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Webster Financial 10-Q 2014
WBS-3.31.2014-10Q
 
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 March 31, 2014
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 April 30, 2014 was 90,316,763


 




INDEX
 

i


PART I. – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
 
March 31,
2014
 
December 31,
2013
(In thousands, except share data)
(Unaudited)
 
 
Assets:
 
 
 
Cash and due from banks
$
251,886

 
$
223,616

Interest-bearing deposits
29,893

 
23,674

Securities available for sale, at fair value
3,008,856

 
3,106,931

Securities held-to-maturity (fair value of $3,478,433 and $3,370,912)
3,448,195

 
3,358,721

Federal Home Loan Bank and Federal Reserve Bank stock, at cost
166,133

 
158,878

Loans held for sale
14,631

 
20,802

Loans and leases
12,994,742

 
12,699,776

Allowance for loan and lease losses
(153,600
)
 
(152,573
)
Loans and leases, net
12,841,142

 
12,547,203

Deferred tax asset, net
55,316

 
65,109

Premises and equipment, net
121,473

 
121,605

Goodwill
529,887

 
529,887

Other intangible assets, net
4,183

 
5,351

Cash surrender value of life insurance policies
433,793

 
430,535

Accrued interest receivable and other assets
270,357

 
260,687

Total assets
$
21,175,745

 
$
20,852,999

Liabilities and shareholders' equity:
 
 
 
Deposits:
 
 
 
Non-interest-bearing
$
3,028,625

 
$
3,128,152

Interest-bearing
12,011,364

 
11,726,268

Total deposits
15,039,989

 
14,854,420

Securities sold under agreements to repurchase and other borrowings
1,147,882

 
1,331,662

Federal Home Loan Bank advances
2,203,606

 
2,052,421

Long-term debt
376,412

 
228,365

Accrued expenses and other liabilities
168,227

 
176,943

Total liabilities
18,936,116

 
18,643,811

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 - 93,373,197 and 93,366,673 shares
934

 
934

Paid-in capital
1,126,875

 
1,125,584

Retained earnings
1,114,088

 
1,080,488

Less: Treasury stock, at cost (3,575,423 and 3,407,256 shares)
(110,226
)
 
(100,918
)
Accumulated other comprehensive loss
(43,691
)
 
(48,549
)
Total shareholders' equity
2,239,629

 
2,209,188

Total liabilities and shareholders' equity
$
21,175,745

 
$
20,852,999

See accompanying Notes to Condensed Consolidated Financial Statements.

1


WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
 
Three months ended March 31,
(In thousands, except per share data)
2014
2013
Interest Income:
 
 
Interest and fees on loans and leases
$
124,010

$
120,692

Taxable interest and dividends on securities
48,396

42,626

Income related to tax exempt securities
5,196

6,128

Loans held for sale
177

637

Total interest income
177,779

170,083

Interest Expense:


Deposits
10,644

12,850

Securities sold under agreements to repurchase and other borrowings
5,205

5,055

Federal Home Loan Bank advances
3,847

4,539

Long-term debt
2,782

1,843

Total interest expense
22,478

24,287

Net interest income
155,301

145,796

Provision for loan and lease losses
9,000

7,500

Net interest income after provision for loan and lease losses
146,301

138,296

Non-interest Income:


Deposit service fees
24,712

23,994

Loan related fees
4,482

4,585

Wealth and investment services
8,838

7,766

Mortgage banking activities
775

7,031

Increase in cash surrender value of life insurance policies
3,258

3,384

Net gain on sale of investment securities
4,336

106

Impairment loss recognized in earnings
(88
)

Other income
3,515

1,412

Total non-interest income
49,828

48,278

Non-interest Expense:


Compensation and benefits
66,371

66,050

Occupancy
12,759

12,879

Technology and equipment
15,010

15,353

Intangible assets amortization
1,168

1,242

Marketing
3,180

4,811

Professional and outside services
2,702

2,150

Deposit insurance
5,311

5,174

Other expense
18,116

17,876

Total non-interest expense
124,617

125,535

Income before income tax expense
71,512

61,039

Income tax expense
21,089

18,922

Net income
50,423

42,117

Preferred stock dividends
(2,639
)
(2,886
)
Net income available to common shareholders
$
47,784

$
39,231

Net income per common share:
 
 
 
 
 
Basic
$
0.53

$
0.46

 
 
 
Diluted
0.53

0.44

See accompanying Notes to Condensed Consolidated Financial Statements.


2


WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
 
 
Three months ended March 31,
(In thousands)
2014
2013
Net income
$
50,423

$
42,117

Other comprehensive income, net of tax
4,858

1,355

Comprehensive income
$
55,281

$
43,472

See accompanying Notes to Condensed Consolidated Financial Statements.


3


WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited)
 
(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, 2013
$
151,649

$
934

$
1,125,584

$
1,080,488

$
(100,918
)
$
(48,549
)
$
2,209,188

Net income



50,423



50,423

Other comprehensive income, net of tax





4,858

4,858

Dividends paid on common stock of $0.15 per share



(13,493
)


(13,493
)
Dividends paid on Series A preferred stock $21.25 per share



(615
)


(615
)
Dividends paid on series E preferred stock $400.00 per share



(2,024
)


(2,024
)
Repurchase of common stock




(10,067
)

(10,067
)
Shares acquired related to employee share-based compensation plans




(2,098
)

(2,098
)
Stock-based compensation, net of tax effects


1,093

(691
)
2,857


3,259

Issuance of common stock


198




198

Balance at March 31, 2014
$
151,649

$
934

$
1,126,875

$
1,114,088

$
(110,226
)
$
(43,691
)
$
2,239,629

 
 
 
 
 
 
 
 
(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



42,117



42,117

Other comprehensive income, net of tax





1,355

1,355

Dividends paid on common stock of $0.10 per share



(8,504
)


(8,504
)
Dividends paid on Series A preferred stock $21.25 per share



(615
)


(615
)
Dividends paid on series E preferred stock $448.89 per share



(2,271
)


(2,271
)
Common stock warrants repurchased


(30
)



(30
)
Shares acquired related to employee share-based compensation plans




(92
)

(92
)
Stock-based compensation, net of tax


829

(1,010
)
2,678


2,497

Issuance of common stock

26

(21,324
)
(36,255
)
57,697


144

Balance at March 31, 2013
$
151,649

$
933

$
1,125,095

$
993,889

$
(112,524
)
$
(30,911
)
$
2,128,131

 See accompanying Notes to Condensed Consolidated Financial Statements.

4


WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 
Three months ended March 31,
(In thousands)
2014
2013
Operating Activities:
 
 
Net income
$
50,423

$
42,117

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Provision for loan and lease losses
9,000

7,500

Deferred tax expense
7,423

12,256

Depreciation and amortization
8,418

9,283

Amortization of earning assets and funding premium/discount, net
11,606

17,544

Stock-based compensation
2,773

2,473

Excess tax benefits from stock-based compensation
(507
)
(20
)
Gain on sale, net of write-down, on foreclosed and repossessed assets
(260
)
(284
)
Loss on sale, net of write-down, on premises and equipment
58

83

Impairment loss recognized in earnings
88


(Gain) loss on fair value adjustment of alternative investments
(18
)
264

Loss (gain) on fair value adjustment of derivative instruments
275

(52
)
Net gain on the sale of investment securities
(4,336
)
(106
)
Increase in cash surrender value of life insurance policies
(3,258
)
(3,384
)
Gain from life insurance policies

(653
)
Gain on sale of loans held for sale
(775
)
(7,031
)
Proceeds from sale of loans held for sale
65,643

244,386

Originations of loans held for sale
(58,560
)
(228,984
)
Net (increase) decrease in accrued interest receivable and other assets
(17,328
)
2,986

Net decrease in accrued expenses and other liabilities
(8,726
)
(32,575
)
Net cash provided by operating activities
61,939

65,803

Investing Activities:
 
 
Net (increase) decrease in interest-bearing deposits
(6,219
)
46,853

Purchases of available for sale securities
(9,908
)
(482,860
)
Proceeds from maturities and principal payments of available for sale securities
96,983

216,013

Proceeds from sales of available for sale securities
21,695

11,771

Purchases of held-to-maturity securities
(225,839
)
(215,783
)
Proceeds from maturities and principal payments of held-to-maturity securities
131,364

207,321

Net purchase of Federal Home Loan Bank stock
(7,255
)
(3,248
)
Net (increase) decrease in loans
(304,732
)
6,836

Proceeds from life insurance policies

1,768

Proceeds from the sale of foreclosed properties and repossessed assets
2,824

1,748

Proceeds from the sale of premises and equipment

226

Purchases of premises and equipment
(7,970
)
(1,758
)
Net cash used for investing activities
(309,057
)
(211,113
)
Financing Activities:
 
 
Net increase in deposits
185,569

93,047

Proceeds from Federal Home Loan Bank advances
1,401,234

900,000

Repayments of Federal Home Loan Bank advances
(1,250,043
)
(825,043
)
Net decrease in securities sold under agreements to repurchase and other borrowings
(183,780
)
(42,393
)
Issuance of long-term debt
150,000


Repayment of long-term debt

(102,579
)
Cash dividends paid to common shareholders
(13,493
)
(8,504
)
Cash dividends paid to preferred shareholders
(2,639
)
(2,886
)
Excess tax benefits from stock-based compensation
507

20

Issuance of common stock
198

144

Repurchases of common stock
(10,067
)

Shares acquired related to employee share-based compensation plans
(2,098
)
(92
)
Common stock warrants repurchased

(30
)
Net cash provided by financing activities
275,388

11,684

See accompanying Notes to Condensed Consolidated Financial Statements.

5


WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited), continued
 
Three months ended March 31,
(In thousands)
2014
2013
Net increase (decrease) in cash and due from banks
28,270

(133,626
)
Cash and due from banks at beginning of period
223,616

252,283

Cash and due from banks at end of period
$
251,886

$
118,657

 
 
 
Supplemental disclosure of cash flow information:
 
 
Interest paid
$
19,419

$
23,828

Income taxes paid
9,764

6,929

Noncash investing and financing activities:
 
 
Transfer of loans and leases, net to foreclosed properties and repossessed assets
$
1,661

$
2,627

See accompanying Notes to Condensed Consolidated Financial Statements.

6


NOTE 1: Summary of Significant Accounting Policies
Nature of Operations. Webster Financial Corporation (collectively, with its consolidated subsidiaries, “Webster” or the “Company”), is a 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 March 31, 2014, 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 also offers equipment financing, commercial real estate lending, and asset-based lending. Webster Bank offers, through its HSA Bank division, health savings accounts on a nationwide basis.
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 U.S. generally accepted accounting principles (“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 interest 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.
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 consolidated financial statements in conformity with GAAP 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 these 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 evaluation 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.
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 and, interest-bearing deposits at the Federal Reserve. Cash equivalents have a maturity of three months or less.
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 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.

7


Investment Securities. Investment securities are classified at the time of purchase as available for sale or held-to-maturity. Classification is determined at purchase, any subsequent changes to classification are reviewed for compliance with corporate objectives and accounting policy. Debt securities classified as held-to-maturity are those which Webster has the ability and intent to hold to maturity. Securities in the held-to-maturity portfolio are recorded at amortized cost net of unamortized premiums and discounts. Discount accretion income and premium amortization expense is recognized in investment securities interest income according to a constant yield methodology. Securities classified as available for sale are recorded at fair value with unrealized gains and losses, net of taxes, recorded 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.
All securities classified as available for sale or held-to-maturity that are in an unrealized loss position are evaluated for other-than-temporary impairment on a quarterly basis. The evaluation considers several qualitative factors including the period of time the security has been in a loss position, in addition to the amount of the unrealized loss. 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 accumulated other comprehensive income ("AOCI"). 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 the lower of cost or fair value and are valued on an 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. Except for loans discharged under Chapter 7 under the Bankruptcy Code, 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. Pursuant to regulatory guidance, a Chapter 7 discharged bankruptcy loan is removed from non-accrual status when the bank expects full repayment of the remaining pre-discharged contractual principal and interest, is a closed-end amortizing loan, fully collateralized, and post-discharge had at least six consecutive months of current payments.

8


Allowance for Loan and Lease Losses. The allowance for loan and lease losses ("ALLL") 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 losses, 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 grades. Changes in the reserve for unfunded credit commitments, within other liabilities, are reported as a component of other expense in the accompanying Condensed Consolidated Statements of Income.
Troubled Debt Restructurings. A modified loan is considered a TDR when two conditions are met: (i) the borrower is experiencing financial difficulties and (ii) 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 consumer loan TDRs, except those that were performing prior to TDR status, 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 one 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 circumstance 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.

9


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 (i) the transferred assets are legally isolated from the Company or its consolidated affiliates, even in bankruptcy or other receivership, (ii) 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 (iii) 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 loan 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. 2013-11 - Income Taxes (Topic 740) - "Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward,a Similar Tax Loss, or a Tax Credit Carryforward Exists (a consensus of the FASB Emerging Issues Task Force)." The ASU requires an entity to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, as applicable. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit shall be presented in the financial statements as a liability and shall not be combined with deferred tax assets. This update was adopted effective January 1, 2014 and will be applied prospectively; however, its netting provisions are consistent with the Company’s previous presentation, as applicable, and as a result do not require additional disclosures.
Recently Issued Accounting Standards Updates
ASU No. 2014-01 - Investments - Equity Method and Joint Ventures (Topic 323) - "Accounting for Investments in Qualified Affordable Housing Projects (a consensus of the FASB Emerging Issues Task Force)." The ASU permits an entity to make an accounting policy election to account for its investment in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportionate amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense (benefit). The decision to apply the proportionate amortization method of accounting should be applied consistently to all qualifying affordable housing project investments. A reporting entity that uses the effective yield or other method to account for its investments in qualified affordable housing projects before the date of adoption may continue to apply such method to those preexisting investments. The amendments are effective for annual and interim periods beginning after January 1, 2015. The Company does not expect the application of this guidance to have a material impact on the Company's financial statements.
ASU No. 2014-04, Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-40) - "Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure (a consensus of the FASB Emerging Issues Task Force)." The ASU clarifies that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (i) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (ii) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar agreement. In addition, the amendments require disclosure of both the amount of foreclosed residential real estate property held by the creditor and the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure in accordance with local requirements of the applicable jurisdiction. An entity can elect to adopt the amendments using either a modified retrospective method or a prospective transition method. The amendments are effective for annual and interim periods beginning after January 1, 2015. The Company does not expect the application of this guidance to have a material impact on the Company's financial statements.


10


NOTE 2: Investment Securities
Summaries of the amortized cost, carrying value, and fair value of Webster’s investment securities are presented below:
 
At March 31, 2014
 
 
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
$
425

$

$

$
425

$

$

$
425

Agency collateralized mortgage obligations (“CMOs”)
736,820

12,266

(1,595
)
747,491



747,491

Agency mortgage-backed securities (“MBS”)
1,220,847

10,420

(37,788
)
1,193,479



1,193,479

Agency commercial mortgage-backed securities (“ACMBS”)
81,341


(915
)
80,426



80,426

Commercial mortgage-backed securities (“CMBS”)
436,217

27,913

(313
)
463,817



463,817

Collateralized loan obligations ("CLOs") (1)
357,374

443


357,817



357,817

Pooled trust preferred securities (2)
14,551


(2,610
)
11,941



11,941

Single issuer trust preferred securities
41,849


(4,912
)
36,937



36,937

Corporate debt securities
108,339

4,603


112,942



112,942

Equity securities - financial institutions (3)
2,314

1,267


3,581



3,581

Total available for sale
$
3,000,077

$
56,912

$
(48,133
)
$
3,008,856

$

$

$
3,008,856

Held-to-maturity:
 
 
 
 
 
 
 
Agency CMOs
$
342,397

$

$

$
342,397

$
9,004

$
(762
)
$
350,639

Agency MBS
2,195,566



2,195,566

46,086

(41,319
)
2,200,333

Agency CMBS
195,912



195,912


(1,542
)
194,370

Municipal bonds and notes
416,903



416,903

13,131

(94
)
429,940

CMBS
289,488



289,488

9,282

(3,705
)
295,065

Private Label MBS
7,929



7,929

157


8,086

Total held-to-maturity
$
3,448,195

$

$

$
3,448,195

$
77,660

$
(47,422
)
$
3,478,433

 
 
 
 
 
 
 
 
Total investment securities
$
6,448,272

$
56,912

$
(48,133
)
$
6,457,051

$
77,660

$
(47,422
)
$
6,487,289

(1)
Amortized cost is net of $2.7 million of other-than-temporary impairments at March 31, 2014.
(2)
Amortized cost is net of $7.0 million of other-than-temporary impairment at March 31, 2014.
(3)
Amortized cost is net of $20.4 million of other-than-temporary impairment at March 31, 2014.


11


 
At December 31, 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
$
325

$

$

$
325

$

$

$
325

Agency CMOs
794,397

14,383

(1,868
)
806,912



806,912

Agency MBS
1,265,276

9,124

(47,698
)
1,226,702



1,226,702

Agency CMBS
71,759


(782
)
70,977



70,977

CMBS
436,872

28,398

(996
)
464,274



464,274

CLOs (1)
357,326

315


357,641



357,641

Pooled trust preferred securities (2)
31,900


(3,410
)
28,490



28,490

Single issuer trust preferred securities
41,807


(6,872
)
34,935



34,935

Corporate debt securities
108,936

4,155


113,091



113,091

Equity securities - financial institutions (3)
2,314

1,270


3,584



3,584

Total available for sale
$
3,110,912

$
57,645

$
(61,626
)
$
3,106,931

$

$

$
3,106,931

Held-to-maturity:
 
 
 
 
 
 
 
Agency CMOs
$
365,081

$

$

$
365,081

$
10,135

$
(1,009
)
$
374,207

Agency MBS
2,130,685



2,130,685

43,315

(53,188
)
2,120,812

Agency CMBS
115,995



115,995

44

(818
)
115,221

Municipal bonds and notes
448,405



448,405

11,104

(1,228
)
458,281

CMBS
290,057



290,057

8,635

(4,975
)
293,717

Private Label MBS
8,498



8,498

176


8,674

Total held-to-maturity
$
3,358,721

$

$

$
3,358,721

$
73,409

$
(61,218
)
$
3,370,912

 
 
 
 
 
 
 
 
Total investment securities
$
6,469,633

$
57,645

$
(61,626
)
$
6,465,652

$
73,409

$
(61,218
)
$
6,477,843

(1)
Amortized cost is net of $2.6 million of other-than-temporary impairment at December 31, 2013.
(2)
Amortized cost is net of $14.0 million of other-than-temporary impairment at December 31, 2013.
(3)
Amortized cost is net of $20.4 million of other-than-temporary impairment at December 31, 2013.
The amortized cost and fair value of debt securities at March 31, 2014, 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
$
425

$
425

 
$
15

$
16

Due after one year through five years
100,425

104,611

 
77,810

81,779

Due after five through ten years
237,962

238,841

 
83,064

85,931

Due after ten years
2,658,951

2,661,398

 
3,287,306

3,310,707

Total debt securities
$
2,997,763

$
3,005,275

 
$
3,448,195

$
3,478,433

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 March 31, 2014, the Company had a carrying value of $818.1 million in 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 $2.8 billion at March 31, 2014 and $2.7 billion at December 31, 2013 were pledged to secure public funds, trust deposits, repurchase agreements and for other purposes, as required or permitted by law. At March 31, 2014 and December 31, 2013, the Company had no investments in obligations of individual states, counties, or municipalities which exceeded 10% of consolidated shareholders’ equity.


12


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 March 31, 2014
 
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
$
117,472

$
(1,475
)
$
8,350

$
(120
)
11
$
125,822

$
(1,595
)
Agency MBS
535,508

(21,128
)
294,392

(16,660
)
82
829,900

(37,788
)
Agency CMBS
80,426

(915
)


4
80,426

(915
)
CMBS
32,532

(291
)
4,387

(22
)
5
36,919

(313
)
Pooled trust preferred securities


11,941

(2,610
)
2
11,941

(2,610
)
Single issuer trust preferred securities
4,100

(65
)
32,837

(4,847
)
8
36,937

(4,912
)
Total available for sale in an unrealized loss position
$
770,038

$
(23,874
)
$
351,907

$
(24,259
)
112
$
1,121,945

$
(48,133
)
Held-to-maturity:
 
 
 
 
 
 
 
Agency CMOs
$
51,439

$
(762
)
$

$

3
$
51,439

$
(762
)
Agency MBS
1,019,663

(32,170
)
167,623

(9,149
)
89
1,187,286

(41,319
)
Agency CMBS
194,371

(1,542
)


9
194,371

(1,542
)
Municipal bonds and notes
8,302

(62
)
2,166

(32
)
14
10,468

(94
)
CMBS
62,338

(2,917
)
14,936

(788
)
8
77,274

(3,705
)
Total held-to-maturity in an unrealized loss position
$
1,336,113

$
(37,453
)
$
184,725

$
(9,969
)
123
$
1,520,838

$
(47,422
)
 
 
 
 
 
 
 
 
Total investment securities in an unrealized loss position
$
2,106,151

$
(61,327
)
$
536,632

$
(34,228
)
235
$
2,642,783

$
(95,555
)
 
 
At December 31, 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
$
149,894

$
(1,713
)
$
9,011

$
(155
)
15
$
158,905

$
(1,868
)
Agency MBS
616,286

(29,537
)
279,680

(18,161
)
88
895,966

(47,698
)
Agency CMBS
70,977

(782
)


3
70,977

(782
)
CMBS
52,340

(996
)


7
52,340

(996
)
Pooled trust preferred securities


11,141

(3,410
)
2
11,141

(3,410
)
Single issuer trust preferred securities
3,777

(381
)
31,158

(6,491
)
8
34,935

(6,872
)
Total available for sale in an unrealized loss position
$
893,274

$
(33,409
)
$
330,990

$
(28,217
)
123
$
1,224,264

$
(61,626
)
Held-to-maturity:
 
 
 
 
 
 
 
Agency CMOs
$
53,789

$
(1,009
)
$

$

4
$
53,789

$
(1,009
)
Agency MBS
1,045,693

(42,181
)
170,780

(11,007
)
94
1,216,473

(53,188
)
Agency CMBS
90,218

(818
)


4
90,218

(818
)
Municipal bonds and notes
46,587

(1,193
)
2,166

(35
)
51
48,753

(1,228
)
CMBS
106,527

(4,059
)
14,832

(916
)
11
121,359

(4,975
)
Total held-to-maturity in an unrealized loss position
$
1,342,814

$
(49,260
)
$
187,778

$
(11,958
)
164
$
1,530,592

$
(61,218
)
 
 
 
 
 
 
 
 
Total investment securities in an unrealized loss position
$
2,236,088

$
(82,669
)
$
518,768

$
(40,175
)
287
$
2,754,856

$
(122,844
)


13


Available for Sale Securities
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, 2014. 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 $1.6 million in unrealized losses in the Company’s investment in agency CMOs at March 31, 2014 compared to $1.9 million at December 31, 2013. The unrealized loss is attributed to an increase in market interest rates which resulted in lower prices. 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 March 31, 2014.
Agency mortgage-backed securities (MBS) – There were $37.8 million in unrealized losses in the Company’s investment in residential mortgage-backed securities issued by government agencies at March 31, 2014, compared to $47.7 million at December 31, 2013. The decrease in unrealized losses was primarily due to lower market rates, which resulted in higher security prices over the quarter. 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 March 31, 2014.
Agency commercial mortgage-backed securities (ACMBS) - There were $0.9 million in unrealized losses in the Company's investment in commercial mortgage-backed securities issued by government agencies at March 31, 2014, compared to $0.8 million at December 31, 2013. The unrealized loss is representative of the bid/ask spreads and marginally higher market rates. The Company does not consider these securities to be other-than-temporarily impaired at March 31, 2014.
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 $0.3 million at March 31, 2014, from $1.0 million at December 31, 2013. As of March 31, 2014, the unrealized loss is comprised of five positions in three deals with small unrealized losses as a result of increased market rates. Internal and external metrics are considered when evaluating potential OTTI. Internal stress tests are performed on individual bonds to monitor potential losses under 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 March 31, 2014.
Collateralized loan obligations (CLOs) – There were no unrealized losses on the Company’s investment in collateralized loan obligations at March 31, 2014 or December 31, 2013. The Company continues to recognize the full write down of CLO positions to market value based on the current definition of covered funds under the Volcker Rule adopted December 10, 2013.
Pooled trust preferred securities – The pooled trust preferred portfolio consists of two non-investment grade collateralized debt obligations (“CDOs”) containing insurance company collateral. The unrealized losses in the Company's investment in pooled trust preferred securities were $2.6 million at March 31, 2014, a decrease of $0.8 million from $3.4 million at December 31, 2013. The decrease in unrealized loss is related to an improvement in pricing driven by tighter credit spreads, improved collateral performance, improved shadow ratings and higher forward LIBOR rates. 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. Based on the valuation analysis, the Company does not consider the remaining two securities with unrealized losses to be other-than-temporarily impaired at March 31, 2014.
The following table summarizes information that was also considered by management in its overall OTTI evaluation of the Pooled Trust Preferred Securities portfolio at or for the three months ended March 31, 2014
(Dollars in thousands)
Class
Amortized
Cost (1)
Gross
Unrealized
Losses
Fair
Value
Lowest Credit
Ratings as of
March 31,
2014 (2)
Total OTTI through March 31,
2014
% of
Performing
Bank
Issuers
Deferrals/
Defaults
(As a % of
Current
Collateral)
Deal Name:
 
 
 
 
 
 
 
 
   Security K
A
$
7,456

$
(1,060
)
$
6,396

CCC
$
(2,040
)
80.9
%
29.3
%
   Security M
A
7,095

(1,550
)
5,545

D
(4,926
)
62.9
%
35.7
%
   Pooled trust preferred securities
 
$
14,551

$
(2,610
)
$
11,941

 
$
(6,966
)
 
 
(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 and S&P in its evaluation of issuers.

14


Single issuer trust preferred securities - The unrealized losses in the Company's investment in single issuer trust preferred securities were $4.9 million at March 31, 2014, a decrease of $2.0 million from $6.9 million at December 31, 2013. The single issuer portfolio consists of four 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, the Company does not consider these securities to be other-than-temporarily impaired at March 31, 2014.
The following table summarizes the lowest credit rating information that was considered by management in evaluating OTTI for the Single Issuer Trust Preferred Securities portfolio at or for the three months ended March 31, 2014:
(Dollars in thousands)
Amortized
Cost
Gross
Unrealized
Losses
Fair
Value
Lowest Credit
Ratings as of
March 31, 2014 (1)
Deal Name:
 
 
 
 
Security B
$
6,941

$
(941
)
$
6,000

BB
Security C
8,727

(901
)
7,826

BBB
Security E
11,830

(879
)
10,951

BBB
Security F
14,351

(2,191
)
12,160

BBB
Single issuer trust preferred securities
$
41,849

$
(4,912
)
$
36,937

 
(1)
The Company utilized credit ratings provided by Moody’s and S&P in its evaluation of issuers.
Corporate debt securities – There were no unrealized losses on the Company’s investment in corporate debt securities at March 31, 2014 or December 31, 2013.
Equity securities - financial institutions – There were no unrealized losses on the Company’s investment in equity securities at March 31, 2014 and December 31, 2013. 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 March 31, 2014.
Available for Sale - Impairment
The following discussion summarizes, by investment type, the basis for the conclusion that the applicable investment securities within the Company’s available for sale portfolio were other-than-temporarily impaired at March 31, 2014.
On December 10, 2013, Federal banking agencies jointly adopted final regulations to implement Section 619 of the Dodd-Frank Act, commonly known as the Volcker Rule. The Volcker Rule restricts the ability of banking entities to engage in proprietary trading or have an ownership interest in transactions with Covered Funds. Under the final rule, a Covered Fund includes investments such as CLO and CDO investments. As of March 31, 2014, based on the current status of the Volcker Rule, the company anticipates it will be required to divest CLO investments defined as Covered Fund investments in accordance with the conformance period defined in the Final Rule. Non-Volcker compliant CDOs were sold during the current quarter ended March 31, 2014. In accordance with GAAP, OTTI is immediately triggered if it becomes more likely than not that a company would be required to divest of a security with a current unrealized loss before achieving full recovery of cost. Unlike credit-driven OTTI, when only the credit portion of the impairment is charged against earnings, a required divestiture situation requires a full write-down to market value in the current period. Refer to Recent Legislation in Management's Discussion and Analysis of Financial Condition and Results of Operations for further information on the Volcker Rule.
Collateralized loan obligations - As of March 31, 2014, the unrealized loss for CLO securities prior to OTTI was $88 thousand and attributable to increased market spreads since time of purchase. The final Volcker Rule precludes banks from owning an ownership interest in Covered Funds which include investments such as certain CLOs. The Company anticipates it is more likely than not that it will be required to divest any Covered Fund investments in accordance with the conformance period defined in the Final Rule. As a result, the Company recognized $88 thousand other-than-temporary impairments for these securities in the current period ending March 31, 2014.

15


Held-to-Maturity Securities
The following discussion summarizes, by investment 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, 2014. 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 these securities before the recovery of its amortized cost. There were no significant credit downgrades on held-to-maturity securities during the year ended March 31, 2014.
Agency CMOs – There were unrealized losses of $0.8 million on the Company’s investment in agency CMOs at March 31, 2014, compared to $1.0 million at December 31, 2013. Unrealized losses are due to an increase in market rates since purchase 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 March 31, 2014.
Agency mortgage-backed securities – There were unrealized losses on the Company’s investment in residential mortgage-backed securities issued by government agencies of $41.3 million at March 31, 2014, compared to $53.2 million at December 31, 2013. The unrealized losses are a result of increased market rates since purchase. 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 March 31, 2014.
Agency commercial mortgage-backed securities - There were unrealized losses on the Company’s investment in commercial mortgage-backed securities issued by government agencies of $1.5 million at March 31, 2014, compared to $0.8 million at December 31, 2013, due primarily to marginally higher market spreads. The Company does not consider these securities to be other-than-temporarily impaired at March 31, 2014.
Municipal bonds and notes – There were unrealized losses of $94 thousand on the Company’s investment in municipal bonds and notes at March 31, 2014 compared to $1.2 million at December 31, 2013. This decrease is primarily the result of lower market rates. The municipal portfolio is primarily comprised of bank qualified bonds, over 93.7% with credit ratings of A or better.  These ratings do not consider prefunded municipal holdings to be rated AA. If prefunded municipal holdings were considered to be rated AA, the percentage of holdings rated A or better would be 95.3%. In addition, the portfolio is comprised of 85.2% general obligation bonds, 14.3% revenue bonds, and 0.5% other bonds. The Company does not consider these securities to be other-than-temporarily impaired at March 31, 2014.
Commercial mortgage-backed securities – There were unrealized losses of $3.7 million on the Company’s investment in commercial mortgage-backed securities issued by entities other than government agencies at March 31, 2014 compared to $5.0 million unrealized losses at December 31, 2013. As of March 31, 2014, the unrealized loss is comprised of eight positions in three deals that have unrealized losses as a result of increased market rates since the time of purchase. These securities are currently performing as expected. The Company does not consider these securities to be other-than-temporarily impaired at March 31, 2014.
Private Label MBS - There were no unrealized losses on the Company's investment in residential mortgage-backed securities issued by entities other than government agencies at March 31, 2014 or December 31, 2013. These securities are currently performing as expected. The Company does not consider these securities to be other-than-temporarily impaired at March 31, 2014.
There were no additions to credit-related OTTI for the three months ended March 31, 2014 or 2013. There was a reduction in outstanding credit-related OTTI due to the sale of four debt securities during the three months ended March 31, 2014. 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.
The following is a roll forward of the amount of OTTI related to debt securities:
 
Three months ended March 31,
(In thousands)
2014
 
2013
Balance of OTTI, beginning of period
$
16,633

 
$
10,460

Reduction for securities sold
(7,056
)
 

Additions for OTTI not previously recognized
88

 

Balance of OTTI, end of period
$
9,665

 
$
10,460




16


The following table summarizes the proceeds from the sale of available for sale securities:
 
Three months ended March 31,
(In thousands)
2014
 
2013
Available for sale:
 
 
 
Agency MBS
$

 
$
11,771

Pooled trust preferred securities
21,695

 

Available for sale securities
$
21,695

 
$
11,771

The following table summarizes the impact of realized gains and losses from the sale of available for sale securities and the impact of the recognition of other-than-temporary impairments for the periods presented:
 
Three months ended March 31,
 
2014
 
2013
(In thousands)
Gains
Losses
OTTI Charges
Net
 
Gains
Losses
OTTI Charges
Net
Available for sale:
 
 
 
 
 
 
 
 
 
Agency MBS
$

$

$

$

 
$
106

$

$

$
106

CLOs


(88
)
(88
)
 




Pooled trust preferred securities
4,336



4,336

 




Available for sale securities
$
4,336

$

$
(88
)
$
4,248

 
$
106

$

$

$
106



17