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Webster Financial 10-Q 2013

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
WBS-9-30-2013 10Q
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
_______________________________________________________________________________
FORM 10-Q
_______________________________________________________________________________
þ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2013
or
o  Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File Number: 001-31486
_______________________________________________________________________________
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 and zip code of principal executive offices)
 
(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    o  No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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    o  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.
Large accelerated filer
þ
 
Accelerated filer
o
 
Non-accelerated filer
o
 
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).    o  Yes    þ  No
The number of shares of common stock, par value $.01 per share, outstanding as of October 31, 2013 was 90,343,433


 




INDEX
 

i


PART I. – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
 
At September 30,
2013
 
At December 31,
2012
(In thousands, except share data)
(Unaudited)
 
 
Assets:
 
 
 
Cash and due from banks
$
266,747

 
$
252,283

Interest-bearing deposits
18,192

 
98,205

Securities available for sale, at fair value
3,193,772

 
3,136,160

Securities held-to-maturity (fair value of $3,248,620 and $3,264,718)
3,205,999

 
3,107,529

Federal Home Loan Bank and Federal Reserve Bank stock, at cost
158,878

 
155,630

Loans held for sale
40,193

 
107,633

Loans and leases
12,477,965

 
12,028,696

Allowance for loan and lease losses
(157,545
)
 
(177,129
)
Loans and leases, net
12,320,420

 
11,851,567

Deferred tax asset, net
72,180

 
68,681

Premises and equipment, net
121,250

 
134,562

Goodwill
529,887

 
529,887

Other intangible assets, net
6,544

 
10,270

Cash surrender value of life insurance policies
427,113

 
418,293

Prepaid FDIC premiums

 
16,323

Accrued interest receivable and other assets
248,379

 
259,742

Total assets
$
20,609,554

 
$
20,146,765

Liabilities and shareholders' equity:
 
 
 
Deposits:
 
 
 
Non-interest-bearing
$
2,968,727

 
$
2,881,131

Interest-bearing
12,030,804

 
11,649,704

Total deposits
14,999,531

 
14,530,835

Securities sold under agreements to repurchase and other borrowings
1,372,290

 
1,076,160

Federal Home Loan Bank advances
1,602,469

 
1,827,612

Long-term debt
229,146

 
334,276

Accrued expenses and other liabilities
238,459

 
284,352

Total liabilities
18,441,895

 
18,053,235

Shareholders’ equity:
 
 
 
Preferred stock, $.01 par value; Authorized - 3,000,000 shares:
 
 
 
Series A issued and outstanding - 28,939 shares
28,939

 
28,939

Series E issued and outstanding - 5,060 shares
122,710

 
122,710

Common stock, $.01 par value; Authorized - 200,000,000 shares:
 
 
 
Issued - 93,360,197 and 90,735,596 shares
933

 
907

Paid-in capital
1,126,344

 
1,145,620

Retained earnings
1,054,117

 
1,000,427

Less: Treasury stock, at cost (3,575,777 and 5,772,006 shares)
(106,443
)
 
(172,807
)
Accumulated other comprehensive loss
(58,941
)
 
(32,266
)
Total shareholders' equity
2,167,659

 
2,093,530

Total liabilities and shareholders' equity
$
20,609,554

 
$
20,146,765

See accompanying Notes to Condensed Consolidated Financial Statements.

1


WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
 
Three months ended September 30,
 
Nine months ended September 30,
(In thousands, except per share data)
2013
2012
 
2013
2012
Interest Income:
 
 
 
 
 
Interest and fees on loans and leases
$
123,664

$
121,367

 
$
366,445

$
363,487

Taxable interest and dividends on securities
42,165

43,532

 
126,619

135,082

Non-taxable interest on securities
5,351

6,662

 
17,104

20,577

Loans held for sale
573

655

 
1,761

1,810

Total interest income
171,753

172,216

 
511,929

520,956

Interest Expense:


 
 
 
Deposits
10,908

14,543

 
35,782

45,701

Securities sold under agreements to repurchase and other borrowings
5,283

5,594

 
15,522

15,388

Federal Home Loan Bank advances
3,753

3,943

 
12,299

12,933

Long-term debt
1,822

3,246

 
5,482

14,298

Total interest expense
21,766

27,326

 
69,085

88,320

Net interest income
149,987

144,890

 
442,844

432,636

Provision for loan and lease losses
8,500

5,000

 
24,500

14,000

Net interest income after provision for loan and lease losses
141,487

139,890

 
418,344

418,636

Non-interest Income:


 
 
 
Deposit service fees
25,170

24,728

 
73,786

71,810

Loan related fees
5,840

4,039

 
15,930

12,473

Wealth and investment services
8,095

7,186

 
24,781

21,656

Mortgage banking activities
665

6,515

 
13,584

14,522

Increase in cash surrender value of life insurance policies
3,516

2,680

 
10,348

7,758

Net gain on sale of investment securities
269

810

 
708

3,347

Other income
2,702

2,521

 
7,649

8,252

Total non-interest income
46,257

48,479

 
146,786

139,818

Non-interest Expense:


 
 
 
Compensation and benefits
64,862

66,126

 
196,680

198,332

Occupancy
11,994

12,462

 
36,710

37,922

Technology and equipment
14,895

15,118

 
45,743

46,721

Intangible assets amortization
1,242

1,384

 
3,726

4,178

Marketing
3,649

4,529

 
12,277

13,723

Professional and outside services
2,254

2,790

 
5,931

8,869

Deposit insurance
5,300

5,675

 
15,998

17,107

Other expense
18,085

15,803

 
54,355

52,027

Total non-interest expense
122,281

123,887

 
371,420

378,879

Income before income tax expense
65,463

64,482

 
193,710

179,575

Income tax expense
18,158

19,489

 
57,915

54,404

Net income
47,305

44,993

 
135,795

125,171

Preferred stock dividends
(2,639
)
(615
)
 
(8,164
)
(1,845
)
Net income available to common shareholders
$
44,666

$
44,378

 
$
127,631

$
123,326

Net income per common share:
 
 
 
 
 
 
 
 
 
Basic
$
0.50

$
0.51

$
1.44

$
1.41

 
 
 
 
 
Diluted
0.49

0.48

1.41

1.34

See accompanying Notes to Condensed Consolidated Financial Statements.


2


WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
 
 
Three months ended September 30,
 
Nine months ended September 30,
(In thousands)
2013
2012
 
2013
2012
Net income
$
47,305

$
44,993

 
$
135,795

$
125,171

Other comprehensive income (loss), net of tax
6,198

14,601

 
(26,675
)
30,927

Comprehensive income
$
53,503

$
59,594

 
$
109,120

$
156,098

See accompanying Notes to Condensed Consolidated Financial Statements.


3


WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited)
 
 
Nine months ended September 30, 2013
(In thousands, except per share data)
Preferred
Stock
Common
Stock
Paid-In
Capital
Retained
Earnings
Treasury
Stock
Accumulated
Other
Comprehensive
Loss
Total
Equity
Balance at December 31, 2012
$
151,649

$
907

$
1,145,620

$
1,000,427

$
(172,807
)
$
(32,266
)
$
2,093,530

Net income



135,795



135,795

Other comprehensive loss, net of tax





(26,675
)
(26,675
)
Dividends paid on common stock of $0.40 per share



(35,176
)


(35,176
)
Dividends paid on Series A preferred stock $63.75 per share



(1,845
)


(1,845
)
Dividends paid on series E preferred stock $1248.89 per share



(6,319
)


(6,319
)
Common stock warrants repurchased


(30
)



(30
)
Exercise of stock options


(729
)

1,713


984

Net shares acquired related to employee share-based compensation plans




(381
)

(381
)
Stock-based compensation, net of tax effects


2,757

(2,511
)
7,335


7,581

Issuance of common stock

26

(21,274
)
(36,254
)
57,697


195

Balance at September 30, 2013
$
151,649

$
933

$
1,126,344

$
1,054,117

$
(106,443
)
$
(58,941
)
$
2,167,659

 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2012
(In thousands, except per share data)
Preferred
Stock

Common
Stock

Paid-In
Capital

Retained
Earnings

Treasury
Stock

Accumulated
Other
Comprehensive
Loss

Total
Equity

Balance at December 31, 2011
$
28,939

$
907

$
1,145,346

$
865,427

$
(134,641
)
$
(60,204
)
$
1,845,774

Net income



125,171



125,171

Other comprehensive income, net of tax





30,927

30,927

Dividends paid on common stock of $0.25 per share



(21,906
)


(21,906
)
Dividends paid on Series A preferred stock $63.75 per share



(1,845
)


(1,845
)
Common stock warrants repurchased


(385
)



(385
)
Exercise of stock options


(1,711
)

2,567


856

Net shares acquired related to employee share-based compensation plans




(2,008
)

(2,008
)
Stock-based compensation, net of tax effects


1,735

(4,253
)
9,205


6,687

Issuance of common stock


407




407

Balance at September 30, 2012
$
28,939

$
907

$
1,145,392

$
962,594

$
(124,877
)
$
(29,277
)
$
1,983,678

 See accompanying Notes to Condensed Consolidated Financial Statements.

4


WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 
Nine months ended September 30,
(In thousands)
2013
2012
Operating Activities:
 
 
Net income
$
135,795

$
125,171

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Provision for loan and lease losses
24,500

14,000

Deferred tax expense
11,221

14,192

Depreciation and amortization
78,236

81,632

Stock-based compensation
7,757

6,735

Excess tax benefits from stock-based compensation
(255
)
(303
)
Gain on sale, net of write-down, on foreclosed and repossessed assets
(1,072
)
(1,923
)
(Gain) loss on sale net of write-down on premises and equipment
(59
)
603

Loss on fair value adjustment of alternative investments
354

775

Loss on fair value adjustment of derivative instruments
290

12

Net gain on the sale of investment securities
(708
)
(3,347
)
Increase in cash surrender value of life insurance policies
(10,348
)
(7,758
)
Gain from life insurance policies
(1,070
)

Gain on sale of loans held for sale
(13,584
)
(14,522
)
Proceeds from sale of loans held for sale
670,226

529,020

Origination of loans held for sale
(592,368
)
(537,348
)
Net decrease (increase) in accrued interest receivable and other assets
83,060

(14,154
)
Net decrease in accrued expenses and other liabilities
(16,743
)
(3,730
)
Net cash provided by operating activities
375,232

189,055

Investing Activities:
 
 
Net decrease in interest-bearing deposits
37,243

16,299

Purchases of available for sale securities
(835,364
)
(1,009,181
)
Proceeds from maturities and principal payments of available for sale securities
621,385

627,429

Proceeds from sales of available for sale securities
44,261

148,223

Purchases of held-to-maturity securities
(702,017
)
(752,030
)
Proceeds from maturities and principal payments of held-to-maturity securities
587,998

571,648

Net (purchase) sale of Federal Home Loan Bank and Federal Reserve Board stock
(3,248
)
1,279

Net increase in loans
(503,397
)
(586,375
)
Purchase of life insurance policies

(100,000
)
Proceeds from life insurance policies
1,768


Proceeds from the sale of foreclosed properties and repossessed assets
5,741

7,453

Proceeds from the sale of premises and equipment
1,304

1,406

Purchases of premises and equipment
(11,247
)
(14,544
)
Net cash used for investing activities
(755,573
)
(1,088,393
)
Financing Activities:
 
 
Net increase in deposits
468,696

757,412

Proceeds from Federal Home Loan Bank advances
3,178,120

2,826,265

Repayments of Federal Home Loan Bank advances
(3,403,245
)
(2,625,500
)
Net increase in securities sold under agreements to repurchase and other borrowings
296,130

145,309

Repayment of long-term debt
(102,579
)
(210,971
)
Cash dividends paid to common shareholders
(35,176
)
(21,906
)
Cash dividends paid to preferred shareholders
(8,164
)
(1,845
)
Exercise of stock options
984

856

Excess tax benefits from stock-based compensation
255

303

Issuance of common stock
195

407

Common stock repurchased
(381
)
(2,008
)
Common stock warrants repurchased
(30
)
(385
)
Net cash provided by financing activities
394,805

867,937

 
 
 
Net increase (decrease) in cash and due from banks
14,464

(31,401
)
Cash and due from banks at beginning of period
252,283

195,957

Cash and due from banks at end of period
$
266,747

$
164,556

 
 
 
Supplemental disclosure of cash flow information:
 
 
Interest paid
$
66,582

$
92,056

Income taxes paid
42,507

30,398

Noncash investing and financing activities:
 
 
Transfer of loans and leases, net to foreclosed properties and repossessed assets
$
9,295

$
5,474

Transfer of loans from portfolio to loans-held-for-sale
44

13,796

See accompanying Notes to Condensed Consolidated Financial Statements.

5


NOTE 1: Summary of Significant Accounting Policies
Nature of Operations. Webster Financial Corporation (collectively, with its consolidated subsidiaries, “Webster” or the “Company”), 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. At September 30, 2013, Webster Financial Corporation's principal asset 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 Financial Corporation and all other entities in which it has a controlling financial interest. All significant intercompany balances and transactions have been eliminated in consolidation. Webster's accounting and financial reporting policies 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 and ability to direct the activities of the VIE that most significantly impact the VIE's 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 a trust which has issued trust preferred securities. The trust is a VIE in which the Company is not the primary beneficiary and, therefore, is not consolidated. The trust's only assets are junior subordinated debentures issued by the Company, which were acquired by the trust using the proceeds from the issuance of the trust preferred securities and common stock. The junior subordinated debentures are included in long-term debt and the Company’s equity interests in the trust is included in other assets in the accompanying Condensed Consolidated Balance Sheets. Interest expense on the junior subordinated debentures is reported in interest expense on long-term debt in the accompanying Condensed Consolidated Statements of Income. See Note 9 - Long-Term Debt.
Certain prior period amounts have been reclassified to conform to the current year's presentation. These reclassifications had no impact on the Company's consolidated financial position, results of operations or net change in cash or cash equivalents.
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 value measurements of financial instruments and valuation of investments for other-than-temporary impairment (“OTTI”), the valuation of goodwill, the deferred tax asset valuation allowance and pension and other postretirement benefits, as well as the status of contingencies are particularly subject to change.
Correction of Immaterial Error Related to Prior Periods. During the three months ended September 30, 2013, the Company identified a $1.7 million error applicable to income taxes in prior periods. The error was determined to be immaterial to the results of the prior periods, and the correction of the error resulted in the recognition of a $1.7 million tax benefit in the three months ended September 30, 2013, which was determined to be immaterial to the results of the current period. For more detailed information see the "Income Taxes" section of Management's Discussion and Analysis of Financial Condition and Results of Operations.
Cash Equivalents and Cash Flows. For the purposes of the Condensed Consolidated Statements of Cash Flows, cash equivalents include cash on hand and due from banks, interest-bearing deposits at the Federal Reserve or other short-term money market investments. Webster classifies financial instruments with maturities of one year or less at the date of purchase as interest-bearing deposits. These deposits are carried at cost, which approximates fair value.

6


Cash flows from loans, either originated or acquired, are classified at that time according to management's original intent to either sell or hold the loan for the foreseeable future. When management's intent is to to sell the loan, the cash flows of that loan are presented as operating cash flows. When management's intent is to hold the loan for the foreseeable future, the cash flows of that loan are presented as investing cash flows.
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 available for sale or held-to-maturity 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 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 loss is recorded in non-interest income in the accompanying Condensed Consolidated Statements of Income. If the Company does not intend to sell the security and 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 accompanying Condensed Consolidated Statements of Income. 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 in the accompanying Condensed Consolidated Statements of Income.
The specific identification method is used to determine realized gains and losses on sales of securities.
Loans Held for Sale. Loans held for sale are primarily residential real estate mortgage loans. Loans typically are assigned this classification upon origination based on management's intent to sell when the loans are underwritten. Loans held for sale are carried at the lower of cost or fair value. Non-residential mortgage loans held for sale are carried at lower of cost or fair value and are valued on individual asset basis. Any cost amount in excess of fair value is recorded as a valuation allowance and recognized as a reduction of other income. Gains or losses on the sale of loans held for sale are included in non-interest income in the accompanying Condensed Consolidated Statements of Income. Direct loan origination costs and fees are deferred and are recognized at the time of sale.
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 yield adjustments 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 if management concludes circumstances indicate that the borrower may be unable to meet contractual principal or interest payments. Residential real estate and consumer loans are placed on non-accrual status at 90 days past due, or at the date when the Company is notified that the borrower is discharged in bankruptcy. A charge-off is recorded at 180 days if the loan balance exceeds the fair value of the collateral less costs to sell. Commercial, commercial real estate and equipment finance loans are subject to a detailed review when 90 days past due to determine accrual status, or when payment is uncertain and a specific consideration is made to put a loan or lease on non-accrual status.
When a loan is placed on non-accrual status, the accrual of interest is discontinued and any 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.

7


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 and lease portfolio as of the balance sheet date. The level of the allowance reflects management’s view of trends in loss activity, current portfolio quality and present economic, political and regulatory conditions. Portions of the allowance may be allocated for specific loans and leases; however, the entire allowance is available for any loan or lease that is charged off. A charge-off is recorded on a case-by-case basis when all or a portion of the loan or lease is deemed to be uncollectible. Back-testing is performed to compare original estimated losses and actual observed losses, resulting in ongoing refinements. 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 portfolio, economic conditions, interest rate sensitivity and the view of the regulatory authorities regarding loan classifications.
The allowance for loan and lease losses consists of three elements: (i) specific valuation allowances established for probable losses on impaired loans and leases; (ii) quantitative valuation allowances calculated using loss experience for like loans and leases 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 factors that may be internal or external to the Company.
Loans and leases 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 homogeneous residential and consumer loans. Commercial, commercial real estate and equipment financing loans and leases over a specific dollar amount and all troubled debt restructurings ("TDR") are evaluated individually for impairment. A loan identified as a 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 non-accruing 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, discharged bankruptcy and the likelihood of collecting scheduled principal and interest payments. Consumer modified loans are analyzed for re-default probability which is considered when determining the impaired reserve for ALLL. The current or weighted-average (for multiple notes within a commercial borrowing arrangement) interest rate of the loan 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 probable losses inherent with funding the unused portion of legal commitments available 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 risk grades. The changes in the reserve for unfunded credit commitments is reported as a component of other expense and the reserve is recorded within other liabilities.
Troubled Debt Restructurings. A modified loan is considered a TDR when two conditions are met: (1) the borrower is experiencing financial difficulties and (2) the modification constitutes a concession. The Company considers all aspects of the restructuring in determining whether a concession has been granted, including the debtor's ability to access funds at a market rate. In general, a concession exists when the modified terms of the loan are more attractive to the borrower than standard market terms. 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 reevaluated to determine if it should be handled by the Company’s Restructuring and Recovery group for resolution, which may result in foreclosure. Loans for which the borrower has been discharged under Chapter 7 bankruptcy are considered collateral dependent TDRs, impaired at the date of discharge, and charged down to the fair value of collateral less cost to sell.
The Company’s policy is to place all consumer loan TDRs on non-accrual status for a minimum period of 6 months. Commercial TDRs are evaluated on a case-by-case basis for determination of whether or not to place on non-accrual status. Loans qualify for return to accrual status once they have demonstrated performance with the restructured terms of the loan agreement for a minimum of 6 months. Initially, all TDRs are reported as impaired. Generally, TDRs are classified as impaired loans and reported as TDRs for the remaining life of the loan. Impaired and TDR classification may be removed if the borrower demonstrates compliance with the modified terms for a minimum of 6 months and through a fiscal year-end, and the restructuring agreement specifies a market rate of interest equal to that which would be provided to a borrower with similar credit at the time of restructuring. In the limited circumstances that a loan is removed from TDR classification it is the Company’s policy to continue to base its measure of loan impairment on the contractual terms specified by the loan agreement.

8


Transfers and Servicing of Financial Assets. Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is generally considered to have been surrendered when (1) the transferred assets are legally isolated from the Company or its consolidated affiliates, even in bankruptcy or other receivership, (2) the transferee has the right to pledge or exchange the assets with no conditions that constrain the transferee and provide more than a trivial benefit to the Company, and (3) the Company does not maintain the obligation or unilateral ability to reclaim or repurchase the assets.
The Company sells financial assets in the normal course of business, the majority of which are residential mortgage loans sales primarily to government-sponsored enterprises through established programs, commercial loan sales through participation agreements, and other individual or portfolio loan and securities sales. In accordance with accounting guidance for asset transfers, the Company considers any ongoing involvement with transferred assets in determining whether the assets can be derecognized from the balance sheet. With the exception of servicing and certain performance-based guarantees, the Company’s continuing involvement with financial assets sold is minimal and generally limited to market customary representation and warranty clauses.
When the Company sells financial assets, it may retain servicing rights and/or other interests in the financial assets. The gain or loss on sale depends on the previous carrying amount of the transferred financial assets and the consideration received and any liabilities incurred in exchange for the transferred assets. Upon transfer, any servicing assets and other interests held by the Company are carried at the lower of cost or fair value.
Recently Adopted Accounting Standards Updates
ASU No. 2011-11, “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities”. The ASU 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 disclosures required by this amendment were applied retrospectively for all comparative periods presented. The amendments are effective for fiscal years beginning on or after January 1, 2013, and interim periods within those annual periods. The amendments did not have a material impact on the Company's financial statements.
ASU 2013-01- Balance Sheet (Topic 210): "Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities". The ASU amends Update 2011-11 to clarify that the scope applies to derivatives, repurchase and reverse repurchase agreements, and securities borrowing and lending transactions that are either offset in accordance with Section 210-20-45 or Section 815-10-45 or subject to master netting or similar arrangements. Other types of financial assets and liabilities subject to master netting or similar arrangements are not subject to the disclosure requirements in Update 2011-11. The amendments are effective for fiscal years beginning on or after January 1, 2013, and interim periods within those annual periods. The amendments did not have a material impact on the Company's financial statements.
ASU 2013-02- Comprehensive Income (Topic 220): "Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income". The ASU requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. The amendments are effective prospectively for reporting periods beginning after December 15, 2012. The amendments did not have a material impact on the Company's financial statements.
ASU 2013-10- Derivatives and Hedging (Topic 815): "Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes (a consensus of the FASB Emerging Issues Task Force)". The ASU permits an entity to use the Fed Funds Effective Swap Rate as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815, in addition to the United States Treasury and London Interbank Offered Rate swap rates. The amendments also remove the restriction on using different benchmark rates for similar hedges. The amendments are effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. The amendments did not have a material impact on the Company's financial statements.


9


NOTE 2: Investment Securities
A summary of the amortized cost, carrying value, and fair value of Webster’s investment securities is presented below:
 
At September 30, 2013
 
 
Recognized in OCI
 
Not Recognized in OCI
 
(In thousands)
Amortized
Cost
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”)
868,288

18,537

(1,349
)
885,476



885,476

Agency mortgage-backed securities (“MBS”)
1,318,550

9,120

(34,416
)
1,293,254



1,293,254

Agency commercial mortgage-backed securities (“ACMBS”)
19,988

96


20,084



20,084

Commercial mortgage-backed securities (“CMBS”)
437,616

29,367

(1,032
)
465,951



465,951

Collateralized loan obligations ("CLOs")
333,023

637

(1,126
)
332,534



332,534

Pooled trust preferred securities (1)
36,581


(6,617
)
29,964



29,964

Single issuer trust preferred securities
51,311


(8,009
)
43,302



43,302

Corporate debt securities
109,529

4,089


113,618



113,618

Equity securities - financial institutions (2)
6,307

3,082


9,389



9,389

Total available for sale
$
3,181,393

$
64,928

$
(52,549
)
$
3,193,772

$

$

$
3,193,772

Held-to-maturity:
 
 
 
 
 
 
 
Agency CMOs
368,980



368,980

11,590

(492
)
380,078

Agency MBS
2,095,513



2,095,513

48,495

(35,832
)
2,108,176

Municipal bonds and notes
466,084



466,084

14,135

(743
)
479,476

CMBS
265,727



265,727

9,272

(4,028
)
270,971

Private Label MBS
9,695



9,695

224


9,919

Total held-to-maturity
$
3,205,999

$

$

$
3,205,999

$
83,716

$
(41,095
)
$
3,248,620

 
 
 
 
 
 
 
 
Total investment securities
$
6,387,392

$
64,928

$
(52,549
)
$
6,399,771

$
83,716

$
(41,095
)
$
6,442,392

(1)
Amortized cost is net of $9.4 million of credit related other-than-temporary impairment at September 30, 2013.
(2)
Amortized cost is net of $21.3 million of other-than-temporary impairment at September 30, 2013.

10


 
At December 31, 2012
 
 
Recognized in OCI
 
Not Recognized in OCI
 
(In thousands)
Amortized
Cost
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 CMOs
1,284,126

25,972

(92
)
1,310,006



1,310,006

Agency MBS
1,121,941

21,437

(1,098
)
1,142,280



1,142,280

CMBS
359,438

42,086

(3,493
)
398,031



398,031

CLOs
88,765


(225
)
88,540



88,540

Pooled trust preferred securities (1)
46,018


(19,811
)
26,207



26,207

Single issuer trust preferred securities
51,181


(6,766
)
44,415



44,415

Corporate debt securities
111,281

6,918


118,199



118,199

Equity securities - financial institutions (2)
6,232

2,054

(4
)
8,282



8,282

Total available for sale
$
3,069,182

$
98,467

$
(31,489
)
$
3,136,160

$

$

$
3,136,160

Held-to-maturity:
 
 
 
 
 
 
 
Agency CMOs
500,369



500,369

16,643

(8
)
517,004

Agency MBS
1,833,677



1,833,677

88,082

(474
)
1,921,285

Municipal bonds and notes
559,131



559,131

34,366

(110
)
593,387

CMBS
199,810



199,810

18,324


218,134

Private Label MBS
14,542



14,542

366


14,908

Total held-to-maturity
$
3,107,529

$

$

$
3,107,529

$
157,781

$
(592
)
$
3,264,718

 
 
 
 
 
 
 
 
Total investment securities
$
6,176,711

$
98,467

$
(31,489
)
$
6,243,689

$
157,781

$
(592
)
$
6,400,878

(1)
Amortized cost is net of $10.5 million of credit related other-than-temporary impairment at December 31, 2012.
(2)
Amortized cost is net of $21.3 million of other-than-temporary impairment at December 31, 2012.
The amortized cost and fair value of debt securities at September 30, 2013, 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

 
$
90

$
91

Due after one year through five years
102,717

106,597

 
66,262

69,780

Due after five through ten years
191,973

192,790

 
138,276

144,351

Due after ten years
2,880,196

2,884,796

 
3,001,371

3,034,398

Total debt securities
$
3,175,086

$
3,184,383

 
$
3,205,999

$
3,248,620

For the maturity schedule above, mortgage-backed securities and collateralized loan obligations, which are not due at a single maturity date, have been categorized based on the maturity date of the underlying collateral. Actual principal cash flows may differ from this maturity date presentation because borrowers have the right to prepay obligations with or without prepayment penalties. At September 30, 2013, the Company had $849.7 million carrying value of callable securities in its CMBS, CLO and municipal bond portfolios. The Company considers these factors in the evaluation of its effective duration and interest rate risk profile.
Securities with a carrying value totaling $2.9 billion at September 30, 2013 and $2.5 billion at December 31, 2012 were pledged to secure public funds, trust deposits, repurchase agreements and for other purposes, as required or permitted by law. At September 30, 2013 and December 31, 2012, the Company had no investments in obligations of individual states, counties, or municipalities which exceed 10% of consolidated shareholders’ equity.

11


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, 2013
 
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
$
90,774

$
(1,255
)
$
9,935

$
(94
)
6

$
100,709

$
(1,349
)
Agency MBS
880,443

(29,177
)
106,834

(5,239
)
92

987,277

(34,416
)
CMBS
51,274

(1,032
)


6

51,274

(1,032
)
CLOs
217,355

(1,126
)


14

217,355

(1,126
)
Pooled trust preferred securities


29,964

(6,617
)
6

29,964

(6,617
)
Single issuer trust preferred securities
3,900

(252
)
39,402

(7,757
)
9

43,302

(8,009
)
Total available for sale in an unrealized loss position
$
1,243,746

$
(32,842
)
$
186,135

$
(19,707
)
133

$
1,429,881

$
(52,549
)
Held-to-maturity:
 
 
 
 
 
 
 
Agency CMOs
29,770

(492
)


2

29,770

(492
)
Agency MBS
1,008,677

(34,002
)
41,673

(1,830
)
72

1,050,350

(35,832
)
Municipal bonds and notes
33,263

(707
)
2,166

(36
)
38

35,429

(743
)
CMBS
77,145

(4,028
)


8

77,145

(4,028
)
Total held-to-maturity in an unrealized loss position
$
1,148,855

$
(39,229
)
$
43,839

$
(1,866
)
120

$
1,192,694

$
(41,095
)
 
 
 
 
 
 
 
 
Total investment securities in an unrealized loss position
$
2,392,601

$
(72,071
)
$
229,974

$
(21,573
)
253

$
2,622,575

$
(93,644
)
 
 
At December 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
$
69,936

$
(92
)
$

$

4

$
69,936

$
(92
)
Agency MBS
275,818

(1,098
)


28

275,818

(1,098
)
CMBS
14,947

(17
)
20,909

(3,476
)
2

35,856

(3,493
)
CLOs
44,775

(225
)


2

44,775

(225
)
Pooled trust preferred securities


26,207

(19,811
)
8

26,207

(19,811
)
Single issuer trust preferred securities


44,415

(6,766
)
9

44,415

(6,766
)
Equity securities-financial institutions
144

(4
)


1

144

(4
)
Total available for sale in an unrealized loss position
$
405,620

$
(1,436
)
$
91,531

$
(30,053
)
54

$
497,151

$
(31,489
)
Held-to-maturity:
 
 
 
 
 
 
 
Agency CMOs
18,741

(8
)


1

18,741

(8
)
Agency MBS
161,057

(474
)


12

161,057

(474
)
Municipal bonds and notes
5,990

(51
)
2,858

(59
)
11

8,848

(110
)
Total held-to-maturity in an unrealized loss position
$
185,788

$
(533
)
$
2,858

$
(59
)
24

$
188,646

$
(592
)
 
 
 
 
 
 
 
 
Total investment securities in an unrealized loss position
$
591,408

$
(1,969
)
$
94,389

$
(30,112
)
78

$
685,797

$
(32,081
)
There were no additions to credit related OTTI for the three and nine months ended September 30, 2013 or 2012. 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 OTTI in future periods.

12


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, 2013. 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 these securities before the recovery of its amortized cost.
Agency collateralized mortgage obligations (CMOs) – There were $1.3 million in unrealized losses in the Company’s investment in agency CMOs at September 30, 2013 compared to $92 thousand at December 31, 2012. The unrealized loss is attributed to an increase in market rates which resulted in lower prices in CMOs. The contractual cash flows for these investments are performing as expected and there has been no change in the underlying credit quality. As such, the Company does not consider these securities to be other-than-temporarily impaired at September 30, 2013.
Agency mortgage-backed securities (MBS) – There were $34.4 million in unrealized losses in the Company’s investment in residential mortgage-backed securities issued by government agencies at September 30, 2013, compared to $1.1 million at December 31, 2012. The increase in unrealized losses is due to the impact of higher interest rates on mortgage-backed securities which resulted in a decrease in price. The contractual cash flows for these investments are performing as expected. The Company does not consider these securities to be other-than-temporarily impaired at September 30, 2013.
Commercial mortgage-backed securities (CMBS) – The unrealized losses on the Company’s investment in commercial mortgage-backed securities issued by entities other than government agencies decreased to $1.0 million at September 30, 2013, from $3.5 million at December 31, 2012. As of September 30, 2013, the unrealized loss is comprised of six positions with small unrealized losses as a result of widening credit spreads and rising interest rates. Internal and external metrics are considered when evaluating potential OTTI on credit sensitive instruments. Internal stress tests are performed on individual bonds to monitor potential loss in either base or high stress scenarios. In addition, market analytics are performed to validate internal results. Contractual cash flows for the bonds continue to perform as expected. The Company does not consider these securities to be other-than-temporarily impaired at September 30, 2013.
Collateralized loan obligations (CLO) – There were $1.1 million in unrealized losses in the Company’s investment in collateralized loan obligations at September 30, 2013, compared to $225 thousand at December 31, 2012. The increase in unrealized losses is due to wider bid/ask spreads in this market. These securities have been stress tested, and this unrealized loss does not signify any change in perceived credit quality. The Company does not consider these securities to be other-than-temporarily impaired at September 30, 2013.
Pooled trust preferred securities – The pooled trust preferred portfolio consists of collateralized debt obligations (“CDOs”) containing predominantly bank and insurance company collateral that are currently non-investment grade. At September 30, 2013, the fair value of the pooled trust preferred securities was $30.0 million, an increase of $3.8 million from $26.2 million at December 31, 2012. The unrealized losses in the Company's investment in pooled trust preferred securities were $6.6 million at September 30, 2013, a decrease of $13.2 million from $19.8 million at December 31, 2012. The decrease in unrealized losses was attributable to a tightening in credit spreads (6-month average used to discount cash flows), higher projected LIBOR rates and improved collateral performance. For the nine months ended September 30, 2013, the Company recognized no other-than-temporary impairment for these securities. An internal model is used to value the pooled trust preferred securities as similar rated holdings continue to reflect an inactive market. The Company employs an internal CDO model for projection of future cash flows and discounting those cash flows to a net present value. Each underlying issuer in the pools is rated internally using the latest financial data on each institution with future deferrals, defaults and losses 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, the Company does not consider these securities to be other-than-temporarily impaired at September 30, 2013.

13


The following table summarizes information that was also considered by management in its overall evaluation of the Pooled Trust Preferred Securities portfolio for OTTI in the current reporting period: 
Deal Name
Class
Amortized
Cost (1)
Gross
Unrealized
Losses
Fair
Value
Lowest Credit
Ratings as of
September 30,
2013 (2)
Total OTTI through September 30,
2013
% of
Performing
Bank/
Insurance
Issuers
Deferrals/
Defaults
(As a % of
Current
Collateral)
(Dollars in thousands)
 
 
 
 
 
 
 
 
Security H
B
$
3,487

$
(533
)
$
2,954

B
$
(352
)
91.7
%
8.0
%
Security I
B
4,468

(716
)
3,752

CCC
(365
)
87.5
%
17.2
%
Security J
B
5,321

(1,067
)
4,254

CCC
(806
)
91.7
%
10.4
%
Security K
A
7,432

(1,107
)
6,325

CCC
(2,040
)
69.1
%
33.5
%
Security L
B
8,728

(1,449
)
7,279

CCC
(867
)
91.3
%
13.2
%
Security M
A
7,145

(1,745
)
5,400

D
(4,926
)
60.7
%
34.6
%
Pooled trust preferred securities
 
$
36,581

$
(6,617
)
$
29,964

 
$
(9,356
)
 
 
(1)For the securities previously deemed impaired, the amortized cost is reflective of previous OTTI recognized in earnings.
(2)The Company utilized credit ratings provided by Moody’s, S&P and Fitch in its evaluation of issuers.
Single issuer trust preferred securities - At September 30, 2013, the fair value of the single issuer trust preferred portfolio was $43.3 million, a decrease of $1.1 million from the fair value of $44.4 million at December 31, 2012. The unrealized losses in the Company's investment in single issuer trust preferred securities were $8.0 million at September 30, 2013, an increase of $1.2 million from $6.8 million at December 31, 2012. The single issuer portfolio consists of five investments issued by three large capitalized money center financial institutions, which continue to service the debt and have shown 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, the Company does not consider these securities to be other-than-temporarily impaired at September 30, 2013.
The following table summarizes the lowest credit rating information that was considered by management in evaluating the Single Issuer Trust Preferred Securities portfolio for OTTI in the current reporting period:
Deal Name
Amortized
Cost
Gross
Unrealized
Losses
Fair
Value
Lowest Credit
Ratings as of
September 30, 2013 (1)
(Dollars in thousands)
 
 
 
 
Security B
$
6,922

$
(922
)
$
6,000

BB
Security C
8,705

(1,280
)
7,425

BBB
Security D
9,547

(1,847
)
7,700

B
Security E
11,804

(1,387
)
10,417

BBB
Security F
14,333

(2,573
)
11,760

BBB
Single issuer trust preferred securities
$
51,311

$
(8,009
)
$
43,302

 
(1)The Company utilized credit ratings provided by Moody’s, S&P and Fitch in its evaluation of issuers.
Corporate debt securities – There were no unrealized losses on the Company’s investment in corporate debt securities at September 30, 2013 or December 31, 2012.
Equity securities - financial institutions – There were no unrealized losses on the Company’s investment in equity securities at September 30, 2013, compared to $4 thousand at December 31, 2012. This portfolio consists primarily of investments in the common stock of small capitalization financial institutions based in New England. 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 does not consider these securities to be other-than-temporarily impaired at September 30, 2013.
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, 2013. Unless

14


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 these securities before the recovery of its amortized cost. There were no significant credit downgrades on held-to-maturity securities during the nine months ended September 30, 2013.
Agency CMOs – There were unrealized losses of $492 thousand on the Company’s investment in agency CMOs at September 30, 2013, compared to $8 thousand at December 31, 2012. This is due to an increase in market rates which resulted in lower prices. The contractual cash flows for these investments are performing as expected. The Company does not consider these securities to be other-than-temporarily impaired at September 30, 2013.
Agency mortgage-backed securities – There were unrealized losses on the Company’s investment in residential mortgage-backed securities issued by government agencies of $35.8 million at September 30, 2013, compared to $0.5 million at December 31, 2012. The increase was primarily due to the impact of higher interest rates on lower coupon mortgages. The contractual cash flows for these investments are performing as expected. The Company does not consider these securities to be other-than-temporarily impaired at September 30, 2013.
Municipal bonds and notes – There were unrealized losses of $743 thousand on the Company’s investment in municipal bonds and notes at September 30, 2013 compared to $110 thousand at December 31, 2012. This increase is primarily the result of both wider credit spreads as well as higher benchmark interest rates. The municipal portfolio is primarily comprised of bank qualified bonds, over 93.9% with credit ratings of A or better.  These ratings do not consider prefunded municipal holdings to be rated AA. If this were the case, the percentage of holdings rated A or better would be 95.8%. In addition, the portfolio is comprised of 85.0% general obligation bonds, 14.5% revenue bonds and 0.5% other bonds. The Company does not consider these securities to be other-than-temporarily impaired at September 30, 2013.
CMBS – There were unrealized losses of $4.0 million