      (10,850   43    18.3   

Security G

   B      3,425      1,064      (10     4,479    CCC      (3,479   63    21.6   

Security H

   B      3,511      —        (218     3,293    B      (322   29    4.6   

Security I

   B      4,489      —        (338     4,151    B      (337   17    9.0   

Security J

   B      5,233      —        (474     4,759    B      (806   31    4.2   

Security K

   A      8,646      —        (726     7,920    B      (697   62    30.1   

Security L

   B      8,798      —        (653     8,145    B      (779   24    5.8   

Security M (c)

   A      8,849      —        (642     8,207    B      (3,399   69    26.3   

Security N

   B      25,069      —        (2,084     22,985    AA      (1,104   31    4.2   
                                             
      $ 77,610    $ 10,660    $ (5,519   $ 82,751       $ (49,669     
                                             

 

(a) The Company utilized credit ratings provided by Moody’s, S&P and Fitch in its evaluation of issuers.
(b) For the securities deemed impaired, the amortized cost reflects previous OTTI recognized in earnings.
(c) OTTI of $1.2 million was recognized on these three securities during the three months ended September 30, 2009.

Based on the review of the qualitative and quantitative factors presented above, with the exception of the three securities noted above, the remaining securities were not deemed to be other-than-temporarily impaired at September 30, 2009 as the Company does not intend to sell these investments and has determined, based upon available evidence that it is more likely than not that the Company will not be required to sell the security before the recovery of its amortized cost.

Trust Preferred Securities – Single Issuers – At September 30, 2009, the fair value of the single issuer trust preferred portfolio was $39.6 million, an increase of $8.8 million from the fair value of $30.8 million at December 31, 2008. The increase in fair value is directly related to the favorable improvement in the market value of these securities. The single issuer portfolio consists mainly of three large cap, money center financial institutions and one mid-sized regional financial institution. During the quarter, two of the issuers were downgraded. However, impairment was not warranted due to the issuers’ continued ability to service their debt and indications of stabilization in their capital structures, as evidenced by the U.S. Treasury’s purchase of capital purchase program (“CPP”) preferred stock in each institution as well as other capital raising strategies employed.

 

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

 

Trust Preferred Securities - Single Issuers   

Deal Name

   Amortized
Cost (a)
   Unrealized
Losses
    Fair
Value
   Lowest Credit
Ratings as of
September 30,
2009
   Total
Other-Than-
Temporary
Impairment thru
September 30,
2009
 
(Dollars in thousands)                            

Security A

   $ 4,998    $ (2,551   $ 2,447    CC    $ (10,009

Security B

     16,310      (4,910     11,400    B      —     

Security C

     8,539      (1,906     6,633    BBB      —     

Security D

     11,611      (3,064     8,547    BBB      —     

Security E

     14,198      (3,638     10,560    BBB      —     
                                 
   $ 55,656    $ (16,069   $ 39,587       $ (10,009
                                 

 

(a) For the securities deemed impaired, the amortized cost reflects previous OTTI recognized in earnings.

Agency notes – GSE – The unrealized losses on the Company’s investment in agency notes was $0.2 million at September 30, 2009. The contractual cash flows for these investments are performing as expected. As the decline in market value is attributable to changes in interest rates and not due to underlying credit deterioration, and because management does not have the intent to sell the security, and it is more likely than not that it will not have to sell the security before recovery of its cost basis, the Company does not consider these investments to be other-than-temporarily impaired at September 30, 2009.

Agency CMOs – GSE – The unrealized losses on the Company’s investment in agency CMOs was $0.4 million at September 30, 2009. The contractual cash flows for these investments are performing as expected. As the decline in market value is attributable to changes in interest rates and not due to underlying credit deterioration, and because management does not have the intent to sell the security, and it is more likely than not that it will not have to sell the security before recovery of its cost basis, the Company does not consider these investments to be other-than-temporarily impaired at September 30, 2009.

Equity securities – The unrealized losses on the Company’s investment in equity securities decreased to $0.5 million at September 30, 2009 from $2.2 million at December 31, 2008 after the OTTI charge of $44 thousand and $3.5 million for the three and nine months ended September 30, 2009. This portfolio consists primarily of investments in the common stock of small cap financial institutions based in New England ($6.1 million of the total fair value and $0.5 million of the total unrealized losses at September 30, 2009), auction rate preferred securities ($2.1 million of the total fair value at September 30, 2009), and perpetual preferred stock of GSEs ($0.4 million of the total fair value at September 30, 2009). When estimating the recovery period for equity securities in an unrealized loss position, management utilizes analyst forecasts, earnings assumptions and other company specific financial performance metrics. In addition, this assessment incorporates general market data, industry and sector cycles and related trends to determine a reasonable recovery period. The Company evaluated the near-term prospects of the issuers in relation to the severity and duration of the impairment. The Company has determined that these securities were not deemed to be other-than-temporarily impaired at September 30, 2009.

Mortgage-backed securities – GSE – The unrealized losses on the Company’s investment in residential mortgage-backed securities issued by the GSEs increased to $0.9 million at September 30, 2009 from $0.2 million at December 31, 2008. The contractual cash flows for these investments are performing as expected. As the decline in market value is attributable to changes in interest rates and not due to underlying credit deterioration, and because management does not have the intent to sell the security, and it is more likely than not that it will not have to sell the security before recovery of its cost basis, the Company does not consider these investments to be other-than-temporarily impaired at September 30, 2009.

Mortgage-backed securities – other – The unrealized losses on the Company’s investment in commercial mortgage-backed securities issued by entities other than GSEs decreased to $30.4 million at September 30, 2009 from $60.2 million at December 31, 2008. The contractual cash flows for these investments are performing as expected. As the decline in market value is attributable to changes in interest rates and not due to underlying credit deterioration, and because management does not have the intent to sell the security, and it is more likely than not that it will not have to sell the security before recovery of its cost basis, the Company does not consider these investments to be other-than-temporarily impaired at September 30, 2009.

 

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The following summarizes by investment security type the basis for the conclusion that the applicable investment securities within the Company’s held-to-maturity portfolio were not other-than-temporarily impaired at September 30, 2009:

Municipal bonds and notes – The unrealized losses on the Company’s investment in municipal bonds and notes decreased to $0.3 million at September 30, 2009 from $14.5 million at December 31, 2008. Nearly all of $0.3 million unrealized losses at September 30, 2009 had been in an unrealized loss position for twelve consecutive months or longer as compared to $3.9 million of the $14.5 million at December 31, 2008. These securities are primarily insured AA and A rated general obligation bonds with stable ratings. The unrealized loss was concentrated in 26 municipal bonds and notes with a fair value of $15.2 million. The Company does not intend to sell these investments and has determined, based upon available evidence, that it is more likely than not that the Company will not be required to sell the security before the recovery of its amortized cost, therefore the Company has determined that these investments were not other-than-temporarily impaired at September 30, 2009.

Mortgage-backed securities – GSE – The unrealized losses on the Company’s investment in residential mortgage-backed securities issued by the GSEs increased $0.9 million at September 30, 2009. The contractual cash flows for these investments are performing as expected. As the decline in market value is attributable to changes in interest rates and not due to underlying credit deterioration, and because management does not have the intent to sell the security and it is more likely than not that it will not have to sell the security before recovery of its cost basis, the Company does not consider these investments to be other-than-temporarily impaired at September 30, 2009.

Mortgage-backed securities – other – The unrealized losses on the Company’s investment in residential mortgage-backed securities issued by entities other than GSEs decreased to $0.2 million at September 30, 2009 from $1.8 million at December 31, 2008. All of the unrealized losses at September 30, 2009 and December 31, 2008 had been in an unrealized loss position for twelve consecutive months or longer. These securities carry AAA ratings and are currently performing as expected. The unrealized loss was concentrated in three securities with a total fair value of $56.4 million. The Company does not intend to sell these investments and has determined, based upon available evidence, that it is more likely than not that the Company will not be required to sell the security before the recovery of its amortized cost and therefore the Company has determined that these investments were not other-than-temporarily impaired at September 30, 2009.

There were no significant credit downgrades on held-to-maturity securities during the third quarter of 2009, and they are currently performing as anticipated. Management expects that recovery of these temporarily impaired securities will occur over the weighted-average estimated remaining life of these securities.

For the three and nine months ended September 30, 2009 and 2008, proceeds from the sale of available for sale securities were $7.0 million and $417.3 million and $21.5 million and $27.8 million, respectively. Gross gains and losses realized from the sale of trading and available for sale securities were $0.5 million and ($5.2) million and $0.5 million and ($2.6) million, respectively, and $6.5 million and ($20.3) million and $1.3 million and ($3.2) million, respectively for the three and nine months ended September 30, 2009 and 2008. When securities are sold, the adjusted cost of the specific security sold is used to compute the gain or loss on the sale. The following tables summarize the impact of net realized gains and losses on sales of securities and the impact of the recognition of other-than-temporary impairments for the three and nine months ended September 30, 2009 and 2008.

 

     Three months ended September 30,  
     2009     2008  
                OTTI                      OTTI
Charges
       

(In thousands)

   Gains    Losses     Charges     Net     Gains    Losses       Net  

Trading securities:

                  

Municipal bonds and notes

   $ —      $ —        $ —        $ —        $ 327    $ (106   $ —        $ 221   
                                                              

Total trading

     —        —          —          —          327      (106     —          221   
                                                              

Available for sale:

                  

Pooled trust preferred securities

     11      (4,821     (1,246     (6,056     —        —          (24,482     (24,482

Equity securities

     476      (394     (44     38        201      (2,532     (9,025     (11,356
                                                              

Total available for sale

     487      (5,215     (1,290     (6,018     201      (2,532     (33,507     (35,838
                                                              

Total

   $ 487    $ (5,215   $ (1,290   $ (6,018   $ 528    $ (2,638   $ (33,507   $ (35,617
                                                              

 

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Table of Contents
     Nine months ended September 30,  
     2009     2008  
                OTTI
Charges
                     OTTI
Charges (a)
       

(In thousands)

   Gains    Losses       Net     Gains    Losses       Net  

Trading securities:

                  

Municipal bonds and notes

   $ —      $ (1   $ —        $ (1   $ 699    $ (563   $ —        $ 136   

Other

     —        —          —          —          18      —          —          18   
                                                              

Total trading

     —        (1     —          (1     717      (563     —          154   
                                                              

Available for sale:

                  

Agency notes-GSE

     —        —          —          —          23      —          —          23   

Pooled trust preferred securities

     11      (16,732     (24,856     (41,577     286      (58     (66,102     (65,874

Equity securities

     779      (3,616     (3,544     (6,381     281      (2,545     (21,717     (23,981

Mortgage-backed securities

     5,696      —          —          5,696        —        —          —          —     
                                                              

Total available for sale

     6,486      (20,348     (28,400     (42,262     590      (2,603     (87,819     (89,832
                                                              

Total

   $ 6,486    $ (20,349   $ (28,400   $ (42,263   $ 1,307    $ (3,166   $ (87,819   $ (89,678
                                                              

 

(a) OTTI charges for the nine months ended September 30, 2008 exclude OTTI charges of $1.9 million taken on the Company’s direct investments. Direct investments are included in other assets in the accompanying condensed consolidated balance sheets.

The following is a roll forward of the amount of credit related OTTI recognized in earnings for the three and nine months ended September 30, 2009:

 

(In thousands)

   Three months ended
September 30, 2009
    Nine months ended
September 30, 2009
 

Balance of credit related OTTI at beginning of period

   $ 105,871      $ 173,496   

Additions for credit related OTTI not previously recognized

     1,246        24,856   

Reduction for securities sold

     (47,439     (121,088

Reduction for non-credit related OTTI previously recognized when there is no intent and/or requirement to sell before recovery of the amortized cost basis (a)

     —          (17,586
                

Subtotal of net additions (reductions)

     (46,193     (113,818
                

Balance of credit-related OTTI at September 30, 2009

   $ 59,678      $ 59,678   
                

 

(a) The reduction of non-credit related OTTI is related to the cumulative effect of the change in accounting principle of non-credit related OTTI when there is no intent to sell and no requirement to sell before recovery of the amortized cost basis of the investment in accordance with the requirements of FASB ASC Topic 320.

To the extent that changes in interest rates, credit movements and other factors that influence the fair value of investments occur, the Company may be required to record impairment charges for other-than-temporary impairment in future periods. See pages 84-89 of Webster’s 2008 Annual Report on Form 10-K for additional information regarding other-than-temporary impairment charges taken by the Company for the year ended December 31, 2008.

See Note 11- Fair Value Measurements for additional information related to the fair value of financial instruments held by Webster as of September 30, 2009.

 

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Table of Contents

NOTE 4: Loans, Net

A summary of loans, net follows:

 

     September 30, 2009     December 31, 2008  

(Dollars in thousands)

   Amount     %     Amount     %  

Residential mortgage loans:

        

1-4 family

   $ 2,776,517      24.5   $ 2,939,025      24.2

Permanent - NCLC

     41,376      0.4        58,625      0.4   

Construction

     10,237      0.1        42,138      0.3   

Liquidating portfolio - construction loans

     5,826      0.1        18,735      0.2   
                            

Total residential mortgage loans

     2,833,956      25.1        3,058,523      25.1   
                            

Consumer loans:

        

Home equity loans

     2,805,264      24.8        2,952,366      24.2   

Liquidating portfolio - home equity loans

     231,305      2.0        283,645      2.3   

Other consumer

     28,029      0.2        28,886      0.3   
                            

Total consumer loans

     3,064,598      27.0        3,264,897      26.8   
                            

Commercial loans:

        

Commercial non-mortgage

     1,618,319      14.3        1,795,738      14.7   

Asset-based loans

     599,218      5.3        753,143      6.2   

Equipment financing

     939,582      8.3        1,022,718      8.4   
                            

Total commercial loans

     3,157,119      27.9        3,571,599      29.3   
                            

Commercial real estate:

        

Commercial real estate

     1,897,512      16.8        1,908,312      15.7   

Commercial construction

     190,610      1.7        165,610      1.3   

Residential development

     128,975      1.1        161,553      1.3   
                            

Total commercial real estate

     2,217,097      19.6        2,235,475      18.3   
                            

Net unamortized premiums

     12,865      0.1        14,580      0.1   

Net deferred costs

     36,724      0.3        42,517      0.4   
                            

Total net unamortized premiums and deferred costs

     49,589      0.4        57,097      0.5   
                            

Total loans

     11,322,359      100.0     12,187,591      100.0
                            

Less: allowance for loan losses

     (326,406       (235,329  
                    

Loans, net

   $ 10,995,953        $ 11,952,262     
                    

Webster individually reviews loans not expected to be collected in accordance with the original terms of the contractual agreement for impairment based on the fair value of expected cash flows or collateral. At September 30, 2009, impaired loans totaled $577.9 million including loans of $116.1 million net of an impairment allowance of $28.9 million. At December 31, 2008, impaired loans totaled $203.4 million, including loans of $29.8 million net of an impairment allowance of $2.8 million. The increase in impaired loans is primarily related to the $128.5 million increase in non-performing loans from December 31, 2008, the increase in Webster’s mortgage assistance program participation.

 

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Table of Contents

The following table summarizes impaired loans as of September 30, 2009 and December 31, 2008:

 

     September 30, 2009    December 31, 2008

(In thousands)

   With
Specific
Reserves
   Without
Reserves
   Total    With
Specific
Reserves
   Without
Reserves
   Total

Loans impaired and still accruing

                 

Residential

   $ —      $ 28,281    $ 28,281    $ —      $ —      $ —  

Equipment financing

     —        —        —        —        —        —  

Consumer

     —        22,163      22,163      —        1      1

Commercial

     27,534      189,211      216,745      12,119      70,919      83,038
                                         

Total loans impaired and still accruing

   $ 27,534    $ 239,655    $ 267,189      12,119      70,920    $ 83,039
                                         

Loans impaired and not accruing

                 

Residential

   $ —      $ 114,675    $ 114,675    $ —      $ 25,963    $ 25,963

Equipment financing

     4,478      11,476      15,954      —        —        —  

Consumer

     —        55,272      55,272      —        7,890      7,890

Commercial

     84,042      40,811      124,853      17,671      68,861      86,532
                                         

Total loans impaired and not accruing

   $ 88,520    $ 222,234    $ 310,754    $ 17,671    $ 102,714    $ 120,385
                                         

Total impaired loans

   $ 116,054    $ 461,889    $ 577,943    $ 29,790    $ 173,634    $ 203,424
                                         

Financial instruments with off-balance sheet risk

Webster is a party to financial instruments with off-balance sheet risk to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These instruments involve, to varying degrees, elements of credit and interest-rate risk in excess of the amount recognized in the condensed consolidated balance sheets.

The following table summarizes financial instruments with off-balance sheet risk:

 

(In thousands)

   September 30,
2009
   December 31,
2008

Unused commercial letters and lines of credit

   $ 2,143,612    $ 2,196,514

Unused portion of home equity credit lines:

     

Continuing portfolio

     1,787,223      1,954,163

Liquidating portfolio

     15,806      21,792

Unadvanced portion of closed consumer construction loans

     12,810      14,611

Unadvanced portion of closed commercial construction loans

     154,175      262,234

Outstanding loan commitments

     7,257      85,291
             

Total financial instruments with off-balance sheet risk

   $ 4,120,883    $ 4,534,605
             

The interest rates for outstanding loan commitments are generally established shortly before closing. The interest rates on home equity lines of credit adjust with changes in the prime rate. At September 30, 2009, the fair value of financial instruments with off-balance sheet risk is considered insignificant to the condensed consolidated financial statements taken as a whole.

NOTE 5: Allowance for Credit Losses

The disruption and volatility in the domestic and global financial and capital markets that began in 2008 continued to affect the banking industry through the third quarter of 2009. There continues to be rising unemployment, a substantial increase in delinquencies, limited refinancing options, and continued declining real estate values. Webster is not immune to some negative consequences arising from overall economic weakness and, in particular, a sharp downturn in the housing market, both locally and nationally. Decreases in real estate values could adversely affect the value of property used as collateral for loans. Adverse changes in the economy may have a negative effect on the ability of Webster’s borrowers to make timely loan payments, which would have an adverse impact on the Company’s earnings. A further increase in loan delinquencies would decrease net interest income and increase loan losses, causing potential increases in the provision and allowance for credit losses.

The allowance for credit losses is maintained at a level that management believes is adequate to absorb probable losses inherent in the loan portfolio and in unfunded credit commitments. This allowance is increased by provisions charged to operating expense and by recoveries on loans previously charged-off and is reduced by charge-offs on loans.

 

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Table of Contents

A summary of the changes in the allowance for credit losses follows:

 

     Three months ended September 30,     Nine months ended September 30,  

(In thousands)

   2009     2008     2009     2008  

Continuing portfolio:

        

Beginning balance

   $ 264,159      $ 151,997      $ 191,426      $ 138,180   

Provision

     56,543        29,883        184,704        70,683   

Charge-offs:

        

Residential

     (2,721     (1,624     (10,478     (4,140

Consumer

     (10,237     (4,643     (27,020     (11,124

Commercial (a)

     (37,594     (14,835     (68,803     (31,227

Residential development

     (3,019     (161     (5,417     (3,872
                                

Total charge-offs

     (53,571     (21,263     (111,718     (50,363

Recoveries

     2,175        714        4,894        2,831   
                                

Net charge-offs

     (51,396     (20,549     (106,824     (47,532
                                

Ending balance - continuing portfolio

   $ 269,306      $ 161,331      $ 269,306      $ 161,331   
                                

Liquidating portfolio:

        

Beginning balance

   $ 41,840      $ 32,871      $ 43,903      $ 49,906   

Provision