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Webster Financial 10-Q 2012
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 March 31, 2012.

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    þ  No

The number of shares of common stock, par value $.01 per share, outstanding as of April 27, 2012 was 87,868,904

 


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

     46   

Item 3.

  

Quantitative and Qualitative Disclosures about Market Risk

     71   

Item 4.

  

Controls and Procedures

     71   

PART II – OTHER INFORMATION

  

Item 1.

  

Legal Proceedings

     72   

Item 1A.

  

Risk Factors

     72   

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

     72   

Item 3.

  

Defaults Upon Senior Securities

     72   

Item 4.

  

Mine Safety Disclosures

     72   

Item 5.

  

Other Information

     72   

Item 6.

  

Exhibits

     73   

SIGNATURES

     74   

EXHIBIT INDEX

     75   

 

2


Table of Contents

PART I. – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

(In thousands, except share data)

   March 31,
2012
    December 31,
2011
 
     (Unaudited)        

Assets:

    

Cash and due from banks

   $ 173,027      $ 195,957   

Interest-bearing deposits

     77,921        96,062   

Securities available for sale, at fair value

     3,144,867        2,874,764   

Securities held-to-maturity (fair value of $3,234,584 and $3,130,546)

     3,079,654        2,973,727   

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

     142,595        143,874   

Loans held for sale

     59,615        57,391   

Loans and leases

     11,312,150        11,225,404   

Allowance for loan and lease losses

     (210,288     (233,487
  

 

 

   

 

 

 

Loans and leases, net

     11,101,862        10,991,917   

Deferred tax asset, net

     81,676        105,665   

Premises and equipment, net

     141,088        147,379   

Goodwill

     529,887        529,887   

Other intangible assets, net

     14,293        15,690   

Cash surrender value of life insurance policies

     309,556        307,039   

Prepaid FDIC premiums

     32,507        37,946   

Accrued interest receivable and other assets

     245,594        237,042   
  

 

 

   

 

 

 

Total assets

   $ 19,134,142      $ 18,714,340   
  

 

 

   

 

 

 

Liabilities and Equity:

    

Deposits:

    

Non-interest-bearing

   $ 2,491,442      $ 2,473,693   

Interest-bearing

     11,453,055        11,182,332   
  

 

 

   

 

 

 

Total deposits

     13,944,497        13,656,025   

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

     1,268,589        1,164,706   

Federal Home Loan Bank advances

     1,352,466        1,252,609   

Long-term debt

     474,318        552,589   

Accrued expenses and other liabilities

     199,330        242,637   
  

 

 

   

 

 

 

Total liabilities

     17,239,200        16,868,566   
  

 

 

   

 

 

 

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 - 90,713,626 and 90,709,350 shares

     907        907   

Paid-in capital

     1,146,141        1,145,346   

Retained earnings

     898,031        865,427   

Less: Treasury stock, at cost (3,467,612 and 3,493,915 shares)

     (132,631     (134,641

Accumulated other comprehensive loss, net

     (46,445     (60,204
  

 

 

   

 

 

 

Total equity

     1,894,942        1,845,774   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 19,134,142      $ 18,714,340   
  

 

 

   

 

 

 

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
March 31,
 

(In thousands, except per share data)

   2012     2011  

Interest Income:

    

Interest and fees on loans and leases

   $ 120,741      $ 121,943   

Taxable interest and dividends on securities

     45,888        46,493   

Non-taxable interest on securities

     6,980        7,351   

Loans held for sale

     498        422   
  

 

 

   

 

 

 

Total interest income

     174,107        176,209   
  

 

 

   

 

 

 

Interest Expense:

    

Deposits

     16,056        22,769   

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

     4,434        3,562   

Federal Home Loan Bank advances

     4,564        3,355   

Long-term debt

     5,685        6,362   
  

 

 

   

 

 

 

Total interest expense

     30,739        36,048   
  

 

 

   

 

 

 

Net interest income

     143,368        140,161   

Provision for loan and lease losses

     4,000        10,000   
  

 

 

   

 

 

 

Net interest income after provision for loan and lease losses

     139,368        130,161   
  

 

 

   

 

 

 

Non-interest Income:

    

Deposit service fees

     23,363        25,340   

Loan related fees

     4,869        4,443   

Wealth and investment services

     7,221        6,722   

Mortgage banking activities

     4,383        1,253   

Increase in cash surrender value of life insurance policies

     2,517        2,533   

Net loss on trading securities

     —          (1,799

Net gain on sale of investment securities

     —          2,176   

Other income

     1,633        3,248   
  

 

 

   

 

 

 

Total non-interest income

     43,986        43,916   
  

 

 

   

 

 

 

Non-interest Expense:

    

Compensation and benefits

     68,619        67,071   

Occupancy

     12,882        14,735   

Technology and equipment

     15,582        15,392   

Intangible assets amortization

     1,397        1,397   

Marketing

     4,100        5,520   

Professional and outside services

     2,692        2,430   

Deposit insurance

     5,709        5,781   

Litigation

     —          292   

Other expenses

     16,832        16,507   
  

 

 

   

 

 

 

Total non-interest expense

     127,813        129,125   
  

 

 

   

 

 

 

Income from continuing operations before income tax expense

     55,541        44,952   

Income tax expense

     16,603        12,368   
  

 

 

   

 

 

 

Income from continuing operations

     38,938        32,584   

Income from discontinued operations, net of tax

     —          1,995   
  

 

 

   

 

 

 

Net income

     38,938        34,579   

Less: Net loss attributable to non controlling interests

     —          (1
  

 

 

   

 

 

 

Net income attributable to Webster Financial Corporation

     38,938        34,580   

Preferred stock dividends

     (615     (831
  

 

 

   

 

 

 

Net income available to common shareholders

   $ 38,323      $ 33,749   
  

 

 

   

 

 

 

Net income per common share:

    

Basic

    

Net income from continuing operations

   $ 0.44      $ 0.36   

Net income available to common shareholders

     0.44        0.38   

Diluted

    

Net income from continuing operations

     0.42        0.34   

Net income available to common shareholders

     0.42        0.36   

See accompanying Notes to Condensed Consolidated Financial Statements.

 

4


Table of Contents

WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

 

     Three months ended
March 31,
 

(In thousands, except per share data)

   2012      2011  

Net income

   $ 38,938       $ 34,579   

Other comprehensive income, net of taxes:

     

Securities:

     

Net change in unrealized gain on securities available for sale

     11,619         4,308   

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

     —           746   

Amortization of unrealized loss on securities transferred to held to maturity

     39         28   

Unrealized gain on derivative instruments

     1,041         1,865   

Defined benefit pension plans:

     

Amortization of net loss

     1,048         406   

Amortization of prior service cost

     12         12   

Current year actuarial gain

     —           365   
  

 

 

    

 

 

 

Other comprehensive income

     13,759         7,730   
  

 

 

    

 

 

 

Comprehensive income

     52,697         42,309   

Less: comprehensive loss attributable to non controlling interests

     —           (1
  

 

 

    

 

 

 

Comprehensive income attributable to Webster Financial Corporation

   $ 52,697       $ 42,310   
  

 

 

    

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

5


Table of Contents

WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited)

 

     Three months ended March 31, 2012  

(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, 2011

   $ 28,939       $ 907       $ 1,145,346      $ 865,427      $ (134,641   $ (60,204   $ —         $ 1,845,774   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net income

     —           —           —          38,938        —          —          —           38,938   

Other comprehensive income

     —           —           —          —          —          13,759        —           13,759   

Dividends declared on common stock of $.05 per share

     —           —           —          (4,377     —          —          —           (4,377

Dividends declared on Series A preferred stock $21.25 per share

     —           —           —          (615     —          —          —           (615

Common stock warrants repurchased

     —           —           —          —          —          —          —           —     

Exercise of stock options

     —           —           (526     —          790        —          —           264   

Net shares acquired related to employee share-based compensation plans

     —           —           —          —          (1,643     —          —           (1,643

Stock-based compensation expense

     —           —           1,222        (1,342     2,863        —          —           2,743   

Issuance of common stock

     —           —           99        —          —          —          —           99   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance, March 31, 2012

   $ 28,939       $ 907       $ 1,146,141      $ 898,031      $ (132,631   $ (46,445   $ —         $ 1,894,942   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

     Three months ended March 31, 2011  

(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, 2010

   $ 28,939       $ 907       $ 1,160,690      $ 741,870      $ (149,462   $ (13,709   $ 9,644      $ 1,778,879   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     —           —           —          34,580        —          —          (1     34,579   

Other comprehensive income

     —           —           —          —          —          7,730        —          7,730   

Dividends declared on common stock of $.01 per share

     —           —           —          (871     —          —          —          (871

Dividends declared on Series A preferred stock $21.25 per share

     —           —           —          (615     —          —          —          (615

Subsidiary preferred stock dividends $0.22 per share

     —           —           —          (216     —          —          —          (216

Disolution of joint venture

     —           —           —            —          —          (66     (66

Exercise of stock options

     —           —           (35       58        —          —          23   

Net shares acquired related to employee share-based compensation plans

     —           —           —          —          (237     —          —          (237

Stock-based compensation expense

     —           —           252        (1,433     2,370        —          —          1,189   

Issuance of common stock

     —           —           22        (250     560        —          —          332   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, March 31, 2011

   $ 28,939       $ 907       $ 1,160,929      $ 773,065      $ (146,711   $ (5,979   $ 9,577      $ 1,820,727   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

6


Table of Contents

WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 

     Three months ended March 31,  

(In thousands)

   2012     2011  

Operating Activities:

    

Net income

   $ 38,938      $ 34,579   

Income from discontinued operations, net of tax

     —          1,995   
  

 

 

   

 

 

 

Income from continuing operations Income from continuing operations

     38,938        32,584   

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

    

Provision for loan and lease losses

     4,000        10,000   

Deferred tax expense

     17,310        6,266   

Depreciation and amortization

     25,646        21,212   

Stock-based compensation

     2,743        1,189   

Excess tax benefits from stock-based compensation

     (1,022     (16

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

     (784     (315

Loss (gain) on sale of premises and equipment

     104        (49

Loss (gain) on fair value adjustment of private equities

     760        (1,103

(Gain) loss on fair value adjustment of derivative instruments

     (156     119   

Net gain on the sale of investment securities

     —          (2,176

Net decrease in trading securities

     —          11,554   

Increase in cash surrender value of life insurance policies

     (2,517     (2,534

Net (increase) decrease in loans held for sale

     (2,224     41,415   

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

     (11,381     322   

Net decrease in accrued expenses and other liabilities

     (36,606     (11,265
  

 

 

   

 

 

 

Net cash provided by operating activities

     34,811        107,203   
  

 

 

   

 

 

 

Investing Activities:

    

Net decrease (increase) in interest-bearing deposits

     18,141        (52,171

Purchases of available for sale securities

     (436,757     (84,144

Proceeds from maturities and principal payments of available for sale securities

     174,454        214,698   

Proceeds from sales of available for sale securities

     —          91,921   

Purchases of held-to-maturity securities

     (280,945     (302,064

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

     171,539        160,429   

Sale of FHLB and FRB stock

     1,279        —     

Net increase in loans

     (117,970     (30,818

Proceeds from the sale of foreclosed properties and repossessed assets

     2,307        4,348   

Proceeds from the sale of premises and equipment

     516        769   

Purchases of premises and equipment

     (2,477     (6,754
  

 

 

   

 

 

 

Net cash used for investing activities

     (469,913     (3,786
  

 

 

   

 

 

 

Financing Activities:

    

Net increase in deposits

     288,472        515,883   

Proceeds from Federal Home Loan Bank advances

     800,000        45,934   

Repayments of Federal Home Loan Bank advances

     (700,032     (410,425

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

     103,883        (234,084

Repayment of long-term debt

     (74,901     (10,310

Cash dividends paid to common shareholders

     (4,377     (871

Cash dividends paid to preferred shareholders of consolidated subsidiary

     —          (216

Cash dividends paid to preferred shareholders

     (615     (615

Exercise of stock options

     264        23   

Excess tax benefits from stock-based compensation

     1,022        16   

Issuance of common stock

     99        332   

Common stock repurchased

     (1,643     (237
  

 

 

   

 

 

 

Net cash provided by (used for) financing activities

     412,172        (94,570
  

 

 

   

 

 

 

Cash Flows from Discontinued Operations:

    

Operating activities

     —          1,995   
  

 

 

   

 

 

 

Net cash provided by discontinued operations

     —          1,995   
  

 

 

   

 

 

 

Net (decrease) increase in cash and due from banks

     (22,930     10,842   

Cash and due from banks at beginning of period

     195,957        159,849   
  

 

 

   

 

 

 

Cash and due from banks at end of period

   $ 173,027      $ 170,691   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Interest paid

   $ 32,023      $ 37,347   

Income taxes paid

     3,814        6,175   

Noncash investing and financing activities:

    

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

   $ 2,508      $ 4,283   

See accompanying Notes to Condensed Consolidated Financial Statements.

 

7


Table of Contents

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 March 31, 2012 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 southern New England and into Westchester County, New York. Webster provides business and consumer banking, mortgage lending, financial planning, trust and investment services through banking offices, ATMs, telephone banking, mobile banking and its Internet website (www.websterbank.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 and all other entities in which Webster has a controlling financial interest (collectively referred to as “Webster” or the “Company”). All significant intercompany balances and transactions have been eliminated in consolidation. The accounting and financial reporting policies Webster follows conform, in all material respects, to accounting principles generally accepted in the United States (“GAAP”) and to general practices within the financial services industry.

The Company determines whether it has a controlling financial interest in an entity by first evaluating whether the entity is a voting interest entity or a variable interest entity (“VIE”) under GAAP. 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 holder with the obligation to absorb losses, the right to receive residual returns and the right to make decisions about the entity’s activities. The Company consolidates voting interest entities in which it has all or at least a majority of, the voting interest. VIEs are entities that lack one or more of the characteristics of a voting interest entity. A controlling financial interest in a VIE is present when the Company has both the power to direct the activities of the VIE that most significantly impact the VIEs economic performance and an obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE.

The Company owns the common stock of trusts which have issued trust preferred securities. These trusts are VIEs in which the Company is not the primary beneficiary and therefore are not consolidated. The trusts’ only assets are junior subordinated debentures issued by the Company, which were acquired by the trusts using the proceeds from the issuance of the trust preferred securities and common stock. The junior subordinated debentures are included in long-term debt (see Note 8) and the Company’s equity interests in the trusts are included in other assets in the condensed consolidated balance sheets. Interest expense on the junior subordinated debentures is reported in interest expense on long-term debt in the condensed consolidated statements of operations.

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, 2011, included in Webster’s Annual Report on Form 10-K filed with the SEC on February 29, 2012 (the “2011 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.

Correction of Immaterial Error Related to Prior Periods. During the year ended December 31, 2011, the Company identified an error related to the accounting for certain Commercial loan origination and amendment fees. The Company determined that these fees were recognized immediately and not properly amortized over the term of the loan, as required by ASC Topic 310-20, Nonrefundable Fees and Other Costs. As a result, these fees were not recognized as Interest and Fees on Loans and Leases but were recognized in Loan Related Fees, which is a component of Other Non-Interest Income in the Condensed Consolidated Statements of Operations. The Company reviewed the impact of this error on the prior periods in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 99, Materiality, and determined that the error was immaterial to previously reported amounts contained in its periodic reports. Accordingly, the Company has revised its Condensed Consolidated Statements of Operations for the three months ended March 31, 2011.

 

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The effects of recording this immaterial correction are as follows:

 

(In thousands, except per share data)

   For the three months ended
March 31, 2011
 
     As Filed      As Revised  

Loans

   $ 11,014,050       $ 11,007,934   

Deferred tax asset

     95,209         97,399   

Retained earnings

     776,968         773,065   

Interest and fees on loans and leases

     121,231         121,943   

Net interest income

     139,449         140,161   

Loan related fees

     4,829         4,443   

Total non-interest income

     44,302         43,916   

Net income before taxes

     44,626         44,952   

Net income after taxes

     32,300         32,584   

Earnings per common share:

     

Basic

     0.38         0.38   

Diluted

     0.36         0.36   

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 Company’s 2011 Form 10-K.

Investment Securities. Investment securities are classified at the time of purchase as “available for sale”, or “held to maturity”. Classification is re-evaluated each quarter to ensure appropriate classification and to maintain consistency with corporate objectives. Debt securities held to maturity are those which Webster has the ability and intent to hold to maturity. Securities held to maturity are recorded at amortized cost. Amortized cost includes the amortization of premiums or accretion of discounts. Such amortization and accretion is included in interest income from securities. Securities classified as available for sale are recorded at fair value. Unrealized gains and losses, net of taxes, are calculated each reporting period and presented as a separate component of other comprehensive income (“OCI”). Securities transferred from available for sale to held to maturity are recorded at fair value at the time of transfer. The respective gain or loss is reclassified as a separate component of OCI and amortized as an adjustment to interest income over the remaining life of the security.

Investment securities are reviewed quarterly for OTTI. All securities classified as held to maturity or available for sale that are in an unrealized loss position are evaluated for OTTI. The evaluation considers several qualitative factors including the amount of the unrealized loss and the period of time the security has been in a loss position. If the Company intends to sell the security or, if it is more than likely the Company will be required to sell the security prior to recovery of its amortized cost basis, the security is written down to fair value and the respective loss is recorded as non-interest expense in the 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 any impairment charge of a debt security would be recognized as a loss in non-interest income in the Condensed Consolidated Statement of Operations. The remaining loss component would be recorded in OCI. A decline in the value of an equity security that is considered OTTI is recorded as a loss in non-interest income on the Condensed Consolidated Statements of Operations.

The specific identification method is used to determine realized gains and losses on sales of securities.

Loans. Loans are stated at the principal amounts outstanding, net of charged off amounts and 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 non-accrual status when timely collection of principal and interest in accordance with contractual terms is doubtful. A loan is transferred to a non-accrual 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 the borrower may be unable to meet contractual principal or interest payments.

Accrual of interest is discontinued if the loan is placed on non-accrual status. Residential real estate and consumer loans are placed on non-accrual 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. 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.

 

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When a loan is put on non-accrual status, unpaid accrued interest is reversed and charged against interest income. If ultimate repayment of a non-accrual 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 non-accrual 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 non-accrual 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 troubled 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 cost 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. The unfunded reserve calculation includes factors that are consistent with ALLL methodology for funded loans using the loss given default, probability of default and a draw down factor applied to the underlying borrower risk and facility grades.

Troubled Debt Restructurings. A modified loan is considered a troubled debt restructuring (“TDR”) when two conditions are met: 1) the borrower is experiencing financial difficulties and 2) the modification constitutes a concession. Modified terms are dependent upon the financial position and needs of the individual borrower. The Company does not employ modification programs for temporary or trial periods. The most common types of modifications include covenant modifications, forbearance and/or other 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.

Fair Value Measurements. In general, fair values of financial instruments are based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial statements are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality and the Company’s creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. Changes in fair value are recorded either through non-interest income/expense or OCI.

 

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Earnings Per Common Share. Earnings per common share is computed using the two-class method. Under the two-class method, basic earnings per common share is computed by dividing net earnings allocated to common stock by the weighted-average number of common shares outstanding during the applicable period, excluding outstanding participating securities. Diluted earnings per common share is computed using the weighted-average number of shares determined for the basic earnings per common share computation plus the dilutive effect of stock compensation and warrants for common stock using the treasury stock method. A reconciliation of the weighted-average shares used in calculating basic and diluted earnings per common share is provided in Note 10 – 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. 2011-11, “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities.” In December 2011, the FASB issued ASU No. 2011-11 which expands required disclosures of information related to the nature of an entity’s rights of setoff and related arrangements associated with its financial instruments and derivative instruments, in an effort to enhance comparability between financial statements prepared with GAAP and IFRS. The requirements include disclosure of net and gross positions in covered financial instruments and derivative instruments which are either (1) offset in accordance with ASC Sections 210-20-45 or 815-10-45, or (2) subject to an enforceable netting or other similar arrangement. The guidance is effective for the Company’s interim and annual periods beginning on January 1, 2013 and will be applied retrospectively. The Company is currently evaluating the impact of the adoption of this accounting standards update on the Company’s financial statements.

ASU No. 2011-12, “Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.” In December 2011, the FASB issued ASU No. 2011-12 which defers the effective date for the part of ASU No. 2011-05 that would have required adjustments of items out of accumulated other comprehensive income to be presented on the components of both net income and other comprehensive income in the financial statements until FASB can adequately evaluate the costs and benefits of this presentation requirement. The Company has deferred this presentation, as permitted, and continues to evaluate 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 below:

 

     At March 31, 2012  
            Recognized in OCI            Not Recognized in OCI        

(Dollars in thousands)

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

Available for sale:

                  

U.S. Treasury Bills

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

Agency collateralized mortgage obligations (“CMOs”) - GSE

     1,779,221         29,443         (1,326     1,807,338         —           —          1,807,338   

Corporate debt

     112,994         1,838         (575     114,257         —           —          114,257   

Pooled trust preferred securities (a)

     52,297         —           (22,482     29,815         —           —          29,815   

Single issuer trust preferred securities

     51,067         —           (10,023     41,044         —           —          41,044   

Equity securities-financial institutions (b)

     6,995         2,043         (22     9,016         —           —          9,016   

Mortgage-backed securities (“MBS”) - GSE

     757,228         24,897         (1,113     781,012         —           —          781,012   

Commercial mortgage-backed securities (“CMBS”)

     341,464         28,786         (8,065     362,185         —           —          362,185   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total available for sale

   $ 3,101,466       $ 87,007       $ (43,606   $ 3,144,867       $ —         $ —        $ 3,144,867   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Held-to-maturity:

                  

Municipal bonds and notes

   $ 643,694       $ —         $ —        $ 643,694       $ 33,527       $ (142   $ 677,079   

Agency collateralized mortgage obligations (“CMOs”) - GSE

     683,551         —           —          683,551         22,401         —          705,952   

Mortgage-backed securities (“MBS”) - GSE

     1,572,801         —           —          1,572,801         93,546         (3,488     1,662,859   

Commercial mortgage-backed securities (“CMBS”)

     158,232         —           —          158,232         8,628         —          166,860   

Private Label MBS

     21,376         —           —          21,376         458         —          21,834   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total held-to-maturity

   $ 3,079,654       $ —         $ —        $ 3,079,654       $ 158,560       $ (3,630   $ 3,234,584   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total investment securities

   $ 6,181,120       $ 87,007       $ (43,606   $ 6,224,521       $ 158,560       $ (3,630   $ 6,379,451   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

(a) Amortized cost is net of $10.5 million of credit related other-than-temporary impairments at March 31, 2012.
(b) Amortized cost is net of $21.6 million of other-than-temporary impairments at March 31, 2012.

 

     At December 31, 2011  
            Recognized in OCI            Not Recognized in OCI        

(Dollars in thousands)

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

Available for sale:

                  

U.S. Treasury Bills

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

Agency collateralized mortgage obligations (“CMOs”) - GSE

     1,916,372         27,211         (3,341     1,940,242         —           —          1,940,242   

Pooled trust preferred securities (a)

     52,606         —           (23,608     28,998         —           —          28,998   

Single issuer trust preferred securities

     51,027         —           (12,813     38,214         —           —          38,214   

Equity securities-financial institutions (b)

     7,669         1,802         (24     9,447         —           —          9,447   

Mortgage-backed securities (“MBS”) - GSE

     502,389         25,079         (158     527,310         —           —          527,310   

Commercial mortgage-backed securities (“CMBS”)

     319,200         22,395         (11,242     330,353         —           —          330,353   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total available for sale

   $ 2,849,463       $ 76,487       $ (51,186   $ 2,874,764       $ —         $ —        $ 2,874,764   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Held-to-maturity:

                  

Municipal bonds and notes

   $ 646,358       $ —         $ —        $ 646,358       $ 30,960       $ (174   $ 677,144   

Agency collateralized mortgage obligations (“CMOs”) - GSE

     733,889         —           —          733,889         20,555         —          754,444   

Mortgage-backed securities (“MBS”) - GSE

     1,411,008         —           —          1,411,008         98,449         —          1,509,457   

Commercial mortgage-backed securities (“CMBS”)

     158,451         —           —          158,451         6,588         —          165,039   

Private Label MBS

     24,021         —           —          24,021         441         —          24,462   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total held-to-maturity

   $ 2,973,727       $ —         $ —        $ 2,973,727       $ 156,993       $ (174   $ 3,130,546   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total investment securities

   $ 5,823,190       $ 76,487       $ (51,186   $ 5,848,491       $ 156,993       $ (174   $ 6,005,310   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

(a) Amortized cost is net of $10.5 million of credit related other-than-temporary impairments at December 31, 2011.
(b) Amortized cost is net of $21.6 million of other-than-temporary impairments at December 31, 2011.

 

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The amortized cost and fair value of debt securities at March 31, 2012, 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       $ 31,430       $ 31,432   

Due after one year through five years

     5,180         5,266         12,416         12,969   

Due after five through ten years

     117,399         118,606         249,977         265,958   

Due after ten years

     2,971,692         3,011,779         2,785,831         2,924,225   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt securities

   $ 3,094,471       $ 3,135,851       $ 3,079,654       $ 3,234,584   
  

 

 

    

 

 

    

 

 

    

 

 

 

For the purposes of the maturity schedule, mortgage-backed securities, which are not due at a single maturity date, have been allocated over maturity groupings based on the expected maturity of the underlying collateral. Actual maturities may differ from contractual maturities because certain borrowers have the right to call or prepay obligations with or without call or prepayment penalties. At March 31, 2012, the Company had $632.6 million carrying value of callable securities in its investment portfolio.

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:

 

     March 31, 2012  
     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

   $ 287,975       $ (1,326   $ —         $ —          8       $ 287,975       $ (1,326

Corporate debt

     24,333         (575     —           —          1         24,333         (575

Pooled trust preferred securities

     6,784         (7,896     23,031         (14,586     8         29,815         (22,482

Single issuer trust preferred securities

     7,383         (859     33,661         (9,164     9         41,044         (10,023

Equity securities-financial institutions

     126         (22     —           —          1         126         (22

MBS - GSE

     124,823         (1,113     —           —          12         124,823         (1,113

CMBS

     1,119         (7     16,246         (8,058     2         17,365         (8,065
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total available for sale

   $ 452,543       $ (11,798   $ 72,938       $ (31,808     41       $ 525,481       $ (43,606
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Held-to-maturity:

                  

Municipal bonds and notes

   $ 7,639       $ (80   $ 3,393       $ (62     21       $ 11,032       $ (142

MBS - GSE

     254,773         (3,488     —           —          20         254,773         (3,488
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total held-to-maturity

   $ 262,412       $ (3,568   $ 3,393       $ (62     41       $ 265,805       $ (3,630
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total investment securities

   $ 714,955       $ (15,366   $ 76,331       $ (31,870     82       $ 791,286       $ (47,236
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

     December 31, 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

   $ 405,318       $ (3,341   $ —         $ —          11       $ 405,318       $ (3,341

Pooled trust preferred securities

     6,526         (8,178     22,472         (15,430     8         28,998         (23,608

Single issuer trust preferred securities

     6,711         (1,521     31,503         (11,292     9         38,214         (12,813

Equity securities-financial institutions

     124         (24     —           —          1         124         (24

MBS - GSE

     90,418         (158     —           —          3         90,418         (158

CMBS

     73,190         (1,924     14,957         (9,318     5         88,147         (11,242
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total available for sale

   $ 582,287       $ (15,146   $ 68,932       $ (36,040     37       $ 651,219       $ (51,186
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Held-to-maturity:

                  

Municipal bonds and notes

   $ 5,405       $ (66   $ 6,117       $ (108     21       $ 11,522       $ (174

MBS - GSE

     —           —          —           —          —           —           —     
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total held-to-maturity

   $ 5,405       $ (66   $ 6,117       $ (108     21       $ 11,522       $ (174
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total investment securities

   $ 587,692       $ (15,212   $ 75,049       $ (36,148     58       $ 662,741       $ (51,360
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

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Securities with a carrying value totaling $2.4 billion at March 31, 2012 and December 31, 2011 were pledged to secure public funds, trust deposits, repurchase agreements and for other purposes, as required or permitted by law. At March 31, 2012 and December 31, 2011, the Company had no investments in obligations of individual states, counties, or municipalities which exceed 10% of consolidated shareholders’ equity.

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 March 31, 2012. Unless otherwise noted for 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 March 31, 2012, the fair value of the pooled trust preferred securities was $29.8 million, an increase of $0.8 million from the fair value of $29.0 million at December 31, 2011. The slight increase in fair value is due to the net impact of small improvements in credit and liquidity spreads and principal paydowns. The gross unrealized loss of $22.5 million at March 31, 2012 is attributable to wider credit spreads that management incorporated in order 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 pool over the holding period.

For the three months ended March 31, 2012, 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 months ended March 31, 2012. The pooled trust preferred portfolio consists of collateralized debt obligations (“CDOs”) containing predominantly bank and insurance collateral that are investment grade and below investment grade. The Company employs an internal CDO model for projection of future cash flows and discounting those cash flows to a net present value. An internal model is used to value the securities due to the continued inactive market and illiquid nature of pooled trust preferred in the entire capital structure. Each underlying issuer in the pools is rated internally using the latest financial data on each institution, and future deferrals, defaults and losses are then estimated on the basis of continued stress in the financial markets. Further, all current and projected deferrals are not assumed to cure, and all current and projected defaults are assumed to have no recovery value. The resulting net cash flows are then discounted at current market levels for similar types of products that are actively trading. To determine potential OTTI due to credit losses, management compares the amortized cost to the present value of expected cash flows adjusted for deferrals and defaults using the discount margin at the time of purchase. Other factors considered include an analysis of excess subordination and temporary interest shortfall coverage. Based on the valuation analysis as of March 31, 2012, management expects to fully recover the remaining amortized cost of those securities not deemed to be other than temporarily impaired. However, additional interest deferrals, defaults, or ratings changes could result in future OTTI charges.

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

 

Trust Preferred Securities - Pooled Issuers

 

Deal Name

   Class    Amortized
Cost (b)
     Gross
Unrealized
Losses
    Fair
Value
     Lowest Credit
Ratings as of
March 31,
2012 (a)
   Total
Other-Than-
Temporary
Impairment thru
March 31,

2012
    % of
Performing
Bank/
Insurance
Issuers
     Current
Deferrals/
Defaults
(As a % of
Original
Collateral)
 
(Dollars in thousands)                                                  

Security H

   B    $ 3,486       $ (1,745   $ 1,741       B    $ (352     96.6         4.6   

Security I

   B      4,467         (2,220     2,247       CCC      (365     88.2         16.8   

Security J

   B      5,286         (2,804     2,482       CCC      (806     90.6         11.6   

Security K

   A      7,372         (3,511     3,861       CCC      (2,040     68.5         33.2   

Security L

   B      8,725         (4,424     4,301       CCC      (867     92.0         11.6   

Security M

   A      7,307         (4,384     2,923       D      (4,926     56.0         39.6   

Security N

   A      15,654         (3,394     12,260       A      (1,104     90.6         11.6   
     

 

 

    

 

 

   

 

 

       

 

 

      
      $ 52,297       $ (22,482   $ 29,815          $ (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 previously deemed impaired, the amortized cost is reflective of previous OTTI recognized in earnings.

Trust Preferred Securities - Single Issuers – At March 31 2012, the fair value of the single issuer trust preferred portfolio was $41.0 million, an increase of $2.8 million from the fair value of $38.2 million at December 31, 2011. The gross unrealized loss of $10.0 million at March 31, 2012 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 continue to service the debt and showed significantly improved capital levels in recent years and remain well above current regulatory capital 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 March 31, 2012.

 

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Table of Contents

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

 

Trust Preferred Securities - Single Issuers

 

Deal Name

   Amortized
Cost
     Gross
Unrealized
Losses
    Fair
Value
     Lowest Credit
Ratings as of
March 31,
2012
   Total
Other-Than-
Temporary
Impairment thru
March 31,

2012
 
(Dollars in thousands)                                

Security B

   $ 6,865       $ (1,810   $ 5,055       BB    $ —     

Security C

     8,645         (1,390     7,255       BBB      —     

Security D

     9,540         (2,490     7,050       BB      —     

Security E

     11,730         (1,914     9,816       BBB      —     

Security F

     14,287         (2,419     11,868       BBB      —     
  

 

 

    

 

 

   

 

 

       

 

 

 
   $ 51,067       $ (10,023   $ 41,044          $ —     
  

 

 

    

 

 

   

 

 

       

 

 

 

Agency CMOs-GSE – There were $1.3 million in unrealized losses in the Company’s investment in agency CMOs at March 31, 2012 compared to $3.3 million at December 31, 2011. The improvement in unrealized losses at March 31, 2012 was the result of lower overall interest rates and tighter market spreads during the three months ended March 31, 2012. 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 March 31, 2012.

Corporate Debt Securities – There were $575 thousand in unrealized losses in the Company’s investment in senior corporate debt securities at March 31, 2012. There were no investments in senior corporate debt securities as of December 31, 2011. The unrealized loss at March 31, 2012 was the result of higher benchmark rates from the time of purchase.

Equity securities – The unrealized losses on the Company’s investment in equity securities were $22 thousand at March 31, 2012 compared to $24 thousand at December 31, 2011. This portfolio consists primarily of investments in the common stock of small capitalization financial institutions based in New England ($8.7 million of the total fair value at March 31, 2012) and auction rate preferred securities ($300 thousand of the total fair value at March 31, 2012). When estimating the recovery period for equity securities in an unrealized loss position, management utilizes analyst forecasts, earnings assumptions and other company-specific financial performance metrics. In addition, this assessment incorporates general market data, industry and sector cycles and related trends to determine a reasonable recovery period. The Company evaluated the near-term prospects of the issuers in relation to the severity and duration of the impairment. The Company determined its holdings of equity securities were not deemed to be other-than-temporarily impaired at March 31, 2012

Mortgage-backed securities - GSE –There were $1.1 million unrealized losses in the Company’s investment in residential mortgage-backed securities issued by the GSEs at March 31, 2012 compared to $158 thousand in unrealized losses at December 31, 2011. This increase was primarily due to fluctuations in interest rates during the quarter with market rates generally ending higher during that period. The contractual cash flows for these investments are performing as expected with the exception of unexpected principal prepayments resulting from GSE buyout programs initiated in 2011.

Commercial mortgage-backed securities – The unrealized losses on the Company’s investment in commercial mortgage-backed securities issued by entities other than GSEs decreased to $8.1 million at March 31, 2012 from $11.2 million at December 31, 2011. This decrease in unrealized loss is primarily the result of recent tightening in credit spreads in the three months ended March 31, 2012. 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 credit spreads reflective of the market risk appetite for this securities class. Management continues to perform internal stress tests on individual bonds to monitor potential tranche losses in either the base or high stress test scenarios. The trends of both internal and external findings are used when evaluating potential OTTI. Market surveillance analytics support internal results for both base and high stress scenarios. Cash flows for the bonds continue to perform as expected and, therefore, no OTTI is warranted at this point in time. The Company has determined that these investments were not other-than-temporarily impaired at March 31, 2012.

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 March 31, 2012. 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 months ended March 31, 2012.

Municipal bonds and notes – There were unrealized losses on the Company’s investment in municipal bonds and notes of $142 thousand at March 31, 2012 compared to $174 thousand at December 31, 2011. This decrease is primarily the result of improved credit spreads in 2012 compared to 2011. The municipal portfolio is comprised of bank qualified bonds, over 92.7% with credit ratings of A or better. In addition, the portfolio is comprised of 84.3% General Obligation bonds and 15.4% Revenue bonds and 0.3% other bonds.

 

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Table of Contents

Agency CMOs - GSE – There were no unrealized losses on the Company’s investment in agency CMOs at March 31, 2012 and at December 31, 2011. The contractual cash flows for this investment are performing as expected. With tighter market spreads during the three months ended March 31, 2012, the agency CMO securities are all at unrealized gains.

Mortgage-backed securities - GSE – There were unrealized losses on the Company’s investment in residential mortgage-backed securities issued by the GSEs of $3.5 million at March 31, 2012 compared to no losses at December 31, 2011. The contractual cash flows for these investments are performing as expected.

CMBS and Private Label MBS – There were no unrealized losses on the Company’s investment in commercial and residential mortgage-backed securities issued by entities other than GSEs at March 31, 2012 and at December 31, 2011. These securities carry AAA ratings and are currently performing as expected.

There were no securities sales for the three months ended March 31, 2012. The following table summarizes sale proceeds of available for sale securities for the three months ended March 31, 2011:

 

     Three months  ended
March 31, 2011
 
(In thousands)       

Available for sale:

  

Pooled trust preferred securities

   $ 1,050   

Equity securities

     2,352   

MBS - GSE

     88,519   
  

 

 

 

Total available for sale

   $ 91,921   
  

 

 

 

There were no realized gains or losses from the sale of securities for the three months ended March 31, 2012. The following table summarizes the impact of realized gains and losses and the impact of the recognition of other-than-temporary impairments from the sale of securities for the three months ended March 31, 2011:

 

     Three months ended March 31, 2011  

(In thousands)

   Gains      Losses     OTTI
Charges
     Net  

Available for sale:

          

Pooled trust preferred securities

   $ —         $ (974   $ —         $ (974

Equity securities

     374         —          —           374   

MBS - GSE

     2,776         —          —           2,776   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total available for sale

   $ 3,150       $ (974   $ —         $ 2,176   
  

 

 

    

 

 

   

 

 

    

 

 

 

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

 

     Three months ended
March 31,
 

(In thousands)

   2012      2011  

Balance of credit related OTTI, beginning of period

   $ 10,460       $ 26,320   

Reduction for securities sold

     —           (4,994
  

 

 

    

 

 

 

Balance of credit related OTTI, end of period

   $ 10,460       $ 21,326   
  

 

 

    

 

 

 

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 months ended March 31, 2012. There was a reduction in outstanding credit-related OTTI due to the sale of one security during the three months ended March 31, 2011.

Investments in Private Equity Funds

In addition to investment securities, the Company has investments in private equity funds. These investments, which totaled $11.6 million at March 31, 2012, are included in other assets in the Condensed Consolidated Balance Sheets. The Company recognized a loss on these investments of $705 thousand for the three months ended March 31, 2012 and a gain of $1.1 million for the three months ended March 31, 2011. These amounts are included in other non-interest income on the Condensed Consolidated Statements of Operations.

 

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Table of Contents

NOTE 3: Loans and Leases

Recorded Investment in Loans and Leases. The following table summarizes recorded investment; the principle amounts outstanding, net of unamortized premiums and discounts, net of deferred fees and/or costs, plus accrued interest, in loans and leases, by portfolio segment at March 31, 2012 and December 31, 2011:

 

     At March 31, 2012  

(In thousands)

   Residential      Consumer      Commercial      Commercial
Real Estate
     Equipment
Financing
     Total  

Loans and Leases:

                 

Ending balance (a)

   $ 3,270,213       $ 2,727,163       $ 2,442,392       $ 2,425,797       $ 446,585       $ 11,312,150   

Accrued interest

     10,945         8,532         6,469         7,404         —           33,350   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total recorded investment

   $ 3,281,158       $ 2,735,695       $ 2,448,861       $ 2,433,201       $ 446,585       $ 11,345,500   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total recorded investment: individually evaluated for impairment

   $ 135,806       $ 34,766       $ 93,177       $ 160,363       $ 2,315       $ 426,427   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total recorded investment: collectively evaluated for impairment

   $ 3,145,352       $ 2,700,929       $ 2,355,684       $ 2,272,838       $ 444,270       $ 10,919,073   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     At December 31, 2011  

(In thousands)

   Residential      Consumer      Commercial      Commercial
Real Estate
     Equipment
Financing
     Total  

Loans and Leases:

                 

Ending balance (a)

   $ 3,219,890       $ 2,760,030       $ 2,385,791       $ 2,384,889       $ 474,804       $ 11,225,404   

Accrued interest

     10,992         8,777         6,585         7,186         —           33,540   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total recorded investment

   $ 3,230,882       $ 2,768,807       $ 2,392,376       $ 2,392,075       $ 474,804       $ 11,258,944   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total recorded investment: individually evaluated for impairment

   $ 135,311       $ 36,629       $ 107,218       $ 212,850       $ 3,268       $ 495,276   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total recorded investment: collectively evaluated for impairment

   $ 3,095,571       $ 2,732,178       $ 2,285,158       $ 2,179,225       $ 471,536       $ 10,763,668   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) The ending balance includes net deferred fees and unamortized premiums of $18.8 million and $20.6 million at March 31, 2012 and December 31, 2011, respectively.

As of March 31, 2012, the Company had pledged $4.3 billion of net eligible loan collateral to support available borrowing capacity at either the FHLB of Boston or the Federal Reserve discount window.

Allowance for Loan and Lease Losses. The following table summarizes the allowance for loan and lease losses (“ALLL”) by portfolio segment for the three months ending March 31, 2012 and 2011:

 

     Three months ended March 31, 2012  

(In thousands)

   Residential     Consumer     Commercial     Commercial
Real Estate
    Equipment
Financing
    Unallocated     Total  

Allowance for loan and lease losses:

              

Balance, beginning of period

   $ 34,565      $ 67,785      $ 60,681      $ 45,013      $ 8,943      $ 16,500      $ 233,487   

Provision (benefit) charged to expense

     448        4,475        3,516        (78     (2,861     (1,500     4,000   

Losses charged off

     (3,115     (10,051     (14,994     (5,848     (634     —          (34,642

Recoveries

     141        2,054        1,800        1,100        2,348        —          7,443   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ 32,039      $ 64,263      $ 51,003      $ 40,187      $ 7,796      $ 15,000      $ 210,288   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

   $ 16,976      $ 4,441      $ 6,309      $ 4,977      $ 22      $ —        $ 32,725   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

   $ 15,063      $ 59,822      $ 44,694      $ 35,210      $ 7,774      $ 15,000      $ 177,563   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     Three months ended March 31, 2011  

(In thousands)

   Residential     Consumer     Commercial     Commercial
Real Estate
    Equipment
Financing
    Unallocated     Total  

Allowance for loan and lease losses:

              

Balance, beginning of period

   $ 30,792      $ 95,071      $ 74,470      $ 77,695      $ 21,637      $ 22,000      $ 321,665   

Provision (benefit) charged to expense

     669        8,525        4,144        827        (2,165     (2,000     10,000   

Losses charged off

     (3,350     (14,988     (11,111     (7,360     (1,134     —          (37,943

Recoveries

     128        1,213        1,416        —          1,469        —          4,226   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ 28,239      $ 89,821      $ 68,919      $ 71,162      $ 19,807      $ 20,000      $ 297,948   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

   $ 14,134      $ 3,623      $ 9,612      $ 10,536      $ 2      $ —        $ 37,907   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

   $ 14,105      $ 86,198      $ 59,307      $ 60,626      $ 19,805      $ 20,000      $ 260,041   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Impaired Loans and Leases. The following table summarizes impaired loans and leases by class as of March 31, 2012 and December 31, 2011:

 

     At March 31, 2012  

(In thousands)

   Unpaid
Principal
Balance
     Total
Recorded
Investment
     Recorded
Investment
No Allowance
     Recorded
Investment
With Allowance
     Related
Valuation
Allowance
 

Residential:

              

1-4 family

   $ 134,788       $ 125,029       $ —         $ 125,029       $ 14,394   

Permanent-NCLC

     11,968         10,674         —           10,674         2,577   

Construction

     128         103         —           103         5   

Liquidating portfolio-construction loans

     —           —           —           —           —     

Consumer:

              

Home equity loans

     33,020         29,883         —           29,883         3,521   

Liquidating portfolio-home equity loans

     5,452         4,876         —           4,876         919   

Other consumer

     7         7         —           7         1   

Commercial:

              

Commercial non-mortgage

     113,662         91,718         39,253         52,465         6,309   

Asset-based loans

     7,427         1,459         1,459         —           —     

Commercial real estate:

              

Commercial real estate

     149,058         140,034         89,129         50,905         4,445   

Commercial construction

     7,322         7,354         —           7,354         532   

Residential development

     13,647         12,975         12,975         —           —     

Equipment Financing

     10,354         2,315         1,665         650         22   

Totals:

              

Residential

     146,884         135,806         —           135,806         16,976   

Consumer

     38,479         34,766         —           34,766         4,441   

Commercial

     121,089         93,177         40,712         52,465         6,309   

Commercial real estate

     170,027         160,363         102,104         58,259         4,977   

Equipment Financing

     10,354         2,315         1,665         650         22   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 486,833       $ 426,427       $ 144,481       $ 281,946       $ 32,725   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     At December 31, 2011  

(In thousands)

   Unpaid
Principal
Balance
     Total
Recorded
Investment
     Recorded
Investment
No Allowance
     Recorded
Investment
With Allowance
     Related
Valuation
Allowance
 

Residential:

              

1-4 family

   $ 133,123         124,461       $ —         $ 124,461       $ 16,611   

Permanent-NCLC

     12,005         10,718         —           10,718         2,747   

Construction

     129         132         —           132         9   

Liquidating portfolio-construction loans

     —           —           —           —           —     

Consumer:

              

Home equity loans

     35,285         31,153         4         31,149         4,116   

Liquidating portfolio-home equity loans

     7,277         5,469         3         5,466         1,050   

Other consumer

     7         7         —           7         1   

Commercial:

              

Commercial non-mortgage

     118,293         105,359         30,207         75,152         12,996   

Asset-based loans

     7,814         1,859         1,859         —           —     

Commercial real estate:

              

Commercial real estate