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Webster Financial 10-Q 2010

Documents found in this filing:

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

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended June 30, 2010.

or

 

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

Commission File Number: 001-31486

 

 

LOGO

WEBSTER FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   06-1187536

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

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

(203) 578-2202

(Registrant’s telephone number, including area code)

 

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

 

 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

þ  Yes    ¨  No

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

 

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

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

The number of shares of common stock, par value $.01 per share, outstanding as of July 23, 2010 was 78,474,088.

 

 

 


Table of Contents

INDEX

 

     Page No.

PART I – FINANCIAL INFORMATION

  

Item 1.

    

Financial Statements

   3

Item 2.

    

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   42

Item 3.

    

Quantitative and Qualitative Disclosures about Market Risk

   69

Item 4.

    

Controls and Procedures

   69

PART II – OTHER INFORMATION

  

Item 1.

    

Legal Proceedings

   70

Item 1A.

    

Risk Factors

   71

Item 2.

    

Unregistered Sales of Equity Securities and Use of Proceeds

   71

Item 3.

    

Defaults Upon Senior Securities

   72

Item 4.

    

[Removed and Reserved]

   72

Item 5.

    

Other Information

   72

Item 6.

    

Exhibits

   73

SIGNATURES

   74

EXHIBIT INDEX

   75

 

2


Table of Contents

PART I. – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

(In thousands, except share and per share data)

   June 30,
2010
    December 31,
2009
 
     (Unaudited)        

Assets:

    

Cash and due from banks

   $ 179,490      $ 171,184   

Interest-bearing deposits

     40,041        390,310   

Investment securities:

    

Trading, at fair value

     8,785        —     

Available for sale, at fair value

     2,206,362        2,126,043   

Held-to-maturity (fair value of $3,270,896 and $2,720,180)

     3,136,605        2,658,869   
                

Total investment securities

     5,351,752        4,784,912   

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

     143,874        140,874   

Loans held for sale (including $0 and $4,790 of mortgage loans carried at fair value, respectively)

     11,109        12,528   

Loans

     10,856,560        11,036,709   

Allowance for loan losses

     (344,087     (341,184
                

Loans, net

     10,512,473        10,695,525   

Deferred tax asset, net

     101,855        121,733   

Premises and equipment, net

     164,865        178,422   

Goodwill

     529,887        529,887   

Other intangible assets, net

     24,071        26,865   

Cash surrender value of life insurance policies

     293,387        289,486   

Prepaid FDIC premiums

     68,257        79,241   

Accrued interest receivable and other assets

     322,087        318,230   
                

Total assets

   $ 17,743,148      $ 17,739,197   
                

Liabilities and Equity:

    

Deposits:

    

Noninterest bearing deposits

   $ 1,763,819      $ 1,664,958   

Interest bearing deposits

     11,715,726        11,967,169   
                

Total deposits

     13,479,545        13,632,127   

Federal Home Loan Bank advances

     629,828        544,651   

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

     960,197        856,846   

Long-term debt

     586,617        588,419   

Accrued expenses and other liabilities

     203,222        159,120   
                

Total liabilities

     15,859,409        15,781,163   
                

Shareholders’ equity:

    

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

    

Series A issued and outstanding - 28,939 shares

     28,939        28,939   

Series B issued and outstanding - 300,000 shares and 400,000 shares (net of discount $4,468 and $6,830)

     295,532        393,170   

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

    

Issued - 81,977,210 shares and 81,963,734 shares

     820        820   

Paid-in capital

     1,007,755        1,007,740   

Retained earnings

     710,295        708,024   

Less: Treasury stock, (at cost; 3,920,345 shares and 4,067,057 shares)

     (156,539     (161,911

Accumulated other comprehensive loss, net

     (12,711     (28,389
                

Total Webster Financial Corporation shareholders’ equity

     1,874,091        1,948,393   
                

Non controlling interests

     9,648        9,641   
                

Total equity

     1,883,739        1,958,034   
                

Total liabilities and equity

   $ 17,743,148      $ 17,739,197   
                

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

 

     Three months ended June 30,     Six months ended June 30,  

(In thousands, except per share data)

   2010     2009     2010     2009  

Interest Income:

        

Interest and fees on loans and leases

   $ 122,447      $ 137,533      $ 245,797      $ 278,300   

Taxable interest and dividends on securities

     47,963        41,098        94,559        83,943   

Non-taxable interest and dividends on securities

     7,480        7,701        15,040        15,683   

Loans held for sale

     144        833        458        997   
                                

Total interest income

     178,034        187,165        355,854        378,923   
                                

Interest Expense:

        

Deposits

     30,482        49,982        62,433        102,890   

Borrowings

     15,210        17,895        29,695        38,548   
                                

Total interest expense

     45,692        67,877        92,128        141,438   
                                

Net interest income

     132,342        119,288        263,726        237,485   

Provision for loan losses

     32,000        85,000        75,000        151,000   
                                

Net interest income after provision for loan losses

     100,342        34,288        188,726        86,485   
                                

Non-interest Income:

        

Deposit service fees

     29,345        29,984        57,129        57,943   

Loan related fees

     7,225        6,350        13,230        12,832   

Wealth and investment services

     6,218        6,081        12,053        11,831   

Mortgage banking activities

     427        3,433        289        4,039   

Increase in cash surrender value of life insurance policies

     2,612        2,665        5,190        5,257   

Gain on the exchange of trust preferreds for common stock

     —          24,336        —          24,336   

Gain on early extinguishment of subordinated notes

     —          —          —          5,993   

Net gain on assets classified as trading

     8,584        —          8,584        —     

Net gain (loss) on sale of investment securities

     4,364        (13,593     8,682        (9,135

Total other-than-temporary impairment losses on securities

     (3,054     (27,110     (11,268     (27,110

Portion of the loss recognized in other comprehensive income

     1,866        —          6,400        —     
                                

Net impairment losses recognized in earnings

     (1,188     (27,110     (4,868     (27,110

Other income

     7,933        3,232        12,247        3,507   
                                

Total non-interest income

     65,520        35,378        112,536        89,493   
                                

Non-interest Expense:

        

Compensation and benefits

     60,584        59,189        121,663        115,658   

Occupancy

     13,546        13,594        27,986        27,889   

Technology and equipment expense

     15,657        15,288        30,925        30,428   

Intangible assets amortization

     1,397        1,450        2,794        2,913   

Marketing

     5,226        3,196        10,017        6,302   

Professional and outside services

     3,566        3,394        6,168        7,178   

Deposit insurance

     7,161        5,959        13,246        10,549   

Litigation reserve

     19,676        —          19,676        —     

Other expenses

     20,854        28,007        48,816        47,176   
                                

Total non-interest expense

     147,667        130,077        281,291        248,093   
                                

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

     18,195        (60,411     19,971        (72,115

Income tax expense (benefit)

     550        (28,536     905        (29,129
                                

Income (loss) from continuing operations

     17,645        (31,875     19,066        (42,986

Income (loss) from discontinued operations, net of tax

     —          313        —          313   
                                

Consolidated net income (loss)

     17,645        (31,562     19,066        (42,673

Less: Net income attributable to non controlling interests

     7        —          7        13   
                                

Net income (loss) attributable to Webster Financial Corporation

     17,638        (31,562     19,059        (42,686

Preferred stock dividends, accretion of preferred stock discount and gain on extinguishment

     (4,908     48,361        (12,398     37,932   
                                

Net income (loss) available to common shareholders

   $ 12,730      $ 16,799      $ 6,661      $ (4,754
                                

See accompanying Notes to Condensed Consolidated Financial Statements.

 

4


Table of Contents

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited), continued

 

 

     Three months ended June 30,     Six months ended June 30,  

(In thousands, except per share data)

   2010    2009     2010    2009  

Net income (loss) per common share:

          

Basic

          

Income (loss) from continuing operations

   $ 0.16    $ 0.30      $ 0.08    $ (0.10

Net income (loss) available to common shareholders

     0.16      0.31        0.08      (0.09

Diluted

          

Income (loss) from continuing operations

     0.15      (0.66     0.08      (0.97

Net income (loss) available to common shareholders

     0.15      (0.65     0.08      (0.96
          

See accompanying Notes to Condensed Consolidated Financial Statements.

 

5


Table of Contents

WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited)

 

    Six months ended June 30, 2009  

(In thousands, except share and per
share data)

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

Balance, December 31, 2008

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

Cumulative effect of change in accounting principle

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

Comprehensive income:

               

Net loss

    —          —       —          (42,686     —          —          13     (42,673

Other comprehensive income (loss), net of taxes:

               

Net change in unrealized gain on securities available for sale

    —          —       —          —          —          48,394        —       48,394   

Amortization of unrealized loss on securities transferred to held to maturity

    —          —       —          —          —          135        —       135   

Net unrealized gain on derivative instruments

    —          —       —          —          —          824        —       824   

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

    —          —       —          —          —          1,116        —       1,116   
                                                           

Other comprehensive income, net of taxes

    —          —       —          —          —          50,469        —       50,469   
                                                           

Total comprehensive income, net of taxes

                  7,796   

Dividends paid on common stock of $.02 per share

    —          —       —          (1,055     —          —          —       (1,055

Dividends paid on Series A preferred stock $42.50 per share

    —          —       —          (9,558     —          —          —       (9,558

Dividends incurred on Series B preferred stock $25.00 per share

    —          —       —          (10,000     —          —          —       (10,000

Subsidiary preferred stock dividends $0.42 per share

    —          —       —          (431     —          —          —       (431

Exercise of stock options

    —          —       —          —          —          —          —       —     

Repurchase of 8,569 common shares

    —          —       —          —          (51     —          —       (51

Stock-based compensation expense

    —          —       1,246        —          —          —          —       1,246   

Accretion of preferred stock discount

    872        —       —          (872     —          —          —       —     

Restricted stock grants and expense

    —          —       5,860        222        (2,847     —          —       3,235   

Conversion of Series A preferred stock

    (168,500     60     49,069        58,792        —          —          —       (60,579

Extinguishment of Trust Preferred Securities

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

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

    —          —       (24     —          —          —          —       (24
                                                           

Balance, June 30, 2009

  $ 448,698      $ 679   $ 826,418      $ 789,718      $ (157,123   $ (66,872   $ 9,632   $ 1,851,150   
                                                           

See accompanying Notes to Condensed Consolidated Financial Statements.

 

6


Table of Contents

WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES

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

 

     Six months ended June 30, 2010  

(In thousands, except share and
per share data)

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

Balance, December 31, 2009

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

Comprehensive income:

                  

Net income

     —          —        —          19,059        —          —          7      19,066   

Other comprehensive income (loss), net of taxes:

                  

Net change in unrealized gain on securities available for sale

     —          —        —          —          —          22,387        —        22,387   

Net change in non-credit related other than temporary impairment on securities

     —          —        —          —          —          (3,633     —        (3,633

Amortization of unrealized loss on securities transferred to held to maturity

     —          —        —          —          —          192        —        192   

Net unrealized loss on derivative instruments

     —          —        —          —          —          (4,043     —        (4,043

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

     —          —        —          —          —          775        —        —   775   
                                                              

Other comprehensive income, net of taxes

     —          —        —          —          —          15,678        —        15,678   
                                                              

Total comprehensive income, net of taxes

                     34,744   

Dividends paid on common stock of $.02 per share

     —          —        —          (1,567     —          —          —        (1,567

Dividends paid on Series A preferred stock $42.50 per share

     —          —        —          (1,230     —          —          —        (1,230

Dividends incurred on Series B preferred stock $25.00 per share

     —          —        —          (8,375     —          —          —        (8,375

Redemption of Preferred Stock

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

Subsidiary preferred stock dividends $0.42 per share

     —          —        —          (432     —          —          —        (432

Exercise of stock options

     —          —        (216     —          418        —          —        202   

Repurchase of 33,200 common shares

     —          —        —          —          (571     —          —        (571

Stock-based compensation expense

     —          —        165        (1,492     3,157        —          —        1,830   

Accretion of preferred stock discount

     727        —        —          (727     —          —          —        —     

Issuance of common stock

     —          —        66        (1,330     2,368        —          —        1,104   
                                                              

Balance, June 30, 2010

   $ 324,471      $ 820    $ 1,007,755      $ 710,295      $ (156,539   $ (12,711   $ 9,648    $ 1,883,739   
                                                              

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 

     Six months ended June 30,  

(In thousands)

   2010     2009  

Operating Activities:

    

Consolidated net income (loss)

   $ 19,066      $ (42,673

Income from discontinued operations, net of tax

     —          313   
                

Income (loss) from continuing operations

     19,066        (42,986

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

    

Provision for loan losses

     75,000        151,000   

Deferred tax benefit

     5,623        4,437   

Depreciation and amortization

     44,716        29,742   

Gain on early extinguishment of subordinated notes

     —          (4,504

Gain on exchange of trust preferred securities for common stock

     —          (24,336

Stock-based compensation

     1,832        4,481   

Foreclosed and repossessed asset write-downs

     2,953        6,279   

Write-down of premises and equipment

     48        1,150   

Loss on write-down of investments to fair value

     4,868        27,110   

Gain on fair value adjustment of direct investments

     (1,943     —     

Loss on fair value adjustment of derivative instruments

     1,774        —     

Net (gain) loss on the sale of investment securities

     (8,682     9,135   

Net gain on assets classified as trading

     (8,584     —     

Net (increase) decrease in trading securities

     (201     76   

Increase in cash surrender value of life insurance policies

     (6,136     (5,257

Net decrease (increase) in loans held for sale

     1,419        (89,412

Net decrease (increase) in accrued interest receivable and other assets

     19,092        (49,511

Net increase (decrease) in accrued expenses and other liabilities

     30,226        (41,434
                

Net cash provided by (used for) operating activities

     181,071        (24,030
                

Investing Activities:

    

Net decrease in interest-bearing deposits

     350,269        13,938   

Purchases of available for sale securities

     (645,406     (688,091

Proceeds from maturities and principal payments of available for sale securities

     320,295        99,085   

Proceeds from sales of available for sale securities

     267,234        410,336   

Purchases of held-to-maturity securities

     (713,221     (286,084

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

     231,736        242,530   

Purchases of FHLB and FRB stock

     (3,000     (3,000

Net decrease in loans

     85,477        264,214   

Proceeds from life insurance policies

     2,237        —     

Proceeds from sale of foreclosed properties

     9,946        11,789   

Proceeds from sale of premises and equipment

     675        —     

Purchases of premises and equipment

     (5,649     (13,283
                

Net cash (used for) provided by investing activities

     (99,407     51,434   
                

Financing Activities:

    

Net (decrease) increase in deposits

     (152,582     1,289,693   

Proceeds from Federal Home Loan Bank advances

     299,000        9,420,286   

Repayments of Federal Home Loan Bank advances

     (213,217     (10,091,665

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

     104,312        (554,912

Redemption of preferred stock

     (100,000     —     

Conversion of Series A Preferred Stock

     —          (58,975

Repayment of long-term debt

     —          (15,928

Issuance of Preferred Stock, net of issuance costs

     —          (24

Cash dividends paid to common shareholders

     (1,569     (1,055

Cash dividends paid to preferred shareholders of consolidated affiliate

     (432     (431

Cash dividends paid to preferred shareholders

     (9,605     (19,225

Exercise of stock options

     202        —     

Tax benefit for treasury stock repurchases

     (571     —     

Common stock issued

     1,104        —     

Common stock repurchased

     —          (51
                

Net cash used for financing activities

     (73,358     (32,287
                

Cash Flows from Discontinued Operations:

    

Operating Activities

     —          313   
                

Net cash provided by discontinued operations

     —          313   
                

Net increase (decrease) in cash and due from banks

     8,306        (4,570

Cash and due from banks at beginning of period

     171,184        259,208   
                

Cash and due from banks at end of period

   $ 179,490      $ 254,638   
                

Supplemental disclosure of cash flow information:

    

Interest paid

   $ 93,155      $ 147,672   

Income taxes paid

     662        1,847   

Noncash investing and financing activities:

    

Gain on early extinguishment of fair value hedge of subordinated debt

   $ —        $ 1,489   

Transfer of loans and leases, net to repossessed assets

     15,802        21,253   

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

NOTE 1: Summary of Significant Accounting Policies

Nature of Operations. Webster Financial Corporation (“Webster” or the “Company”) is a financial holding company and a bank holding company headquartered in Waterbury, Connecticut that delivers, through its subsidiaries, financial services to individuals, families and businesses throughout New England and into Westchester County, New York. Webster also offers equipment financing, asset-based lending, commercial real estate lending, health savings accounts and, prior to November 2009, insurance premium (“BIC”) financing on a national basis.

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

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

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

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

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

Comprehensive Income. Comprehensive income includes all changes in shareholders’ equity during a period, except those resulting from transactions with shareholders. Besides net income, other components of Webster’s comprehensive income include the after-tax effect of changes in the net unrealized gain/loss on securities available for sale, change in non-credit related other than temporary impairment on securities, amortization of unrealized losses on securities transferred to held to maturity, changes in the net actuarial gain/loss on defined benefit post-retirement benefit plans and changes in the accumulated gain/loss on effective cash flow hedging instruments. Comprehensive income for the six months ended June 30, 2010 and 2009 is reported in the accompanying condensed consolidated statements of shareholders equity.

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

 

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There have been no other changes to our significant accounting policies that were disclosed in the 2009 Form 10-K.

Accounting Standards Updates

ASU No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820) - Improving Disclosures About Fair Value Measurements.” ASU 2010-06 requires expanded disclosures related to fair value measurements including (i) the amounts of significant transfers of assets or liabilities between Levels 1 and 2 of the fair value hierarchy and the reasons for the transfers, (ii) the reasons for transfers of assets or liabilities in or out of Level 3 of the fair value hierarchy, with significant transfers disclosed separately, (iii) the policy for determining when transfers between levels of the fair value hierarchy are recognized and (iv) for recurring fair value measurements of assets and liabilities in Level 3 of the fair value hierarchy, a gross presentation of information about purchases, sales, issuances and settlements. ASU 2010-06 further clarifies that (i) fair value measurement disclosures should be provided for each class of assets and liabilities (rather than major category), which would generally be a subset of assets or liabilities within a line item in the statement of financial position and (ii) companies should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements for each class of assets and liabilities included in Levels 2 and 3 of the fair value hierarchy. The disclosures related to the gross presentation of purchases, sales, issuances and settlements of assets and liabilities included in Level 3 of the fair value hierarchy will be required for the Company beginning January 1, 2011. The remaining disclosure requirements and clarifications made by ASU 2010-06 became effective for the Company on January 1, 2010. See Note 13 – Fair Value Measurements.

ASU No. 2010-11, “Derivatives and Hedging (Topic 815) - Scope Exception Related to Embedded Credit Derivatives.” ASU 2010-11 clarifies that the only form of an embedded credit derivative that is exempt from embedded derivative bifurcation requirements are those that relate to the subordination of one financial instrument to another. As a result, entities that have contracts containing an embedded credit derivative feature in a form other than such subordination may need to separately account for the embedded credit derivative feature. The provisions of ASU 2010-11 will become effective for the Company on July 1, 2010 and are not expected to have a significant impact on the Company’s Condensed Consolidated Financial Statements.

ASU No. 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” On July 21, 2010, the FASB issued ASU No. 2010-20 which requires significant new disclosures about the allowance for credit losses and the credit quality of financing receivables. The requirements are intended to enhance transparency regarding credit losses and the credit quality of loan and lease receivables by disclosing an evaluation of (i) the nature of credit risk inherent in the entity’s portfolio of financing receivables, (ii) how that risk is analyzed and assessed in arriving at the allowance for credit losses and (iii) the changes and reasons for those changes in the allowance for credit losses. Under this statement, allowance for credit losses and fair value are to be disclosed by portfolio segment, while credit quality information, impaired financing receivables and nonaccrual status are to be presented by class of financing receivable. Disclosure of the nature and extent, the financial impact and segment information of troubled debt restructurings will also be required. The disclosures are to be presented at the level of disaggregation that management uses when assessing and monitoring the portfolio’s risk and performance. ASU 2010-20 will be effective for the Company’s consolidated financial statements as of December 31, 2010, as it relates to disclosures required as of the end of a reporting period. Disclosures that relate to activity during a reporting period will be required for the Company’s consolidated financial statements that include periods beginning on or after January 1, 2011.

 

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NOTE 2: Investment Securities

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

 

     June 30, 2010
          Recognized in OCI          Not Recognized in OCI      

(Dollars in thousands)

   Amortized
cost (a)(b)
   Gross
unrealized
gains
   Gross
unrealized
losses
    Carrying
value
   Gross
unrealized
gains
   Gross
unrealized
losses
    Fair value

Trading:

                  

Equity securities (a) 

   $ 8,785    $ —      $ —        $ 8,785    $ —      $ —        $ 8,785
                                                  

Total Trading

   $ 8,785    $ —      $ —        $ 8,785    $ —      $ —        $ 8,785
                                                  

Available for sale:

                  

U.S. Treasury Bills

   $ 200    $ —      $ —        $ 200    $ —      $ —        $ 200

Agency notes - GSE

     130,167      114      —          130,281      —        —          130,281

Agency collateralized mortgage obligations (“CMOs”) - GSE

     790,027      18,816      —          808,843      —        —          808,843

Pooled trust preferred securities (b)

     70,357      2,316      (14,117     58,556      —        —          58,556

Single issuer trust preferred securities

     50,780      —        (10,592     40,188      —        —          40,188

Equity securities-financial institutions (c)

     6,260      465      (329     6,396      —        —          6,396

Mortgage-backed securities - GSE

     830,838      40,597      —          871,435      —        —          871,435

Mortgage-backed securities - Private Label

     299,560      9,967      (19,064     290,463      —        —          290,463
                                                  

Total available for sale

   $ 2,178,189    $ 72,275    $ (44,102   $ 2,206,362    $ —      $ —        $ 2,206,362
                                                  

Held to maturity:

                  

Municipal bonds and notes

   $ 674,473    $ —      $ —        $ 674,473    $ 16,309    $ (2,290   $ 688,492

Agency collateralized mortgage obligations (“CMOs”) - GSE

     654,300      —        —          654,300      16,948      —          671,248

Mortgage-backed securities - GSE

     1,763,558      —        —          1,763,558      102,410      (73     1,865,895

Mortgage-backed securities - Private Label

     44,274      —        —          44,274      987      —          45,261
                                                  

Total held to maturity

   $ 3,136,605    $ —      $ —        $ 3,136,605    $ 136,654    $ (2,363   $ 3,270,896
                                                  

Total investment securities

   $ 5,323,579    $ 72,275    $ (44,102   $ 5,351,752    $ 136,654    $ (2,363   $ 5,486,043
                                                  

 

(a) Amortized cost includes $8.6 million mark to market gain at June 30, 2010.
(b) Amortized cost is net of $39.2 million of credit related other-than-temporary impairments at June 30, 2010.
(c) Amortized cost is net of $21.7 million of other-than-temporary impairments at June 30, 2010.

 

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     December 31, 2009
          Recognized in OCI          Not Recognized in OCI      

(Dollars in thousands)

   Amortized
cost (a)(b)
   Gross
unrealized
gains
   Gross
unrealized
losses
    Carrying
value
   Gross
unrealized
gains
   Gross
unrealized
losses
    Fair value

Available for sale:

                  

U.S. Treasury Bills

   $ 200    $ —      $ —        $ 200    $ —      $ —        $ 200

Agency notes - GSE

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

Agency collateralized mortgage obligations (“CMOs”) - GSE

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

Pooled trust preferred securities (a)

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

Single issuer trust preferred securities

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

Equity securities - financial institutions (b)

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

Mortgage-backed securities - GSE

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

Mortgage-backed securities - Private Label

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

Total available for sale

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

Held to maturity:

                  

Municipal bonds and notes

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

Mortgage-backed securities - GSE

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

Mortgage-backed securities - Private Label

     52,492      —        —          52,492      —        (292     52,200
                                                  

Total held to maturity

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

Total investment securities

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

 

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

Securities with a carrying value totaling $2.4 billion at June 30, 2010 and $2.2 billion at December 31, 2009 were pledged to secure public funds, trust deposits, repurchase agreements and for other purposes, as required or permitted by law.

The amortized cost and fair value of debt securities at June 30, 2010, by contractual maturity, are set for the below.

 

     Available for Sale    Held to Maturity

(Dollars in thousands)

   Amortized
Cost
   Fair
Value
   Amortized
Cost
   Fair
Value

Due in one year or less

   $ 130,367    $ 130,481    $ 11,528    $ 11,529

Due after one year through five years

     24,769      24,953      3,349      3,403

Due after five through ten years

     47,486      38,117      383,690      406,077

Due after ten years

     1,969,307      2,006,415      2,738,038      2,849,887
                           

Totals

   $ 2,171,929    $ 2,199,966    $ 3,136,605    $ 3,270,896
                           

For the purposes of the maturity schedule, mortgage-backed securities, which are not due at a single maturity date, have been allocated over maturity groupings based on the expected maturity of the underlying collateral. Actual maturities may differ from contractual maturities because certain borrowers have the right to call or prepay obligations with or without call or prepayment penalties. At June 30, 2010, the Company had $696.4 million of callable securities in its investment portfolio.

At June 30, 2010 and December 31, 2009, the Company had no investments in obligations of individual states, counties, or municipalities, which exceed 10% of consolidated shareholders’ equity.

Management evaluates securities for other than temporary impairment (“OTTI”) on a quarterly basis. All securities classified as held to maturity or available for sale that are in an unrealized loss position are evaluated for OTTI. Consideration is given to, among other qualitative factors; current market conditions, fair value in relationship to cost, extent and nature of change in fair value, issuer rating changes and trends, volatility of earnings, current analysts’ evaluations, and all available information relevant to the collectability of debt securities. If the Company intends to sell the security or, if it is more likely than not that the Company will be required to sell the security prior to recovery of its amortized cost basis, the security’s amortized cost is written down to fair value and the respective loss is recorded as non-interest expense in the Consolidated Statement of Operations. If the Company does not intend to sell the security and if it is more likely than not that the Company will not be required to sell the security prior to recovery of its amortized cost basis, only the credit component of any non-credit related impairment charge of a debt security is recognized as a loss in non-interest income in the Consolidated Statement of Operations. The remaining impairment is recorded in other comprehensive income (“OCI”). A decline in the value of an equity security that is considered OTTI is recorded as a loss in non-interest income in the Consolidated Statements of Operations.

 

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The following table provides information on the gross unrealized losses and fair value of the Company’s investment securities with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment security category and length of time that individual investment securities have been in a continuous unrealized loss position at June 30, 2010.

 

          June 30, 2010  
          Less Than Twelve Months     Twelve Months or Longer     Total  

(Dollars in thousands)

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

Available for Sale:

                  

U.S. Treasury Bills

   1    $ 200    $ —        $ —      $ —        $ 200    $ —     

Agency notes - GSE

   —        —        —          —        —          —        —     

Agency CMOs - GSE

   —        —        —          —        —          —        —     

Pooled trust preferred securities

   10      49,204      (11,672     3,083      (2,444     52,287      (14,116

Single issuer trust preferred securities

   9      —        —          40,187      (10,592     40,187      (10,592

Equity securities

   14      1,370      (329     —        —          1,370      (329

Mortgage-backed securities-GSE

   —        —        —          —        —          —        —     

Mortgage-backed securities-Private Label

   5      5,349      (6     65,265      (19,059     70,614      (19,065
                                                  

Total available for sale

   39    $ 56,123    $ (12,007   $ 108,535    $ (32,095   $ 164,458    $ (44,102
                                                  

Held-to-maturity:

                  

Municipal bonds and notes

   108    $ 91,623    $ (1,425   $ 12,440    $ (865   $ 104,063    $ (2,290

Mortgage-backed securities-GSE

   1      —        —          10,159      (73     10,159      (73

Mortgage-backed securities-Private Label

   —        —        —          —        —          —        —     
                                                  

Total held-to-maturity

   109    $ 91,623    $ (1,425   $ 22,599    $ (938   $ 114,222    $ (2,363
                                                  

Total investment securities

   148    $ 147,746    $ (13,432   $ 131,134    $ (33,033   $ 278,680    $ (46,465
                                                  

The following table provides information on the gross unrealized losses and fair value of the Company’s investment securities with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment security category and length of time that individual investment securities have been in a continuous unrealized loss position at December 31, 2009.

 

          December 31, 2009  
          Less Than Twelve Months     Twelve Months or Longer     Total  

(Dollars in thousands)

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

Available for Sale:

                  

Agency notes - GSE

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

Agency CMOs - GSE

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

Pooled trust preferred securities

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

Single issuer trust preferred securities

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

Equity securities - financial institutions

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

Mortgage-backed securities-GSE

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

Mortgage-backed securities-Private Label

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

Total available for sale

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

Held-to-maturity:

                  

Municipal bonds and notes

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

Mortgage-backed securities-GSE

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

Mortgage-backed securities-Private Label

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

Total held-to-maturity

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

Total investment securities

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

 

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The following summarizes, by investment security type, the basis for evaluating if the applicable investment securities within the Company’s available for sale portfolio were other-than-temporarily impaired at June 30, 2010.

Trust Preferred Securities – Pooled Issuers – At June 30, 2010, the fair value of the pooled trust preferred securities was $58.6 million, a decrease of $12.1 million from the fair value of $70.7 million at December 31, 2009. The gross unrealized loss of $14.1 million, at June 30, 2010 is primarily attributable to changes in interest rates including a liquidity spread premium to reflect the inactive and illiquid nature of the trust preferred securities market at this time. For the three and six months ended June 30, 2010, respectively, the Company recognized $1.2 million and $4.8 million in OTTI for these securities, reflective of payment deferrals and credit deterioration of the underlying collateral. Non credit related OTTI of $1.9 million and $6.4 million on securities not expected to be sold and for which it is not more likely than not that we will be required to sell the securities before recovery of their amortized cost basis, was recognized in OCI during the three and six months ended June 30, 2010, respectively. The pooled trust preferred portfolio consists of collateralized debt obligations (“CDOs”) containing predominantly bank and insurance collateral that are investment grade and below investment grade. The Company employs an internal CDO model for projection of future cash flows and discounting those cash flows to a net present value. An internal model is used to value the securities due to the continued inactive market and illiquid nature of pooled trust preferred in the entire capital structure. Each underlying issuer in the pools is rated internally using the latest financial data on each institution, and future deferrals, defaults and losses are then estimated on the basis of continued stress in the financial markets. Further, all current and projected deferrals are not assumed to cure, and all current and projected defaults are assumed to have no recovery value. The resulting net cash flows are then discounted at current market levels for similar types of products that are actively trading. To determine potential OTTI due to credit losses, management compares the amortized cost to the present value of expected cash flows adjusted for deferrals and defaults using the discount margin at the time of purchase. Other factors considered include an analysis of excess subordination and temporary interest shortfall coverage. Based on the valuation analysis as of June 30, 2010, management expects to fully recover the remaining amortized cost of those securities not deemed to be other-than-temporarily impaired. However, additional interest deferrals, defaults, or ratings changes could result in future OTTI charges.

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

Trust Preferred Securities - Pooled Issuers

 

          

Amortized

   Unrealized    

Fair

  

Lowest Credit
Ratings as of
June 30,

  

Total
Other-Than-
Temporary
Impairment thru

   

% of
Performing
Bank/
Insurance

   

Current
Deferrals/
Defaults
(As a % of
Original

 

Deal Name (d)

   Class    Cost (b)    Gains    (Losses)     Value    2010 (a)    June 30, 2010     Issuers     Collateral)  
(Dollars in thousands)                                                  

Security A

   MEZ    $ 815    $ 323    $ —        $ 1,138    C    $ (1,866   81.3   25.4

Security B

   C      920      276      —          1,196    CCC      (4,094   94.4      9.9   

Security E

   B      2,173      —        (43     2,130    C      (7,909   71.4      29.2   

Security F-1

   C      2,218      1,717      —          3,935    C      (10,850   83.7      21.1   

Security F-2

   C      621      —        (436     185    C      —        83.7      21.1   

Security G (c) (d)

   B      1,963      —        (904     1,059    CC      (4,994   71.4      26.3   

Security H

   B      3,508      —        (1,402     2,106    B      (326   100.0      —     

Security I

   B      4,483      —        (1,809     2,674    B      (346   94.4      9.9   

Security J

   B      5,248      —        (2,249     2,999    B      (806   98.0      4.2   

Security G (d)

   A      7,303      —        (54     7,249    B      (2,040   72.6      31.0   

Security L

   B      8,789      —        (3,608     5,181    B      (793   96.0      6.6   

Security M (c) (d)

   A      8,180      —        (1,019     7,161    D      (4,092   58.2      42.8   

Security N

   A      24,136      —        (2,593     21,543    AA      (1,104   96.9      4.2   
                                               
      $ 70,357    $ 2,316    $ (14,117   $ 58,556       $ (39,220    
                                               

 

(a) The Company utilized credit ratings provided by Moody’s, S&P and Fitch in its evaluation of issuers.
(b) For the securities deemed impaired, the amortized cost reflects previous OTTI recognized in earnings.
(c) Credit-related OTTI of $1.2 million was recognized on these 2 securities during the three months ended June 30, 2010.
(d) During the six months ended June 30, 2010, OTTI of $4.8 million was recognized on these 3 securities, in addition to Security D, which was sold during the three months ended June 30, 2010.

 

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Trust Preferred Securities – Single Issuers – At June 30, 2010, the fair value of the single issuer trust preferred portfolio was $40.2 million, an increase of $1.5 million from the fair value of $38.7 million at December 31, 2009. The gross unrealized loss of $10.6 million at June 30, 2010 is primarily attributable to changes in interest rates and wider credit spreads over the holding period of these securities. The single issuer portfolio consists of five investments issued by three large capitalization, money center financial institutions, which continued in their ability to service debt and indications of stabilization in their capital structures. Based on the review of the qualitative and quantitative factors presented above, these securities were not deemed to be other-than-temporarily impaired at June 30, 2010 as the Company does not intend to sell these investments and has determined, based upon available evidence, that it is more likely than not that the Company will not be required to sell the security before the recovery of its amortized cost.

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

Trust Preferred Securities - Single Issuers

 

Deal Name

   Amortized
Cost
   Unrealized
Losses
    Fair
Value
   Lowest Credit
Ratings as of
June  30,

2010
   Total
Other-Than-
Temporary
Impairment
thru June 30,
2010
(Dollars in thousands)                          

Security B

   $ 6,798    $ (1,843   $ 4,955    BB    $ —  

Security C

     8,572      (1,348     7,224    BBB      —  

Security D

     9,540      (2,790     6,750    BB      —  

Security E

     11,646      (2,092     9,554    BBB      —  

Security F

     14,224      (2,519     11,705    BBB      —  
                               
   $ 50,780    $ (10,592   $ 40,188       $ —  
                               

Agency notes – GSE – There were no unrealized losses in the Company’s investment in agency notes at June 30, 2010 compared to $0.2 million at December 31, 2009. The contractual cash flows for these investments are performing as expected. With lower overall yields and higher prices during the second quarter ended June 30, 2010, these securities are all at unrealized gains.

Agency CMOs – GSE – There were no unrealized losses in the Company’s investment in agency CMOs at June 30, 2010 compared to $2.1 million at December 31, 2009. The contractual cash flows for these investments are performing as expected. With lower overall yields and higher prices during the second quarter ended June 30, 2010, these securities are all at unrealized gains.

Equity securities – The unrealized losses on the Company’s investment in equity securities decreased to $0.3 million at June 30, 2010 from $0.5 million at December 31, 2009. This portfolio consists primarily of investments in the common stock of small capitalization financial institutions based in New England ($5.2 million of the total fair value at June 30, 2010) and auction rate preferred securities ($1.2 million of the total fair value at June 30, 2010). When estimating the recovery period for equity securities in an unrealized loss position, management utilizes analyst forecasts, earnings assumptions and other company specific financial performance metrics. In addition, this assessment incorporates general market data, industry and sector cycles and related trends to determine a reasonable recovery period. The Company evaluated the near-term prospects of the issuers in relation to the severity and duration of the impairment. The Company determined its holdings of equity securities were not deemed to be other-than-temporarily impaired at June 30, 2010.

Mortgage-backed securities – GSE – There were no unrealized losses in the Company’s investment in residential mortgage-backed securities issued by the GSEs at June 30, 2010 compared to $0.8 million in unrealized losses at December 31, 2009. The contractual cash flows for these investments are performing as expected with the exception of unexpected principal prepayments resulting from GSE buyout programs initiated in first quarter ended March 31, 2010 and second quarter ended June 30, 2010. With lower overall yields and higher prices during the second quarter ended June 30, 2010, these securities are all at unrealized gains.

Mortgage-backed securities – Private Label – The unrealized losses on the Company’s investment in commercial mortgage-backed securities issued by entities other than GSEs decreased to $19.1 million at June 30, 2010 from $29.1 million at December 31, 2009. This decrease is primarily the result of improvement in credit spreads in 2010 compared to 2009, and the recent overall drop in yields and higher prices during the second quarter ended June 30, 2010. The contractual cash flows for

 

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these investments are performing as expected. As the decline in market value is attributable to cumulative changes in interest rates and not due to underlying credit deterioration, and because management does not have the intent to sell the securities, and based upon available evidence it is more likely than not that the Company will not be required to sell the securities before the recovery of its amortized cost, the Company does not consider these investments to be other-than-temporarily impaired at June 30, 2010.

The following summarizes by investment security type the basis for the conclusion that the applicable investment securities within the Company’s held-to-maturity portfolio were not other-than-temporarily impaired at June 30, 2010:

Municipal bonds and notes – The unrealized losses on the Company’s investment in municipal bonds and notes decreased to $2.3 million at June 30, 2010 from $4.0 million at December 31, 2009. This decrease is primarily the result of interest rate changes in 2010 compared to 2009. These securities are primarily insured AA and A rated general obligation bonds with stable ratings. The Company does not intend to sell these investments and has determined, based upon available evidence, it is more likely than not that the Company will not be required to sell the securities before the recovery of its amortized cost, therefore the Company has determined that these investments were not other-than-temporarily impaired at June 30, 2010.

Mortgage-backed securities – GSE – The unrealized losses on the Company’s investment in residential mortgage-backed securities issued by the GSEs was $0.1 million at June 30, 2010 a decrease of $4.1 million as compared to $4.2 million at December 31, 2009. The contractual cash flows for these investments are performing as expected with the exception of unexpected principal prepayments resulting from GSE buyout programs initiated in the first quarter and second quarter 2010. As the increase in market value is attributable to cumulative changes in interest rates versus underlying credit deterioration, and because management does not have the intent to sell the securities and based upon available evidence, it is more likely than not that the Company will not be required to sell the securities before the recovery of its amortized cost, the Company does not consider these investments to be other-than-temporarily impaired at June 30, 2010.

Mortgage-backed securities – Private Label – There were no unrealized losses on the Company’s investment in residential mortgage-backed securities issued by entities other than GSEs at June 30, 2010 compared to $0.3 million at December 31, 2009. These securities carry AAA ratings and are currently performing as expected. The Company does not intend to sell these investments and has determined, based upon available evidence, that it is more likely than not that the Company will not be required to sell the securities before the recovery of its amortized cost and therefore the Company has determined that these investments were not other-than-temporarily impaired at June 30, 2010.

There were no significant credit downgrades on held-to-maturity securities during the three and six months ended June 30, 2010, which are currently performing as anticipated. Management expects that recovery of these temporarily impaired securities will occur over the weighted-average estimated remaining life of these securities.

For the three and six months ended June 30, 2010 and 2009, proceeds from sale of available for sale securities were $146.6 million and $267.2 million and $8.0 million and $410.3 million, respectively. Gross gains and losses realized from the sale of available for sale securities were $4.4 million and $0.0 million, and $0.1 million and $13.7 million, respectively, for the three months ended June 30, 2010 and 2009. Gross gains and losses realized from the sale of available for sale securities were $8.7 million and $0.0 million, and $6.0 million and $15.1 million, respectively, for the three and six months ended June 30, 2010 and 2009. When securities are sold, the adjusted cost of the specific security sold is used to compute the gain or loss on the sale.

 

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The following tables summarize the impact of net realized gains and losses on sales of securities and the impact of the recognition of other-than-temporary impairments for the three and six months ended June 30, 2010 and 2009.

 

     Three months ended June 30,  
     2010     2009  

(In thousands)

   Gains    Losses    OTTI
Charges
    Net     Gains    Losses     OTTI
Charges
    Net  

Trading securities:

                   

Equity securities

   $ 15,016    $ —      $ —        $ 15,016      $ —      $ —        $ —        $ —     

Municipal bonds and notes

     —        —        —          —          —        —          —          —     

Other

     —        —        —          —          —        —          —          —     
                                                             

Total trading

     15,016      —        —          15,016        —        —          —          —     
                                                             

Available for sale:

                   

Agency notes - GSE

     —        —        —          —          —        —          —          —     

Agency CMOs - GSE

     4,024      —        —          4,024        —        —          —          —     

Pooled trust preferred securities

     340      —        (1,188     (848     —        (11,912     (23,610     (35,522

Single issuer trust preferred securities

     —        —        —          —          —        —          —          —     

Equity securities

     —        —        —          —          97      (1,778     (3,500     (5,181

Mortgage-backed securities-GSE

     —        —        —          —          —        —          —          —     

Mortgage-backed securities-Private Label

     —        —        —          —          —        —          —          —     
                                                             

Total available for sale

     4,364      —        (1,188     3,176        97      (13,690     (27,110     (40,703
                                                             

Total

   $ 19,380    $ —      $ (1,188   $ 18,192      $ 97    $ (13,690   $ (27,110   $ (40,703
                                                             
     Six months ended June 30,  
     2010     2009  

(In thousands)

   Gains    Losses    OTTI
Charges
    Net     Gains    Losses     OTTI
Charges
    Net  

Trading securities:

                   

Equity securities

   $ 15,016    $ —      $ —        $ 15,016      $ —      $ (1   $ —        $ (1

Municipal bonds and notes

     —        —        —          —          —        —          —          —     

Other

     —        —        —          —          —        —          —          —     
                                                             

Total trading

     15,016      —        —          15,016        —        (1     —          (1
                                                             

Available for sale:

                   

Agency notes - GSE

     —        —        —          —          —        —          —          —     

Agency CMOs - GSE

     8,342      —        —          8,342        —        —          —          —     

Pooled trust preferred securities

     340      —        (4,802     (4,462     —        (11,912     (23,610     (35,522

Single issuer trust preferred securities

     —        —        —          —          —        —          —          —     

Equity securities

     —        —        (66     (66     303      (3,221     (3,500     (6,418

Mortgage-backed securities-GSE

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

Mortgage-backed securities-Private Label

     —        —        —          —          —        —          —          —     
                                                             

Total available for sale

     8,682      —        (4,868     3,814        5,999      (15,133     (27,110     (36,244
                                                             

Total

   $ 23,698    $ —      $ (4,868   $ 18,830      $ 5,999    $ (15,134   $ (27,110   $ (36,245
                                                             

The following is a roll forward of the amount of credit related OTTI recognized in earnings for the three and six months ended June 30, 2010:

 

(In thousands)

   Three months ended
June 30, 2010
    Six months ended
June 30, 2010
 

Balance of credit related OTTI, beginning of year

   $ 47,105      $ 43,492   

Additions for credit related OTTI not previously recognized (a)

     1,188        4,802   

Reduction for securities sold

     (9,073     (9,073

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

     —          —     
                

Subtotal of additions and reductions, net

     (7,885     (4,271
                

Balance of credit-related OTTI end of period

   $ 39,220      $ 39,221   
                

 

(a) The $1.2 million and $4.8 million additions to credit related OTTI for the three and six months ended June 30, 2010, respectively, are reflective of payment deferrals and credit deterioration of the underlying collateral.

 

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To the extent that changes in interest rates, credit movements and other factors that influence the fair value of investments occur, the Company may be required to record impairment charges for other-than-temporary impairment in future periods.

In addition to investment securities, the Company carries investments in private equity funds. These investments, which totaled $14.5 million at June 30, 2010, are included in other assets in the Condensed Consolidated Balance Sheet. The Company recognized $1.3 million and $2.0 million gain, net of OTTI charges, on these investments during the three and six months ended June 30, 2010. These amounts are included in other non-interest income on the Condensed Consolidated Statement of Operations.

During the second quarter ended June 30, 2010, the Company sold 594,107 shares at $12 per share of its investment in Higher One Holdings Inc., as part of that company’s initial public offering on June 29, 2010. A gain of $6.4 million is recorded in the Condensed Consolidated Statement of Operations for the three and six months ended June 30, 2010. As of June 30, 2010 the Company holds 605,893 shares in Higher One’s common stock, which are classified as trading assets in the investment portfolio. As such, the Company will book any gain or loss from the shares being marked to market value until they are sold. For the three and six months ended June 30, 2010 the Company recorded a gain of $8.6 million for the mark to market value on these trading assets.

NOTE 3: Loans, Net

A summary of loans, net follows:

 

     At June 30, 2010     At December 31, 2009  

(In thousands)

   Amount     %     Amount     %  

Residential mortgage loans:

        

1-4 family

   $ 2,914,640      26.7   $ 2,825,938      25.6

Permanent-NCLC

     28,245      0.3        36,790      0.3   

Construction

     27,945      0.3        27,408      0.2   

Liquidating portfolio-construction loans

     2,383      0.1        4,817      0.1   
                            

Total residential mortgage loans

     2,973,213      27.4        2,894,953      26.2   
                            

Consumer loans:

        

Home equity loans

     2,666,355      24.5        2,745,154      24.9   

Liquidating portfolio-home equity loans

     194,554      1.8     </