Annual Reports

 
Quarterly Reports

  • 10-Q (Nov 6, 2017)
  • 10-Q (Aug 4, 2017)
  • 10-Q (May 5, 2017)
  • 10-Q (Nov 7, 2016)
  • 10-Q (Aug 9, 2016)
  • 10-Q (May 9, 2016)

 
8-K

 
Other

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 September 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 October 25, 2011 was 87,503,485.

 

 

 


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      76   

Item 4.

   Controls and Procedures      76   
PART II – OTHER INFORMATION   

Item 1.

   Legal Proceedings      77   

Item 1A.

   Risk Factors      77   

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds      78   

Item 3.

   Defaults Upon Senior Securities      78   

Item 4.

   [Removed and Reserved]      78   

Item 5.

   Other Information      78   

Item 6.

   Exhibits      79   
SIGNATURES      80   
EXHIBIT INDEX      81   

 

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)

   September 30,
2011
    December 31,
2010
 
     (Unaudited)        

Assets:

    

Cash and due from banks

   $ 168,776      $ 159,849   

Interest-bearing deposits

     87,240        52,811   

Trading securities, at fair value

     —          11,554   

Securities available for sale, at fair value

     2,500,151        2,413,776   

Securities held-to-maturity (fair value of $3,261,733 and $3,141,775)

     3,106,013        3,072,453   

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

     143,874        143,874   

Loans held for sale

     28,266        52,224   

Loans and leases

     11,056,446        11,024,639   

Allowance for loan and lease losses

     (257,352     (321,665
  

 

 

   

 

 

 

Loans and leases, net

     10,799,094        10,702,974   

Deferred tax asset, net

     96,310        104,774   

Premises and equipment, net

     148,274        157,724   

Goodwill

     529,887        529,887   

Other intangible assets, net

     17,087        21,277   

Cash surrender value of life insurance policies

     305,901        298,149   

Prepaid FDIC premiums

     42,424        57,548   

Accrued interest receivable and other assets

     254,796        259,194   
  

 

 

   

 

 

 

Total assets

   $ 18,228,093      $ 18,038,068   
  

 

 

   

 

 

 

Liabilities and Equity:

    

Deposits:

    

Non-interest bearing

   $ 2,292,673      $ 2,216,987   

Interest bearing

     11,293,261        11,391,798   
  

 

 

   

 

 

 

Total deposits

     13,585,934        13,608,785   

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

     1,220,905        1,091,477   

Federal Home Loan Bank advances

     760,964        768,005   

Long-term debt

     554,478        582,837   

Accrued expenses and other liabilities

     255,892        203,898   
  

 

 

   

 

 

 

Total liabilities

     16,378,173        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 - 90,703,887 shares and 90,688,879 shares

     907        907   

Paid-in capital

     1,145,146        1,160,690   

Retained earnings

     839,816        746,057   

Less: Treasury stock, (at cost; 3,657,626 shares and 3,830,050 shares)

     (141,338     (149,462

Accumulated other comprehensive loss, net

     (33,127     (13,709
  

 

 

   

 

 

 

Total Webster Financial Corporation shareholders’ equity

     1,840,343        1,773,422   

Non controlling interests

     9,577        9,644   
  

 

 

   

 

 

 

Total equity

     1,849,920        1,783,066   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 18,228,093      $ 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
September 30,
    Nine months ended
September 30,
 

(In thousands, except per share data)

   2011     2010     2011     2010  

Interest Income:

        

Interest and fees on loans and leases

   $ 120,018      $ 123,042      $ 362,848      $ 368,839   

Taxable interest and dividends on securities

     45,753        45,709        138,504        140,268   

Tax-exempt interest and dividends on securities

     7,221        7,473        21,841        22,513   

Loans held for sale

     266        79        865        537   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     173,258        176,303        524,058        532,157   
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest Expense:

        

Deposits

     18,930        26,409        63,540        88,842   

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

     4,384        4,048        11,723        12,172   

Federal Home Loan Bank advances

     3,551        4,682        10,201        13,847   

Long-term debt

     6,012        6,430        18,647        18,836   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     32,877        41,569        104,111        133,697   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     140,381        134,734        419,947        398,460   

Provision for loan and lease losses

     5,000        25,000        20,000        100,000   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan and lease losses

     135,381        109,734        399,947        298,460   
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-interest Income:

        

Deposit service fees

     27,074        26,822        78,509        83,951   

Loan related fees

     6,823        6,119        18,071        19,349   

Wealth and investment services

     6,486        6,220        20,662        18,273   

Mortgage banking activities

     1,324        1,658        3,811        1,947   

Increase in cash surrender value of life insurance policies

     2,642        2,677        7,751        7,867   

Net gain (loss) on trading securities

     —          1,205        (1,799     9,789   

Net gain on sale of investment securities

     —          1,027        3,823        9,709   

Total other-than-temporary impairment loss on securities

     —          (5,314     —          (14,445

Less: Portion of loss recognized in other comprehensive income

     —          4,344        —          8,607   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net impairment loss recognized in earnings

     —          (970     —          (5,838

Other income

     1,857        2,510        6,698        14,757   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest income

     46,206        47,268        137,526        159,804   
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-interest Expense:

        

Compensation and benefits

     61,897        60,133        194,501        181,402   

Occupancy

     13,150        13,777        40,741        41,763   

Technology and equipment

     15,141        15,886        45,667        46,811   

Intangible assets amortization

     1,397        1,397        4,191        4,191   

Marketing

     4,144        4,634        13,916        14,651   

Professional and outside services

     3,125        4,038        8,368        10,206   

Deposit insurance

     4,472        5,882        16,171        19,128   

Litigation

     —          2,800        —          22,476   

Other expenses

     19,892        21,174        60,849        70,384   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest expense

     123,218        129,721        384,404        411,012   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income tax expense

     58,369        27,281        153,069        47,252   

Income tax expense

     15,990        4,597        44,183        5,502   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     42,379        22,684        108,886        41,750   

Income from discontinued operations, net of tax

     —          —          1,995        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     42,379        22,684        110,881        41,750   

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

     —          (3     (1     4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Webster Financial Corporation

     42,379        22,687        110,882        41,746   

Preferred stock dividends

     (831     (4,581     (2,493     (14,616

Accretion of preferred stock discount

     —          (327     —          (2,689
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to common shareholders

   $ 41,548      $ 17,779      $ 108,389      $ 24,441   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per common share:

        

Basic

        

Income from continuing operations

   $ 0.48      $ 0.23      $ 1.22      $ 0.31   

Net income available to common shareholders

     0.48        0.23        1.24        0.31   

Diluted

        

Income from continuing operations

     0.45        0.22        1.15        0.30   

Net income available to common shareholders

     0.45        0.22        1.17        0.30   

See accompanying Notes to Condensed Consolidated Financial Statements.

 

4


Table of Contents

WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited)

 

     Nine months ended September 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), Net
    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

     —           —           —          110,882        —          —          (1     110,881   

Other comprehensive income (loss), net of taxes:

                  

Net change in unrealized gain on securities available for sale

     —           —           —          —          —          557        —          557   

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

     —           —           —          —          —          77        —          77   

Net unrealized loss on derivative instruments

     —           —           —          —          —          (22,416     —          (22,416

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

     —           —           —          —          —          1,618        —          1,618   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive loss, net of taxes

     —           —           —          —          —          (19,418     —          (19,418
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income, net of taxes

                     91,463   

Dividends declared on common stock of $.11 per share

     —           —           —          (9,607     —          —          —          (9,607

Dividends declared on Series A preferred stock $63.75 per share

     —           —           —          (1,846     —          —          —          (1,846

Subsidiary preferred stock dividends $0.65 per share

     —           —           —          (647     —          —          —          (647

Common Stock Warrants Repurchased

     —           —           (16,246     —          —          —          —          (16,246

Exercise of stock options

     —           —           (209     —          312        —          —          103   

Dissolution of Joint Venture

     —           —           —          —          —          —          (66     (66

Net shares acquired related to employee share-based compensation plans

     —           —           3        —          (1,345     —          —          (1,342

Stock-based compensation expense

     —           —           712        (4,698     8,438        —          —          4,452   

Issuance of common stock

     —           —           196        (325     719        —          —          590   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, September 30, 2011

   $ 28,939       $ 907       $ 1,145,146      $ 839,816      $ (141,338   $ (33,127   $ 9,577      $ 1,849,920   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     Nine months ended September 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,

Net
    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

     —          —           —          41,746        —          —          4         41,750   

Other comprehensive income (loss), net of taxes:

                  

Net change in unrealized gain on securities available for sale

     —          —           —          —          —          26,369        —           26,369   

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

     —          —           —          —          —          (2,754     —           (2,754

Amortization of unrealized loss on securities transferred to held to maturity

     —          —           —          —          —          262        —           262   

Net unrealized loss on derivative instruments

                (6,064     —           (6,064

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

     —          —           —          —          —          1,162        —           1,162   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Other comprehensive income, net of taxes

     —          —           —          —          —          18,975        —           18,975   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total comprehensive income, net of taxes

                     60,725   

Dividends declared on common stock of $.03 per share

     —          —           —          (2,351     —          —          —           (2,351

Dividends declared on Series A preferred stock $63.75 per share

     —          —           —          (1,846     —          —          —           (1,846

Dividends incurred on Series B preferred stock $37.50 per share

     —          —           —          (12,123     —          —          —           (12,123

Redemption of Preferred Stock

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

Subsidiary preferred stock dividends $0.65 per share

     —          —           —          (647     —          —          —           (647

Exercise of stock options

     —          —           (426       749        —          —           323   

Net shares acquired related to employee share-based compensation plans

     —          —           —          —          (884     —          —           (884

Stock-based compensation expense

     —          —           975        (4,652     7,254        —          —           3,577   

Accretion of preferred stock discount

     1,054        —           —          (1,054     —          —          —           —     

Issuance of common stock

     —          —           88        (2,012     3,612        —          —           1,688   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance, September 30, 2010

   $ 324,798      $ 820       $ 1,008,377      $ 723,450      $ (151,180   $ (9,414   $ 9,645       $ 1,906,496   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

5


Table of Contents

WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 

     Nine months ended September 30,  

(In thousands)

   2011     2010  

Operating Activities:

    

Net income

   $ 110,881      $ 41,750   

Income from discontinued operations, net of tax

     1,995        —     
  

 

 

   

 

 

 

Income from continuing operations

     108,886        41,750   

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

    

Provision for loan and lease losses

     20,000        100,000   

Deferred tax expense

     22,509        5,584   

Depreciation and amortization

     59,673        67,423   

Stock-based compensation

     4,452        3,577   

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

     4,830        5,110   

Write-down of premises and equipment

     707        135   

Loss on sale of premises and equipment

     961        —     

Loss on write-down of investments to fair value

     —          5,838   

Gain on fair value adjustment of direct investments

     (1,488     (1,264

Loss on fair value adjustment of derivative instruments

     1,813        2,504   

Net gain on the sale of investment securities

     (3,823     (9,709

Net decrease (increase) in trading securities

     11,554        (9,991

Increase in cash surrender value of life insurance policies

     (7,751     (7,867

Gain from life insurance policies

     —          (1,972

Net decrease (increase) in loans held for sale

     23,958        (496

Net decrease in accrued interest receivable and other assets

     13,524        56,797   

Net increase in accrued expenses and other liabilities

     5,671        27,975   
  

 

 

   

 

 

 

Net cash provided by operating activities

     265,476        285,394   
  

 

 

   

 

 

 

Investing Activities:

    

Net (increase) decrease in interest-bearing deposits

     (34,429     325,055   

Purchases of available for sale securities

     (755,911     (929,273

Proceeds from maturities and principal payments of available for sale securities

     383,313        482,170   

Proceeds from sales of available for sale securities

     278,757        341,059   

Purchases of held-to-maturity securities

     (435,586     (836,094

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

     393,378        389,531   

Purchases of FHLB and FRB stock

     —          (3,000

Net increase in loans

     (133,085     (12,755

Proceeds from life insurance policies

     —          2,237   

Proceeds from sale of foreclosed properties and repossessed assets

     12,572        21,195   

Proceeds from sale of premises and equipment

     3,881        675   

Purchases of premises and equipment

     (19,708     (10,873
  

 

 

   

 

 

 

Net cash used for investing activities

     (306,818     (230,073
  

 

 

   

 

 

 

Financing Activities:

    

Net decrease in deposits

     (22,851     (58,092

Proceeds from Federal Home Loan Bank advances

     748,934        749,000   

Repayments of Federal Home Loan Bank advances

     (755,487     (819,320

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

     129,428        192,718   

Redemption of preferred stock

     —          (100,000

Repayment of long-term debt

     (22,689     —     

Cash dividends paid to common shareholders

     (9,607     (2,351

Cash dividends paid to preferred shareholders of consolidated subsidiary

     (647     (647

Cash dividends paid to preferred shareholders

     (1,846     (13,969

Exercise of stock options

     103        323   

Issuance of common stock

     590        1,688   

Common stock repurchased

     (1,342     (884

Common stock warrants repurchased

     (16,246     —     

Dissolution of Joint Venture

     (66     —     
  

 

 

   

 

 

 

Net cash provided by (used for) financing activities

     48,274        (51,534
  

 

 

   

 

 

 

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

     8,927        3,787   

Cash and due from banks at beginning of period

     159,849        171,184   
  

 

 

   

 

 

 

Cash and due from banks at end of period

   $ 168,776      $ 174,971   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Interest paid

   $ 108,582      $ 134,711   

Income taxes paid

     12,889        15,009   

Noncash investing and financing activities:

    

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

   $ 8,088      $ 30,184   

See accompanying Notes to Condensed Consolidated Financial Statements.

 

6


Table of Contents

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 asset at September 30, 2011 was 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 171 banking offices, 485 ATMs, telephone banking, 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, valuation of investments for other-than-temporary impairment (“OTTI”) and the goodwill valuation 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.

 

7


Table of Contents

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 nonaccrual 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. Therefore, loans are monitored to ensure they are well secured and in the process of being collected. Webster has a policy in place to charge off the remaining balance when the collectability becomes uncertain.

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, and represents management’s best estimate of probable losses that may be incurred within the existing loan portfolio as of the balance sheet date. The level of the allowance reflects management’s view of trends in loan loss activity, current loan portfolio quality and 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 based on the information available at the time, the ultimate adequacy of the allowance is dependent upon a variety of factors that are beyond the Company’s control, which include the performance of the Company’s loan portfolio, economic conditions, interest rate sensitivity and the view of the regulatory authorities regarding loan classifications.

The Company’s allowance for loan and lease losses consists of three elements: (i) specific valuation allowances established for probable losses on impaired loans; (ii) quantitative valuation allowances calculated using loan loss experience for like 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, 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. 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 size for other loans primarily residential and consumer loans. Commercial, commercial real estate and equipment financing loans over a specific dollar amount and all trouble debt restructurings are evaluated individually for impairment. A loan identified as a troubled debt restructuring (“TDR”) is considered an impaired loan for the entire term of the loan, with few exceptions. If a loan is impaired, a specific valuation allowance may be established, and the loan is reported net, at the present value of estimated future cash flows using the loan’s original interest rate or at the fair value of collateral less costs to sell if repayment is expected from collateral liquidation. 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 likelihood of collecting scheduled principal and interest payments. Consumer modified loans are analyzed for re-default probability which is factored into the impaired reserve calculation for ALLL. The current or weighted average (for multiple notes within a commercial borrowing arrangement) rate is used as the discount rate when the interest rate floats with a specified index. A change in terms or payments would be included in the impairment calculation.

Reserve for Unfunded Commitments. The reserve for unfunded commitments provides for potential losses inherent with funding the unused portion of legal commitments to lend.

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. 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. The most common types of modifications include covenant modifications, forbearance and/or concessions. 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.

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. Initially, all TDRs are reported as impaired. Generally, TDRs are classified as impaired loans and TDRs for the remaining life of the loan. 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.

 

8


Table of Contents

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 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 provisions of ASU No. 2011-02 became effective for the Company on July 1, 2011 and did not have a significant impact on the Company’s consolidated 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 from 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.

 

9


Table of Contents

ASU No. 2011-08, “Intangibles - Goodwill and Other (Topic 350) - Testing Goodwill for Impairment.” In September 2011, the FASB issued ASU No. 2011-08 which no longer requires an entity to initially perform the two-step goodwill impairment test. An entity may first make an assessment of qualitative factors in order to determine whether events and circumstances would more likely than not result in an impairment of goodwill. Only if this assessment concludes that impairment is more likely than not would the two-step goodwill impairment testing be required. An entity may bypass the qualitative assessment during any reporting period. The guidance is effective for the Company’s interim and annual periods beginning after December 15, 2011 and will be applied prospectively. Early adoption is permitted, including interim or annual goodwill impairment tests performed before September 15, 2011, for interim or annual reports that have not been issued. The Company is currently evaluating the impact of the adoption of this accounting standards update on the Company’s financial statements.

ASU No. 2011-09, “Compensation - Retirement Benefits - Multiemployer Plans (Topic 715-80): Disclosure about an Employer’s Participation in a Multiemployer Plan.” In September 2011, the FASB issued ASU No. 2011-09 which requires quantitative and qualitative disclosures about each significant plan including, the legal name and the plan’s employer identification number; the most recent certified funding status or percentage funded and report plans subject to funding improvement; expiration dates of collective bargaining agreements; whether employer’s contribution exceeds 5% of total contributions; contributions to each significant plan and contributions to all plans; and the nature and effect of changes that impact comparability between periods an income statement is presented. The guidance is effective for the Company’s interim and annual periods ending after December 15, 2011 and will be applied prospectively. 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.

 

10


Table of Contents

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 for the periods indicated:

 

    At September 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
   

(In thousands)

             

Available for sale:

             

U.S. Treasury Bills

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

Agency collateralized mortgage obligations (“CMOs”) - GSE

    1,673,602        37,523        (383     1,710,742        —          —          1,710,742   

Pooled trust preferred securities (a)

    54,364        —          (23,580     30,784        —          —          30,784   

Single issuer trust preferred securities

    50,975        —          (13,833     37,142        —          —          37,142   

Equity securities-financial institutions (b)

    7,370        589        (245     7,714        —          —          7,714   

Mortgage-backed securities - GSE

    393,510        27,484        —          420,994        —          —          420,994   

Commercial mortgage-backed securities (CMBS)

    290,092        18,604        (16,121     292,575        —          —          292,575   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available for sale

  $ 2,470,113      $ 84,200      $ (54,162   $ 2,500,151      $ —        $ —        $ 2,500,151   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Held to maturity:              

Municipal bonds and notes

  $ 659,610      $ —        $ —        $ 659,610      $ 24,000      $ (450   $ 683,160   

Agency collateralized mortgage obligations (“CMOs”) - GSE

    754,297        —          —          754,297        28,192        —          782,489   

Mortgage-backed securities - GSE

    1,521,145        —          —          1,521,145        102,202        —          1,623,347   

Commercial mortgage-backed securities (CMBS)

    144,518        —          —          144,518        1,524        (235     145,807   

Private Label MBS

    26,443        —          —          26,443        487        —          26,930   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total held to maturity

  $ 3,106,013      $ —        $ —        $ 3,106,013      $ 156,405      $ (685   $ 3,261,733   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Total investment securities   $ 5,576,126      $ 84,200      $ (54,162   $ 5,606,164      $ 156,405      $ (685   $ 5,761,884   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

(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.

 

11


Table of Contents

Securities with a carrying value totaling $2.4 billion at September 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 September 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.

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

 

     Available for Sale      Held to Maturity  

(In thousands)

   Amortized
Cost
     Fair
Value
     Amortized
Cost
     Fair
Value
 

Due in one year or less

   $ 200       $ 200       $ 19,802       $ 19,808   

Due after one year through five years

     —           —           6,148         6,427   

Due after five years through ten years

     37,221         29,108         288,153         305,765   

Due after ten years

     2,425,322         2,463,129         2,791,910         2,929,733   
  

 

 

    

 

 

    

 

 

    

 

 

 

Totals

   $ 2,462,743       $ 2,492,437       $ 3,106,013       $ 3,261,733   
  

 

 

    

 

 

    

 

 

    

 

 

 

For the purposes of the maturity schedule, mortgage-backed securities, which are not due at a single maturity date, have been allocated over maturity groupings based on the expected maturity of the underlying collateral. Actual maturities may differ from contractual maturities because certain borrowers have the right to call or prepay obligations with or without call or prepayment penalties. At September 30, 2011, the Company had $671.1 million of callable securities in its investment portfolio.

Management evaluates securities for 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 Statements 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:

 

     At September 30, 2011  
     Less Than Twelve Months     Twelve Months or Longer     Total  

(Dollars in thousands)

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

Available for Sale:

                  

Agency CMOs - GSE

   $ 175,165       $ (383   $ —         $ —          4       $ 175,165       $ (383

Pooled trust preferred securities

     7,812         (6,880     22,972         (16,700     8         30,784         (23,580

Single issuer trust preferred securities

     6,784         (1,436     30,358         (12,397     9         37,142         (13,833

Equity securities

     2,403         (245     —           —          18         2,403         (245

Commercial mortgage-backed securities (CMBS)

     52,234         (7,926     16,051         (8,195     4         68,285         (16,121
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total available for sale

   $ 244,398       $ (16,870   $ 69,381       $ (37,292     43       $ 313,779       $ (54,162
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Held-to-maturity:

                  

Municipal bonds and notes

   $ 7,025       $ (63   $ 27,632       $ (387     41       $ 34,657       $ (450

Commercial mortgage-backed securities (CMBS)

     36,352         (235     —           —          4         36,352         (235
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total held-to-maturity

   $ 43,377       $ (298   $ 27,632       $ (387     45       $ 71,009       $ (685
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total investment securities

   $ 287,775       $ (17,168   $ 97,013       $ (37,679     88       $ 384,788       $ (54,847
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

12


Table of Contents
     At December 31, 2010  
     Less Than Twelve Months     Twelve Months or Longer     Total  

(Dollars in thousands)

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

Available for Sale:

                  

Agency CMOs - GSE

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

Pooled trust preferred securities

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

Single issuer trust preferred securities

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

Equity securities

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

Mortgage-backed securities-GSE

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

Commercial mortgage-backed securities (CMBS)

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

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total available for sale

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

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 
Held-to-maturity:                   

Municipal bonds and notes

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

Agency CMOs - GSE

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

Mortgage-backed securities - GSE

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

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total held-to-maturity

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

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total investment securities

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

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

The following discussion 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 September 30, 2011. Unless otherwise noted, under an investment security type, management does not intend to sell these investments and has determined, based upon available evidence, that it is more likely than not that the Company will not be required to sell the security before the recovery of its amortized cost.

Trust Preferred Securities – Pooled Issuers – At September 30, 2011, the fair value of the pooled trust preferred securities was $30.8 million, a decrease of $22.4 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, principal pay downs on another, and wider credit and liquidity spreads. During the nine months ended September 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 $23.6 million at September 30, 2011 is attributable to cumulative decreases in market interest rates, increases in liquidity spread premiums selected by management to reflect the inactive and illiquid nature of the trust preferred securities market at this time, and changes in the underlying credit profile of issuers in each trust over the holding period. Since the end of 2010, the 30 year swap rate has declined 141 basis points and credit spreads in general have increased. Over the course of 2011, the combination of these changes in interest rates and credit spreads, changes in the underlying securities cash flow projections, and a reduction in the overall size of the portfolio, account for the increase in unrealized losses of $9.0 million from December 31, 2010. For the three and nine months ended September 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 nine months ended September 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. Based on the valuation analysis presented above, these securities were not deemed to be other-than-temporarily impaired as of September 30, 2011.

 

13


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
September 30,
   Total
Credit Related
Other-Than-
Temporary
Impairment thru
September 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       $ —         $ (1,908   $ 1,575       B    $ (352     96.6         4.6   

Security I

   B      4,464         —           (2,453     2,011       CCC      (365     88.2         16.8   

Security J

   B      5,274         —           (3,050     2,224       CCC      (806     90.6         11.6   

Security K

   A      7,349         —           (2,259     5,090       CCC      (2,040     68.5         34.1   

Security L

   B      8,719         —           (4,865     3,854       CCC      (867     92.0         11.6   

Security M

   A      7,343         —           (4,621     2,722       D      (4,926     51.6         41.7   

Security N

   A      17,732         —           (4,424     13,308       A      (1,104     90.6         11.6   
     

 

 

    

 

 

    

 

 

   

 

 

       

 

 

      

Total

      $ 54,364       $ —         $ (23,580   $ 30,784          $ (10,460     
     

 

 

    

 

 

    

 

 

   

 

 

       

 

 

      

 

(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 September 30, 2011, the fair value of the single issuer trust preferred portfolio was $37.1 million, a decrease of $5.2 million from the fair value of $42.3 million at December 31, 2010. The gross unrealized loss of $13.8 million at September 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 significantly improved capital levels in recent years and remain well above current regulatory standards. Based on the review of the qualitative and quantitative factors presented above, these securities were not deemed to be other-than-temporarily impaired at September 30, 2011.

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
September 30,
   Total
Other-Than-
Temporary
Impairment thru
September 30,
 

Deal Name

   Cost      Gains      Losses     Value      2011    2011  
(In thousands)                                       

Security B

   $ 6,845       $ —         $ (2,211   $ 4,634       BB    $ —     

Security C

     8,621         —           (1,507     7,114       BBB      —     

Security D

     9,540         —           (4,040     5,500       BB      —     

Security E

     11,705         —           (2,555     9,150       BBB      —     

Security F

     14,264         —           (3,520     10,744       BBB      —     
  

 

 

    

 

 

    

 

 

   

 

 

       

 

 

 

Total

   $ 50,975       $ —         $ (13,833   $ 37,142          $ —     
  

 

 

    

 

 

    

 

 

   

 

 

       

 

 

 

 

14


Table of Contents

Agency CMOs – GSE – There were $383 thousand in unrealized losses in the Company’s investment in agency CMOs at September 30, 2011 compared to $6.3 million at December 31, 2010. The improvement in unrealized losses at September 30, 2011 was the result of lower overall interest rates and tighter market spreads during the three and nine months ended 2011. The contractual cash flows for these investments are performing as expected. As such, the Company does not consider these investments to be other-than-temporarily impaired at September 30, 2011.

Equity securities – The unrealized losses on the Company’s investment in equity securities were $245 thousand at September 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 ($6.7 million of the total fair value at September 30, 2011) and auction rate preferred securities ($975 thousand of the total fair value at September 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 September 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 September 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 nine months ended September 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 $16.1 million at September 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 three and nine months ended September 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 has determined that these investments were not other-than-temporarily impaired at September 30, 2011.

The following discussion summarizes, by investment security type, the basis for the conclusion that the applicable investment securities within the Company’s held to maturity portfolio were not other-than-temporarily impaired at September 30, 2011. Unless otherwise noted, under an investment security type, management 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. There were no significant credit downgrades on held to maturity securities during the three and nine months ended September 30, 2011.

Municipal bonds and notes – There were unrealized losses on the Company’s investment in municipal bonds and notes of $450 thousand at September 30, 2011 compared to $25.2 million at December 31, 2010. This decrease is primarily the result of a decline in market interest rates 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 86.2% General Obligation bonds and 13.5% Revenue bonds and 0.3% other bonds.

Agency collateralized mortgage obligations – GSE – There were no unrealized losses on the Company’s investment in agency CMOs at September 30, 2011 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 nine months ended September 30, 2011, the agency CMO securities are all at unrealized gains.

Mortgage-backed securities – GSE – There were no unrealized losses on the Company’s investment in residential mortgage-backed securities issued by the GSEs at September 30, 2011 compared to $4.3 million at December 31, 2010. The contractual cash flows for these investments are performing as expected. The increase in market value is attributable to lower overall interest rates during the three and nine months ended September 30, 2011.

CMBS and Private Label CMOs – There were unrealized losses of $235 thousand on the Company’s investment in commercial and residential mortgage-backed securities issued by entities other than GSEs at September 30, 2011 compared to no unrealized losses at December 31, 2010. These securities carry AAA ratings and are currently performing as expected.

 

15


Table of Contents

The following tables summarize the impact of sale proceeds and net realized gains and losses on sales of securities and the impact of the recognition of other-than-temporary impairments for the three and nine months ended September 30, 2011 and 2010:

 

    Three months ended September 30,  
    2011     2010  

(In thousands)

  Sale
Proceeds
    Gains     Losses     OTTI
Charges
    Net     Sale
Proceeds
    Gains     Losses     OTTI
Charges
    Net  

Available for sale:

                   

Agency notes - GSE

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

Agency CMOs - GSE

    —          —          —          —          —          73,052        1,173        —          —          1,173   

Pooled trust preferred securities

    —          —          —          —          —          773        —          (146     (970     (1,116

Single issuer trust preferred securities

    —          —          —          —          —          —          —          —          —          —     

Equity securities

    —          —          —          —          —          —          —          —          —          —     

Mortgage-backed securities-GSE

    —          —          —          —          —          —          —          —          —          —     

Commercial mortgage-backed securities

    —          —          —          —          —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available for sale

  $ —        $ —        $ —        $ —        $ —        $ 73,825      $ 1,173      $ (146   $ (970   $ 57   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    Nine months ended September 30,  
    2011     2010  

(In thousands)

  Sale
Proceeds
    Gains     Losses     OTTI
Charges
    Net     Sale
Proceeds
    Gains     Losses     OTTI
Charges
    Net  

Available for sale:

                   

Agency notes - GSE

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

Agency CMOs - GSE

    94,335        1,959        —          —          1,959        73,052        1,173        —          —          1,173   

Pooled trust preferred securities

    1,456        —          (3,343     —          (3,343     1,853        340        (146     (5,771     (5,577

Single issuer trust preferred securities

    —          —          —          —          —          —          —          —          —          —     

Equity securities

    2,353        374        —          —          374        —          —          —          (67     (67

Mortgage-backed securities-GSE

    180,613        4,833        —          —          4,833        266,154        8,342        —          —          8,342   

Commercial mortgage-backed securities

    —          —          —          —          —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available for sale

  $ 278,757      $ 7,166      $ (3,343   $ —        $ 3,823      $ 341,059      $ 9,855      $ (146   $ (5,838   $ 3,871   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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

(In thousands)

   2011     2010     2011     2010  

Balance of credit related OTTI, beginning of period

   $ 10,476      $ 39,220      $ 26,320      $ 43,492   

Additions for credit related OTTI not previously recognized

     —          970        —          5,771   

Reduction for payment of deferred interest

     (16     —          (16     —     

Reduction for securities sold

     —          (1,867     (15,844     (10,940
  

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal of additions and reductions, net

     (16     (897     (15,860     (5,169
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance of credit related OTTI, end of period

   $ 10,460      $ 38,323      $ 10,460      $ 38,323   
  

 

 

   

 

 

   

 

 

   

 

 

 

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 nine months ended September 30, 2011. There was a reduction in outstanding credit-related OTTI due to the sale of two securities during the nine months ended September 30, 2011.

Investments in Private Equity Funds

In addition to investment securities, the Company has investments in private equity funds. These investments, which totaled $13.1 million at September 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 $0.1 million and $1.5 million during the three and nine months ended September 30, 2011, respectively, and a $0.7 million loss and a $1.4 million gain, net of OTTI charges on these investments, during the three and nine months ended September 30, 2010, respectively. These amounts are included in other non-interest income on the Condensed Consolidated Statements of Operations.

 

16


Table of Contents

Trading Securities

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 other non-interest income in the Condensed Consolidated Statement of Operations for the nine months ended September 30, 2010.

For the three and nine months ended September 30, 2011 the Company recorded no gain or loss and a loss of $1.8 million, respectively, for the mark to market value given these securities were classified as trading. For the three and nine months ended September 30, 2010 the Company recorded a gain of $1.2 million and $9.8 million, respectively, for the mark to market value given these securities were classified as trading.

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 September 30, 2011 and December 31, 2010:

 

     At September 30, 2011  

(In thousands)

   Residential      Consumer      Commercial      Commercial
Real Estate