Webster Financial Corp. CEO DAVID A COULTER bought 610072 shares on 12-30-2009 at $11.27
Webster Financial Corporation (âWebsterâ or the âCompanyâ), a bank holding company and financial holding company under the Bank Holding Company Act of 1956, as amended, was incorporated under the laws of Delaware in 1986. Webster, on a consolidated basis, at December 31, 2008 had assets of $17.6 billion and shareholdersâ equity of $1.9 billion. Websterâs principal assets at December 31, 2008 were all of the outstanding capital stock of Webster Bank, National Association (âWebster Bankâ).
Webster, through Webster Bank and various non-banking financial services subsidiaries, delivers financial services to individuals, families and businesses throughout southern New England and into eastern New York State. Webster also offers equipment financing, commercial real estate lending, asset-based lending, health savings accounts and insurance premium financing on a regional or national basis. Webster provides business and consumer banking, mortgage lending, financial planning, trust and investment services through 181 banking offices, 489 ATMs, telephone banking and its Internet website ( www.websteronline.com ). Through its HSA Bank division ( www.hsabank.com ), Webster Bank offers health savings accounts on a nationwide basis. Websterâs common stock is traded on the New York Stock Exchange under the symbol âWBSâ.
Websterâs mission statement, the foundation of its operating principles, is stated simply as âWe Find A Wayâ , to help individuals, families and businesses achieve their financial goals. The Company operates with a local market orientation and with a vision to be New Englandâs bank. Operating objectives include acquiring and developing customer relationships through marketing, on boarding and cross-sale efforts to fuel internal growth and expanding geographically in contiguous markets through a build and buy strategy. Webster also pursues acquisitions of like-minded partners who share Websterâs vision to be New Englandâs bank.
Websterâs Commercial Banking group takes a direct relationship approach to providing lending, deposit and cash management services to middle-market companies in its four-state franchise territory and commercial real estate loans principally in New England and the mid-Atlantic region. Additionally, it serves as a primary referral source to wealth management and retail operations. Asset-based lending is located in New York with a national presence. All credit underwriting, contract preparation and closings, as well as servicing (including collections) are centrally performed by the applicable group. At December 31, 2008 the loan portfolio of the Commercial Banking group grew 5.1% to $3.6 billion from $3.5 billion at December 31, 2007.
The Middle-Market group delivers Websterâs broad range of financial services to a diversified group of companies with revenues greater than $10 million, primarily privately held companies located within southern New England. Typical loan facilities include lines of credit for working capital, term loans to finance purchases of equipment and commercial real estate loans for owner-occupied buildings. Unit and relationship managers within the Middle-Market group average over 20 years of experience in their markets. The Middle-Market loan portfolio was $819.1 million at December 31, 2008, a decrease of 5.4%, compared to $865.7 million at December 31, 2007, primarily due to prepayment volume. Total Middle-Market loan originations were $106.2 million in 2008 compared to $126.7 million in 2007.
Webster Business Credit Corporation
Webster Business Credit Corporation (âWBCCâ) is Webster Bankâs asset-based lending subsidiary with headquarters in New York, New York and eight regional offices. Asset-based loans are generally secured by accounts receivable and inventories of the borrower and, in some cases, also include additional collateral such as property and equipment. The asset-based lending segment of the commercial portfolio was $753.4 million at December 31, 2008, a decrease of 5.3%, compared to $795.3 million at December 31, 2007. Loan originations for the asset-based lending portfolio were $83.5 million in 2008 compared to $285.3 million in 2007.
Deposit and Cash Management Services
Webster offers a wide range of deposit and cash management services for clients ranging from sole proprietors to large corporations. For depository needs, Webster offers products ranging from core checking and money market accounts, to treasury sweep options including repurchase agreements and Euro dollar deposits. For clients with more sophisticated cash management needs, available services include ACH origination and payment services such as lockbox for receipts posting, positive pay for fraud control and controlled disbursement for cash forecasting. All of these services are available through Websterâs online banking system Webster Web-Link (tm) which uses image technology to provide online information to customers.
Retail Banking is dedicated to serving the needs of over 412,000 consumer households and approximately 60,000 small business customers in southern New England and eastern New York State. Websterâs Retail Banking segment is focused on growing its customer base through the acquisition of new customer relationships and the retention and expansion of existing customer relationships.
Retail Bankingâs distribution network provides convenience and easy access to Websterâs full range of products and services. This multi-channel network is comprised of 181 banking offices and 489 ATMs in Connecticut, Massachusetts, Rhode Island and New York. In the fourth quarter of 2007, Webster announced an ATM branding agreement for Webster branded ATMs in select Walgreens locations. As of December 31, 2008, 147 ATMs were actively operating in select Walgreens across eastern Massachusetts (115), Rhode Island (23) and Connecticut (9). This branding agreement complements Websterâs branch expansion program and establishes another distribution platform for future growth in Rhode Island and Massachusetts. The distribution network also includes a telephone banking center and a full-range of internet banking services. In addition to transaction and servicing convenience, Retail Bankingâs distribution network delivers a full range of deposit, lending and investment products and services to both consumer and small business customers within Websterâs regional footprint.
Retail Bankingâs primary focus is on core deposit growth, which provides a low-cost funding source for the Bank in addition to an increasing stream of fee revenues. As of December 31, 2008, consumer retail deposits within the branch footprint totaled $8.4 billion. Websterâs successful execution of its strategy is evidenced by its #2 ranking in deposit market share in the state of Connecticut. Core deposit growth is driven by a growing base of checking relationships, strong customer retention and successful cross-sell efforts including increasing debit card and on-line banking usage. Revenue growth is achieved by offering a range of deposit products that pay competitive interest rates to meet customer savings and liquidity management needs and deepen customer relationships.
Business & Professional Banking
Retail Banking includes the Business & Professional Banking division (âB&Pâ). B&P is focused on the development and delivery of a full array of credit and deposit-related products to small businesses and professional services firms with annual revenue up to $10 million. B&P markets and sells to these customers through a combination of direct sales (âBusiness Bankersâ) and branch-delivered efforts. B&P is a significant generator of deposits to Webster and the B&P lending effort is focused on those customers with borrowing needs from $10,000 to $2 million. Deposits from B&P customers totaled $1.2 billion as of December 31, 2008. Webster was recognized in 2008, for the sixth consecutive year, by the Connecticut district of the Small Business Administration (âSBAâ) as the stateâs leading bank SBA 504 lender, as well as recognized as the leading Connecticut bank lender based on number of loans, dollars of loans approved, and loans to veterans. The B&P loan portfolio was $927.0 million in 2008 compared to $909.9 million in 2007. Total loan originations for B&P were $238.0 million in 2008 compared to $198.0 million in 2007.
Webster offers the investment and securities-related services, including brokerage and investment advice that it had previously offered through its subsidiary Webster Investment Services, Inc. (âWISâ), through a strategic partnership with UVEST Financial Services Group, Inc. UVEST, a provider of investment and insurance programs in financial institutionsâ branches, is a broker dealer registered with the Securities and Exchange Commission, a registered investment advisor under federal and applicable state laws, a member of the Financial Industry Regulatory Authority (âFINRAâ), and a member of the Securities Investor Protection Corporation (âSIPCâ). Webster, through its relationship with UVEST, has over 100 dual employees who are registered representatives located throughout its branch network offering customers an array of insurance and investment products including stocks and bonds, mutual funds, annuities and managed accounts. Brokerage and online investing services are available for customers. At December 31, 2008, Webster had $1.6 billion of assets under administration in its strategic partnership with UVEST, compared with $1.9 billion of assets under administration at December 31, 2007. These assets are not included in the Consolidated Financial Statements.
Expansion and Acquisition
An important element of Websterâs growth strategy is its build and buy strategy for franchise expansion. The Company opened one de novo location, in the third quarter of 2008, in North Kingstown, Rhode Island. In 2009, Webster intends to open three new locations in Rhode Island and Massachusetts and to relocate its downtown Providence office. Webster intends to offset expenses associated with expansion into new locations with consolidation within its existing network.
Websterâs Consumer Finance division provides a convenient and competitive selection of residential first mortgages, home equity loans and lines and direct installment lending programs through Webster Bank. Webster Bankâs loan distribution channels consist of the branch network, loan officers and the contact center. Websterâs Consumer Finance segment offers a broad range of products to meet the needs of its customers in and around its retail branch footprint.
Consumer loan products are underwritten in accordance with accepted industry guidelines including, but not limited to, the evaluation of the credit worthiness of the borrower(s) and collateral. Independent credit reporting agencies, Fair Isaac scoring model (FICO) and the analysis of personal financial information are utilized to determine the credit worthiness of potential borrowers. Also, the Consumer Finance division obtains and evaluates an independent appraisal of collateral value to determine the adequacy of the collateral. Updated FICO scores and collateral values are obtained on at least a quarterly basis.
In late 2007, Webster discontinued its indirect residential construction lending and its indirect home equity lending outside of its primary New England market area referred to as National Wholesale Lending. Webster placed these two portfolios into a liquidating portfolio and disclosed this as a separate category from its continuing portfolio. The liquidating portfolio is managed by a designated credit team. At December 31, 2008 and 2007, these two indirect out-of-footprint loan portfolios totaled $302.4 million and $423.9 million, respectively, and were comprised of $283.7 million and $340.6 million, respectively, of indirect home equity loans and $18.7 million and $83.3 million, respectively, of residential construction loans.
Residential Mortgages and Mortgage Banking
Consumer Finance is dedicated to providing a full complement of residential mortgage loan products that are available to meet the financial needs of Websterâs customers. Webster offers customers products including conventional conforming and jumbo fixed rate loans, conforming and jumbo adjustable rate loans, Federal Housing Authority (âFHAâ), Veterans Administration (âVAâ) and state agency mortgage loans through the Connecticut Housing Finance Authority (âCHFAâ). Various programs are offered to support the Community Reinvestment Act goals at the state level. Types of properties consist of one-to-four family residences, owner and non-owner occupied, second homes, construction, permanent and improved single family building lots. Webster both retains and sells servicing on originated loans. The determination to sell or retain servicing is dependent on several factors including borrower relationships with Webster.
Total residential mortgage originations for the group were $600 million in 2008 compared to $3.2 billion in 2007. Originations in 2007 included mortgages originated from the discontinued National Wholesale Lending channel. Webster discontinued all national wholesale mortgage banking activities in the fourth quarter of 2007 and, as a result, closed its wholesale lending offices in Seattle, Washington; Phoenix, Arizona; Cheshire, Connecticut; and Chicago, Illinois. In 2007, Webster recorded severance and other costs, primarily for lease terminations and outplacement of $3.5 million (pre-tax) related to the discontinuance of national wholesale mortgage banking activities. Websterâs remaining mortgage and consumer lending operations in Cheshire, Connecticut focus solely on direct to consumer retail originations.
Webster Bank concentrates on offering a range of products including home equity loans and lines of credit, as well as second mortgages. Although there are no credit card loans in the consumer loan portfolio as of December 31, 2008, Webster offers its customers credit card programs issued by a third party provider. The consumer continuing loan portfolio remained relatively flat year over year with a total continuing portfolio balance of $3.0 billion at December 31, 2008 compared to $2.9 billion at December 31, 2007. The liquidating consumer loan portfolio was $283.7 million and $340.6 million at December 31, 2008 and 2007, respectively. Total consumer loan originations were $0.9 billion in 2008 compared to $1.2 billion in 2007.
Webster Financial Advisors (âWFAâ) targets high net worth clients, not-for-profit organizations and business clients with investment management, trust, credit and deposit products and financial planning services. WFA takes a comprehensive view when dealing with clients in order to fully serve their short and long-term financial objectives. Proprietary and non-proprietary investment products are offered through WFA and the J. Bush & Co. division. WFA provides several different levels of financial planning expertise including specialized services through another wholly-owned subsidiary, Fleming, Perry & Cox. At December 31, 2008 there were approximately $1.7 billion of client assets under management and administration, a decrease of 26.1% when compared to December 31, 2007, of which $1.1 billion were under management and administration. The decline in assets under management and administration is directly related to the decline in the market value of these assets. These assets are not included in the Consolidated Financial Statements.
Insurance Premium Financing
Budget Installment Corp. (âBICâ), an insurance premium financing subsidiary headquartered in Garden City, New York, provides insurance premium financing products covering commercial property and casualty policies. Its dedicated staff of insurance premium financing professionals works directly with local, regional and national insurance agents and brokers to market BICâs financing products to customers nationwide. BICâs portfolio was $86.1 million at December 31, 2008, a increase of 2.0%, compared to $84.4 million at December 31, 2007. Originations totaled $187.0 million in 2008 compared to $204.8 million in 2007.
Risk Management Functions
Websterâs risk management framework has been designed to identify, monitor, report and manage risk issues throughout the Company. The Audit and Risk Committees of the Board of Directors, comprised solely of independent directors, oversee all Websterâs risk-related matters. Websterâs Enterprise Risk Management Committee, which reports directly to the Risk Committee, is chaired by Websterâs Chief Risk Officer and is comprised of Websterâs Executive Management Committee and Senior Risk Officers. Websterâs Senior Risk Officers oversee matters related to market, credit and operational risk and report directly to the Chief Risk Officer. Websterâs Corporate Treasurer, Chief Credit Risk Officer and Chief Compliance and Operating Risk Officer are Websterâs Senior Risk Officers and are responsible for overseeing matters related to the Companyâs risk environment.
Market risk refers to the risk of loss arising from adverse changes in interest rates, foreign currency exchange rates, commodity prices and other relevant market rates and prices, such as equity prices. The risk of loss can be assessed from the perspective of adverse changes in fair values, cash flows and future earnings. Due to the nature of its operations, Webster is primarily exposed to interest rate risk and, to a lesser extent, liquidity risk. Accordingly, Websterâs interest rate sensitivity and liquidity are monitored on an ongoing basis by its Asset and Liability Committee (âALCOâ), whose primary goal is to manage interest rate risk to maximize net income and net economic value over time in changing interest rate environments subject to Board of Director approved risk limits. ALCO is chaired by Websterâs Treasurer who, as a Senior Risk Officer, regularly reports ALCO findings to the Enterprise Risk Management Committee and the Risk Committee of the Board of Directors.
Webster Bank manages and controls risk in its loan and investment portfolios through adherence to consistent standards. Written credit policies establish underwriting standards, place limits on exposure and set other limits or standards as deemed necessary and prudent. Exceptions to the underwriting policies arise periodically, and to ensure proper identification and disclosure, additional approval requirements and a tracking requirement for all qualified exceptions have been established. In addition, regular reports are made by the Chief Credit Risk Officer to the Enterprise Risk Management Committee and the Risk Committee of the Board of Directors regarding the credit quality of the loan and investment portfolios.
Credit Risk Management, which is under the supervision of the Chief Credit Risk Officer, is independent of the loan production and Treasury areas, oversees the approval process, ensures adherence to credit policies and monitors efforts to reduce classified and nonperforming assets.
The Loan Review Department, which is independent of the loan production areas and loan approval, performs ongoing independent reviews of the risk management process, the adequacy of loan documentation and the assigned loan risk ratings. The results of its reviews are reported directly to the Risk Committee of the Board of Directors.
Operational Risk is the risk of loss resulting from inadequate or failed internal processes, people or systems or from external events. The definition includes the risk of loss from failure to comply with laws, ethical
standards and contractual obligations. Websterâs Chief Compliance and Operating Risk Officer oversees the management and effectiveness of Websterâs compliance and operational risk management framework which includes the Compliance Program, the Bank Secrecy Act Program, the CRA and Fair Lending Programs, the Privacy Program, the Information Security Program, the Identity Theft Prevention Program, the Bank Security Program and the Enterprise Risk Management Program. The Chief Compliance and Operating Risk Officer is responsible for reporting on the adequacy of all operating risk management components and programs to the Enterprise Risk Management Committee and the Risk Committee of the Board of Directors and/or other committees of the Board as provided for under relevant charters.
Compliance Risk Management which is under the supervision of the Chief Compliance and Operating Risk Officer, is independent of the operational lines of business and manages and controls compliance risks at the corporate level. Websterâs Compliance Program defines the infrastructure to support this oversight with defined roles and responsibilities, compliance risk assessments, policies and procedures, training and communication, testing and monitoring, issue management and supervision, evaluation and reporting mechanisms.
The Information and Corporate Security department is responsible for the effective management of the Information Security Program which is designed to protect against loss or unauthorized access to Websterâs information assets and the Bank Security Program which is designed to ensure physical security of Websterâs employees, customers and physical assets. In addition, the Privacy Program and Identity Theft Prevention Program are managed in the Information and Corporate Security Department of the Operational Risk Management division.
The Bank Secrecy Act (BSA) Department, Financial Intelligence Unit and Fraud Mitigation and Recovery Department work together to ensure that BSA Program elements and internal and external fraud prevention and investigation processes are coordinated to mitigate losses and achieve regulatory reporting objectives.
The Community Reinvestment Act and Fair Lending Department is responsible for ensuring the respective programs, regulatory requirements and performance objectives are monitored for ongoing effectiveness.
Enterprise Risk Management, which is under the supervision of the Chief Compliance and Operating Risk Officer, is responsible for evaluating, aggregating and reporting on all enterprise risks to the Enterprise Risk Management Committee and the Risk Committee of the Board of Directors.
Internal Audit provides an independent assessment of the quality of internal controls for all major business units and operations throughout Webster. Results of Internal Audit reviews are reported to management and the Audit Committee. Corrective measures are monitored to ensure risk issues are mitigated or resolved. Internal Audit reports directly to the Audit Committee.
The OneWebster Initiative
The OneWebster initiative, which began in January 2008, is an ongoing, company-wide review of business practices designed to enhance the customer experience and improve the Companyâs overall operating efficiency. As a result of this initiative, Webster expects to increase pre-tax earnings by an annual rate of $50 million by the middle of 2010 through actions that will save approximately $40 million in costs and achieve an additional $10 million in incremental revenue growth on an annual run-rate basis compared with 2007. Webster plans to achieve the $40 million in cost savings by streamlining processes by instituting other efficiency initiatives. About 240 positions were eliminated, with more than half to be achieved through attrition and elimination of open positions. Webster incurred severance and other related charges of approximately $13.1 million in connection with the implementation of over 1,100 OneWebster ideas generated by employees during 2008. The remaining OneWebster charges are expected to be recorded in the first two quarters of 2009.
MANAGEMENT DISCUSSION FROM LATEST 10K
The following discussion should be read in conjunction with the Consolidated Financial Statements of Webster Financial Corporation and the Notes thereto included elsewhere in this report (collectively, the âFinancial Statementsâ).
Critical Accounting Policies and Estimates
Critical accounting estimates are necessary in the application of certain accounting policies and procedures, and are particularly susceptible to significant change. Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. Management believes that the most critical accounting policies, which involve the most complex or subjective decisions or assessments, are as follows:
Allowance for Credit Losses
Arriving at an appropriate level of allowance for credit losses involves a high degree of judgment. The allowance for credit losses, which comprises the allowance for loan losses and the reserve for unfunded credit commitments, provides for probable losses based upon evaluations of known and inherent risks in the loan portfolio and in unfunded credit commitments. To assess the adequacy of the allowance, management considers historical information as well as the prevailing business environment, as it is affected by changing economic conditions and various external factors, which may impact the portfolio in ways currently unforeseen. The allowance is increased by provisions for credit losses and by recoveries of loans previously charged-off, and reduced by loans charged-off. For a full discussion of the methodology of assessing the adequacy of the allowance for credit losses, see the âAsset Qualityâ section elsewhere within Managementâs Discussion and Analysis of Financial Condition and Results of Operations.
Valuation of Investment Securities
Management evaluates securities for other-than-temporary impairment on at least a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. The consideration of the above factors are subjective and involve estimates and assumptions about matters that are inherently uncertain. Should actual factors and conditions differ materially from those used by management, the actual realization of gains or losses on investment securities could differ materially from the amounts recorded in the financial statements.
Valuation of Goodwill/Other Intangible Assets
Webster, in part, has increased its market share through acquisitions accounted for under the purchase method, which requires that assets acquired and liabilities assumed be recorded at their fair values estimated by means of internal or other valuation techniques. These valuation estimates affect the measurement of goodwill and other intangible assets recorded in the acquisition. Goodwill is subject to ongoing periodic impairment tests and is evaluated using various fair value techniques including multiples of revenue, discounted cash flows, price/equity and price/earnings ratios.
Certain aspects of income tax accounting require significant management judgment, including determining the expected realization of deferred tax assets and evaluating uncertain tax positions. Such judgments are subjective and involve estimates and assumptions about matters that are inherently uncertain. Should actual factors and conditions differ materially from those used by management, the actual realization of the net deferred tax assets could differ materially from the amounts recorded in the financial statements.
Deferred tax assets generally represent items that can be used as a tax deduction or credit in future income tax returns, for which a financial statement tax benefit has already been recognized. The realization of the net deferred tax asset generally depends upon future levels of taxable income and the existence of prior yearsâ taxable income to which âcarry backâ refund claims could be made. Valuation allowances are established against those deferred tax assets determined not likely to be realized.
Deferred tax liabilities generally represent items that will require a future tax payment, for which tax expense has been recognized in the Companyâs financial statements and a payment has been deferred, or a deduction taken on the Companyâs tax return but not yet recognized as an expense in the financial statements. Deferred tax liabilities are also recognized for certain ânon-cashâ items such as certain acquired intangible assets subject to amortization which results in future financial statement expenses that are not deductible for tax purposes.
For more information about income taxes, see Note 9 of Notes to Consolidated Financial Statements included elsewhere within this report.
Pension and Other Postretirement Benefits
The determination of the obligation and expense for pension and other postretirement benefits is dependent upon certain assumptions used in calculating such amounts. Key assumptions used in the actuarial valuations include the discount rate, expected long-term rate of return on plan assets and rates of increase in compensation and health care costs. Actual results could differ from the assumptions and market driven rates may fluctuate. Significant differences in actual experience or significant changes in the assumptions may materially affect the future pension and other postretirement obligations and expense. See Note 20 of Notes to Consolidated Financial Statements for further information.
Results of Operations
Websterâs net loss for the year ended December 31, 2008 was $321.8 million or $6.42 per diluted common share, compared to net income of $96.8 million or $1.76 per diluted common share for the year ended December 31, 2007. Loss from continuing operations was $318.8 million or $6.36 per diluted common share for the year ended December 31, 2008, compared to income from continuing operations of $110.7 million or $2.01 per diluted common share in 2007, a decrease of 388.0%.
The year over year decrease in results from continuing operations for 2008 as compared to 2007 is primarily attributable to the increase in the loss on write-down of investments to fair value of $215.7 million, the $198.4 million impairment of goodwill, a $118.6 million increase in the provision for credit losses and a $10.0 million increase in net losses on sales of investment securities offset by a $113.9 million reduction in the income tax expense. Excluding the net impact of these items, pre-tax income from continuing operations would have been $158.0 million and pre-tax income from continuing operations per common share would have been $3.04.
The year over year decrease in results from continuing operations for 2007 as compared to 2006 include an increase in provision for credit losses of $56.8 million, severance and other charges of $15.6 million, a net charge of $6.8 million related to the redemption of debt and a $3.6 million loss on the write-down of investments to fair value. Excluding the net impact of these items, pre-tax income from continuing operations would have been $158.9 million and pre-tax income from continuing operations per common share would have been $2.89.
Net interest income of $505.8 million for the year ended December 31, 2008 decreased 0.47% when compared to 2007 due to a decrease in the net interest margin of 12 basis points when compared to the prior year. The decline year over year was primarily due to reductions in the Federal Reserve rates as well as an increase in non-performing assets and lower yields on assets tied to prime and LIBOR. Average interest bearing liabilities increased $0.5 billion, or 3.23%, with increases in average borrowings of $0.9 billion partially offset by decreases in average deposits of $0.4 billion. Average earning assets increased $0.5 billion, or 3.23% when compared to 2007, which includes the December 2008 receipt and subsequent investment of $400 million pursuant to the Capital Purchase Program under TARP.
Non-interest income of $(28.1) million decreased by $230.4 million, or 113.9%, in 2008 compared to 2007. The decrease in non-interest income was primarily due to the $215.7 million increase in loss on write-down of investments to fair value, the $10.0 million increase in net losses on sales of investment securities and the $8.1 million decrease in income from mortgage banking activities due to the decision to exit the National Wholesale origination channel, partially offset by a $5.5 million increase in deposit service fees. The decrease in non-interest income was also impacted by a $2.8 million decline in loan fees and income from wealth and investment services in 2008 when compared to the results for 2007.
Non-interest expenses of $676.0 million increased $192.1 million, or 39.7%, in 2008 compared to 2007. The decrease is primarily due to the $198.4 million goodwill impairment charge, partially offset by $4.9 million lower compensation expense.
Net Interest Income
The following table describes the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have impacted interest income and interest expense during the periods indicated. Information is provided in each category with respect to changes attributable to changes in volume (changes in volume multiplied by prior rate), changes attributable to changes in rates (changes in rates multiplied by prior volume) and the total net change. The change attributable to the combined impact of volume and rate has been allocated proportionately to the change due to volume and the change due to rate. The table below is based upon reported net interest income.
Net interest income, the difference between interest earned on interest-earning assets and interest expense incurred on deposits and borrowings, totaled $505.8 million for the year ended December 31, 2008, compared to $508.2 million for the year ended December 31, 2007, a decrease of $2.4 million. Average interest-earning assets grew by 3.23% to $15.8 billion at December 31, 2008 from $15.3 billion at December 31, 2007 while average interest-bearing liabilities also grew 3.23% to $15.3 billion at December 31, 2008 from $14.8 billion at December 31, 2007. Despite the offsetting growth in interest-earning assets to interest-bearing liabilities, the net interest margin declined by 12 basis points to 3.28% for the year ended December 31, 2008 from 3.40% for the year ended December 31, 2007. The yield on interest-earning assets declined by 102 basis points for the year ended December 31, 2008 while the cost of interest-bearing liabilities declined 91 basis points for the year ended December 31, 2008.
The decline in yields in certain asset classes within the loan portfolio reflects the effects that the 400 basis point reductions made by the Federal Reserve during 2008 have had on the floating rate home equity lines, commercial real estate (âCREâ) and commercial and industrial (âC&Iâ) interest bearing assets. At December 31, 2008 approximately 70.0% of Websterâs CRE portfolio and 64.4% of its C&I portfolio are floating rate assets, while 97.4% of the equipment finance portfolio is fixed rate. The decline in yields is also impacted by the increase in non-accruing loans. Websterâs total non-performing assets increased to $263.2 million at December 31, 2008 in comparison with $121.1 million at December 31, 2007, with C&I, residential development, 1-4 family residential and residential construction representing $100.0 million of the $142.1 million increase. The majority of the increase is a result of residential development loans along with 1-4 family residential and construction loans that reflect the continuing challenge of the residential housing market as well as the deterioration of economic conditions of the market in general.
Since net interest income is affected by changes in interest rates, by loan and deposit pricing strategies, competitive conditions, the volume and mix of interest-earning assets and interest-bearing liabilities as well as the level of non-performing assets, Webster manages the risk of changes in interest rates on its net interest income through an Asset/Liability Management Committee and through related interest rate risk monitoring and management policies. See âAsset/Liability Management and Market Riskâ for further discussion of Websterâs interest rate risk position.
Interest income decreased $126.3 million, or 12.7%, to $869.3 million for the year ended December 31, 2008 as compared to 2007. The decrease in the average yield of 102 basis points was partially offset by an increase in average interest earning assets of $492.4 million. The average loan portfolio, excluding loans held for sale,
increased by $310.0 million for the year ended December 31, 2008, or 2.5%, compared to 2007. Average investment securities increased by $552.6 million for the year ended December 31, 2008, or 22.4%, compared to 2007. In addition, higher yielding commercial and consumer loans partially replaced reductions in residential loans.
The 102 basis point decrease in the average yield earned on interest-earning assets for the year ended December 31, 2008 to 5.58% compared to 6.60% for 2007 is a direct result of actions taken by the federal government to reduce the fed fund rates by 400 basis points during the year ended December 31, 2008. The loan portfolio yield decreased 116 basis points to 5.60% for the year ended December 31, 2008 and comprised 80.6% of average interest-earning assets at December 31, 2008 compared to the loan portfolio yield of 6.76% and 81.2% of average interest-earning assets for the year ended December 31, 2007. Additionally, the yield on investment securities was 5.51%, a 28 basis point decrease over 2007.
Interest expense for the year ended December 31, 2008 decreased $123.9 million, or 25.4%, compared to 2007. The decrease was primarily due to competitive deposit pricing, a decline in average deposits of $445.8 million for the year ended December 31, 2008 and the 400 basis points in rate reductions made by the Federal Reserve, offset by a $925.5 million increase in average total borrowings when compared to 2007.
The cost of interest-bearing liabilities was 2.37% for the year ended December 31, 2008, a decrease of 91 basis points compared to 3.28% for 2007. Deposit costs for the year ended December 31, 2008 decreased to 2.08% from 2.90% in 2007, a decrease of 82 basis points. Total borrowing costs for the year ended December 31, 2008 decreased 189 basis points to 3.45% from 5.34% for 2007.
Provision for Credit Losses
The provision for credit losses was $186.3 million for the year ended December 31, 2008, an increase of $118.5 million compared to $67.8 million for the year ended December 31, 2007. The increase in the provision is primarily due to increased charge-offs and increased reserve coverage levels given the increase in nonperforming loans as well as the general deteriorating economic conditions affecting all of the Companyâs loan portfolios. For the year ended December 31, 2008, total net charge-offs were $138.1 million compared to $25.2 million in 2007. See Tables 18 through 24 for information on the allowance for credit losses, net charge-offs and nonperforming assets.
Management performs a quarterly review of the loan portfolio and unfunded commitments to determine the adequacy of the allowance for credit losses. Several factors influence the amount of the provision, primarily loan growth and portfolio mix, performance, net charge-offs and the general economic environment. At December 31, 2008, the allowance for credit losses totaled $245.8 million or 2.02% of total loans compared to $197.6 million or 1.58% at December 31, 2007. See the âAllowance for Credit Losses Methodologyâ section later in Managementâs Discussion and Analysis for further details.
Non-interest revenue which represents the recurring component of non-interest income decreased of $6.3 million, or 3.1%, when compared to 2007. The decrease from the prior year is primarily attributable to the $8.1 million decrease in mortgage banking activities directly related to the closure of National Wholesale mortgage lending, a $1.8 million and $1.0 million decrease in loan related fees and wealth and investment services, respectively, offset by an increase in deposit service fees of $5.5 million. See below for further discussion of various components of non-interest income.
Deposit Service Fees. Deposit service fees increased $5.5 million, or 4.8%, for the year ended December 31, 2008 as compared to 2007. The increase was primarily due to the implementation of a new tiered consumer fee structure during 2008, increased ATM surcharges and increased debit card usage.
Loan Related Fees. Loan related fees decreased by $1.8 million, or 5.7%, for the year ended December 31, 2008 as compared to 2007. The decrease was primarily due to a decrease in loan servicing fee income which is the direct result of fewer loans originated for sale.
Wealth and Investment Services. Wealth and investment service fees decreased $1.0 million or 3.5% for the year ended December 31, 2008 as compared to 2007. The decrease is due to a decline in the value of assets under management due to adverse market conditions resulting in a reduction in management fees earned.
Total non-interest expense for the year ended December 31, 2008 was $676.0 million, an increase of a $192.1 million or 39.7% compared to 2007. The increase in non-interest expense for the year ended December 31, 2008 is primarily a result of a $198.4 million impairment charge for the goodwill related to commercial banking, consumer finance and other lending business segments, partially offset by the one time expense of $8.9 million premium for the redemption of Webster Capital Trust I and II in 2007. In addition, the amortization of intangible assets decreased by $4.4 million primarily due to core deposit intangibles from several past acquisitions becoming fully amortized during the year. Further changes in various components of non-interest expense are discussed below.
Compensation and Benefits. Total compensation and benefits decreased by $4.9 million for the year ended December 31, 2008 or 2.0% compared to 2007. The decrease in compensation and benefits is related to workforce reductions from the OneWebster initiative, reduced incentive compensation as well as a decline in benefit expenses.
Occupancy. Total occupancy expense increased by $3.7 million or 7.4% for the year ended December 31, 2008 compared to 2007. The increase in occupancy is primarily expenses related to the de novo branch expansion program, higher rent expense and increased utilities. The Company intends to offset future de novo expansion expenses with consolidation within its existing branch network.
Furniture and Equipment. Total furniture and equipment expense increased by $1.4 million or 2.3% for the year ended December 31, 2008 compared to 2007. The increase is primarily due to higher depreciation on data processing equipment, increases in equipment maintenance contracts and service contract costs.
Foreclosed and Repossessed Property Expenses. Total foreclosed and repossessed property expenses increased $6.9 million or 344.9% for the year ended December 31, 2008 compared to 2007. The increase is directly related to the $22.5 million increase in foreclosed and repossessed property, reflective of higher levels of delinquency and non-performing assets in 2008.
FDIC Deposit Insurance Assessment. Total FDIC deposit insurance assessment increased by $3.2 million or 209.1% due to the expiration of Websterâs remaining credit that had previously been offset premium assessments. Assessments for 2009 are expected to remain at these levels or greater depending on FDIC actions.
Severance and other costs. Charges totaling $16.2 million were recorded in 2008. Included in this charge was $13.1 million of severance and other OneWebster implementation costs. Additional severance of approximately $1.0 million was recorded for early retirement and other executive changes. A charge of $1.8 million was recognized to reduce the carrying value of a building and office complex currently being marketed for sale to market value and classified as assets held for disposition in accordance with generally accepted accounting principles. See the following table for a breakout of the costs.
The results of operations of Webster Insurance and Webster Risk Services are reported as discontinued operations. Loss from discontinued operations, net of tax, totaled $3.1 million for the year ended December 31, 2008 compared to the loss from discontinued operations of $13.9 million for 2007 and income from continuing operations of $0.1 million for 2006. The sales of Webster Insurance and Webster Risk Services were completed on February 1, 2008 and April 22, 2008, respectively. See Note 2 of Notes to Consolidated Financial Statements contained elsewhere within this report for additional information.
During 2008 Webster recognized an income tax benefit of $65.8 million applicable to its loss from continuing operations. As a result of the pre-tax loss and tax benefit, Websterâs 2008 effective tax rate and other comparative measures are not meaningful for these purposes. In 2007, Webster recognized tax expense of $48.1 million applicable to continuing operations and its effective tax rate was 30.3%.
Websterâs 2008 tax benefit was impacted by certain components of its loss that resulted in no tax benefit which otherwise would have increased the benefit by over $80 million. Those loss items resulting in no tax benefit pertained to substantially all of the $198 million goodwill impairment (tax benefit of nearly $69 million otherwise) and certain securities losses treated as capital and limited for U.S. tax-deductibility purposes (tax benefit of more than $11 million otherwise).
The other significant item, when comparing 2008 to 2007, relates to a higher level of tax-exempt interest income in 2008 that resulted in an increased tax benefit of more than $2.7 million when compared to 2007.
For more information on income taxes, including Websterâs deferred tax assets and valuation allowance, see Note 9 of Notes to Consolidated Financial Statements included elsewhere within this report.
Comparison of 2007 and 2006 Years
Websterâs net income was $96.8 million or $1.76 per diluted share in 2007, compared to $133.8 million or $2.47 per diluted share in 2006, a decrease of 27.7%. Income from continuing operations was $110.7 million or $2.01 per diluted share in 2007, compared to $133.7 million or $2.47 per diluted share in 2006, a decrease of 17.2%.
During the fourth quarter of 2007, management determined that the sale of its insurance agency business (Webster Insurance) would be structured such that the consideration would comprise an upfront payment and additional potential consideration over a multi-year earn-out period. Given this structure, Webster accordingly wrote down the carrying value of its investment and as of year end 2007 reported Webster Insurance separately from its continuing operations. The results of Webster Insurance (and the loss on write-down of the assets held for disposition to fair value) are shown as discontinued operations, net of tax in the Consolidated Statements of Income. Webster has reported the assets and liabilities of Webster Insurance as assets and liabilities held for disposition at December 31, 2007.
Results from continuing operations include an increase in provisions for credit losses of $56.8 million, severance and other charges of $15.6 million, a net charge of $6.8 million related to the redemption of debt and a $3.6 million loss on the write-down of direct investments to fair value. The net impact of these items was $82.8 million ($53.8 million after tax or $0.98 per diluted share). Results from continuing operations in 2006 include charges of $57.0 million ($37.0 million after tax or $0.69 per diluted share) related to the balance sheet repositioning actions taken in 2006.
The net interest margin for 2007 increased by 24 basis points when compared to the prior year. This was primarily due to increases in higher yielding commercial and consumer loans and a decrease in average outstanding securities and borrowings partially offset by an increase in the cost of deposits. Average interest bearing liabilities decreased $1.2 billion, or 7.3%, with decreases in borrowings of $1.5 billion partially offset by increases in average deposits of $0.4 billion. Average earning assets decreased $1.1 billion, or 6.6%, ($409.9 million in loans and $704.8 million in securities) when compared to 2006 as a result of the balance sheet restructuring actions.
Non-interest income of $202.3 million increased by $70.7 million, or 53.7%, in 2007 compared to 2006. The increase in non-interest income was primarily due to the $48.9 million and $2.3 million in losses recognized to write-down and subsequently sell, respectively, the available for sale mortgage-backed securities portfolio in 2006, the $5.7 million loss on the sale of mortgage loans in 2006 and an increase in deposit service fees of $17.9 million in 2007 compared to 2006 partially offset by a $3.6 million decrease in loan related fees.
Non-interest expenses of $484.0 million increased $47.6 million, or 10.9%, compared to 2006. The increase reflects the impact of severance and other costs of $15.6 million, debt prepayment expenses of $8.9 million and an increase in compensation and benefits of $15.0 million, $3.4 million related to the write-off of software development costs and $2.3 million of closing costs related to Peoples Mortgage Corporation (âPMCâ).
Net Interest Income
Net interest income which is the difference between interest earned on loans, investments and other interest-earning assets and interest paid on deposits and borrowings, totaled $508.2 million in 2007, compared to $508.6 million in 2006, a decrease of $0.4 million. Net interest income is affected by changes in interest rates, by loan and deposit pricing strategies and competitive conditions, the volume and mix of interest-earning assets and interest-bearing liabilities and the level of non-performing assets. The decrease in net interest income is largely due to lower volumes of average interest-earning assets, mostly related to decreases in average securities partially offset by decreases in average interest-bearing liabilities related to decreases in average borrowings.
Interest income (on a fully tax-equivalent basis) decreased $17.5 million, or 1.7%, to $1.0 billion for 2007 as compared to 2006. A decrease in the average interest earning-assets over the prior year was partially offset by slightly higher average yields earned on the assets. The decline in the volume of interest-earning assets is a result of the balance sheet repositioning which began in the fourth quarter of 2006 and was completed by the first quarter of 2007. The average loan portfolio, excluding loans held for sale, decreased by $409.9 million, or 3.2%, compared to 2006. Average securities decreased by $704.8 million, or 23.0%, compared to 2006. Additionally higher yielding commercial and consumer loans partially replaced reductions in residential loans.
The yield earned on interest-earning assets increased 35 basis points for the year ended December 31, 2007 to 6.60% compared to 6.25% for 2006 as a result of the balance sheet repositioning actions. The loan portfolio yield increased 17 basis points to 6.76% for the year ended December 31, 2007 and comprised 81.2% of average interest-earning assets compared to the loan portfolio yield of 6.59% and 78.3% of average interest-earning assets for the year ended December 31, 2006. Additionally, the yield on securities was 5.79%, an 86 basis point improvement over 2006.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
Forward-Looking Statements and Factors that Could Affect Future Results
Certain statements contained in this Quarterly Report on Form 10-Q that are not statements of historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the âActâ), notwithstanding that such statements are not specifically identified as such. In addition, certain statements may be contained in the Companyâs future filings with the SEC, in press releases, and in oral and written statements made by or with the approval of the Company that are not statements of historical fact and constitute forward-looking statements within the meaning of the Act. Examples of forward-looking statements include, but are not limited to: (i) projections of revenues, expenses, income or loss, earnings or loss per share, the payment or nonpayment of dividends, capital structure and other financial items; (ii) statements of plans, objectives and expectations of Webster or its management or Board of Directors, including those relating to products or services; (iii) statements of future economic performance; and (iv) statements of assumptions underlying such statements. Words such as âbelievesâ, âanticipatesâ, âexpectsâ, âintendsâ, âtargetedâ, âcontinueâ, âremainâ, âwillâ, âshouldâ, âmayâ and other similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.
Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those in such statements. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to:
Critical Accounting Policies
The Companyâs significant accounting policies are described in Note 1 to the consolidated financial statements included in its 2008 Annual Report on Form 10-K. The preparation of the consolidated financial statements in accordance with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and to disclose contingent assets and liabilities. Actual results could differ from those estimates. Management has identified accounting for the allowance for credit losses, valuation and analysis for impairment of goodwill and other intangible assets, and the analysis of other-than-temporary impairment for its investment securities, income taxes and pension and other post retirement benefits as the Companyâs most critical accounting policies and estimates in that they are important to the portrayal of the Companyâs financial condition and results, and they require managementâs most subjective and complex judgment as a result of the need to make estimates about the effects of matters that are inherently uncertain. These accounting policies, including the nature of the estimates and types of assumptions used, are described throughout this Item 2, Managementâs Discussion and Analysis of Financial Condition and Results of Operations and Part II, Item 7, Managementâs Discussion and Analysis of Financial Condition and Results of Operations included in the Companyâs 2008 Annual Report on Form 10-K.
Significant Third Quarter Event
During the third quarter, Webster strengthened its capital position through an agreement with Warburg Pincus, the global private equity firm, pursuant to which Warburg agreed to invest $115 million in Webster, as previously disclosed. An initial amount of $40 million was invested on July 27, 2009 and the remaining $75 million was invested on October 15, 2009. This investment, coupled with the successful exchange offer for convertible preferred stock and trust preferred securities completed during the second quarter, enabled Webster to significantly increase common equity with minimal dilution to tangible book value. For more information regarding Warburgâs investment in Webster and the securities purchased, see Note 12 to Websterâs condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.
(a) Calculated using SNLâs methodology-non-interest expense (excluding foreclosed property expenses, intangible amortization, goodwill impairments and other charges) as a percentage of net interest income (FTE basis) plus non-interest income (excluding gain/loss on securities and other charges).
(b) Calculated based on income from continuing operations for all periods presented.
(c) For the three and nine months ended September 30, 2009 and 2008, respectively, the effect of stock options, restricted stock, convertible preferred stock outstanding at September 30, 2009 and the outstanding warrant to purchase common stock on the computation of diluted earnings per share was anti-dilutive. Therefore, the effect of these instruments were not included in the determination of diluted shares (average).
(d) Calculated in accordance with FASB ASC Topic 260 and related updates including FASB ASU No. 2009-08 which required the Company to determine the dilutive effects of the Series A Preferred Stock tendered on June 24, 2009 separately from the remaining shares outstanding at September 30, 2009. Accordingly, the adjustments to dilutive EPS related to the Series A Preferred Stock includes the $58.8 million excess of the carrying amount of the preferred stock retired over the fair value of the common shares issued and cash delivered, net of the $7.2 million of dividends paid. These adjustments were not incorporated into the calculation of diluted EPS for the three and six months ended June 30, 2009. Had the $58.8 million excess of the carrying amount of the preferred stock retired over the fair value of the common shares issued and cash delivered, net of the $7.2 million of dividends paid been taken into consideration diluted EPS for continuing operations would have been $(0.66) and $(0.97) for the three and six months ended June 30, 2009, respectively, a decrease from the $0.30 and $(0.10), respectively, previously reported within Websterâs Form 10-Q for the three and six months ended June 30, 2009.
(e) The ratios presented are projected for the 2009 reporting periods and actual for the 2008 reporting periods.
Net Interest Income
Net interest income totaled $126.7 million and $364.2 million for the three and nine months ended September 30, 2009, respectively, a decrease of $2.5 million and $15.6 million from the comparable periods in the prior year, respectively. Average earning assets grew by 2.5% to $16.1 billion for the nine months ended September 30, 2009 from $15.7 billion for the nine months ended September 30, 2008, while the net interest margin declined from 3.32% and 3.28% for the three and nine months ended September 30, 2008, respectively, to 3.24% and 3.21% for the three and nine months ended September 30, 2009, respectively. The securities portfolio totaled $4.6 billion at September 30, 2009 compared to $3.7 billion at December 31, 2008 and $2.9 billion a year ago. The yield in the securities portfolio on a fully tax-equivalent basis for the three and nine months ended September 30, 2009 was 5.14% and 5.31%, respectively, compared with 5.62% and 5.62% for the same periods in 2008.
Net interest income can change significantly from period to period based on general levels of interest rates, customer prepayment patterns, the mix of interest earning assets and the mix of interest bearing and non-interest bearing deposits and borrowings. Webster manages the risk of changes in interest rates on its net interest income through an Asset/Liability Management Committee and through related interest rate risk monitoring and management policies. See âAsset/Liability Management and Market Riskâ for further discussion of Websterâs interest rate risk position.
Interest income for the three months ended September 30, 2009 decreased $29.7 million, or 13.8%, from the comparable period in 2008. The decrease in short-term interest rates had an unfavorable impact on interest sensitive loans as well as lower rates on new volumes. The average balance for investment securities for the three months ended September 30, 2009 was $4.3 billion, an increase of $1.4 billion from the comparable period in 2008. The average balance for loans for the three months ended September 30, 2009 was $11.5 billion, a decrease of $1.3 billion from the comparable period in 2008.
Interest income for the nine months ended September 30, 2009 decreased $96.7 million, or 14.6%, from the comparable period in 2008. The decrease in short-term interest rates had an unfavorable impact on interest sensitive loans as well as increased non-performing loans. The average balance for investment securities for the nine months ended September 30, 2009 was $4.0 billion, an increase of $1.1 billion from the comparable period in 2008. The average balance for loans for the nine months ended September 30, 2009 was $11.9 billion, a decrease of $0.8 billion from the comparable period in 2008.
The yield on interest-earning assets decreased 94 basis points to 5.31% for the nine months ended September 30, 2009, from the comparable period in 2008. The decrease reflects the declining interest rate environment during these periods as well as increased non-performing loans.
The loan portfolio yield decreased 109 basis points to 4.58% for the nine months ended September 30, 2009 and comprised 73.5% of average interest-earning assets compared to 80.7% of average interest-earning assets for the nine months ended September 30, 2008.
Thank you, Melissa. Good morning, everyone and welcome to Websterâs third quarter earningâs call and webcast. You can find our earnings release which was issued earlier this morning and the slides for the Company of this presentation on our website at websterbank.com. As usual, I will provide an overview for the quarter and Gerry Plush, our Chief Financial Officer and Chief Risk Officer will provide a review of our financials. I will then offer some closing remarks and open it up for your questions.
We will begin focusing on slide 3. Since our July earningâs call, I am pleased to say that Webster continues to make significant progress on a number of fronts, including improving pre-tax pre-provision earnings, further strengthening of our capital levels, especially tangible common equity, increases not only in deposits, but market share as well made even more impressive by lynch [ph] quarter expansion and net interest margin, and stable loans delinquencies in third straight quarter. I will elaborate on each of these.
First, our pre-tax pre-provision earnings rose to $56.1 million in Q3, up 10% from Q2, aided in part by a 14 basis point increase in the net interest margin to 3.18%, and by previously committed improvements from our OneWebster earnings optimization initiative. These data points speak to the fundamental strength of the Webster franchise which is beginning to shine through in a challenging economic environment.
We expect our pre-tax pre-provision earnings to grow even stronger as the economy recovers, and as we execute on our plans for growth. If you look at slide 4, you can see that capital was the high point of the quarter. As we announced last week, Warburg Pincus has completed its $115 million investment in Webster common stock, non-voting preferred and warrants. We shortly will be scheduling a special shareholdersâ meeting to gain approval for Warburgâs preferred to convert into common.
While we talked with many of you about the Warburg Pincus investment, I want to spend a minute discussing the relationship and the rationale, and to reiterate why we are so pleased with this transaction. Our relationship with Warburg became increasingly comfortable with one another. We found that we share a common perspective on what will constitute a successful regional banking strategy focused on New England. So when we decided to explore raising capital, it was only natural that Warburg Pincus would be in a considered set. My point is that Webster and Warburg Pincus understand each other very well, share a long-term focus, and are completely aligned on the belief that successful execution of our strategy to be New Englandâs bank will create significant shareholder value.
Weâre pleased that one of the marquee names in private equity is our largest shareholder, Warburg Pincusâ track record of bank investing, which includes Mellon, Dime and others is legendary. Their thorough due diligence which grew on the expertise of JPMorgan Chase, Promontory Financial Group, Ernst & Young, and Sullivan & Cromwell, as well as Warburgâs own extensive capability, convinced them that Websterâs long-term potential for shareholder value creation warranted a premium to market. More than one investor has remarked that Warburgâs investment is a malice [ph] is at financial equivalent of the good housekeeping seal of approval for Webster. It certainly has triggered interest in Webster from investors who previously werenât holders of our shares.
Terms of the investmentship pleased our investors. The issuance price for Warburg Pincus common share has represented a 12% premium to the 10-day trailing average for our shares, and nearly a 20% premium to the 20-day trailing average at the time it was announced. The investment resulted in minimal dilution to tangible book value and modest dilution to normalize EPS, and was struck on terms that we believe were considerably more favorable than we could have achieved otherwise in a common equity raise.
In addition, Dave Coulter has joined our Board of Directors. As you may know, Dave is a former Chairman and CEO of Bank of America and former Vice Chairman of JPMorgan Chase, among other notable achievements. We know Dave well and have very my personal and professional regard for him. And I can tell you that in addition to his valuable services as a member of the Board, he is also proven to be a valued mentor and coach.
Following our very successful exchange offer in Q2, the Warburg Pincus investment boosted our already solid regulatory capital levels well above the median for our peers and then brought our pro forma September 30 Tier 1 common to risk weighted assets ratio to 6.93%, bringing us closer to the June 30 median of the top 50 US commercial banks and up more than a 125 basis points from year end 2008. Bottom line is well our capital levels has in well in excess of regulatory requirements all along our Tier 1 common intangible common ratios were not.
The opportunity to boost these levels and what we deemed to be highly favorable terms and put to rest any questions about tangible common equity levels was compelling. We can now say confidently that our capital ratios across the Board position us well not only to whether the economic storm but also to grow once our regional economy rebalance.
And market reaction to our capital actions speak for itself, since the day before we announced the exchange offer, our shares were up 74% compared to increase of 5% for the KRX index, which is comprised, a peer banks rank from 25th to 74th in terms of asset size.
This late July when we announced the Warburg investment our shares has risen 32% versus 9% to the KRX, and year-to-date our shares have declined 8% compared to a 30% to the KRX. To be sure, there is a lot more to be done to restore the value loss in the downturn. But the point is that our capital actions have ignited relatively strong share price performance.
As I signaled in our previous call, Webster intends to seek approval from treasury and our primary regulators to begin an orderly repayment of treasury's capital purchase plan investment; we have now begun that process. Given the strength of our regulatory capital ratios and the fact that CPP is not included in the calculation of tangible common equity in Tier 1 common ratios, our initial repayment plan is not envisioned the need to raise additional common equity other than through the tools we already have it at hand including completing exchanges for junior capital and possible utilization of our existing discretionary stock purchase program.
The third area Iâd like to highlight is deposits. Building on our success in the prior two quarters, our deposits first growth initiative delivered a $426 million linked quarter increase in deposits, with all growth coming in core deposits. On a year-over-year basis, deposits are up 15% after taking into account a price driven reduction of $394 million in mostly single service CDs and broker deposits.
Our strong deposit performances had a major impact on our funding profile. Our loan to deposit ratio is now 83% compared to 109% a year ago, and our core deposits to total deposits ratio is now 69% up from 61% a year ago.
The growth in deposit is reflected in our market share, which is rising according to FDIC market share report that came out last week. In Connecticut, 11 basis point increase in our number two deposit share, narrow the gap behind the market leader, and lengthened our lead over the number three competitor, both of which saw declines.
In the Providence MSA, with the top three retail market leaders all saw share erosion. Webster picked up 58 basis points in deposit share. While our other subject to Providence, I want to note that weâre consolidating our regional headquarters together with a new branch in 100 Westminster in the heart of Providence this financial district.
The photos in slide 7, give you some idea what our Providence facility will look like and our progress toward opening the branch in the near future. Together with our assumed to open Boston office pictured in slide 8, weâre raising our profile in these two important markets is part of our New Englandâs bank strategy.
Like a Providence facility, our new Boston flagship is located in the heart of financial district. Our initial focus in Boston weâll be concentrated on middle-market companies, Government Finance and Business and Professional customers including lawyers, accountants and medical practices.
Before I leave this subject to deposits, itâs important to note that weâre growing deposits through intense focus and building the core deposit relationship, not through pricing, single service CDs or broker deposits. Our rising net interest margin is proof of our progress in this regard.
On the top of the loans [ph] which Gerry will cover in detail, I should note that loan balances decline modestly across all categories in Q3. This isnât surprising given the fact that in a recession borrowers both businesses and consumers pay off loan balances rather than renewing or increasing them, and that underwriting standards are higher. Still we did originate renew or modify $617 million in loans in Q3 and $2.3 billion year-to-date.
We are fully committed to working with borrowers to see them through these difficult times. As evidenced by our successful foreclosure avoidance [ph] programs and our proactive engagement of our business borrowers. For example, note that 60% of the increase in residential non-accrual loans in Q3 came from loan modifications, which now in total account for 40% of residential non-performing loans.
At some point and perhaps soon, our loan balances will begin growing again given our intensified focus on small businesses, middle market companies, consumers and select Commercial Real Estate with appropriately priced risk adjusted returns.
We intend to play a meaningful role in providing credit for the economic recovery in our region. Meanwhile, we continue to (inaudible) of our national, equipment finance and asset-based lending businesses consistent with our off reference strategic review.
Regarding our strategy, Webster has an opportunity to fill a vacuum and what we refer to as the Business and Professional Banking market. As a regional bank with a local feel, we can serve this market better than our larger competitors. Our suite of products for small businesses is as good as any in the market regardless of size. To fill the small business banking void, we are building a value proposition that brings Webster into small businesses circle of trusted advisors together with their CPA and attorney. We will accomplish this by building on our knowledge base and understanding of small businesses and by delivering a consistent customer experience across our footprint.
To take our small business banking to the next level, we recently hired Ginger Siegel, an experienced small business banker, formally with Washington Mutual and Citibank. Opportunities in the small business market abound, and we are intent on seizing them as New Englandâs bank. This market is a major growth opportunity for us and you should expect to hear more in the quarters ahead.
The final area I will touch on is credit before turning the call over to Gerry for a more detailed review. While we are seeing some modestly encouraging signs, for example, in delinquencies, it's still too early to try to predict when problem loans and charge-offs will quest [ph]. You can see this in our continuing high provision level and net charge-offs. We are actively identifying and managing our underperforming credits, being vigilant in our risk ratings and reserving prudently.
During Q3, we increased our coverage for credit losses to 2.9% of loans, marking the fourth consecutive quarter in which we reserved significantly more than we charged off in anticipation of future possible credit losses.
You can see in our credit numbers that there maybe some reason for cautious optimism while non-performing loans rose $11 million during Q3, they were down or flat across every category except commercial real estate, restructured residential mortgages where we modified terms and consumers.
Meanwhile, delinquencies remained stable at about $130 million for the third quarter in a row, and well below the $140 million of last year's Q4. Even non-accrual [ph] loans declined for the second quarter in a row while securities [ph] and assets climbed also for the second consecutive quarter.
With that, Iâll turn the call over to Gerry.
Thank you, Jim, and good morning, everyone. Weâve provided a view of core earnings for the third quarter on slide 8 and outlined several items to take into consideration when looking to see with the pre-tax, pre-provision earnings for the Company were in Q3.
We are pleased to report an increase to $56 million primarily from higher revenue. As you can see here, there are a number of material items that impacted the quarter and resulted in a net pre-tax loss. Similar to prior quarters, we have excluded these certain items including $4.7 million in net losses from sales of securities as well as $1.3 million in investment write-downs from OTTI charges related to credit deterioration in the quarter.
We have also excluded $4.2 million in severance and other costs, and $2.2 million in OREO and repossessed equipment write-downs, again, just given the nature of these particular charges. Our results also included a provision for credit losses of $85 million [ph] of which $56.5 million related to the continuing portfolio and $28.5 million related to the liquidating portfolio. So, exclusive of these, you can see the momentum building in our underlying performance in the quarter as the margin improved and average earning assets increased.
Before we proceed further through the slides, I would like to provide an update on two significant accounting items we addressed this quarter. First, regarding goodwill. Webster is required to perform its annual goodwill impairment test in the third quarter of each fiscal year, and as in past years we utilized external valuation experts to assist us. The testing results confirmed that no valuation allowance was required.
Second, regarding deferred tax asset valuation allowances, we prepared a realizability analysis under ASC 740 to make a determination whether valuation allowance would be required to be established in the third quarter.
As many of you are aware, there is significant focus required in this area when a company has reported significant losses in the current or prior years. Based on the applicable literature, the company performed an analysis for the recoverability of its DTA, and this includes consideration of reversing temporary differences, taxes paid in prior years, tax planning strategies, and reliance on future taxable income.
Management is required to identify all this available evidence, both positive and negative, in determining the likelihood of the realization of the DTA and assessing the need for a valuation allowance. And based on all this available evidence, it was determined that it was more likely than not that the DTA will be realized and no valuation allowance is required to be established in the quarter.
Please note that the DTA will need to be evaluated on an ongoing basis, certainly quarterly, for realizability based on current information. Itâs also important to note that for regulatory and Tier 1 common purposes, we deduct the full amount of the DTA from capital.
Back to the slideshow, if you turn to the next slide on slide 10, hereâs a view of our income statement. You can see here on a summary level what the key drivers for each line item are, plus the increase in net interest income reflects a significantly improved net interest margin of 3.18% as the cost of interest bearing liabilities declined 28 basis points, while earning asset yields declined only 12 basis points.
Our non-interest income increased on higher deposit service fees and other income offsetting declines in loan fees and mortgage banking activities after a strong second quarter for these categories. Wealth and investment services revenue increased modestly as the valuation of assets under management improved in the quarter.
Our non-interest expenses increased 2.8 million, primarily from increases in compensation related expense, marketing and other expenses. We will cover this in greater detail in a few slides. The non-core items for the quarter included previously mentioned losses on sales of securities, foreclosed property expense and write-downs, severance and other costs, and credit related OTTI charges as outlined when we covered the prior slide. You can also see here the preferred dividends were about $6.9 million in Q3 compared to $10.4 million in Q2. This is what we are paying in the remaining convertible preferred shares as well as the preferred shares issued pursuant to the CPP.
Turning to slide 11. Here you can see that the margin improved again to 318 in the quarter compared to 304 in Q2 and 2.99% in the first quarter. As we mentioned during the second quarter call, we had a significant number of CDs that matured in Q3 over $1.7 billion and repriced at lower rates moved out or into other deposit products. In addition, we continue to make disciplined pricing decisions in all of the deposit categories, and as a result our total cost of deposits decreased by 29 basis points. The decrease in the cost of borrowings reflects a reduction in the cost of long-term debt. So overall, strong improvement in Q3, and our expectation is that there is opportunity for further improvement in the fourth quarter, given discipline around loan and deposit pricing decisions, CD maturities and FHOB [ph] advanced maturities.
Turning now to slide 12, where we cover the detail behind non-interest income, you can see the deposit service fees increased about $860,000 from last quarter. This increase in Q3 is primarily related to seasonal customer behavior. Loan related fees declined $793,000 from the second quarter and $1.6 million from a year ago, and that's primarily due to lower application and amendment fees in the quarter compared to prior periods. Mortgage banking activities declined $2 million in comparison with strong second quarter where we saw greater originations. Other income increased $2.2 million from the second quarter from higher credit card referral fees, derivatives and direct investment income, and other miscellaneous items including insurance proceeds quarter-over-quarter.
The net loss from sales of securities totaled $4.7 million, which is primarily from a loss in the sale of $4.9 million in book value of pooled trust preferred securities. In the case of these transactions, we would have taken OTTI charges versus a loss on sale, and given our intent to reduce concentration and exposure to other financial services entities, as well as manage our DTA, we executed these trades.
We also reported a loss of $1.3 million on the write-down of certain pooled trust preferred securities and preferred stock to fair value. This is based on credit deterioration and the underlying issuers. We update our credit assessment on each of the underlying issuers in these pools quarterly, and determine that impairment was warranted based on our review.
Turning now to look at non-interest expenses, which when you exclude foreclosed and repossessed property expense, severance and other charges, and FDIC special assessments in the second quarter, increased about $2.8 million from the second quarter.
Comp and benefits increased primarily increased from one extra day of pay for our non-exempt personnel, and incentives, and itâs somewhat offset by declines in group insurance and commissions, while marketing rose about $600,000 from increased campaigns for checking and for advertising around branding. And our other expenses were up about $1.6 million, primarily from charges in the reserve for unfunded lines of credit in the buildup of some litigation reserves.
Our foreclosed and repossessed property expenses were down $660,000 on a quarter-over-quarter basis, while severance and other costs were higher by $2.9 million. The increase in other costs includes the establishment of a $3 million reserve for fraud which had no customer impact, and this excludes any consideration for recovery.
Given this is a pending law enforcement matter, weâre really not in a position to comment further on this subject. However, you should know that in establishing the $3 million reserve, we believe weâve captured the maximum possible financial exposure before any consideration of in any insurance recovery for restitution.
We will turn it now to give an update on our One Webster program. As you recall, this earning optimization program was initiated in the beginning of 2008, and you can see here on this slide, there is an update of our progress through September of 2009.
Our intent is to show the expectations versus progress to-date through the end of the third quarter. Again for background, we originally identified about $50 million worth of run rate improvement, about 80% on the expense side, and 20% on the revenue side, and our original expectations would have this fully implemented by the middle of 2010.
And in December of last year, we added another $16.5 million worth of expected benefits as part of the 60-day review, where we centralized support functions and tight expense of control [ph]. And clearly in this chart, you can see we are making considerable progress towards these goals. Many of the benefits from these efforts are being muted in the current period by increases in items such as FDIC insurance premium expense, reduced FAS 91 expense associated with lower loan volumes, higher pension expense and higher foreclosed property expense given the current economic environment.
Turning to the next slide, we provide a high level view of selective balances. You can see our total assets increased as compared to last quarter, while loans declined in all principal categories in Q3, itâs primarily in commercial loans, which declined by 164 million. Weâll discuss the specific loan segments in greater detail in a few minutes.
The securities portfolio increased by $441 million, weâll cover that in greater detail on the next slide. On the funding side, deposits increased by $426 million, and the strength and quality of this deposit growth was over than further improvement in the ratios of loans to deposits or deposits.
Given this strong deposit growth and inflows from loan repayments, we utilized some of that funding to offset maturing borrowings, which declined by $144 million, and utilized the balance to fund asset growth in the period.
Weâll turn now and take a more detailed look at the investment portfolio on slide 16. Here you can see the components of our $4.6 billion investment portfolio. The growth of $441 million was from purchases of $260 million in agency (inaudible), $130 million in short-term agency debentures and $97 million in short duration agency CMOs.
There is no securities in this portfolio backed by sub-prime (inaudible), and you can see here that there is a $103 million in unrealized gains in the HTM portfolio and that's up from $33 million in June 30th. There is $3 million in unrealized losses in the AFS portfolio, a substantial improvement over the $53 million in net unrealized losses at June 30th. And as in prior quarters, weâve posted additional details in our website regarding the investment portfolio, so the supplemental schedules are out there for you to review.
On the next slide, we cover some of the more significant actions weâve took during the quarter. There you can see what weâve purchase and there is the $615 million in agency securities and notes most of which we cover in detail over viewing the prior slide. We also continue to reduce exposure financial institutions in the quarter by selling $7 million worth of common stock and only $6 million remains in portfolio.
Also in keeping with the strategy reducing exposure to financial institutions and reducing deferred tax asset. We sold $4.9 million book value with the par value of $53 million and a pool trust preferred securities at a net loss of $4.7 million, and generated additional tax loss of $45 million which reduced the DTA by almost $16 million. We also recognized OTTI charges of $1.2 million of pooled trust preferred securities the reaming (inaudible) are a book value of 77.6 million and it got a fair value of the $82.8 million, and again little more detail provide in the supplemental schedules.
Weâll turn now to slide 18 and cover our loan portfolio, which totaled $11.3 billion at September 30th and thatâs a decline of $288 million from Q2. Weâll first go to each segment of the portfolio and then an overall asset quality wrap up including a summary on non-accrual. The $11.1 billion continuing portfolio consists generally a relationship lending to consumers, small, middle market businesses, as well as national businesses, and asset based lending and equipment finance, based on an original basis, (inaudible) outside of the footprint, remain [ph] the sponsors to be known in the region.
The specialty segments of ABO and equipment finance are direct to customer and managed centrally. The discontinuing liquidating portfolio consists predominantly of indirect home equity loans at this point, and this portfolio declined by $18.5 million in the quarter.
On slide 19, the focus is on the loan mix and yields. You can see here that the yields in the portfolio declined about 3 basis points during the quarter. Our residential yields continue to decline from refinancing activity and to a lesser extent from interest reversals.
The consumer yields increased slightly reflecting of pricing discipline, the new home equity originations and commercial improved by 6 basis points also reflective of better spreads and structure on new loans, renewal and modifications, while pre-decline by 7 basis points from periodic rate reassess.
Now, weâll give some detail on each of the loan segments. First, weâll take a look at our residential loan portfolio. Approximately 81% is in footprint, 46% is in jumbos, abut 52% in conforming loans. Again, no options ARMs minimal all the exposure which is under $37 million. Originations were $219 million for the quarter, compared to the $302 million originated in Q2, and just about a $124 million a year ago.
The refreshed weighted average FICO on the portfolio 723, and a refreshed portfolio weighted average LTV is 59%. The majority of the $16.2 million increase that you see here in residential non-accrual loans is related to loans modified and placed on non-accrual status. However, these loans are paying interest in principal for the modification terms and interest is recorded only on receipt.
We've also provided an update for Permanent NCLC segment within the residential and that decline $41.4 million at September 30th of 2009, and thatâs down from $44.7 million at June from $1 million in payouts, $1 million in transfers to REO and about a $1.3 million in write downs. This segment has had a disproportionate effect on NPLs and net charge-offs in the quarter relative to the entire $2.8 billion continuing portfolio.
Regarding our consumer portfolio itâs about 99% home equity, utilization was constant with the second quarter at about 51%. About 83% of this portfolio is in footprint 19% of home equity portfolios in old (inaudible) position. We've also included the updated weighted average FICO and CLTV. And you can see there is no change in the average FICO scores from last quarter and there is a slight positive change in CLTV from the updated Case Schiller valuations.
Originations in consumer was $66.8 million this quarter, as compared to $69 million in the second quarter and from a $180.9 million a year-ago. The NPLs in this portfolio totaled $39.8 million and thatâs up slightly from the $38.4 million at June 30th.
On slide 22, weâll now take a look at our discontinued liquidating portfolio, which consists of about $231 million of home equity, $6 million of national construction loans. We saw a $90 million decline in the third quarter of â09 including about $4.3 million in net payoff activity. About $13.1 million in charge offs were specific to the home equity segment to $270,000 in charge offs were related to NCLC. We have reserves for these discontinued portfolios at about $57.1 million of which $56.1 million is for home equity and $1 million for the national construction portfolio. The liquidating reserves for home equity are based on a forward-looking projected charge-off coverage and the reserves for NCLC are based on a credit-by-credit assessment, and both of which we update quarterly.
This quarter we provided about $28.5 million in provision expense specifically for these segments. This represents an increase in allowance coverage for the equity portfolio based on our updated risk assessment and on the remaining portfolio, and coverage now represents about 15-months worth of projected charge-offs.
Turning now to slide 23, we will take a look at our commercial non-mortgage portfolio, which consists of middle markets, small business, insurance premium finance and segment banking. Contained in this portfolio are core in-market small business and middle market customer relationships. The portfolio totaled $1.6 billion at September 30th, a decrease from $1.7 billion at June 30th. The originations for the quarter for small business totaled about $18 million in comparison to the $19 million in the second quarter and about $41 million a year ago where middle market originated $8 million in the quarter compared to $24 million in Q2 and a little under $27 million.
It's important to note that non-accruals declined about $7.3 million in the second quarter in this portfolio. Overall, both the middle market and small business portfolios continue to be relatively stable from a credit performance perspective thus far in the cycle.
Turning now to take a look at equipment finance in the next slide, you can see this portfolio consists of five industry segments; transportation, construction, environmental, manufacturing and aviation. The portfolio totaled $951 million in comparison to $998 million at June 30th.
Originations were $48.8 million in the quarter and that's in comparison to the $73.4 million in Q2 and a $107.9 million a year ago. When we look at the asset quality stats specific to this business, we've certainly seen some increases in non-performing loans across all segments â just given the challenging economic environment and impact this has had on small businesses. We did see, however, modest declines in NPLs during the period down to $31.8 million in comparison to $35.7 million at June 30th. We are about $12.5 million in new non-accrual loans in the quarter compared to $30.7 million in the second quarter.
If we turn now and take a look at asset based lending on the next slide, there are reductions and commitments in outstanding balances in both Q1 and Q2 of 2009, that we saw a continuation of in the third quarter. Originations for the quarter were about $14.6 million and thatâs in comparison with $2.8 million in Q2 and $16.4 million a year ago.
The decrease in non-performing loans in the quarter was related to pay-down activity and approximately $60 million worth of charge-offs. Charge-offs in the quarter included the write-off of $9 million for single credit based on an updated appraisal, which reflects deterioration in value of the underlying collateral.
On the next slide, you can see our commercial real estate portfolio, which consists of investor trade, small business, owner occupied. This portfolio is well diversified by product, by geography and property type. There is a modest retail exposure and the team continues to actively monitor maturities, vacancy trends and leasing activity.
There is no originations for the quarter in commercial real estate in comparison to $24.9 million in Q2 and $120.7 million a year ago. This portfolio decreased slightly in the quarter and while the three portfolios saw no charge-offs, once again, this quarter we did see an increase of $31 million in non-performing loans based on the receipt of updated financial information and expected cash flows.
Delinquencies totaled $23.9 million in comparison to $19.1 million at June 30th, about $7.2 million at the end of 2008. Upcoming maturities for 2010, 2011 and 2012 for this portfolio are $308 million, $317 million and $139 million respectively.
If you turn now to slide 27, you can see that the res dev portfolio declined $129 million as of September 30th, a reduction of $15 million. That was primarily driven by $10.3 million of pay-off activity, a million in loan sales, and $3 million in net charge-offs. Itâs also offset by some loan disbursements of performing projects. Net charge-offs in the quarter were primarily driven by non-accrual resolution and updated valuations on new non-performing loans, though our 7.6 million of new non-accruals in the quarter compared to 1.1 million in the second quarter.
Absorption activity continues to be slow, but we have seen continued sales activity across the footprint in Q3 as we affected 44 releases on the $10.3 million worth of pay-offs from executing contracts. About 91% or $170 million of the portfolio on September 30th was in Connecticut, Massachusetts and $32 million consisted of 16 projects in Fairfield County. In these performing portfolios, there is only three remaining res dev relationships with an aggregate exposure greater than $5 million.
Turning to slide 28, you can see here we've provided a new schedule and a summary of the new non-accruals which we've covered in each of the session today, as well as securities [ph] and assets net charge-offs and transfers to OREO. So, you can readily see the flows in non-performing loans from quarter-to-quarter.
On the newt slide and the concluding slide in the asset quality credit sanction, we provide a view overall of the portfolio and the discontinued liquidating portfolio overall. And you can see here easily the impact that the discontinued segment has had on our totals.
I want to reference a couple of asset quality statistics that were included in the press release tables. Our total non-performing loans were about $361 million or 3.19% of total loans in September 30th and that compares with $350 million or 3.02% of loans of June 30th.
The increase in non performance was primarily attributed to increased levels of performing non-accrual resi loans as discussed earlier, and increases in commercial real estate, and that's offset by declines in commercial, equipment finance, asset-based lending and residential development loans. Note that our past due loans for the continuing portfolios were up slightly to about $117.8 million in comparison to $113.4 million at June 30. Increases in consumer of about $2.8 million and commercial real estate of 4.8 were partially offset by declines in equipment finance and residential development.
Weâll turn now to take a look at deposits. And is noted previously, everyone in our company continues to be focused on business development, and is part of that focus on having a deposits first mentality since we believe our primary role as a regional bank is to directly gather deposits for the purpose of self-funding our loan activities. And as you can see, in the third quarter we generated over $426 million in growth, specifically in money market and savings accounts, were offset by decline [ph] and now CDs and brokered deposits.
And as you can see on the next slide, while growing deposits during the quarter we saw a 29 basis point decline in cost, again reflecting we did not achieve this growth through pricing. You can see this very clearly on slide 31. And with over $775 million of CD maturities in Q4, weâve an opportunity to continue to lower our cost of deposits further. And with a keen focus on growing commercial small business and government finance operating relationships, we continue to have opportunity to prove on mix in the periods to come as well. And as previously noted, you can see there was solid improvement in both our core deposit ratio and our loans to deposit ratio in Q3.
On slide 32, weâll take a quick look at borrowings. You can see here that our borrowings consist of FHLB advances, repos and other short-term and long-term debt. Our borrowings to total assets declined to almost 29% at September 30, and that's down from 13% at June 30 and 21% from a year ago. But itâs important to notice that the asset side, the denominators [ph] been relatively constant in each of these periods. So we continue to utilize strong deposit inflows discussed in the prior slides to offset maturities, and further reduce reliance on borrowings as a funding source. And itâs important to note that borrowing cost will be favorable impacted in Q4 from the maturity of about 118.5 million in FHLB advances.
Turning now to slide 33, weâve outlined the diverse sources of liquidity that we have while the third quarter deposit growth is very significant, again given that CD maturities and downward repricing of deposit products in each line of business. We got strong cash management services that continue to be well received in the market, continue to see progress both in relationships in commercial and government finance.
Additionally, you can see here, we have availability from wholesale sources of about 5.1 billion in capacity, over 400 million overnight at (inaudible), and from a holding company perspective, we have over 10 years worth of cash needs available at the holding company.
Iâll now turn it back to Jim and heâll provide some closing remarks.
Thank you, Gerry. I just want to say after listening to your comments that we pride ourselves on full disclosure and transparency, and I think what you just heard from Gerry and with all the slides you have there is a very good example of that.
I want to conclude with some takeaway highlights for the quarter. We posted improved pre-tax, pre-provision earnings of $56 million, up $5 million from Q2. Our capital levels are solid across the board, and regulatory capital ratio has significantly exceed regulatory requirements and peer group ratios such that we are seeking regulatory approval to begin to repay CPP capital.
Our deposit growth initiative has helped us increase our market share, and our net interest margin grew 14 basis points to 318 in the quarter with the trend in NIM remaining positive.
And finally we continue to be cautious on credit increasing our reserve coverage significantly for the fourth consecutive quarter. New non-accrual loans are trending slightly downward, while (inaudible) continue to rise. Non-performing loans are down in most categories, and delinquencies remain stable. We continue to reserve well in excess of charge-offs. Thank you for participating in our call today. Now Gerry and I will be pleased to take your questions.