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Webster Financial 10-Q 2011

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, 2011.

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 25, 2011 was 87,529,807.

 

 

 


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      48   

Item 3.

   Quantitative and Qualitative Disclosures about Market Risk      78   

Item 4.

   Controls and Procedures      78   
PART II – OTHER INFORMATION   

Item 1.

   Legal Proceedings      79   

Item 1A.

   Risk Factors      80   

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds      80   

Item 3.

   Defaults Upon Senior Securities      80   

Item 4.

   [Removed and Reserved]      80   

Item 5.

   Other Information      80   

Item 6.

   Exhibits      81   
SIGNATURES      82   
EXHIBIT INDEX      83   

 

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 data)

   June 30,
2011
    December 31,
2010
 
     (Unaudited)        

Assets:

    

Cash and due from banks

   $ 196,181      $ 159,849   

Interest-bearing deposits

     57,863        52,811   

Trading securities, at fair value

     —          11,554   

Securities available for sale, at fair value

     2,143,072        2,413,776   

Securities held-to-maturity (fair value of $3,239,149 and $3,141,775)

     3,123,510        3,072,453   

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

     143,874        143,874   

Loans held for sale

     21,650        52,224   

Loans and leases

     11,018,640        11,024,639   

Allowance for loan and lease losses

     (281,243     (321,665
  

 

 

   

 

 

 

Loans and leases, net

     10,737,397        10,702,974   

Deferred tax asset, net

     89,925        104,774   

Premises and equipment, net

     152,009        157,724   

Goodwill

     529,887        529,887   

Other intangible assets, net

     18,483        21,277   

Cash surrender value of life insurance policies

     303,258        298,149   

Prepaid FDIC premiums

     46,546        57,548   

Accrued interest receivable and other assets

     243,173        259,194   
  

 

 

   

 

 

 

Total assets

   $ 17,806,828      $ 18,038,068   
  

 

 

   

 

 

 

Liabilities and Equity:

    

Deposits:

    

Non-interest bearing

   $ 2,323,266      $ 2,216,987   

Interest bearing

     11,393,261        11,391,798   
  

 

 

   

 

 

 

Total deposits

     13,716,527        13,608,785   

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

     1,079,866        1,091,477   

Federal Home Loan Bank advances

     403,131        768,005   

Long-term debt

     566,677        582,837   

Accrued expenses and other liabilities

     197,970        203,898   
  

 

 

   

 

 

 

Total liabilities

     15,964,171        16,255,002   
  

 

 

   

 

 

 

Shareholders’ equity:

    

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

    

Series A issued and outstanding - 28,939 shares

     28,939        28,939   

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

    

Issued - 90,698,951 shares and 90,688,879 shares

     907        907   

Paid-in capital

     1,146,397        1,160,690   

Retained earnings

     804,109        746,057   

Less: Treasury stock, (at cost; 3,686,826 shares and 3,830,050 shares)

     (143,275     (149,462

Accumulated other comprehensive loss, net

     (3,997     (13,709
  

 

 

   

 

 

 

Total Webster Financial Corporation shareholders’ equity

     1,833,080        1,773,422   

Non controlling interests

     9,577        9,644   
  

 

 

   

 

 

 

Total equity

     1,842,657        1,783,066   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 17,806,828      $ 18,038,068   
  

 

 

   

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

3


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)

   2011     2010     2011     2010  

Interest Income:

        

Interest and fees on loans and leases

   $ 121,599      $ 122,447      $ 242,830      $ 245,797   

Taxable interest and dividends on securities

     46,258        47,963        92,751        94,559   

Non-taxable interest and dividends on securities

     7,269        7,480        14,620        15,040   

Loans held for sale

     177        144        599        458   
                                

Total interest income

     175,303        178,034        350,800        355,854   
                                

Interest Expense:

        

Deposits

     21,841        30,482        44,610        62,433   

Repurchase agreements and other short-term borrowings

     3,777        4,121        7,339        8,124   

Federal Home Loan Bank advances

     3,295        4,747        6,650        9,165   

Long-term debt

     6,273        6,342        12,635        12,406   
                                

Total interest expense

     35,186        45,692        71,234        92,128   
                                

Net interest income

     140,117        132,342        279,566        263,726   

Provision for loan and lease losses

     5,000        32,000        15,000        75,000   
                                

Net interest income after provision for loan and lease losses

     135,117        100,342        264,566        188,726   
                                

Non-interest Income:

        

Deposit service fees

     26,095        29,345        51,435        57,129   

Loan related fees

     6,419        7,225        11,248        13,230   

Wealth and investment services

     7,454        6,218        14,176        12,053   

Mortgage banking activities

     1,234        427        2,487        289   

Increase in cash surrender value of life insurance policies

     2,576        2,612        5,109        5,190   

Net gain (loss) on trading securities

     —          8,584        (1,799     8,584   

Net gain on sale of investment securities

     1,647        4,364        3,823        8,682   

Total other-than-temporary impairment losses on securities

     —          (3,054     —          (11,268

Portion of the loss recognized in other comprehensive income

     —          1,866        —          6,400   
                                

Net impairment losses recognized in earnings

     —          (1,188     —          (4,868

Other income

     1,593        7,933        4,841        12,247   
                                

Total non-interest income

     47,018        65,520        91,320        112,536   
                                

Non-interest Expense:

        

Compensation and benefits

     65,592        60,327        132,604        121,269   

Occupancy

     12,856        13,546        27,591        27,986   

Technology and equipment expense

     15,134        15,657        30,526        30,925   

Intangible assets amortization

     1,397        1,397        2,794        2,794   

Marketing

     4,252        5,226        9,772        10,017   

Professional and outside services

     2,813        3,566        5,243        6,168   

Deposit insurance

     5,918        7,161        11,699        13,246   

Litigation reserve

     —          19,676        —          19,676   

Other expenses

     24,099        21,111        40,957        49,210   
                                

Total non-interest expense

     132,061        147,667        261,186        281,291   
                                

Income from continuing operations before income tax expense

     50,074        18,195        94,700        19,971   

Income tax expense

     15,867        550        28,193        905   
                                

Income from continuing operations

     34,207        17,645        66,507        19,066   

Income from discontinued operations, net of tax

     —          —          1,995        —     
                                

Consolidated net income

     34,207        17,645        68,502        19,066   

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

     —          7        (1     7   
                                

Net income attributable to Webster Financial Corporation

     34,207        17,638        68,503        19,059   

Preferred stock dividends

     (831     (4,581     (1,662     (10,036

Accretion of preferred stock discount

     —          (327     —          (2,362
                                

Net income available to common shareholders

   $ 33,376      $ 12,730      $ 66,841      $ 6,661   
                                

Net income per common share:

        

Basic

        

Income from continuing operations

   $ 0.38      $ 0.16      $ 0.74      $ 0.08   

Net income available to common shareholders

     0.38        0.16        0.76        0.08   

Diluted

        

Income from continuing operations

     0.36        0.15        0.70        0.08   

Net income available to common shareholders

     0.36        0.15        0.72        0.08   

See accompanying Notes to Condensed Consolidated Financial Statements.

 

4


Table of Contents

WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited)

 

     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) Income
    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

Change in actuarial loss 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 declared on common stock of $.02 per share

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

Dividends declared 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 $0.43 per share

     —          —           —          (432     —          —          —           (432

Exercise of stock options

     —          —           (216       418        —          —           202   

Net shares acquired related to employee share-based compensation plans

     —          —           —          —          (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.

5


Table of Contents

WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES

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

 

     Six months ended June 30, 2011  

(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, 2010

   $ 28,939       $ 907       $ 1,160,690      $ 746,057      $ (149,462   $ (13,709   $ 9,644      $ 1,783,066   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income:

                  

Net income

     —           —           —          68,503        —          —          (1     68,502   

Other comprehensive income (loss), net of taxes:

                  

Net change in unrealized gain on securities available for sale

     —           —           —          —          —          10,432        —          10,432   

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

     —           —           —          —          —          746        —          746   

Amortization of unrealized loss on securities transferred to held to maturity

     —           —           —          —          —          50        —          50   

Net unrealized loss on derivative instruments

     —           —           —          —          —          (2,716     —          (2,716

Change in actuarial loss and prior service cost for pension and other postretirement benefits

     —           —           —          —          —          1,200        —          1,200   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income, net of taxes

     —           —           —          —          —          9,712        —          9,712   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income, net of taxes

                     78,214   

Dividends declared on common stock of $.06 per share

     —           —           —          (5,243     —          —          —          (5,243 )  

Dividends declared on Series A preferred stock $42.50 per share

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

Subsidiary preferred stock dividends $0.43 per share

     —           —           —          (432     —          —          —          (432

Common Stock Warrants Repurchased

     —           —           (14,674     —          —          —          —          (14,674

Exercise of stock options

     —           —           (206     —          313        —          —          107   

Dissolution of joint Venture (WP MTG LLC)

     —           —           —          —          —          —          (66     (66

Net shares acquired related to employee share-based compensation plans

     —           —           —          —          (537     —          —          (537

Stock-based compensation expense

     —           —           470        (3,233     5,711        —          —          2,948   

Issuance of common stock

     —           —           117        (313     700        —          —          504   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2011

   $ 28,939       $ 907       $ 1,146,397      $ 804,109      $ (143,275   $ (3,997   $ 9,577      $ 1,842,657   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

6


Table of Contents

WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 

     Six months ended June 30,  

(In thousands)

   2011     2010  

Operating Activities:

    

Consolidated net income

   $ 68,502      $ 19,066   

Income from discontinued operations, net of tax

     1,995        —     
  

 

 

   

 

 

 

Income from continuing operations

     66,507        19,066   

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

    

Provision for loan and leases losses

     15,000        75,000   

Deferred tax expense

     12,891        5,623   

Depreciation and amortization

     39,609        44,716   

Stock-based compensation

     3,648        1,832   

Loss on sale and write-down of foreclosed and repossessed assets

     5,552        2,953   

Write-down of premises and equipment

     264        48   

Gain on sale of premises and equipment

     (135     —     

Loss on write-down of investments to fair value

     —          4,868   

Gain on fair value adjustment of direct investments

     (1,397     (1,943

Loss on fair value adjustment of derivative instruments

     837        1,774   

Net gain on the sale of investment securities

     (3,823     (8,682

Net gain on assets classified as trading

     —          (8,584

Net decrease (increase) in trading securities

     11,554        (201

Increase in cash surrender value of life insurance policies

     (5,109     (6,136

Net decrease in loans held for sale

     30,574        1,419   

Net decrease in accrued interest receivable and other assets

     10,405        19,092   

Net (decrease) increase in accrued expenses and other liabilities

     (6,018     30,226   
  

 

 

   

 

 

 

Net cash provided by operating activities

     180,359        181,071   
  

 

 

   

 

 

 

Investing Activities:

    

Net (increase) decrease in interest-bearing deposits

     (5,052     350,269   

Purchases of available for sale securities

     (285,336     (645,406

Proceeds from maturities and principal payments of available for sale securities

     289,150        320,295   

Proceeds from sales of available for sale securities

     278,757        267,234   

Purchases of held-to-maturity securities

     (337,164     (713,221

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

     280,205        231,736   

Purchases of FHLB and FRB stock

     —          (3,000

Net (increase) decrease in loans

     (62,070     85,477   

Proceeds from life insurance policies

     —          2,237   

Proceeds from sale of foreclosed properties and repossessed assets

     7,789        9,946   

Proceeds from sale of premises and equipment

     3,901        675   

Purchases of premises and equipment

     (13,159     (5,649
  

 

 

   

 

 

 

Net cash provided by (used for) investing activities

     157,021        (99,407
  

 

 

   

 

 

 

Financing Activities:

    

Net increase (decrease) in deposits

     107,742        (152,582

Proceeds from Federal Home Loan Bank advances

     45,934        299,000   

Repayments of Federal Home Loan Bank advances

     (410,456     (213,217

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

     (11,612     104,312   

Redemption of preferred stock

     —          (100,000

Repayment of long-term debt

     (12,380     —     

Cash dividends paid to common shareholders

     (5,243     (1,569

Cash dividends paid to preferred shareholders of consolidated affiliate

     (432     (432

Cash dividends paid to preferred shareholders

     (1,230     (9,605

Exercise of stock options

     107        202   

Issuance of common stock

     504        1,104   

Common stock repurchased

     (537     (571

Common stock warrants repurchased

     (14,674     —     

Dissolution of joint Venture (WP MTG LLC)

     (66     —     
  

 

 

   

 

 

 

Net cash used for financing activities

     (303,043     (73,358
  

 

 

   

 

 

 

Cash Flows from Discontinued Operations:

    

Operating Activities

     1,995        —     
  

 

 

   

 

 

 

Net cash provided by discontinued operations

     1,995        —     
  

 

 

   

 

 

 

Net increase in cash and due from banks

     36,332        8,306   

Cash and due from banks at beginning of period

     159,849        171,184   
  

 

 

   

 

 

 

Cash and due from banks at end of period

   $ 196,181      $ 179,490   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Interest paid

   $ 75,604      $ 93,155   

Income taxes paid

     12,341        662   

Noncash investing and financing activities:

    

Transfer of loans and leases, net to foreclosed properties and repossessed assets

   $ 6,973      $ 15,802   

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 (together, with its consolidated subsidiaries, “Webster”, the “Company”, our company, we or us), is a bank holding company and financial holding company under the Bank Holding Company Act of 1956, as amended, headquartered in Waterbury, Connecticut and incorporated under the laws of Delaware in 1986. Webster Financial Corporation’s principal assets at June 30, 2011 were all of the outstanding capital stock of Webster Bank, National Association (“Webster Bank”).

Webster, through Webster Bank and various non-banking financial services subsidiaries, delivers financial services to individuals, families and businesses throughout New England and into Westchester County, New York. Webster provides business and consumer banking, mortgage lending, financial planning, trust and investment services through 176 banking offices, 495 ATMs, mobile banking and its Internet website (www.websteronline.com). Webster Bank offers, through its HSA Bank division, health savings accounts on a nationwide basis. Webster also offers equipment financing, commercial real estate lending and asset-based lending.

Basis of Presentation. The Condensed Consolidated Financial Statements include the accounts of Webster Financial Corporation and all other entities in which it 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 GAAP for complete financial statements and should be read in conjunction with the Company’s Consolidated Financial Statements, and notes thereto, for the year ended December 31, 2010, included in Webster’s Annual Report on Form 10-K filed with the SEC on February 25, 2011 (the “2010 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 Condensed Consolidated Financial Statements. Actual results could differ from those estimates. The allowance for loan and lease losses, the fair values of financial instruments, the deferred tax asset valuation allowance, status of contingencies and the goodwill evaluation are particularly subject to change.

Reclassifications. Certain items in prior financial statements have been reclassified to conform to current presentation. These reclassifications had no impact on the Company’s consolidated financial position, results of operations or net change in cash or cash equivalents.

There have been no changes to our significant accounting policies that were disclosed in the 2010 Form 10-K.

Loans. Loans are stated at the principal amounts outstanding, net of unamortized premiums and discounts and net of deferred loan fees and/or costs which are recognized as a yield adjustment using the interest method. These yield adjustments are amortized over the contractual life of the related loans adjusted for estimated prepayments when applicable. Interest on loans is credited to interest income as earned based on the interest rate applied to principal amounts outstanding. Loans are placed on nonaccrual status when timely collection of principal and interest in accordance with contractual terms is doubtful. Loans are transferred to a nonaccrual basis generally when principal or interest payments become 90 days delinquent, unless the loan is well secured and in process of collection, or sooner when management concludes circumstances indicate that borrowers may be unable to meet contractual principal or interest payments.

Accrual of interest is discontinued if the loan is placed on nonaccrual status. Residential real estate and consumer loans are placed on nonaccrual status at 90 days past due and a charge-off is recorded at 180 days if the loan balance exceeds the fair value of the collateral less costs to sell. All commercial, commercial real estate and equipment finance loans are subject to a detailed review by the Company’s credit risk team when 90 days past due and a specific determination is made to put a loan on non-accrual status. A charge off is recorded on a case by case basis when all or a portion of the loan is deemed to be uncollectible.

 

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When a loan is put on nonaccrual status, unpaid accrued interest is reversed and charged against interest income. If ultimate repayment of a nonaccrual loan is expected, any payments received are applied in accordance with contractual terms. If ultimate repayment is not expected on commercial, commercial real estate and equipment finance loans, any payment received on a nonaccrual loan is applied to principal until the unpaid balance has been fully recovered. Any excess is then credited to interest income when received. If the Company determines, through a current valuation analysis, that principal can be repaid on residential real estate and consumer loans, interest payments may be taken into income as received or on a cash basis. Loans are removed from nonaccrual status when they become current as to principal and interest or demonstrate a period of performance under contractual terms and, in the opinion of management, are fully collectible as to principal and interest.

Allowance for Credit Losses. The allowance for credit losses includes the allowance for loan and lease losses and the reserve for unfunded credit commitments.

Allowance for Loan and Lease Losses (“ALLL”). The allowance for loan and lease losses is a reserve established through a provision for loan and lease losses charged to expense, which represents management’s best estimate of probable losses that may be incurred within the existing portfolio of loans at the balance sheet date. The level of the allowance reflects management’s continuing evaluation of trends in loan loss experience, current loan portfolio quality, present economic, political and regulatory conditions. Portions of the allowance may be allocated for specific loans; however, the entire allowance is available for any loan that is charged off. While management utilizes its best judgment and information available at the time, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond the Company’s control, including the actual performance of the Company’s loan portfolio, the economy, changes in interest rates and the view of the regulatory authorities toward loan classifications.

The Company’s allowance for loan and lease losses consists of three elements: (i) specific valuation allowances established for probable losses on specific loans; (ii) historical valuation allowances calculated based on historical loan loss experience for similar loans with similar characteristics and trends, adjusted, as necessary, to reflect the impact of current conditions; and (iii) qualitative factors determined based on general economic conditions and other qualitative risk factors both internal and external to the Company.

Loans are considered impaired, when based on current information and events, if it is probable the Company will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. Commercial, commercial real estate and equipment financing loans over a specific dollar amount and all troubled debt restructures are individually evaluated for impairment. A loan identified as a troubled debt restructuring (“TDR”) is considered an impaired loan for the entire term of the loan, with very limited exceptions. Impairment is evaluated on a pooled basis for smaller-balance loans of a similar nature and on an individual loan basis depending on risk rating, accrual status and loan balance. If a loan is impaired, a specific valuation allowance is established, if necessary, so that the loan is reported net, at the present value of estimated future cash flows using the loan’s original rate or at the fair value of collateral if repayment is expected solely from the collateral. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. Impaired loans, or portions thereof, are charged off when deemed uncollectible. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due.

Reserve for Unfunded Commitments. The reserve for unfunded commitments provides for probable losses inherent in lending related commitments, including unused commitments to extend credit.

Troubled Debt Restructurings. A modified loan is considered a TDR when two conditions are met: 1) the borrower is experiencing documented financial difficulty and 2) concessions are made by the Company that would not otherwise be considered for a borrower with similar credit characteristics. The most common types of modifications include below market interest rate reductions and/or maturity extensions. Modified terms are dependent upon the financial position and needs of the individual borrower, as the Company does not employ modification programs for temporary or trial periods. If the modification agreement is violated, the loan is handled by the Company’s Restructuring and Recovery group for resolution, which may result in foreclosure. TDRs are classified as impaired loans and TDRs for the remaining life of the loan.

The Company’s policy is to place all consumer loan TDRs on non-accrual status for a minimum period of six months. Loans qualify for return to accrual status once they have demonstrated performance with the restructured terms of the loan agreement for a minimum of six months. Commercial TDRs are evaluated on a case by case basis. All TDRs are reported as impaired. Impaired and TDR classification may be removed if the borrower demonstrates compliance with the modified terms and the restructuring agreement specifies an interest rate equal to that which would be provided to a borrower with similar credit at the time of restructuring.

Earnings Per Share. Earnings per common share is computed using 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

 

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compensation and warrants for common stock 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. In addition to net income, other components of Webster’s comprehensive income include the after-tax effect of changes in the net unrealized gain/loss on securities available for sale, changes in the net actuarial gain/loss on defined benefit post-retirement benefit plans and changes in the accumulated gain/loss on derivative instruments.

Accounting Standards Updates

ASU No. 2011-02, “Receivables (Topic 310) - A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring.” In April 2011, the FASB issued ASU No. 2011-02 to clarify when a loan modification or restructuring is considered a troubled debt restructuring (“TDR”). The changes apply to a lender that modifies a receivable covered by Subtopic 310-40, “Receivables—Troubled Debt Restructurings by Creditors.” In evaluating whether a restructuring constitutes a TDR, a creditor must separately conclude that both of the following exist: (i) the restructuring constitutes a concession and (ii) the debtor is experiencing financial difficulties. A creditor may determine that a debtor is experiencing financial difficulties, even though the debtor is not currently in default, if the creditor determines it is probable that the debtor would default on its payments for any of its debts in the foreseeable future without the loan modification. Lenders who determine that they are making a concession on the terms of the loan to a borrower who is having financial problems should follow the guidance found in ASU No. 2011-02. The guidance on identifying and disclosing TDRs is effective for interim and annual reporting periods beginning on or after June 15, 2011 and applies retrospectively to restructuring occurring on or after the beginning of the year. The guidance on measuring the impairment of a receivable restructured in a troubled debt restructuring is effective on a prospective basis. The Company is currently evaluating the impact of the adoption of this accounting standard update on the Company’s financial statements.

ASU No. 2011-03, “Transfers and Servicing (Topic 860) - Reconsideration of Effective Control for Repurchase Agreements.” In April 2011, the FASB issued ASU No. 2011-03 to clarify the determination of whether an entity may or may not recognize a sale upon transfer of financial assets subject to repurchase agreements. The changes remove form the assessment of effective control: (i) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (ii) the collateral maintenance implementation guidance related to that criterion. As a result, it is anticipated that most repurchase agreements will not qualify for derecognition from the transferor’s financial statements. This change is effective for the Company’s interim and annual reporting periods beginning on or after December 15, 2011 and will be applied prospectively to new transactions or modifications of existing transactions after the effective date. The Company is currently evaluating the impact of the adoption of this accounting standards update on its financial statements and does not expect the application of this guidance will have a significant impact as the Company has been accounting for its repurchase agreements as secured financing.

ASU No. 2011-04, “Fair Value Measurement (Topic 820) - Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRSs.” In May 2011, the FASB issued ASU No. 2011-04 which will supersede most of the accounting guidance currently found in Topic 820 of FASB’s ASC. The amendments will improve comparability of fair value measurements presented and disclosed in financial statements prepared with GAAP and International Financial Reporting Standards (“IFRS”). The amendments also clarify the application of existing fair value measurement requirements. These amendments include (1) the application of the highest and best use and valuation premise concepts, (2) measuring the fair value of an instrument classified in a reporting entity’s shareholders’ equity and (3) disclosing quantitative information about the unobservable inputs used within the Level 3 hierarchy. The guidance is effective for the Company’s interim and annual periods beginning after December 15, 2011 and will be applied prospectively. The Company is currently evaluating the impact of the adoption of this accounting standards update on the Company’s financial statements.

ASU No. 2011-05, “Comprehensive Income (Topic 220) - Presentation of Comprehensive Income.” In June 2011, the FASB issued ASU No. 2011-05 which eliminates the option to present the components of other comprehensive income as part of the statement of stockholders’ equity. The amendments require that all nonowner changes in stockholders’ equity must be presented in a single continuous statement of comprehensive income or in two separate but consecutive statements. Regardless of whether an entity chooses to present comprehensive income in a single continuous statement or in two separate but consecutive statements the entity is required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented. The guidance is effective for the Company’s interim and annual periods beginning after December 15, 2011 and will be applied retrospectively. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of this accounting standards update on the Company’s financial statements.

 

 

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NOTE 2: Investment Securities

A summary of the amortized cost, carrying value, and fair value of Webster’s investment securities is presented in the tables below:

 

    At June 30, 2011  
    Amortized
cost (a)(b)
    Recognized in OCI     Carrying
value
    Not Recognized in OCI     Fair value  
      Gross
unrealized
gains
    Gross
unrealized
losses
      Gross
unrealized
gains
    Gross
unrealized
losses
   

(Dollars in thousands)

             

Available for sale:

             

U.S. Treasury Bills

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

Agency collateralized mortgage obligations (“CMOs”) - GSE

    1,266,018        19,302        (839     1,284,481        —          —          1,284,481   

Pooled trust preferred securities (a)

    56,896        —          (10,010     46,886        —          —          46,886   

Single issuer trust preferred securities

    50,931        —          (6,006     44,925        —          —          44,925   

Equity securities-financial institutions (b)

    5,756        1,015        (6     6,765        —          —          6,765   

Mortgage-backed securities - GSE

    427,294        28,720        —          456,014        —          —          456,014   

Commercial mortgage-backed securities (CMBS)

    290,556        19,085        (5,840     303,801        —          —          303,801   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available for sale

  $ 2,097,651      $ 68,122      $ (22,701   $ 2,143,072      $ —        $ —        $ 2,143,072   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Held to maturity:              

Municipal bonds and notes

  $ 661,296      $ —        $ —        $ 661,296      $ 15,079      $ (4,532   $ 671,843   

Agency collateralized mortgage obligations (“CMOs”) - GSE

    789,448        —          —          789,448        21,150        —          810,598   

Mortgage-backed securities - GSE

    1,539,439        —          —          1,539,439        84,604        (1,639     1,622,404   

Commercial mortgage-backed securities (CMBS)

    103,611        —          —          103,611        1,070        (649     104,032   

Private Label MBS

    29,716        —          —          29,716        556        —          30,272   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total held to maturity

  $ 3,123,510      $ —        $ —        $ 3,123,510      $ 122,459      $ (6,820   $ 3,239,149   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Total investment securities   $ 5,221,161      $ 68,122      $ (22,701   $ 5,266,582      $ 122,459      $ (6,820   $ 5,382,221   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) Amortized cost is net of $10.5 million of credit related other-than-temporary impairments at June 30, 2011.
(b) Amortized cost is net of $21.6 million of other-than-temporary impairments at June 30, 2011.

 

    At December 31, 2010  
    Amortized
cost (a)(b)
    Recognized in OCI     Carrying
value
    Not Recognized in OCI     Fair value  
      Gross
unrealized
gains
    Gross
unrealized
losses
      Gross
unrealized
gains
    Gross
unrealized
losses
   

(Dollars in thousands)

             

Available for sale:

             

U.S. Treasury Bills

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

Agency notes - GSE

    100,020        29        —          100,049        —          —          100,049   

Agency collateralized mortgage obligations (“CMOs”) - GSE

    1,172,942        12,524        (6,307     1,179,159        —          —          1,179,159   

Pooled trust preferred securities (a)

    65,054        2,693        (14,558     53,189        —          —          53,189   

Single issuer trust preferred securities

    50,852        —          (8,577     42,275        —          —          42,275   

Equity securities-financial institutions (b)

    6,510        1,064        (233     7,341        —          —          7,341   

Mortgage-backed securities - GSE

    691,567        32,103        (88     723,582        —          —          723,582   

Commercial mortgage-backed securities (CMBS)

    296,730        14,736        (3,485     307,981        —          —          307,981   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available for sale

  $ 2,383,875      $ 63,149      $ (33,248   $ 2,413,776      $ —        $ —        $ 2,413,776   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Held to maturity:              

Municipal bonds and notes

  $ 670,287      $ —        $ —        $ 670,287      $ 7,978      $ (25,199   $ 653,066   

Agency collateralized mortgage obligations (“CMOs”) - GSE

    643,189        —          —          643,189        13,292        (515     655,966   

Mortgage-backed securities - GSE

    1,707,893        —          —          1,707,893        77,204        (4,263     1,780,834   

Commercial mortgage-backed securities (CMBS)

    14,997        —          —          14,997        39        —          15,036   

Private Label MBS

    36,087        —          —          36,087        786        —          36,873   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total held to maturity

  $ 3,072,453      $ —        $ —        $ 3,072,453      $ 99,299      $ (29,977   $ 3,141,775   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Total investment securities   $ 5,456,328      $ 63,149      $ (33,248   $ 5,486,229      $ 99,299      $ (29,977   $ 5,555,551   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) Amortized cost is net of $26.3 million of credit related other-than-temporary impairments at December 31, 2010.
(b) Amortized cost is net of $21.7 million of other-than-temporary impairments at December 31, 2010.

Securities with a carrying value totaling $2.5 billion at June 30, 2011 and $2.6 billion at December 31, 2010 were pledged to secure public funds, trust deposits, repurchase agreements and for other purposes, as required or permitted by law.

At June 30, 2011 and December 31, 2010, the Company had no investments in obligations of individual states, counties, or municipalities which exceed 10% of consolidated shareholders’ equity.

 

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The amortized cost and fair value of debt securities at June 30, 2011, by contractual maturity, are set forth below:

 

     Available for Sale      Held to Maturity  

(Dollars in thousands)

   Amortized
Cost
     Fair
Value
     Amortized
Cost
     Fair
Value
 

Due in one year or less

   $ 200       $ 200       $ 16,231       $ 16,245   

Due after one year through five years

     —           —           6,588         6,860   

Due after five years through ten years

     38,864         33,909         308,304         326,282   

Due after ten years

     2,052,831         2,102,198         2,792,387         2,889,762   
  

 

 

    

 

 

    

 

 

    

 

 

 

Totals

   $ 2,091,895       $ 2,136,307       $ 3,123,510       $ 3,239,149   
  

 

 

    

 

 

    

 

 

    

 

 

 

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, 2011, the Company had $682.3 million of callable securities in its investment portfolio.

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 Condensed 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 the impairment charge of a debt security is recognized as a loss in non-interest income in the Condensed Consolidated Statements of Operations. The remaining non credit impairment component 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 Condensed Consolidated Statements of Operations.

The following tables provide 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:

 

     # of
Holdings
     At June 30, 2011  
        Less Than Twelve
Months
    Twelve Months or
Longer
    Total  

(Dollars in thousands)

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

Available for Sale:

                  

Agency CMOs - GSE

     4       $ 135,746       $ (839   $ —         $ —        $ 135,746       $ (839

Pooled trust preferred securities

     8         14,248         (487     32,638         (9,523     46,886         (10,010

Single issuer trust preferred securities

     9         8,002         (207     36,923         (5,799     44,925         (6,006

Equity securities

     1         143         (6     —           —          143         (6

Commercial mortgage-backed securities (CMBS)

     4         59,379         (791     19,173         (5,049     78,552         (5,840
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total available for sale

     26       $ 217,518       $ (2,330   $ 88,734       $ (20,371   $ 306,252       $ (22,701
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Held-to-maturity:

                  

Municipal bonds and notes

     153       $ 138,452       $ (3,905   $ 10,599       $ (627   $ 149,051       $ (4,532

Mortgage-backed securities - GSE

     6         108,371         (1,639     —           —          108,371         (1,639

Commercial mortgage-backed securities (CMBS)

     4         43,450         (649     —           —          43,450         (649
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total held-to-maturity

     163       $ 290,273       $ (6,193   $ 10,599       $ (627   $ 300,872       $ (6,820
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total investment securities

     189       $ 507,791       $ (8,523   $ 99,333       $ (20,998   $ 607,124       $ (29,521
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

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Table of Contents
            At December 31, 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:

                  

Agency CMOs - GSE

     9       $ 450,099       $ (6,307   $ —         $ —        $ 450,099       $ (6,307

Pooled trust preferred securities

     9         8,126         (1,534     40,147         (13,024     48,273         (14,558

Single issuer trust preferred securities

     9         —           —          42,275         (8,577     42,275         (8,577

Equity securities

     14         1,328         (222     138         (11     1,466         (233

Mortgage-backed securities-GSE

     1         28,391         (88     —           —          28,391         (88

Commercial mortgage-backed securities (CMBS)

     3         —           —          55,817         (3,485     55,817         (3,485
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total available for sale

     45       $ 487,944       $ (8,151   $ 138,377       $ (25,097   $ 626,321       $ (33,248
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
Held-to-maturity:                   

Municipal bonds and notes

     410       $ 357,771       $ (23,621   $ 11,737       $ (1,578   $ 369,508       $ (25,199

Agency CMOs - GSE

     1         51,874         (515     —           —          51,874         (515

Mortgage-backed securities - GSE

     11         301,305         (4,263     —           —          301,305         (4,263
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total held-to-maturity

     422       $ 710,950       $ (28,399   $ 11,737       $ (1,578   $ 722,687       $ (29,977
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total investment securities

     467       $ 1,198,894       $ (36,550   $ 150,114       $ (26,675   $ 1,349,008       $ (63,225
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

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, 2011.

Trust Preferred Securities – Pooled Issuers – At June 30, 2011, the fair value of the pooled trust preferred securities was $46.9 million, a decrease of $6.3 million from the fair value of $53.2 million at December 31, 2010. The decrease in fair value is due to sales of two securities and principal pay downs on another. During the six months ended June 30, 2011 the Company sold two securities with an amortized cost of $5.0 million at a loss of $3.3 million. The gross unrealized loss of $10.0 million at June 30, 2011 is primarily attributable to cumulative 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 as well as changes in the underlying credit profile of issuers in each of the trust over the holding period. Since the end of 2010, the 30 year swap rate is largely unchanged as are credit spreads. Over the course of 2011, the combination of subtle changes in interest rates, changes in the underlying securities cash flow projections, and a reduction in the overall size of the portfolio, account for the reduction in unrealized losses of $12.0 million from December 31, 2010. For the three and six months ended June 30, 2011, the Company recognized no credit related OTTI for these securities. As a result, there was no additional non credit related OTTI recognized in OCI during the three and six months ended June 30, 2011. 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 of those securities not deemed to be other-than-temporarily impaired as of June 30, 2011, management does not intend to sell these investments and has determined, based upon available evidence, that it is move likely than not that the Company will not be required to sell the security before the recovery of its amortized cost. However, additional interest deferrals, defaults, or ratings changes could result in future OTTI charges.

 

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Table of Contents

The following table summarizes pertinent information that was considered by management in evaluating Trust Preferred Securities – Pooled Issuers for OTTI in the current reporting period:

 

Trust Preferred Securities - Pooled Issuers

 
           Amortized      Unrealized    

Fair

    

Lowest Credit
Ratings as of

June 30,

  

Total
Credit Related
Other-Than-
Temporary
Impairment thru

June 30,

    % of
Performing
Bank/
Insurance
     Current
Deferrals/
Defaults
(As a % of
Original
 

Deal Name (c), (d)

   Class    Cost (b)      Gains      (Losses)     Value      2011 (a)    2011     Issuers      Collateral)  
(Dollars in thousands)                                                         

Security H

   B    $ 3,483       $ —         $ (1,096   $ 2,387       B    $ (352     96.6         4.6   

Security I

   B      4,463         —           (1,415     3,048       CCC      (365     88.2         16.8   

Security J

   B      5,268         —           (1,838     3,430       CCC      (806     90.6         11.6   

Security K

   A      7,336         —           (95     7,241       CCC      (2,040     67.1         36.7   

Security L

   B      8,717         —           (2,842     5,875       CCC      (867     92.0         11.6   

Security M

   A      7,398         —           (392     7,006       D      (4,942     52.7         41.7   

Security N

   A      20,231         —           (2,332     17,899       A      (1,104     90.6         11.6   
     

 

 

    

 

 

    

 

 

   

 

 

       

 

 

      
      $ 56,896       $ —         $ (10,010   $ 46,886          $ (10,476     
     

 

 

    

 

 

    

 

 

   

 

 

       

 

 

      

 

(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) One security (Security G) with an amortized cost of $2.0 million was sold during the three months ended March 31, 2011 for a loss of $1.0 million.
(d) One security (Security F) with an amortized cost of $3.0 million was sold during the three months ended June 30, 2011 for a loss of $2.3 million.

Trust Preferred Securities - Single Issuers – At June 30, 2011, the fair value of the single issuer trust preferred portfolio was $44.9 million, an increase of $2.6 million from the fair value of $42.3 million at December 31, 2010. The gross unrealized loss of $6.0 million at June 30, 2011 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 to service debt and showed 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, 2011 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

 
     Amortized      Unrealized     Fair      Lowest Credit
Ratings as of
June 30,
   Total
Other-Than-
Temporary
Impairment thru
June 30,
 

Deal Name

   Cost      Gains      Losses     Value      2011    2011  
(Dollars in thousands)                                       

Security B

   $ 6,835       $ —         $ (757   $ 6,078       BB    $ —     

Security C

     8,609         —           (664     7,945       BBB      —     

Security D

     9,540         —           (2,103     7,437       BB      —     

Security E

     11,693         —           (880     10,813       BBB      —     

Security F

     14,254         —           (1,602     12,652       BBB      —     
  

 

 

    

 

 

    

 

 

   

 

 

       

 

 

 
   $ 50,931       $ —         $ (6,006   $ 44,925          $ —     
  

 

 

    

 

 

    

 

 

   

 

 

       

 

 

 

Agency CMOs - GSE - There were $839 thousand in unrealized losses in the Company’s investment in agency CMOs at June 30, 2011 compared to $6.3 million at December 31, 2010. The improvement in unrealized losses at June 30, 2011 was the result of lower overall interest rates and tighter credit spreads during the six months ended 2011. The contractual cash flows for these investments are performing as expected. The Company does not consider these investments to be other than temporarily impaired at June 30, 2011 as the Company does not intend to sell these investments and has determined, based on 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.

 

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Table of Contents

Equity securities – The unrealized losses on the Company’s investment in equity securities was $6 thousand at June 30, 2011 compared to $233 thousand at December 31, 2010. This portfolio consists primarily of investments in the common stock of small capitalization financial institutions based in New England ($5.8 million of the total fair value at June 30, 2011) and auction rate preferred securities ($975 thousand of the total fair value at June 30, 2011). 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, 2011.

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, 2011 compared to $88 thousand in unrealized losses at December 31, 2010. The contractual cash flows for these investments are performing as expected. With tighter market spreads during the three and six months ended June 30, 2011, these securities are all at unrealized gains.

Commercial mortgage backed securities – The unrealized losses on the Company’s investment in commercial mortgage-backed securities issued by entities other than GSEs increased to $5.8 million at June 30, 2011 from $3.5 million at December 31, 2010. This increase in unrealized loss is primarily the result of recent widening in credit spreads in the six months ended June 30, 2011. The contractual cash flows for these investments are performing as expected. The decrease in market value is attributable to cumulative changes in interest rates and not due to underlying credit deterioration. 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, 2011.

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, 2011:

Municipal bonds and notes – There are unrealized losses on the Company’s investment in municipal bonds and notes of $4.5 million at June 30, 2011 compared to $25.2 million at December 31, 2010. This decrease is primarily the result of credit spread improvement in 2011 compared to 2010. The municipal portfolio is comprised of bank qualified bonds, over 94% with credit ratings of A or better. In addition, the portfolio is comprised of 87% General Obligation bonds and 13% Revenue bonds. 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, 2011.

Agency collateralized mortgage obligations – GSE – There are no unrealized losses on the Company’s investment in agency CMOs compared to $515 thousand in unrealized losses at December 31, 2010. The contractual cash flows for this investment are performing as expected. With tighter market spreads and lower overall interest rates during the three and six months ended June 30, 2011, the agency CMO securities are all at unrealized gains.

Mortgage-backed securities - GSE – The unrealized losses on the Company’s investment in residential mortgage-backed securities issued by the GSEs decreased to $1.6 million at June 30, 2011 from $4.3 million at December 31, 2010. The contractual cash flows for these investments are performing as expected. 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, 2011.

CMBS and Private Label CMOs – There were unrealized losses of $649 thousand on the Company’s investment in commercial and residential mortgage-backed securities issued by entities other than GSEs at June 30, 2011 compared to no unrealized losses at December 31, 2010. These securities carry AAA ratings and are currently performing as expected.

There were no significant credit downgrades on held to maturity securities during the three and six months ended June 30, 2011, and these securities are currently performing as anticipated. 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.

For the three and six months ended June 30, 2011 and 2010, proceeds from sale of available for sale securities were $186.8 million and $278.8 million and $146.6 million and $267.2 million, respectively. Gross gains realized from the sale of available for sale securities were $4.0 million and $7.2 million and $4.4 million and $8.7 million for the three and six months ended June 30, 2011 and 2010, respectively. Gross losses realized from the sale of available for sale securities were $2.4 million and $3.3 million for the three and six months ended June 30, 2011, respectively, while there were no losses realized for the three and six months ended June 30, 2010. 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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Table of Contents

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, 2011 and 2010:

 

     Three months ended June 30,  
     2011     2010  
                  OTTI                          OTTI        
(In thousands)    Gains      Losses     Charges      Net     Gains      Losses      Charges     Net  
Available for sale:                     

Agency notes - GSE

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

Agency CMOs - GSE

     1,959         —          —           1,959        —           —           —          —     

Pooled trust preferred securities

     —           (2,369     —           (2,369     340         —           (1,189     (849

Single issuer trust preferred securities

     —           —          —           —          —           —           —          —     

Equity securities

     —           —          —           —          —           —           1        1   

Mortgage-backed securities-GSE

     2,057         —          —           2,057        4,024         —           —          4,024   

Commercial mortgage-backed securities

     —           —          —           —          —           —           —          —     
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total available for sale

   $ 4,016       $ (2,369   $ —         $ 1,647      $ 4,364       $ —         $ (1,188   $ 3,176   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 
     Six months ended June 30,  
     2011     2010  
                  OTTI                          OTTI        
(In thousands)    Gains      Losses     Charges      Net     Gains      Losses      Charges     Net  
Available for sale:                     

Agency notes - GSE

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

Agency CMOs - GSE

     1,959         —          —           1,959        —           —           —          —     

Pooled trust preferred securities

     —           (3,343     —           (3,343     340         —           (4,802     (4,462

Single issuer trust preferred securities

     —           —          —           —          —           —           —          —     

Equity securities

     374         —          —           374        —           —           (66     (66

Mortgage-backed securities-GSE

     4,833         —          —           4,833        8,342         —           —          8,342   

Commercial mortgage-backed securities

     —           —          —           —          —           —           —          —     
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total available for sale

   $ 7,166       $ (3,343   $ —         $ 3,823      $ 8,682       $ —         $ (4,868   $ 3,814   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

The following is a roll forward of the amount of credit related OTTI for the three and six months ended June 30, 2011 and 2010:

 

     Three months ended
June 30,
    Six months ended
June 30,
 
(in thousands)    2011     2010     2011     2010  

Balance of credit related OTTI, beginning of period

   $ 21,326      $ 47,105      $ 26,320      $ 43,492   

Additions for credit related OTTI not previously recognized

     —          1,189        —          4,802   

Reduction for securities sold

     (10,850     (9,073     (15,844     (9,073
  

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal of additions and reductions, net

     (10,850     (7,884     (15,844     (4,271
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance of credit-related OTTI, end of period

   $ 10,476      $ 39,221      $ 10,476      $ 39,221   
  

 

 

   

 

 

   

 

 

   

 

 

 

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.

There were no additions to credit related OTTI for the three and six months ended June 30, 2011. There was a reduction in outstanding credit-related OTTI due to the sale of two securities during the six months ended June 30, 2011.

Investments in Private Equity Funds

In addition to investment securities, the Company has investments in private equity funds. These investments, which totaled $12.7 million at June 30, 2011, are included in other assets in the Condensed Consolidated Balance Sheets. The Company recognized a gain, net of OTTI charges on these investments, of $294 thousand and $1.4 million during the three and six months ended June 30, 2011, respectively, and $1.3 million and $2.0 million during the three and six months ended June 30, 2010, respectively. These amounts are included in other non-interest income on the Condensed Consolidated Statements of Operations.

 

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Table of Contents

Trading Securities

During the three months ended June 30, 2010, the Company sold 594,107 shares of Higher One Holdings Inc. common stock, as part of that company’s initial public offering, and recorded a gain of $6.4 million in other non-interest income in the Condensed Consolidated Statements of Operations. In addition, during the three months ended June 30, 2010 a gain on trading securities of $8.6 million was recorded in the Condensed Consolidated Statements of Operations for the 571,143 shares of Higher One Holdings Inc. common stock that the Company continued to hold.

During the three months ended March 31, 2011, the Company sold the remaining 571,143 shares of Higher One Holdings Inc. common stock and recorded a loss on trading securities of $1.8 million in the Condensed Consolidated Statements of Operations.

 

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Table of Contents

NOTE 3: Loans and Leases, Net

Recorded Investment in Loans and Leases. The following table summarizes recorded investment in loans and leases by portfolio segment at June 30, 2011 and December 31, 2010:

 

     June 30, 2011  

(In thousands)

   Residential      Consumer      Commercial      Commercial
Real Estate
     Equipment
Financing  (b)
     Total  

Loans and Leases:

                 

Ending balance (a)

   $ 3,139,408       $ 2,802,907       $ 2,274,024       $ 2,224,184       $ 578,117       $ 11,018,640   

Accrued interest

     11,214         8,704         6,650         6,837         —           33,405   
                                                     

Total Recorded Investment

   $ 3,150,622       $ 2,811,611       $ 2,280,674       $ 2,231,021       $ 578,117       $ 11,0