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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 March 31, 2010.

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.    þ  Yes    ¨  No

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

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

 

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

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

The number of shares of common stock, par value $.01 per share, outstanding as of April 29, 2010 was 78,475,237.

 

 

 


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    37
      Item 3.   Quantitative and Qualitative Disclosures about Market Risk    62
      Item 4.   Controls and Procedures    62

PART II – OTHER INFORMATION

  
      Item 1.   Legal Proceedings    63
      Item 1A.   Risk Factors    63
      Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds    63
      Item 3.   Defaults Upon Senior Securities    63
      Item 4.   [Removed and Reserved]    63
      Item 5.   Other Information    63
      Item 6.   Exhibits    64

SIGNATURES

   65

EXHIBIT INDEX

   66

 

2


Table of Contents

PART I. – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

(In thousands, except share and per share data)

   March 31,
2010
    December 31,
2009
 
     (Unaudited)        

Assets:

    

Cash and due from banks

   $ 158,065      $ 171,184   

Interest-bearing deposits

     162,193        390,310   

Investment securities:

    

Available for sale, at fair value

     2,365,956        2,126,043   

Held-to-maturity (fair value of $2,992,958 and $2,720,180)

     2,915,923        2,658,869   
                

Total investment securities

     5,281,879        4,784,912   

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

     140,874        140,874   

Loans held for sale (included $21,286 and $4,790 of mortgage loans carried at fair value, respectively)

     29,790        12,528   

Loans

     10,896,520        11,036,709   

Allowance for loan losses

     (343,871     (341,184
                

Loans, net

     10,552,649        10,695,525   

Deferred tax asset, net

     121,010        121,733   

Premises and equipment, net

     171,178        178,422   

Goodwill

     529,887        529,887   

Other intangible assets, net

     25,468        26,865   

Cash surrender value of life insurance policies

     290,786        289,486   

Prepaid FDIC premiums

     73,752        79,241   

Accrued interest receivable and other assets

     487,184        318,230   
                

Total assets

   $ 18,024,715      $ 17,739,197   
                

Liabilities and Equity:

    

Deposits:

    

Noninterest bearing deposits

   $ 1,662,122      $ 1,664,958   

Interest bearing deposits

     12,331,404        11,967,169   
                

Total deposits

     13,993,526        13,632,127   

Federal Home Loan Bank advances

     574,378        544,651   

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

     849,876        856,846   

Long-term debt

     588,540        588,419   

Accrued expenses and other liabilities

     162,678        159,120   
                

Total liabilities

     16,168,998        15,781,163   
                

Shareholders’ equity:

    

Preferred stock, $.01 par value; Authorized - 3,000,000 shares;

    

Series A issued and outstanding - 28,939 shares

     28,939        28,939   

Series B issued and outstanding - 300,000 shares and 400,000 shares (net of discount $4,795 and $6,830)

     295,205        393,170   

Common stock, $.01 par value; Authorized - 200,000,000 shares

    

Issued - 81,969,280 shares and 81,963,734 shares

     820        820   

Paid-in capital

     1,007,153        1,007,740   

Retained earnings

     699,642        708,024   

Less: Treasury stock, (at cost; 4,019,023 shares and 4,067,057 shares)

     (159,363     (161,911

Accumulated other comprehensive loss, net

     (26,320     (28,389
                

Total Webster Financial Corporation shareholders’ equity

     1,846,076        1,948,393   
                

Non controlling interests

     9,641        9,641   
                

Total equity

     1,855,717        1,958,034   
                

Total liabilities and equity

   $ 18,024,715      $ 17,739,197   
                

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

 

     Three months ended March 31,  

(In thousands, except per share data)

   2010     2009  

Interest Income:

    

Interest and fees on loans and leases

   $ 123,350      $ 140,767   

Taxable interest and dividends on securities

     46,625        42,844   

Non-taxable interest and dividends on securities

     7,531        7,983   

Loans held for sale

     314        164   
                

Total interest income

     177,820        191,758   
                

Interest Expense:

    

Deposits

     31,951        52,908   

Borrowings

     14,485        20,653   
                

Total interest expense

     46,436        73,561   
                

Net interest income

     131,384        118,197   

Provision for loan losses

     43,000        66,000   
                

Net interest income after provision for loan losses

     88,384        52,197   
                

Non-interest Income:

    

Deposit service fees

     27,784        27,959   

Loan related fees

     6,005        6,482   

Wealth and investment services

     5,835        5,750   

Mortgage banking activities

     (138     606   

Increase in cash surrender value of life insurance policies

     2,578        2,592   

Gain on early extinguishment of subordinated notes

     —          5,993   

Net gain on sale of investment securities

     4,318        4,457   

Total other-than-temporary impairment losses on securities

     (8,214     —     

Portion of the loss recognized in other comprehensive income

     4,534        —     
                

Net impairment losses recognized in earnings

     (3,680     —     

Other income

     4,314        276   
                

Total non-interest income

     47,016        54,115   
                

Non-interest Expense:

    

Compensation and benefits

     61,079        56,469   

Occupancy

     14,440        14,295   

Technology and equipment expense

     15,268        15,140   

Intangible assets amortization

     1,397        1,464   

Marketing

     4,791        3,106   

Professional and outside services

     2,602        3,784   

Deposit insurance

     6,085        4,590   

Other including fraud related costs

     27,962        19,170   
                

Total non-interest expense

     133,624        118,018   
                

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

     1,776        (11,706

Income tax expense (benefit)

     355        (593
                

Income (loss) from continuing operations

     1,421        (11,113

Income (loss) from discontinued operations, net of tax

     —          —     
                

Consolidated net income (loss)

     1,421        (11,113

Less: Net income attributable to non controlling interests

     —          13   
                

Net income (loss) attributable to Webster Financial Corporation

     1,421        (11,126

Preferred stock dividends, accretion of preferred stock discount

     (7,490     (10,431
                

Net loss available to common shareholders

   $ (6,069   $ (21,557
                

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited), continued

 

     Three months ended March 31,  

(In thousands, except per share data)

   2010     2009  

Net loss per common share:

    

Basic

    

Loss from continuing operations

   $ (0.08   $ (0.41

Net loss available to common shareholders

     (0.08     (0.41

Diluted

    

Loss from continuing operations

     (0.08     (0.41

Net loss available to common shareholders

     (0.08     (0.41

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited)

 

     Three months ended March 31, 2009  

(In thousands, except share and per
share data)

   Preferred
Stock
   Common
Stock
   Paid In
Capital
    Retained
Earnings
    Treasury
Stock
    Accumulated
Other
Comprehensive
(Loss) Income
    Non Controlling
Interest
   Total  

Balance, December 31, 2008

   $ 616,326    $ 566    $ 733,487      $ 783,875      $ (154,225   $ (105,910   $ 9,619    $ 1,883,738   
                                                             

Cumulative effect of change in accounting principle

     —        —        —          —          —          —          —        —     

Comprehensive income:

                   

Net (loss) income

     —        —        —          (11,126     —          —          13      (11,113

Other comprehensive income (loss), net of taxes:

                   

Net unrealized gain on securities available for sale

     —        —        —          —          —          (17     —        (17

Amortization of unrealized loss on securities transferred to held to maturity

     —        —        —          —          —          60        —        60   

Realized portion of deferred hedging gain

     —        —        —          —          —          (66     —        (66

Net actuarial gain and prior service cost for pension and other postretirement benefits

     —        —        —          —          —          530        —        530   

Unrealized gain on cash flow hedge

     —        —        —          —          —          321        —        321   

Amortization of deferred hedging gain

     —        —        —          —          —          (114     —        (114
                                                             

Other comprehensive loss, net of taxes

     —        —        —          —          —          714        —        714   
                                                             

Total comprehensive income, net of taxes

                      (10,465

Dividends paid on common stock of $.01 per share

     —        —        —          (529     —          —          —        (529

Dividends paid on Series A preferred stock $21.25 per share

     —        —        —          (4,779     —          —          —        (4,779

Dividends incurred on Series B preferred stock $12.50 per share

     —        —        —          (5,000     —          —          —        (5,000

Subsidiary preferred stock dividends per share

     —        —        —          (216     —          —          —        (216

Exercise of stock options

     —        —        —          —          —          —          —        —     

Repurchase of 6,123 common shares

     —        —        —          —          (36     —          —        (36

Stock-based compensation expense

     —        —        635        —          —          —          —        635   

Accretion of preferred stock discount

     436      —        —          (436     —          —          —        —     

Restricted stock grants and expense

     —        —        3,427        —          (1,690     —          —        1,737   

Additional issuance costs associated with the issuance of the Series B preferred stock and warrant

     —        —        (24     —          —          —          —        (24
                                                             

Balance, March 31, 2009

   $ 616,762    $ 566    $ 737,525      $ 761,789      $ (155,951   $ (105,196   $ 9,632    $ 1,865,127   
                                                             

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited), continued

 

     Three months ended March 31, 2010  

(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
Interest
   Total  

Balance, December 31, 2009

   $ 422,109      $ 820    $ 1,007,740      $ 708,024      $ (161,911   $ (28,389   $ 9,641    $ 1,958,034   
                                                              

Comprehensive income:

                  

Net income

     —          —        —          1,421        —          —          —        1,421   

Other comprehensive income (loss), net of taxes:

                  

Net unrealized gain on securities available for sale, net of taxes

     —          —        —          —          —          4,273        —        4,273   

Noncredit related impairment change in fair value on securities

     —          —        —          —          —          (2,947     —        (2,947

Amortization of unrealized loss on securities transferred to held to maturity

     —          —        —          —          —          85        —        85   

Realized portion of deferred hedging gain

     —          —        —          —          —          (45     —        (45

Net actuarial gain and prior service cost for pension and other postretirement benefits

     —          —        —          —          —          387        —        387   

Unrealized gain on cash flow hedge

     —          —        —          —          —          354        —        354   

Amortization of deferred hedging gain

     —          —        —          —          —          (38     —        (38
                                                              

Other comprehensive income, net of taxes

     —          —        —          —          —          2,069        —        2,069   
                                                              

Total comprehensive income, net of taxes

                     3,445   

Dividends paid on common stock of $.01 per share

     —          —        —          (782     —          —          —        (782

Dividends paid on Series A preferred stock $21.66 per share

     —          —        —          (615     —          —          —        (615

Dividends incurred on Series B preferred stock $12.50 per share

     —          —        —          (4,583     —          —          —        (4,583

Redemption of Preferred Stock

     (98,365     —        —          (1,635     —          —          —        (100,000

Subsidiary preferred stock dividends $0.21 per share

     —          —        —          (216     —          —          —        (216

Exercise of stock options

     —          —        308          110        —          —        418   

Repurchase of common shares 18,854

     —          —        —          —          (288     —          —        (288

Stock-based compensation expense

     —          —        (927     (813     1,493        —          —        (247

Accretion of preferred stock discount

     400        —        —          (400     —          —          —        —     

Issuance of common stock

     —          —        32        (759     1,233        —          —        506   
                                                              

Balance, March 31, 2010

   $ 324,144      $ 820    $ 1,007,153      $ 699,642      $ (159,363   $ (26,320   $ 9,641    $ 1,855,717   
                                                              

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 

      Three months ended March 31,  

(In thousands)

   2010     2009  

Operating Activities:

    

Consolidated net income (loss)

   $ 1,421      $ (11,126

Income (loss) from continuing operations

     1,421        (11,126

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

    

Provision for loan losses

     43,000        66,000   

Deferred tax benefit

     (1,554     (10,423

Depreciation and amortization

     21,966        14,060   

Gain on early extinguishment of subordinated notes

     —          (4,504

Stock-based compensation

     (247     2,373   

Foreclosed and repossessed asset write-downs

     2,061        3,840   

Write-down of fixed assets

     9        —     

Loss on write-down of investments to fair value

     3,680        —     

Gain on fair value adjustment of direct investments

     (694     —     

Net gain on the sale of securities

     (4,318     (4,458

Net loss on trading securities

     —          77   

Increase in cash surrender value of life insurance

     (1,300     (2,592

Net (increase) in loans held for sale

     (17,262     (24,352

Net (increase) in accrued interest receivable and other assets

     (154,026     (15,414

Net (decrease) increase in accrued expenses and other liabilities

     (2,392     2,062   
                

Net cash (used for) provided by operating activities

     (109,656     15,543   
                

Investing Activities:

    

Net decrease in interest-bearing deposits

     228,117        2,212   

Purchases of available for sale securities

     (528,208     (353,222

Proceeds from maturities and principal payments of available for sale securities

     164,095        47,430   

Proceeds from sales of available for sale securities

     120,622        402,309   

Purchases of held-to-maturity securities

     (378,214     (2,675

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

     119,500        95,031   

Net decrease in loans

     89,448        49,335   

Proceeds from sale of foreclosed properties

     3,842        3,165   

Proceeds from sale of fixed assets

     675        —     

Purchases of fixed assets

     (2,575     (5,632
                

Net cash (used for) provided by investing activities

     (182,698     237,953   
                

Financing Activities:

    

Net increase in deposits

     361,399        809,869   

Proceeds from Federal Home Loan Bank advances

     243,000        9,329,810   

Repayments of Federal Home Loan Bank advances

     (213,115     (9,993,703

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

     (6,489     (423,639

Redemption of Preferred Stock

     (100,000     —     

Repayment of long-term debt

     —          (15,928

Issuance of Preferred Stock, net of issuance costs

     —          (24

Cash dividends paid to common shareholders

     (782     (529

Cash dividends paid to preferred shareholders of consolidated affiliate

     —          (216

Cash dividends paid to preferred shareholders

     (5,414     (9,446

Exercise of stock options

     418        —     

Common stock issued

     506        —     

Common stock repurchased

     (288     (36
                

Net cash provided by (used for) financing activities

     279,235        (303,842
                

Net decrease in cash and due from banks

     (13,119     (50,346

Cash and due from banks at beginning of period

     171,184        259,208   
                

Cash and due from banks at end of period

   $ 158,065      $ 208,862   
                

Supplemental disclosure of cash flow information:

    

Interest paid

   $ 45,968      $ 76,798   

Income taxes paid

     91        790   

Noncash investing and financing activities:

    

Gain on early extinguishment of fair value hedge of subordinated debt

   $ —        $ 1,489   

Transfer of loans and leases, net to foreclosed properties

     7,390        10,331   

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 New England and into Westchester County, New York. Webster also offers equipment financing, asset-based lending, health savings accounts and, prior to November 2009, insurance premium financing on a national basis and commercial real estate lending on a regional basis.

Basis of Presentation. The Condensed Consolidated Financial Statements include the accounts of Webster and all other entities in which Webster has a controlling financial interest (collectively referred to as “Webster” or the “Company”). All significant intercompany balances and transactions have been eliminated in consolidation. The accounting and financial reporting policies Webster follows conform, in all material respects, to accounting principles generally accepted in the United States (“GAAP”) and to general practices within the financial services industry.

The Company determines whether it has a controlling financial interest in an entity by first evaluating whether the entity is a voting interest entity or a variable interest entity under accounting principles generally accepted in the United States. Voting interest entities are entities in which the total equity investment at risk is sufficient to enable the entity to finance itself independently and provides the equity holders with the obligation to absorb losses, the right to receive residual returns and the right to make decisions about the entity’s activities. Subsidiaries of the Company that have issued trust preferred securities are not consolidated.

The Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q have not been audited by an independent registered public accounting firm, but in the opinion of management, reflect all adjustments necessary for a fair presentation of the Company’s financial position and results of operations. All such adjustments were of a normal and recurring nature. The Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q adopted by the Securities and Exchange Commission (“SEC”). Accordingly, the Condensed Consolidated Financial Statements do not include all of the information and footnotes required by accounting GAAP for complete financial statements and should be read in conjunction with the Company’s Consolidated Financial Statements, and notes thereto, for the year ended December 31, 2009, included in Webster’s Annual Report on Form 10-K filed with the SEC on March 1, 2010 (the “2009 Form 10-K”). Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period.

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

Earnings Per Share. Earnings per share is computed using the two-class method prescribed under FASB ASC Topic 260, “Earnings Per Share,” which provides that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share. The Company has determined that its outstanding non-vested restricted stock awards are participating securities. Under the two-class method, basic earnings per common share is computed by dividing net earnings allocated to common stock by the weighted-average number of common shares outstanding during the applicable period, excluding outstanding participating securities. Diluted earnings per common share is computed using the weighted-average number of shares determined for the basic earnings per common share computation plus the dilutive effect of stock compensation using the treasury stock method. A reconciliation of the weighted-average shares used in calculating basic earnings per common share and the weighted average common shares used in calculating diluted earnings per common share for the reported periods is provided in Note 11 – Earnings Per Common Share.

Comprehensive Income. Comprehensive income includes all changes in shareholders’ 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, non-credit related impairment changes in fair value on securities, amortization of unrealized losses on securities transferred to held to maturity, 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.

Reclassifications. Certain items in prior financial statements have been reclassified to conform to current presentation.

There have been no other changes to our significant accounting policies that were disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009.

 

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Recent Accounting Standards

FASB ASC Topic 810, “Consolidation.” As disclosed in the Company’s summary of significant accounting policies in Note 1 of Notes to Consolidated Financial Statements in the Company’s Annual reporting on Form 10-K for the fiscal year ended December 31, 2009, new authoritative accounting guidance under FASB ASC Topic 810 amends prior guidance to change how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. The new authoritative accounting guidance requires additional disclosures about the reporting entity’s involvement with variable-interest entities and any significant changes in risk exposure due to that involvement as well as its affect on the entity’s financial statements. The new authoritative accounting guidance under FASB ASC Topic 810 was effective on January 1, 2010 and did not have a significant impact on the Company’s Condensed Consolidated Financial Statements as of the three months ended March 31, 2010.

Additional new authoritative accounting guidance under FASB ASC Topic 810 clarifies the scope related to the accounting and reporting for decreases in ownership of a subsidiary. This related guidance applies to; a subsidiary or group of assets that is a business or nonprofit activity, a subsidiary that is a business or nonprofit activity that is transferred to an equity method investee or joint venture, and an exchange of a group of assets that constitutes a business or nonprofit activity for a non-controlling interest in an entity (including an equity method investee or a joint venture). Additionally, the new authoritative accounting guidance requires expanded disclosures related to valuation techniques used to measure the fair value of any retained investment, nature of any continuing involvement, and whether the transaction that was with a related party or whether the former subsidiary or entity acquiring the assets will become a related party. The forgoing new authoritative accounting guidance under FASB ASC Topic 810 became effective for the Company’s Consolidated Financial Statements for the annual reporting period ended on December 31, 2009 and did not have a significant impact on the Company’s Consolidated Financial Statements.

FASB ASC Topic 820, “Fair Value Measurements and Disclosures.” FASB ASC Topic 820, “Fair Value Measurements and Disclosures,” defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. The provisions of FASB ASC Topic 820 became effective for the Company on January 1, 2008 for financial assets and financial liabilities and on January 1, 2009 for non-financial assets and non-financial liabilities (see Note 13-Fair Value Measurements).

New authoritative accounting guidance under FASB ASC Topic 820 requires additional disclosures relating to Level 1, Level 2, and Level 3 fair value measurements. Specifically, the entity is required to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reason for the transfer. Additionally, the entity is required to present separately purchases, sales, issuances, and settlements of fair value measurements using significant unobservable inputs (Level 3). In addition, the Company should provide fair value measurement disclosures for each class of assets and liabilities and disclosures for the valuation techniques and inputs used to measure fair value for both recurring and non recurring fair value measurements that fall into Level 2 or Level 3. The new authoritative accounting guidance under FASB ASC Topic 820 is effective for annual reporting periods beginning after December 15, 2009, with the exception of the separate disclosure of purchases, sales, issuances and settlements of fair value measurements using significant unobservable inputs (Level 3) which is effective for the first quarter ended 2011. The Company included the required disclosures for the period ended March 31, 2010 in Note 13 Fair Value Measurements.

FASB ASC Topic 860, “Accounting for Transfers of Financial Assets.” FASB ASC Topic 860, “Accounting for Transfers of Financial Assets,” represents a revision to the provisions of former FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, and requires more information about transfers of financial assets, including securitization transactions, and where entities have continuing exposure to the risks related to the transferred financial assets. The new authoritative accounting guidance under FASB ASC Topic 860 is to be applied prospectively, with past agreements grandfathered under the previous guidance. The forgoing new authoritative accounting guidance under FASB ASC Topic 860 became effective for the Company’s Consolidated Financial Statements for periods ending after January 1, 2010 and did not have a significant impact on the Company’s Consolidated Financial Statements.

 

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NOTE 2: Investment Securities

The following table presents a summary of the cost, carrying value and fair value of Webster’s investment securities.

 

     March 31, 2010
     Amortized
cost (a)(b)
   Recognized in OCI     Carrying
value
   Not Recognized in OCI     Fair value

(Dollars in thousands)

      Gross
unrealized
gains
   Gross
unrealized
losses
       Gross
unrealized
gains
   Gross
unrealized
losses
   

Available for sale:

                  

U.S. Treasury Bills

   $ 200    $ —      $ —        $ 200         $ 200

Agency notes - GSE

     130,255      22      (39     130,238           130,238

Agency collateralized mortgage obligations (“CMOs”) - GSE

     719,944      7,246      (724     726,466           726,466

Pooled trust preferred securities (a)

     72,370      2,639      (17,054     57,955           57,955

Single issuer trust preferred securities

     50,731      —        (8,318     42,413           42,413

Equity securities (b)

     6,760      195      (440     6,515           6,515

Mortgage-backed securities - GSE

     1,101,102      33,958      (1,363     1,133,697           1,133,697

Mortgage-backed securities - Private Label

     285,346      5,465      (22,339     268,472           268,472
                                                  

Total available for sale

   $ 2,366,708    $ 49,525    $ (50,277   $ 2,365,956         $ 2,365,956
                                                  

Held to maturity:

                  

Municipal bonds and notes

   $ 675,515         $ 675,515    $ 13,372    $ (4,449   $ 684,438

Agency collateralized mortgage obligations (“CMOs”) - GSE

     341,617           341,617      3,140      —          344,757

Mortgage-backed securities - GSE

     1,849,588           1,849,588      67,645      (2,849     1,914,384

Mortgage-backed securities - Private Label

     49,203           49,203      212      (36     49,379
                                                  

Total held to maturity

   $ 2,915,923         $ 2,915,923    $ 84,369    $ (7,334   $ 2,992,958
                                                  

Total investment securities

   $ 5,282,631    $ 49,525    $ (50,277   $ 5,281,879    $ 84,369    $ (7,334   $ 5,358,914
                                                  

 

(a) Amortized cost is net of $47.1 million of credit related other-than-temporary impairments at March 31, 2010.
(b) Amortized cost is net of $21.7 million of other-than-temporary impairments at March 31, 2010.

 

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     December 31, 2009
     Amortized
cost (a)(b)
   Recognized in OCI     Carrying
value
   Not Recognized in OCI     Fair value

(Dollars in thousands)

      Gross
unrealized
gains
   Gross
unrealized
losses
       Gross
unrealized
gains
   Gross
unrealized
losses
   

Available for sale:

                  

U.S. Treasury Bills

   $ 200    $ —      $ —        $ 200         $ 200

Agency notes - GSE

     130,343      —        (196     130,147           130,147

Agency collateralized mortgage obligations (“CMOs”) - GSE

     320,682      260      (2,085     318,857           318,857

Pooled trust preferred securities (a)

     76,217      5,288      (10,816     70,689           70,689

Single issuer trust preferred securities

     50,692      —        (11,978     38,714           38,714

Equity securities - financial institutions (b)

     6,826      251      (478     6,599           6,599

Mortgage-backed securities - GSE

     1,365,005      45,782      (845     1,409,942           1,409,942

Mortgage-backed securities - Private Label

     178,870      1,113      (29,088     150,895           150,895
                                                  

Total available for sale

   $ 2,128,835    $ 52,694    $ (55,486   $ 2,126,043         $ 2,126,043
                                                  

Held to maturity:

                  

Municipal bonds and notes

   $ 686,495         $ 686,495    $ 14,663    $ (4,018   $ 697,140

Mortgage-backed securities - GSE

     1,919,882           1,919,882      55,109      (4,151     1,970,840

Mortgage-backed securities - Private Label

     52,492           52,492         (292     52,200
                                                  

Total held to maturity

   $ 2,658,869         $ 2,658,869    $ 69,772    $ (8,461   $ 2,720,180
                                                  

Total investment securities

   $ 4,787,704    $ 52,694    $ (55,486   $ 4,784,912    $ 69,772    $ (8,461   $ 4,846,223
                                                  

 

(a) Amortized cost is net of $43.5 million of credit related other-than-temporary impairments at December 31, 2009.
(b) Amortized cost is net of $21.6 million of other-than-temporary impairments at December 31, 2009.

Securities with a carrying value totaling $2.5 billion at March 31, 2010 and $2.2 billion at December 31, 2009 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 debt securities at March 31, 2010, by contractual maturity, are set for the below.

 

     Available for Sale    Held to Maturity

(Dollars in thousands)

   Amortized
Cost
   Fair
Value
   Amortized
Cost
   Fair
Value

Due in one year or less

   $ 130,455    $ 130,438    $ 5,615    $ 5,619

Due after one year through five years

     27,337      27,511      3,053      3,077

Due after five through ten years

     49,719      39,097      403,195      421,052

Due after ten years

     2,152,437      2,162,395      2,504,060      2,563,210
                           

Totals

   $ 2,359,948    $ 2,359,441    $ 2,915,923    $ 2,992,958
                           

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 March 31, 2010, the Company had $705.0 million of callable securities in its investment portfolio.

At March 31, 2010 and December 31, 2009, the Company had no investments in obligations of individual states, counties, or municipalities, which exceed 10% of shareholders’ equity.

Management evaluates securities for other than temporary impairment (“OTTI”) on a quarterly basis. All securities classified as held to maturity or available for sale that are in an unrealized loss position are evaluated 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. If the Company intends to sell the security or, if it is more likely than not that the Company will be required to sell the security prior to recovery of its amortized cost basis, the security is written down to fair value and the respective loss is recorded as non-interest expense in the Consolidated Statement of Operations. If the Company does not intend to sell the security and if it is more likely than not that the Company will not be required to sell the security prior to recovery of its amortized cost basis, only the credit component of any impairment charge of a debt security is be recognized as a loss in non-interest expense in the consolidated statement of income. The remaining impairment is recorded in OCI. A decline in the value of an equity security that is considered OTTI is recorded as a loss in non-interest expense on the Consolidated Statements of Operations.

 

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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 March 31, 2010.

 

          March 31, 2010  
     # of
Holdings
   Less Than Twelve Months     Twelve Months or Longer     Total  

(Dollars in thousands)

      Fair Value    Unrealized 
Losses
    Fair Value    Unrealized 
Losses
    Fair Value    Unrealized 
Losses
 

Available for Sale:

                  

Agency notes - GSE

   3    $ 80,151    $ (39   $ —      $ —        $ 80,151    $ (39

Agency CMOs - GSE

   2      76,002      (724     —        —          76,002      (724

Pooled trust preferred securities

   9      51,371      (17,054     —        —          51,371      (17,054

Single issuer trust preferred securities

   9      —          42,413      (8,318     42,413      (8,318

Equity securities

   14      2,422      (440     —        —          2,422      (440

Mortgage-backed securities-GSE

   15      222,813      (1,363     —        —          222,813      (1,363

Mortgage-backed securities-Private Label

   7      39,879      (349     62,313      (21,990     102,192      (22,339
                                                  

Total available for sale

   59    $ 472,638    $ (19,969   $ 104,726    $ (30,308   $ 577,364    $ (50,277
                                                  

Held-to-maturity:

                  

Municipal bonds and notes

   182    $ 161,427    $ (3,277   $ 12,888    $ (1,173   $ 174,315    $ (4,450

Mortgage-backed securities-GSE

   4      115,815      (2,849     —        —          115,815      (2,849

Mortgage-backed securities-Private Label

   1      12,601      (35     —        —          12,601      (35
                                                  

Total held-to-maturity

   187    $ 289,843    $ (6,161   $ 12,888    $ (1,173   $ 302,731    $ (7,334
                                                  

Total investment securities

   246    $ 762,481    $ (26,130   $ 117,614    $ (31,481   $ 880,095    $ (57,611
                                                  

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 December 31, 2009.

 

          December 31, 2009  
     # of
Holdings
   Less Than Twelve Months     Twelve Months or Longer     Total  

(Dollars in thousands)

      Fair Value    Unrealized 
Losses
    Fair Value    Unrealized 
Losses
    Fair Value    Unrealized 
Losses
 

Available for Sale:

                  

Agency notes - GSE

   4    $ 130,147    $ (196   $ —      $ —        $ 130,147    $ (196

Agency CMOs - GSE

   4      168,383      (2,085     —        —          168,383      (2,085

Pooled trust preferred securities

   11      60,154      (10,816     —        —          60,154      (10,816

Single issuer trust preferred securities

   5      —        —          38,714      (11,978     38,714      (11,978

Equity securities - financial institutions

   26      969      (134     2,411      (344     3,380      (478

Mortgage-backed securities-GSE

   4      40,705      (845     —        —          40,705      (845

Mortgage-backed securities-Private Label

   8      43,840      (1,118     56,313      (27,970     100,153      (29,088
                                                  

Total available for sale

   62    $ 444,198    $ (15,194   $ 97,438    $ (40,292   $ 541,636    $ (55,486
                                                  

Held-to-maturity:

                  

Municipal bonds and notes

   164    $ 142,028    $ (2,841   $ 13,072    $ (1,177   $ 155,100    $ (4,018

Mortgage-backed securities-GSE

   8      314,003      (4,151     —        —          314,003      (4,151

Mortgage-backed securities-Private Label

   3      52,200      (292     —        —          52,200      (292
                                                  

Total held-to-maturity

   175    $ 508,231    $ (7,284   $ 13,072    $ (1,177   $ 521,303    $ (8,461
                                                  

Total investment securities

   237    $ 952,429    $ (22,478   $ 110,510    $ (41,469   $ 1,062,939    $ (63,947
                                                  

 

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The following summarizes, by investment security type, the basis for evaluating if the applicable investment securities within the Company’s available for sale portfolio that were other-than-temporarily impaired at March 31, 2010.

Trust Preferred Securities – Pooled Issuers – At March 31, 2010, the fair value of the pooled trust preferred securities was $58.0 million, a decrease of $12.7 million from the fair value of $70.7 million at December 31, 2009. The gross unrealized loss of $17.1 million, at March 31, 2010 is primarily attributable to 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. For the period ended March 31, 2010, the Company recognized $3.6 million in OTTI for these securities, reflective of assumed reductions in quality of insurance company credit ratings. Non credit related OTTI of $4.5 million on securities not expected to be sold and for which it is not more likely than not that we will be required to sell the securities before recovery of their amortized cost basis, was recognized in OCI during the three months ended March 31, 2010. The pooled trust preferred portfolio consists of 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 discount margin at time of purchase. Other factors considered include an analysis of excess subordination and temporary interest shortfall coverage. Based on the valuation analysis as of March 31, 2010, management expects to fully recover amortized cost. However, additional interest deferrals, defaults, or ratings changes could result in future OTTI charges.

The following table summarizes pertinent information that was considered by management in evaluating Trust Preferred Securities – Pooled Issuers for OTTI.

Trust Preferred Securities - Pooled Issuers

 

Deal Name (d)

   Class    Amortized
Cost (b)
   Unrealized     Fair
Value
   Lowest Credit
Ratings as of
March 31,
2010 (a)
   Total
Other-Than-
Temporary
Impairment thru
March 31, 2010
    Number of
Performing
Banks and
Insurance Cos.
In Issuance
   Current
Deferrals/
Defaults
(As a % of
Remaining
Collateral)
 
         Gains    (Losses)               
(Dollars in thousands)                                                 

Security A

   MEZ    $ 815    $ 139      $ 954    C    $ (1,866   26    24.9

Security B

   C      917      500        1,417    CCC      (4,094   17    9.0   

Security D (c)

   B      740         (357     383    CC      (9,073   60    27.4   

Security E

   B      2,130         (133     1,997    C      (7,909   36    —     

Security F-1

   C      2,213      2,000        4,213    C      (10,850   49    —     

Security F-2

   C      473         (322     151    C      49    —     

Security G (c)

   B      2,721         (1,308     1,413    CC      (4,219   56    26.9   

Security H

   B      3,506         (1,325     2,181    B      (326   29    —     

Security I

   B      4,481         (1,694     2,787    B      (345   17    9.0   

Security J

   B      5,243         (2,106     3,137    B      (806   31    4.2   

Security K (c)

   A      7,303         (1,428     5,875    B      (2,040   53    31.0   

Security L

   B      8,784         (3,409     5,375    B      (793   24    5.8   

Security M (c)

   A      8,571         (1,442     7,129    D      (3,680   91    —     

Security N

   A      24,473         (3,530     20,943    AA      (1,104   31    4.2   
                                                
      $ 72,370    $ 2,639    $ (17,054   $ 57,955       $ (47,105     
                                                

 

(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 $3.6 million was recognized on these 4 securities during the three months ended March 31, 2010.
(d) Security C was sold during the fourth quarter of 2009.

 

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Based on the review of qualitative and quantitative factors, the remaining securities were not deemed to be other-than-temporarily impaired at March 31, 2010. 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 March 31, 2010, the fair value of the single issuer trust preferred portfolio was $42.4 million, an increase of $3.7 million from the fair value of $38.7 million at December 31, 2009. The increase in fair value is directly related to the favorable improvement in the credit spreads of these securities. The single issuer portfolio consists of five investments issued by three large cap, money center financial institutions. During the three months ended March 31, 2010, two 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.

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 (a)

   Amortized
Cost (a)
   Unrealized
Losses
    Fair
Value
   Lowest Credit
Ratings as of
March 31,
2010
   Total
Other-Than-
Temporary
Impairment
thru March  31,
2010
(Dollars in thousands)                          

Security B

   $ 6,788    $ (1,531   $ 5,257    BB    $ —  

Security C

     8,558      (953     7,605    BBB   

Security D

     9,540      (2,015     7,525    BB      —  

Security E

     11,634      (1,616     10,018    BBB      —  

Security F

     14,211      (2,203     12,008    BBB      —  
                               
   $ 50,731    $ (8,318   $ 42,413       $ —  
                               

 

(a) Security A was sold during fourth quarter of 2009.

Based on the review of the qualitative and quantitative factors presented above, these securities were not deemed to be other-than-temporarily impaired at March 31, 2010 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.

Agency notes – GSE – The unrealized losses on the Company’s investment in agency notes decreased to $39 thousand at March 31, 2010 from $196 thousand at December 31, 2009. The contractual cash flows for these investments are performing as expected. As the decline in market value is attributable to cumulative changes in interest rates and not due to underlying credit deterioration, management does not have the intent to sell the securities, and based upon available evidence it is more likely than not that the Company will not be required to sell the securities before the recovery of its amortized cost, the Company does not consider these investments to be other-than-temporarily impaired at March 31, 2010.

Agency CMOs – GSE – The unrealized loss on the Company’s investment in agency CMOs decreased to $0.7 million at March 31, 2010 from $2.1 million at December 31, 2009. The contractual cash flows for these investments are performing as expected. As the decline in market value is attributable to cumulative changes in interest rates and not due to underlying credit deterioration, management does not have the intent to sell the securities, and based upon available evidence it is more likely than not that the Company will not be required to sell the securities before the recovery of its amortized cost, the Company does not consider these investments to be other-than-temporarily impaired at March 31, 2010.

Equity securities – The unrealized losses on the Company’s investment in equity securities decreased to $0.4 million at March 31, 2010 from $0.5 million at December 31, 2009. This portfolio consists primarily of investments in the common stock of small capitalization financial institutions based in New England ($4.8 million of the total fair value) and auction rate preferred securities ($1.7 million of the total fair value at March 31, 2010). 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 determined its holdings of equity securities were not deemed to be other-than-temporarily impaired at March 31, 2010.

 

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Mortgage-backed securities – GSE – The unrealized losses on the Company’s investment in residential mortgage-backed securities issued by the GSEs increased to $1.4 million at March 31, 2010 from $0.8 million at December 31, 2009. The contractual cash flows for these investments are performing as expected with the exception of unexpected principal prepayments resulting from GSE policy changes regarding the treatment of defaulted loans. As the decline in market value is attributable to cumulative changes in interest rates and GSE policy changes and not due to underlying credit deterioration, and because management does not have the intent to sell the securities, and based upon available evidence it is more likely than not that the Company will not be required to sell the securities before the recovery of its amortized cost, the Company does not consider these investments to be other-than-temporarily impaired at March 31, 2010.

Mortgage-backed securities – Private Label – The unrealized losses on the Company’s investment in commercial mortgage-backed securities issued by entities other than GSEs decreased to $22.3 million at March 31, 2010 from $29.1 million at December 31, 2009. This decrease is primarily the result of improvement in credit spreads in 2010 compared to 2009. The contractual cash flows for these investments are performing as expected. As the decline in market value is attributable to cumulative changes in interest rates and not due to underlying credit deterioration, and because management does not have the intent to sell the securities, and based upon available evidence it is more likely than not that the Company will not be required to sell the securities before the recovery of its amortized cost, the Company does not consider these investments to be other-than-temporarily impaired at March 31, 2010.

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 March 31, 2010:

Municipal bonds and notes – The unrealized losses on the Company’s investment in municipal bonds and notes increased to $4.4 million at March 31, 2010 from $4.0 million at December 31, 2009. This increase is primarily the result of interest rate changes in 2010 compared to 2009. These securities are primarily insured AA and A rated general obligation bonds with stable ratings. The Company does not intend to sell these investments and has determined, based upon available evidence, it is more likely than not that the Company will not be required to sell the securities before the recovery of its amortized cost, therefore the Company has determined that these investments were not other-than-temporarily impaired at March 31, 2010.

Mortgage-backed securities – GSE – The unrealized losses on the Company’s investment in residential mortgage-backed securities issued by the GSEs was $2.8 million at March 31, 2010 a decrease of $1.4 million as compared to $4.2 million at December 31, 2009. The contractual cash flows for these investments are performing as expected with the exception of unexpected principal prepayments resulting from GSE policy changes regarding the treatment of defaulted loans. As the increase in market value is attributable to cumulative changes in interest rates versus underlying credit deterioration, and because management does not have the intent to sell the securities and based upon available evidence, it is more likely than not that the Company will not be required to sell the securities before the recovery of its amortized cost, the Company does not consider these investments to be other-than-temporarily impaired at March 31, 2010.

Mortgage-backed securities – Private Label – The unrealized losses on the Company’s investment in residential mortgage-backed securities issued by entities other than GSEs decreased to $36 thousand at March 31, 2010 from $0.3 million at December 31, 2009. These securities carry AAA ratings and are currently performing as expected. 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 securities before the recovery of its amortized cost and therefore the Company has determined that these investments were not other-than-temporarily impaired at March 31, 2010.

There were no significant credit downgrades on held-to-maturity securities during the three months ended March 31, 2010, which 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 months ended March 31, 2010 and 2009, proceeds from sale of available for sale securities were $120.7 million and $402.3 million, respectively. Gross gains and losses realized from the sale of available for sale securities was $4.3 million and $0.0 million and $5.9 million and $1.4 million, respectively, for the three months ended March 31, 2010 and 2009. When securities are sold, the adjusted cost of the specific security sold is used to compute the gain or loss on the sale.

 

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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 months ended March 31, 2010 and 2009.

 

     Three months ended March 31,  
     2010     2009  

(In thousands)

   Gains    Losses    OTTI
Charges
    Net     Gains    Losses     OTTI
Charges
   Net  

Trading securities:

                    

Municipal bonds and notes

   $ —      $ —      $ —        $ —        $ —      $ (1   $ —      $ (1

Other

     —        —        —          —          —        —          —        —     
                                                            

Total trading

     —        —        —          —          —        (1     —        (1
                                                            

Available for sale:

                    

Agency notes - GSE

     —        —        —          —          —        —          —        —     

Single issuer trust preferred securities

     —        —        —          —          —        —          —        —     

Pooled trust preferred securities

     —        —        (3,613     (3,613     —        —          —        —     

Equity securities

     —        —        (67     (67     206      (1,444     —        (1,238

Mortgage-backed securities

     4,318      —        —          4,318        5,696      —          —        5,696   
                                                            

Total available for sale

     4,318      —        (3,680     638        5,902      (1,444     —        4,458   
                                                            

Total

   $ 4,318    $ —      $ (3,680   $ 638      $ 5,902    $ (1,445   $ —      $ 4,457   
                                                            

The following is a roll forward of the amount of credit related OTTI recognized in earnings for the three months ended March 31, 2010:

 

(In thousands)

   Three months ended
March 31, 2010

Balance of credit related OTTI, beginning of year

   $ 43,492

Additions for credit related OTTI not previously recognized (a)

     3,613

Reduction for securities sold

     —  

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

     —  
      

Subtotal of net additions (reductions)

     3,613
      

Balance of credit-related OTTI end of period

   $ 47,105
      

 

(a) The $3.6 million addition to credit-related OTTI is primarily the result of assumed reductions in the quality of insurance company credit ratings.

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.

In addition to investment securities, the Company carries investments in private equity funds. These investments, which totaled $13.0 million at March 31, 2010, are included in other assets in the Condensed Consolidated Balance Sheet. The Company recognized a $0.7 million gain, net of OTTI charges, on these investments during the three months ended March 31, 2010. This amount is included in other non-interest income on the Condensed Consolidated Statement of Operations.

 

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NOTE 3: Loans, Net

A summary of loans, net follows:

 

     At March 31, 2010    At December 31, 2009

(In thousands)

   Amount     %    Amount     %

Residential mortgage loans:

         

1-4 family

   $ 2,821,892      25.9    $ 2,825,938      25.6

Permanent-NCLC

     32,578      0.3      36,790      0.3

Construction

     28,376      0.2      27,408      0.2

Liquidating portfolio-construction loans

     3,309      0.1      4,817      0.1
                         

Total residential mortgage loans

     2,886,155      26.5      2,894,953      26.2
                         

Consumer loans:

         

Home equity loans

     2,694,469      24.7      2,745,154      24.9

Liquidating portfolio-home equity loans

     207,258      1.9      219,125      2.0

Other consumer

     28,150      0.3      27,590      0.2
                         

Total consumer loans

     2,929,877      26.9      2,991,869      27.1
                         

Commercial loans:

         

Commercial non-mortgage

     1,539,200      14.1      1,505,181      13.6

Asset-based loans

     504,175      4.6      527,187      4.8

Equipment financing

     836,494      7.7      886,892      8.1
                         

Total commercial loans

     2,879,869      26.4      2,919,260      26.5
                         

Commercial real estate:

         

Commercial real estate

     1,925,664      17.7      1,921,685      17.4

Commercial construction

     132,404      1.2      148,173      1.3

Residential development

     97,455      0.9      114,586      1.1
                         

Total commercial real estate

     2,155,523      19.8      2,184,444      19.8
                         

Net unamortized premiums

     11,958      0.1      12,512      0.1

Net deferred costs

     33,138      0.3      33,671      0.3
                         

Total unamortized premiums and deferred costs

     45,096      0.4      46,183      0.4
                         

Total loans

     10,896,520      100.0      11,036,709      100.0
                         

Less: allowance for loan losses

     (343,871        (341,184  
                     

Loans, net

   $ 10,552,649         $ 10,695,525     
                     

A majority of mortgage loans are secured by real estate in the State of Connecticut. Accordingly, the ultimate collectability of a substantial portion of the loan portfolio is dependent on economic and market conditions in Connecticut.

Loans totaling $3.9 billion at March 31, 2010 and $4.1 billion at December 31, 2009 were pledged as collateral for borrowings, as required or permitted by law.

Non-Performing Loans. Accrual of interest is discontinued if the loan is placed on nonaccrual status. Residential real estate and consumer loans are placed on nonaccrual status at 90 days past due. All commercial loans are subject to a detailed review by the Company’s credit risk team when 90 days past due and a specific determination is made to put a loan on non-accrual status. When a loan is transferred to nonaccrual status, unpaid accrued interest is reversed and charged against interest income. Interest on loans that are more than 90 days past due, as well as certain other loans as determined by management, is no longer accrued and all previously accrued and unpaid interest is charged to interest income. Nonaccrual loans totaled $348.8 million and $373.0 million at March 31, 2010 and December 31, 2009, respectively. Interest on nonaccrual loans that would have been recorded as additional interest income for the three months ended March 31, 2010 and 2009 had the loans been current in accordance with their original terms totaled $6.9 million and $6.1 million, respectively.

Impaired Loans. 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 March 31, 2010, impaired loans totaled $434.5 million, including loans with specific reserves of $166.7 million. At December 31, 2009, impaired loans totaled $401.2 million, including loans with specific reserves of $118.5 million. The increase in impaired loans is primarily related to the restructuring of $35.1 million of commercial real estate loans and Webster’s continued participation in the mortgage assistance program.

 

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The following table summarizes impaired loans for the periods presented:

 

     March 31, 2010    December 31, 2009

(In thousands)

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

Loans impaired and still accruing

                 

Residential

   $ 18,255    $ —      $ 18,255    $ 11,496    $ 2,732    $ 14,228

Equipment financing

     2,628      248      2,876      1,454      —        1,454

Consumer

     2,220      201      2,421      764      759      1,523

Commercial

     72,527      114,712      187,239      22,305      138,391      160,696
                                         

Total loans impaired and still accruing

   $ 95,630    $ 115,161    $ 210,791    $ 36,019    $ 141,882    $ 177,901
                                         

Loans impaired and not accruing

                 

Residential

   $ 16,007    $ 38,827    $ 54,834    $ 23,834    $ 28,147    $ 51,981

Equipment financing

     2,857      20,052      22,909      739      17,190      17,929

Consumer

     2,312      13,164      15,476      4,041      9,976      14,017

Commercial

     49,900      80,619      130,519      53,847      85,524      139,371
                                         

Total loans impaired and not accruing

   $ 71,076    $ 152,662    $ 223,738    $ 82,461    $ 140,837    $ 223,298
                                         

Total impaired loans

   $ 166,706    $ 267,823    $ 434,529    $ 118,480    $ 282,719    $ 401,199
                                         

The average recorded investment in impaired loans was $417.9 million and $302.3 million at March 31, 2010 and December 31, 2009, respectively.

Troubled Debt Restructures. A loan whose terms have been modified due to the financial difficulties of a borrower is reported by Webster as a troubled debt restructure (“TDR”). All TDRs are placed on non-accrual status until the loan qualifies for return to accrual status. Loans qualify for return to accrual status once they have demonstrated performance with the restructured terms of the loan agreement for a minimum of six months. TDRs are by definition impaired loans and have been reported within the impaired loan categories in the preceding table. In accordance with Webster’s credit risk policy, loans or portions of loans are charged off against the allowance for loan losses when deemed by management to be uncollectible. For the three months ended March 31, 2010, Webster charged off $1.9 million for the portion of TDRs deemed to be uncollectible. For the three months ended March 31, 2009 there were no charge-offs on TDRs. At March 31, 2010, there were no commitments to lend any additional funds to debtors in troubled debt restructurings.

At March 31, 2010 and December 31, 2009, total troubled debt restructurings approximated $201.5 million and $190.6 million, respectively as follows:

 

(In thousands)

   March 31,
2010
   December 31,
2009

Residential

   $ 36,788    $ 59,438

Equipment financing

     8,996      9,611

Consumer

     7,127      12,453

Commercial

     148,572      109,139
             

Total

   $ 201,483    $ 190,641
             

 

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Allowance for loan losses. The following table provides detail of activity in the Company’s allowance for loan losses for the three months ended March 31:

 

     Three months ended
March 31,
 

(In thousands)

   2010     2009  

Continuing portfolio:

    

Balance at beginning of period

   $ 287,784      $ 191,426   

Provision

     34,821        53,834   

Charge-offs:

    

Residential

     (4,455     (2,964

Consumer

     (9,896     (6,541

Commercial (a)

     (14,208     (10,605

Residential development

     (5,131     (48
                

Total charge-offs - continuing portfolio

     (33,690     (20,158
                

Recoveries

     2,256        1,460   
                

Net charge-offs - continuing portfolio

     (31,434     (18,698
                

Ending balance - continuing portfolio

   $ 291,171      $ 226,562   
                

Liquidating portfolio:

    

Balance at beginning of period

   $ 53,400      $ 43,903   

Provision

     8,179        11,866   

Charge-offs:

    

NCLC

     (70     (2,086

Consumer (home equity)

     (9,315     (9,911
                

Total charge-offs - liquidating portfolio

     (9,385     (11,997
                

Recoveries

     506        595   
                

Net charge-offs - liquidating portfolio

     (8,879     (11,402
                

Ending balance - liquidating portfolio

     52,700        44,367   
                

Ending balance - allowance for loan losses

   $ 343,871      $ 270,929   
                

 

(a) All Small Business loans, both commercial and commercial real estate, are considered commercial for purposes of reporting charge-offs and recoveries.

NOTE 4: Goodwill and Other Intangible Assets

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

 

(In thousands)

   March 31,
2010
   December 31,
2009

Balances not subject to amortization:

     

Goodwill

   $ 529,887    $ 529,887

Balances subject to amortization:

     

Core deposit intangibles

     25,468      26,865
             

Total goodwill and other intangible assets

   $ 555,355    $ 556,752
             

Goodwill is allocated to Webster’s business segments as follows:

 

(In thousands)

   March 31,
2010
   December 31,
2009

Retail Banking

   $ 516,560    $ 516,560

Other

     13,327      13,327
             

Total

   $ 529,887    $ 529,887
             

No impairment losses on goodwill or other intangible assets were incurred during the three months ended March 31, 2010.

 

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Amortization of intangible assets for the three months ended March 31, 2010, totaled $1.4 million. Estimated annual amortization expense of current intangible assets with finite useful lives, absent any future impairment or change in estimated useful lives, is summarized below for each of the next five years and thereafter.

 

(In thousands)

    

For years ending December 31,

  

2010

   $ 5,588

2011

     5,588

2012

     5,420

2013

     4,918

2014

     2,685

Thereafter

     2,666
  

NOTE 5: Deposits

A summary of deposit types follows:

 

      March 31, 2010     December 31, 2009  

(Dollars in thousands)

   Amount    % of
total deposits
    Amount    % of
total deposits
 

Demand

   $ 1,662,122    11.9   $ 1,664,958    12.2

NOW

     2,127,530    15.2        2,244,347    16.5   

Money market

     2,384,297    17.0        1,991,423    14.6   

Savings

     3,372,260    24.1        3,146,603    23.1   

Health savings accounts

     782,207    5.6        668,163    4.9   

Certificates of deposit

     3,613,735    25.8        3,830,865    28.1   

Brokered deposits

     51,375    0.4        85,768    0.6   
                          

Total

   $ 13,993,526    100.0   $ 13,632,127    100.0
                          

Interest expense on deposits is summarized as follows:

 

     Three months ended
March 31,

(In thousands)

   2010    2009

NOW

   $ 1,273    $ 547

Money market

     4,069      5,676

Savings

     6,285      6,815

Health savings accounts

     2,251      2,673

Certificates of deposit

     17,651      35,557

Brokered deposits

     422      1,640
             

Total

   $ 31,951    $ 52,908
             

The scheduled maturities of time deposits (in thousands) at March 31, 2010 are as follows:

 

(In thousands)

    

Maturing in the years ending December 31:

  

2010

   $ 2,538,633

2011

     620,261

2012

     110,438

2013

     225,779

2014

     104,394

Thereafter

     65,605
      

Total

   $ 3,665,110
      

 

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NOTE 6: Federal Home Loan Bank Advances

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

 

     March 31, 2010    December 31, 2009

(In thousands)

   Total
Outstanding
   Callable    Total
Outstanding
   Callable

Fixed Rate:

           

4.16 % to 4.95 % due in 2010

   $ 115,000    $ 115,000    $ 135,015    $ 135,000

3.19 % to 6.60 % due in 2011

     100,331      —        100,404      —  

4.00 % to 4.00 % due in 2012

     51,400      —        51,400      —  

0.28 % to 5.49 % due in 2013

     299,000      49,000      249,000      49,000

0.00 % to 6.00 % due after 2014

     5,972      —        6,000      —  
                           
     571,703      164,000      541,819      184,000

Unamortized premiums

     1,693      —        1,898      —  

Hedge accounting adjustments

     982      —        934      —  
                           

Total advances

   $ 574,378    $ 164,000    $ 544,651    $ 184,000
                           

Webster Bank had additional borrowing capacity from the FHLB of approximately $1.6 billion and $1.9 billion at March 31, 2010 and December 31, 2009, respectively. At March 31, 2010 and December 31, 2009, investment securities were not fully utilized as collateral, and had all securities been used for collateral, Webster Bank would have had additional borrowing capacity of approximately $2.3 billion and $1.7 billion, respectively. At March 31, 2010 and December 31, 2009, Webster Bank was in compliance with FHLB collateral requirements.

NOTE 7: Securities Sold Under Agreements to Repurchase and Other Short-term Debt

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

 

(In thousands)

   March 31,
2010
   December 31,
2009

Securities sold under agreements to repurchase

   $ 839,994    $ 843,096

Treasury tax and loan

     9,162      12,550
             
     849,156      855,646

Unamortized premiums

     720      1,200
             

Total

   $ 849,876    $ 856,846
             

The following table sets forth certain information concerning short-term repurchase agreements (with original maturities of one year or less):

 

(Dollars in thousands)

   March 31,
2010
    December 31,
2009
 

Average amount outstanding during the quarter

   $ 273,992      $ 279,800   

Amount outstanding at end of quarter

     366,993        270,096   

Highest month end balance during quarter

     366,993        286,492   

Weighted-average interest rate at end of quarter

     0.36     0.41

Weighted-average interest rate during the quarter

     0.40     0.43

 

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NOTE 8: Long-Term Debt

Long-term debt consists of the following:

 

(In thousands)

   March 31,
2010
    December 31,
2009
 

Subordinated notes (due January 2013)

   $ 177,480      $ 177,480   

Senior notes (due April 2014)

     150,000        150,000   

Junior subordinated debt to related capital trusts (due 2027-2037):

    

Webster Capital Trust IV

     136,070        136,070   

Webster Statutory Trust I

     77,320        77,320   

People’s Bancshares Capital Trust II

     10,309        10,309   

Eastern Wisconsin Bancshares Capital Trust II

     2,070        2,070   

NewMil Statutory Trust I

     10,310        10,310   
                
     563,559        563,559   

Unamortized premiums, net

     (121     (360

Hedge accounting adjustments

     25,102        25,220   
                

Total long-term debt

   $ 588,540      $ 588,419   
                

NOTE 9: Preferred Stock

On February 26, 2010 Webster received approval to repurchase $100 million of its Series B preferred stock that was issued to the U.S. Department of Treasury under its Capital Repurchase Program. Webster’s redemption of the preferred stock was not subject to any additional conditions or stipulations from the Treasury Department, including the issuance of additional capital. The repurchase occurred on March 3, 2010 and required the acceleration of $1.6 million of the unamortized discount related to the redeemed shares.

NOTE 10: Regulatory Matters

Capital adequacy guidelines issued by the federal banking agencies require Webster and Webster Bank to maintain certain minimum ratios, as set forth below. Failure to meet capital requirements may result in certain actions by regulators that could have a direct material effect on the consolidated financials. At March 31, 2010, Webster and Webster Bank, were deemed to be “well capitalized” under regulatory capital adequacy standards.

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

 

     Actual     Capital Requirements     Well Capitalized  

(Dollars in thousands)

   Amount    Ratio     Amount    Ratio     Amount    Ratio  

At March 31, 2010

               

Webster Financial Corporation

               

Total risk-based capital

   $ 1,730,378    14.4   $ 963,047    8.0   $ 1,203,808    10.0

Tier 1 capital

     1,506,401    12.5        481,523    4.0        722,285    6.0   

Tier 1 leverage capital ratio

     1,506,401    8.7        690,214    4.0        862,767    5.0   

Webster Bank, N.A.

               

Total risk-based capital

   $ 1,600,960    13.3   $ 960,457    8.0   $ 1,200,572    10.0

Tier 1 capital

     1,377,383    11.5        480,229    4.0        720,343    6.0   

Tier 1 leverage capital ratio

     1,377,383    8.0        688,967    4.0        861,209    5.0   

At December 31, 2009

               

Webster Financial Corporation

               

Total risk-based capital

   $ 1,866,459    15.4   $ 969,512    8.0   $ 1,211,890    10.0

Tier 1 capital

     1,606,018    13.3        484,756    4.0        727,134    6.0   

Tier 1 leverage capital ratio

     1,606,018    9.4        682,980    4.0        853,726    5.0   

Webster Bank, N.A.

               

Total risk-based capital

   $ 1,525,481    12.6   $ 967,002    8.0   $ 1,208,753    10.0

Tier 1 capital

     1,265,427    10.5        483,501    4.0        725,252    6.0   

Tier 1 leverage capital ratio

     1,265,427    7.5        679,615    4.0        849,519    5.0   

In the first quarter of 2010 the Company downstreamed $100 million from Webster to Webster Bank to improve its overall capital position; which also had the effect of increasing the bank-level leverage and total capital ratios. Starting June 30, 2010, Webster Bank, N.A. will be subject to individual minimum capital ratios. Webster Bank, N.A. will be required to maintain a Tier 1 leverage ratio of at least 7.5% of adjusted total assets and a total risk-based capital ratio of at least 12% of risk weighted assets. The Bank currently exceeds these requirements at March 31, 2010.

 

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NOTE 11: Earnings Per Common Share

The following table presents the components of the total weighted average shares available for allocation of undistributed income for the three months ended March 31, 2010 and 2009:

 

      Three months ended
March 31,
 

(In thousands)

   2010     2009  

Weighted average common stock outstanding

   77,922      52,102   

Weighted average unvested participating securities

   430      371   
            

Weighted average shares available for allocation of undistributed income

   78,352      52,473   

Less: weighted average unvested participating securities not contractually obligated to fund undistributed losses

   (430   (371
            

Weighted average basic shares outstanding

   77,922      52,102   

Add: dilutive effects of preferred stock conversion

   —        —     

Add: dilutive effects of stock-based compensation

   —        —     
            

Weighted average dilutive shares outstanding

   77,922      52,102   
            

For the three months ended March 31, 2010 and 2009, Webster reported a loss available to common shareholders. The unvested participating securities were not contractually obligated to fund the undistributed loss nor was the contractual redemption amount of the unvested participating securities reduced as a result of the undistributed losses. As a result, the full amount of the undistributed loss from was allocated to the common shareholders for the computation of basic and diluted earnings per share for the three months ended March 31, 2010 and 2009.

The following table presents undistributed and distributed earnings (losses) allocated to common shareholders:

 

      For three months ended
March 31,
 

(In thousands)

   2010     2009  

Net (loss) income applicable to common shareholders

   $ (6,069   $ (21,557

Less: (loss) income from discontinued operations, net of tax

     —          —     
                

(Loss) income from continuing operations applicable to common shareholders

     (6,069     (21,557

Less:

    

Dividends paid - common shareholders

   $ 779      $ 521   

Dividends paid - participating shares

     3        6   
                

Losses undistributed to common shareholders

   $ (6,851   $ (22,084
                

(Loss) income from continuing operations available to common shareholders

    

Distributed earnings to common shareholders

   $ 779      $ 521   

Allocation of undistributed losses to common shareholders

     (6,851     (22,084
                

Loss from continuing operations available to common shareholders

   $ (6,072   $ (21,563
                

 

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

 

     For three months ended
March 31,
 

(In thousands except per share information)

   2010     2009  

Basic:

    

Loss from continuing operations available to common shareholders

   $ (6,072   $ (21,563

Shares outstanding (average)

     77,922        52,102   
                

Basic loss per common share from continuing operations

   $ (0.08   $ (0.41
                

Basic loss per common share

   $ (0.08   $ (0.41
                

Diluted:

    

Loss from continuing operations available to common shareholders

   $ (6,072   $ (21,563

Diluted loss from continuing operations available to common shareholders

     (6,072     (21,563

Diluted shares (average)

     77,922        52,102   
                

Diluted loss per common share from continuing operations

   $ (0.08   $ (0.41
                

The following table presents the weighted average potential common shares from non participating stock options and warrants whose exercise price was less than the weighted average market price of Webster’s common stock for the respective periods. These classes of potential common shares were deemed to be anti-dilutive to the earnings per share calculation and therefore were excluded from the computation of diluted earnings per share for the respective periods.

 

     Three months ended
March 31,

(In thousands)

   2010    2009

Non-participating stock options

   917    —  

Stock Options

Options to purchase 2.4 million and 2.3 million shares for the three months ended March 31, 2010 and 2009, respectively, were excluded from the calculation of diluted earnings per share because the options’ exercise price was greater than the average market price of the shares for the respective periods.

Restricted Stock

Non-participating restricted stock awards of 150,830 and 177,426 for the three months ended March 31, 2010 and 2009, respectively, whose issuance is contingent upon the satisfaction of certain performance conditions, were deemed to be anti-dilutive and therefore were excluded from the calculation of diluted earnings per share for the respective periods.

Series A Preferred Stock

The Series A Preferred Stock at March 31, 2010 and 2009 represent potential common stock of 1.1 million and 4.1 million, respectively. The affect of the potential common stock associated with the Series A Preferred Stock was deemed to be anti-dilutive and therefore was excluded from the calculation of diluted earnings per share for the three months ended March 31, 2010 and 2009.

Warrants – Series A1 and A2

The Series A1 and A2 warrants to purchase an aggregate 8.6 million shares of common stock issued in connection with the Warburg investment was excluded from the calculation of diluted earnings per share because of the net loss available to common shareholders for the three months ended March 31, 2010.

Warrant – U.S. Treasury

The warrant to purchase an aggregate 3.3 million shares of common stock issued in connection with the Series B Preferred Stock on November 21, 2008 was also excluded from the calculation of diluted earnings per share because the exercise price of $18.28 per share was greater than the average market price of Webster’s common stock for the three months ended March 31, 2010 and 2009.

 

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NOTE 12: Derivative Financial Instruments

Risk Management Objective of Using Derivatives

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

Cash Flow Hedges of Interest Rate Risk

Webster’s primary objective in using interest rate derivatives is to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, Webster uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for Webster making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.

During April 2008, the Company entered into an interest rate swap contract on an FHLB advance with a total notional amount of $100 million. The interest rate swap contract was designated as a cash flow hedge with the objective of making the quarterly interest payments fixed on the Company’s variable-rate (three month LIBOR plus a margin of three basis points) FHLB advance made on April 2008 and ending in April 2013 from the risk of variability of those payments resulting from changes in the three month LIBOR interest rate. On April 30, 2009 the cash flow swap contract for the FHLB advance was terminated. At the time of termination, the swap had an unrealized loss of $5.9 million, which will be amortized over the remaining life of the advance. Approximately $0.4 million of the gain has been reclassified into earnings in the three months ended March 31, 2010.

On June 15, 2007, Webster terminated an interest rate swap entered to hedge the forecasted issuance of the Trust Securities which qualified for cash flow hedge accounting. The $2.7 million termination gain was deferred and is being amortized from accumulated other comprehensive income (loss) and recorded to interest expense over ten years, which represents the fixed rate term of the Junior Subordinated Notes. The effect of this transaction reduces the net cost of the Trust Securities to 7.5% through June 15, 2017. Approximately $45 thousand of the gain has been reclassified into earnings in the three months ended March 31, 2010.

In 2003, Webster entered into a futures derivative contract, which qualified for cash flow hedge accounting to hedge the forecasted issuance of the Subordinated Notes. Upon issuance of the Subordinated Notes, the futures contract was terminated resulting in the realization of a $1.7 million gain which was deferred and is being amortized into interest expense over the life of the subordinated notes. In connection with the fixed price cash tender offer of Webster Bank’s outstanding 5.875% Subordinated Notes due in 2013, described below, Webster recognized approximately $72 thousand of the deferred gain for the portion of the Subordinated Notes tendered in 2009. Approximately $38 thousand of the remaining gain has been reclassified into earnings in the three months ended March 31, 2010.

During March 2010, Webster entered into a $100 million forward settle interest rate swap which qualifies for cash flow hedge accounting to protect against adverse fluctuations in interest rates by reducing the exposure to variability in cash flows relating to interest payments on a forecasted issuance of $ 100 million short term 3-year debt. The forecasted debt borrowing is expected to occur between February 1, 2011 and June 1, 2011.

Also during March 2010, Webster entered into a $100 million interest rate swap designated as a cash flow hedge of a variable rate FHLB advance maturing on April 29, 2013. The interest rate swap effectively fixes the interest payments on $100 million of 3-month LIBOR indexed variable rate debt at 1.85375%.

The table below presents the fair value of Webster’s derivative financial instruments designated as cash flow hedges as well as their classification on the Condensed Consolidated Balance Sheet as of March 31, 2010.

 

     Consolidated         March 31, 2010  

(In thousands)

   Balance Sheet
Location
   # of
Instruments
   Notional
Amount
   Estimated
Fair Value
 

Interest rate derivatives designated as hedges of cash flow:

           

Interest rate swap on FHLB advances

   Other assets    1    $ 100,000    $ 62   

Forward settle interest rate swap on anticpated debt

   Other liabilities    1      100,000      (77

 

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Table of Contents

Fair Value Hedges of Interest Rate Risk

Webster is exposed to changes in the fair value of certain of its fixed rate obligations due to changes in benchmark interest rates. Webster uses interest rate swaps to manage its exposure to changes in fair value on these instruments attributable to changes in the benchmark interest rate. Interest rate swaps designated as fair value hedges involve the receipt of fixed-rate amounts from a counterparty in exchange for Webster making variable-rate payments over the life of the agreements without the exchange of the underlying notional amount.

The table below presents the fair value of Webster’s derivative financial instruments designated as fair value hedges as well as their classification on the Condensed Consolidated Balance Sheets as of March 31, 2010 and December 31, 2009.

 

     Consolidated         March 31, 2010         December 31, 2009

(In thousands)

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

Interest rate derivatives designated as hedges of fair value:

                    

Interest rate swaps on subordinated notes

   Other assets    —      $ —      $ —      2    $ 175,000    $ 11,262

Interest rate swap on FHLB advances

   Other assets    1      100,000      463    1      100,000      350

For derivatives designated and that qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in earnings. Webster includes the gain or loss from the period end mark to market (“MTM”) adjustments on the hedged items in the same line item as the offsetting loss or gain on the related derivatives. The impact of derivative net settlements, hedge ineffectiveness, basis amortization adjustments and amortization of deferred hedge terminations are also recognized in earnings. The net impact on interest expense related to fair value hedges for the three months ended March 31, 2010 and 2009 is presented below:

 

     Three months ended March 31,  
     2010     2009  
     Interest
(Income)
Expense
    MTM
(Gain)
Loss
    Realized
Deferred
(Gain)
Loss
    Net
Impact
    Interest
(Income)
Expense
    MTM
(Gain)
Loss
   Realized
Deferred
(Gain)
Loss
   Net
Impact
 

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

                  

Interest rate swaps on senior notes

   $ —        $ —        $ (799   $ (799   $ (1,102   $ —      $ —      $ (1,102

Interest rate swaps on subordinated debt

     (497     (94     (728     (1,319     (1,137     —        —        (1,137

Interest rate swaps on FHLB advances

     (185     (41     (24     (250     457        —        —        457   
                                                              

Net impact on interest expense on borrowings

   $ (682   $ (135   $ (1,551   $ (2,368   $ (1,782   $ —      $ —      $ (1,782
                                                              

On March 10, 2009, the Company announced the commencement of a fixed price cash tender offer, which expired on March 18, 2009, for any and all of Webster Bank’s outstanding 5.875% Subordinated Notes due in 2013. In connection with the tender offer, the Company terminated $25 million of the fair value hedge associated with the subordinated notes. The termination of that portion of the swap resulted in a net gain of $1.9 million. The pro-rata share of the gain not directly related to the debt redemption was $188,480 which was deferred and is being amortized over the remaining life of the subordinated notes. Approximately $12 thousand of the gain was recognized into earnings in the three months ended March 31, 2010.

On December 8, 2009, Webster terminated an interest rate swap fair value hedge against a $100 million 4.99% FHLB advance due August 2010. The FHLB advance was restructured into a new 3.21% $100 million advance due 2013. The new advance qualifies as a modification versus debt extinguishment in accordance with FASB ASC Topic 470, “Debt”. The $389 thousand swap termination gain was deferred and is being amortized over 4 years or the life of the modified FHLB advance due December 9, 2013. $24 thousand of the gain was recognized into earnings in the three months ended March 31, 2010.

In December 2009, Webster terminated the fair value hedge of the outstanding $150 million Senior Notes 5.125% debt due April 15, 2014. The interest rate swap was terminated in two transactions for $75 million each with a total gain of $14 million. The gain will be deferred and amortized over the remaining life of the Senior Notes until April 15, 2014. $0.8 million of the gain was recognized into earnings in the three months ended March 31, 2010.

 

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Non-designated Hedges

Derivatives not designated as hedges are not speculative and are used to manage Webster’s exposure to interest rate movements and other identified risks but do not meet the strict hedge accounting requirements of FASB ASC 815, “Derivatives and Hedging”. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in earnings. As of March 31, 2010 and December 31, 2009, Webster had the following outstanding derivatives that were not designated as hedges in qualifying hedging relationships:

 

     Consolidated         March 31, 2010          December 31, 2009  

(In thousands)

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

Customer position:

                   

Commercial loan interest rate swaps

   Other assets    89    $ 431,082    $ 30,348      89    $ 432,325    $ 28,544   

Commercial loan interest rate swaps

   Other liabilities    2      8,082      (62   3      15,064      (247

Commercial loan interest rate swaps with floors

   Other assets    12      27,939      844      10      21,093      528   

Commercial loan interest rate caps

   Other liabilities    4      16,324      (164   4      16,710      (284

Webster position:

                   

Commercial loan interest rate swaps

   Other liabilities    86      422,593      (28,269   85      429,314      (26,370

Commercial loan interest rate swaps

   Other liabilities    4      16,530      204      6      18,036      423   

Commercial loan interest rate swaps with floors

   Other liabilities    11      27,194      (397   6      12,129      (259

Commercial loan interest rate swaps with floors

   Other liabilities    1      745      8      4      8,964      43   

Commercial loan interest rate caps

   Other liabilities    4      16,324      164      4      16,710      284   

Webster reported the changes in the fair value of derivatives not designated in hedging relationships as a component of other non-interest income in the accompanying condensed consolidated statements of operations as follows for the three months ended March 31, 2010 and 2009.

 

     Three months ended March 31,
     2010    2009
     Interest
Income
(Expense)
   MTM
Gain
(Loss)
   Net Interest
Income
(Expense)
   Interest
Income
(Expense)
   MTM
Gain
(Loss)
   Net Interest
Income
(Expense)

Impact reported in other non-interest income

                 

Visa Swap

   $ —      $ —      $ —      $ —      $ —      $ —  

Commercial loan interest rate derivatives, net

     175      15      190      162      172      334
                                         

Net impact on other non-interest income

   $ 175    $ 15    $ 190    $ 162    $ 172    $ 334
                                         

The weighted average rates paid and received for interest rate swaps outstanding at March 31, 2010 were as follows:

 

     Weighted-Average
     Interest
Rate Paid
   Interest
Rate Received

Interest rate swaps:

     

Fair value hedge interest rate swaps on FHLB advances

   2.4488    3.1900

Cash flow hedge interest rate swaps on FHLB advances

   1.8538    0.3209

Non-hedging interest rate swaps

   2.0994    2.1743

The weighted-average strike rates for interest rate caps and floors outstanding at March 31, 2010 were as follows:

 

     Strike Rate  

Non-hedging commercial loan interest rate caps

   4.94

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

   0.97   

Mortgage Banking Derivatives. Certain derivative instruments, primarily forward sales of mortgage loans and mortgage-backed securities (“MBS”) are utilized by Webster in its efforts to manage risk of loss associated with its mortgage loan commitments and mortgage loans held for sale. Prior to closing and funding certain single-family residential mortgage loans, an interest-rate locked commitment is generally

 

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extended to the borrower. During the period from commitment date to closing date, Webster is subject to the risk that market rates of interest may change. If market rates rise, investors generally will pay less to purchase such loans resulting in a reduction in the gain on sale of the loans or, possibly, a loss. In an effort to mitigate such risk, forward delivery sales commitments, under which Webster agrees to deliver whole mortgage loans to various investors or issue MBS, are established. At March 31, 2010, outstanding rate locks totaled approximately $14.5 million and the outstanding commitments to sell residential mortgage loans totaled approximately $36.0 million. Forward sales, which include mandatory forward commitments of approximately $35.0 million at March 31, 2010, establish the price to be received upon the sale of the related mortgage loan, thereby mitigating certain interest rate risk. There is, however, still certain execution risk specifically related to Webster’s ability to close and deliver to its investors the mortgage loans it has committed to sell.

The interest rate locked loan commitments and forward sales commitments are recorded at fair value, with changes in fair value recorded in current period earnings. As of March 31, 2010, the fair value of interest rate locked loan commitments and forward sales commitments totaled $(214,313) and were recorded as a component of other assets in the accompanying Condensed Consolidated Balance Sheets. As of December 31, 2009, the fair value of interest rate locked loan commitments and forward sales commitments totaled $168,138 and were recorded as a component of other assets in the accompanying Condensed Consolidated Balance Sheets.

Foreign Currency Derivatives. The Company enters into foreign currency forward contracts that are not designated as hedging instruments primarily to accommodate the business needs of its customers. Upon the origination of a foreign currency forward contract with a customer, the Company simultaneously enters into an offsetting contract with a third party to negate the exposure to fluctuations in foreign currency exchange rates. The notional amounts and fair values of open foreign currency forward contracts were not material at March 31, 2010 and December 31, 2009.

Futures Contracts. On March 30, 2010, to hedge against a rise in short term rates over the next twelve months, Webster entered into a short-selling of a one year strip of Fed funds future contracts. This transaction is designed to work in conjunction with floating rate assets with interest rate floors which will not be affected if there is an increase in short-term interest rates. The contracts will be reflected as trading assets on the balance sheet and as non-interest income on the income statement. During the three months ended March 31, 2010, the Company recognized $152,000 in losses.

Counterparty Credit Risk. Derivative contracts involve the risk of dealing with both bank customers’ and institutions’ derivative counterparties and their ability to meet contractual terms. The Company has Master ISDA agreements including the Credit Support Annex with each of its derivative counterparties. Under these agreements daily net exposure in excess of our negotiated threshold is secured by posted collateral. In accordance with Webster policies, in order to conduct business with Webster, institutional counterparties must have an investment grade credit rating and be approved by the Company’s Chief Credit Risk Officer. The Company’s credit exposure on interest rate swaps is limited to the net favorable value and interest payments of all swaps by each counterparty for the amounts up to the established threshold for collateralization. Credit exposure may be reduced by the amount of collateral pledged by the counterparty. The Company’s credit exposure relating to interest rate swaps with bank customers was approximately $31.2 million at March 31, 2010. This credit exposure is partly mitigated as transactions with customers are secured by the collateral, if any, securing the underlying transaction being hedged. The Company’s credit exposure, net of collateral pledged, relating to interest rate swaps with upstream financial institution counterparties was approximately $20 million at March 31, 2010. The company has adopted a zero threshold with the majority of its upstream financial institution counterparties thus the credit exposure represents collateral held at those institutions. Collateral levels for upstream financial institution counterparties are monitored on a daily basis and adjusted as necessary. In the event of default, should the collateral not be returned, the exposure would be offset by terminating the transactions.

NOTE 13: Fair Value Measurements

The Company uses fair value to record adjustments to certain assets and liabilities and to prepare required disclosures. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined using market quotes. However, in many instances, there are no quoted market prices available. In such instances, fair values are determined using various valuation techniques. Various assumptions and observable inputs must be relied upon in applying these techniques. Accordingly, the fair value estimates may not be realized in an immediate transfer of the respective asset or liability.

Fair Value Hierarchy

FASB ASC Topic 820 “Fair Value Measurements” establishes a fair value hierarchy for use in grouping assets and liabilities. The three levels within the hierarchy are as follows:

 

   

Level 1: Valuation is based upon unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

 

   

Level 2: Fair value is calculated using inputs other than quoted market prices that are directly or indirectly observable for the asset or liability. The valuation may rely on quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in inactive markets, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit ratings, etc.) or inputs that are derived principally or corroborated by market data by correlation or other means.

 

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

Categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. A description of the valuation methodologies used by the Company is presented below.

Cash, Due from Banks, and Interest bearing deposits

The carrying amount of cash, due from banks, and short term investments is used to approximate fair value, given the short timeframe to maturity and as such assets do not present unanticipated credit concerns.

Securities

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

If quoted market prices are not available, the Company employs an independent pricing service who utilizes matrix pricing to calculate fair value. Such fair value measurements consider observable data such as dealer quotes, market spreads, cash flows, yield curves, live trading levels, trade execution data, market consensus prepayments speeds, credit information, and the respective terms and conditions for debt instruments. Level 2 securities include CMOs, mortgage backed securities and corporate bonds issued by GSEs.

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

Management uses an internally developed model to value pooled trust preferred securities. There are various inputs to the model including actual and estimated deferral and default rates that are implied from the underlying performance of the issuers in the structure. Adjusted cash flows are discounted at a rate that considers both the liquidity and credit risk of each security. Discount rates are implied from observable market inputs.

The Company engaged an independent pricing service to provide pricing for auction rate preferred securities. The pricing methodology employed uses the income approach and considers future cash flows of the underlying securities using a discount rate derived from observable market inputs.

On a quarterly basis, management reviews the trust preferred securities pricing generated from our internal model as well as the auction rate preferred securities pricing provided by our independent pricing service.

Loans Receivable

Loans held for sale are accounted for at the lower of cost or market. The fair value of loans held for sale are based on quoted market prices of similar or identical loans sold in conjunction with securitization transactions, adjusted as required for changes in loan characteristics. The Company employs an independent third party to provide fair value estimates for loans held for investment. Such estimates are calculated using discounted cash flow analysis, using market interest rates for comparable loans. The associated cash flows are adjusted for credit and other potential losses. Fair value for impaired loans is estimated using the net present value of the expected cash flows or the fair value of the underlying collateral if repayment is collateral dependent.

Mortgage Servicing Assets

The Company accounts for servicing assets at cost, subject to impairment testing. When the carrying value exceeds fair value, a valuation allowance is established to reduce the carrying cost to fair value.

Fair value is calculated as the present value of estimated future net servicing income and relies on market based assumptions for loan prepayment speeds, servicing costs, discount rates, and other economic factors.

Foreclosed Property and Repossessed Assets

Foreclosed property and repossessed assets are recorded as held for sale initially at the lower of the loan balance or fair value of the collateral less estimated selling costs. For the three months ended March 31, 2010 and 2009, foreclosed properties and repossessed assets with a carrying value of $7.4 million and $10.3 million were transferred to foreclosed property and repossessed assets from loans. Prior to the transfer, the assets whose fair value less costs to sell was less than their carrying value, were written down to fair value through a charge to the allowance for loan losses. Subsequent to foreclosure, valuations are updated periodically, and the assets may be marked down further, reflecting a new cost basis. Subsequent valuation adjustments to foreclosed properties and repossessed assets totaled $2.4 million and $3.4 million for the three months ended March 31, 2010 and 2009 reflective of continued deterioration in fair market values. Fair value measurements may be based upon appraisals or third-party price opinions and, accordingly, those measurements are classified as

 

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Level 2. Other fair value measurements may be based on internally developed pricing methods, and those measurements are classified as Level 3. Foreclosed and repossessed assets are included in other assets in the accompanying Condensed Consolidated Balance Sheets and totaled $30.5 million and $29.0 million at March 31, 2010 and December 31, 2009, respectively.

Deposit Liabilities

The fair values disclosed for demand deposits are by definition equal to the amount payable on demand at the reporting date which is also their carrying value. The carrying amounts of variable-rate, fixed term money market accounts and certificates of deposit approximate their fair values at the reporting date. Fair values for fixed rate certificates of deposit are estimated using a discounted cash flow calculation that applies market interest rates on comparable instruments to a schedule of aggregated expensed monthly maturities on time deposits

Short Term Borrowings

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

Long Term Debt

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

Derivative Instruments

Derivative instruments are internally valued using level 2 inputs obtained from third parties. The resulting fair values are validated against valuations performed by independent third parties.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

 

     March 31, 2010

(In thousands)

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

Financial assets held at fair value:

           

Available for sale securities:

           

U.S. treasury bills

   $ 200    $ 200    $ —      $ —  

Agency Notes - GSE

     130,238      —        130,238      —  

Agency CMOs - GSE

     726,466      —        726,466      —  

Single issuer trust preferred securities

     42,413      —        42,413      —  

Pooled trust preferred securities

     57,955      —        —        57,955

Equity securities - financial institutions

     6,515      4,799      —        1,716

Mortgage-backed securities- GSE

     1,133,697      —        1,133,697      —  

Mortgage-backed securities- other

     268,472      —