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Webster Financial 10-Q 2014
WBS-06.30.2014-10Q
 
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 June 30, 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 July 31, 2014 was 90,265,020


 




INDEX
 

i


PART I. – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
 
June 30,
2014
 
December 31,
2013
(In thousands, except share data)
(Unaudited)
 
 
Assets:
 
 
 
Cash and due from banks
$
287,917

 
$
223,616

Interest-bearing deposits
18,620

 
23,674

Securities available-for-sale, at fair value
2,980,031

 
3,106,931

Securities held-to-maturity (fair value of $3,552,498 and $3,370,912)
3,478,803

 
3,358,721

Federal Home Loan Bank and Federal Reserve Bank stock
168,595

 
158,878

Loans held for sale
31,671

 
20,802

Loans and leases
13,275,380

 
12,699,776

Allowance for loan and lease losses
(154,868
)
 
(152,573
)
Loans and leases, net
13,120,512

 
12,547,203

Deferred tax asset, net
57,671

 
65,109

Premises and equipment, net
119,840

 
121,605

Goodwill
529,887

 
529,887

Other intangible assets, net
3,515

 
5,351

Cash surrender value of life insurance policies
436,445

 
430,535

Accrued interest receivable and other assets
290,830

 
260,687

Total assets
$
21,524,337

 
$
20,852,999

Liabilities and shareholders' equity:
 
 
 
Deposits:
 
 
 
Non-interest-bearing
$
3,249,996

 
$
3,128,152

Interest-bearing
11,952,849

 
11,726,268

Total deposits
15,202,845

 
14,854,420

Securities sold under agreements to repurchase and other borrowings
1,401,259

 
1,331,662

Federal Home Loan Bank advances
2,217,324

 
2,052,421

Long-term debt
226,178

 
228,365

Accrued expenses and other liabilities
192,253

 
176,943

Total liabilities
19,239,859

 
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 - 93,381,269 and 93,366,673 shares
934

 
934

Paid-in capital
1,128,300

 
1,125,584

Retained earnings
1,143,189

 
1,080,488

Treasury stock, at cost (3,316,513 and 3,407,256 shares)
(109,599
)
 
(100,918
)
Accumulated other comprehensive loss
(29,995
)
 
(48,549
)
Total shareholders' equity
2,284,478

 
2,209,188

Total liabilities and shareholders' equity
$
21,524,337

 
$
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 June 30,
 
Six months ended June 30,
(In thousands, except per share data)
2014
2013
 
2014
2013
Interest Income:
 
 
 
 
 
Interest and fees on loans and leases
$
125,771

$
121,313

 
$
249,781

$
242,005

Taxable interest and dividends on securities
47,252

42,770

 
96,093

85,598

Non-taxable interest on securities
4,259

5,459

 
9,010

11,385

Loans held for sale
215

551

 
392

1,188

Total interest income
177,497

170,093

 
355,276

340,176

Interest Expense:


 
 
 
Deposits
10,851

12,024

 
21,495

24,874

Securities sold under agreements to repurchase and other borrowings
5,082

5,184

 
10,287

10,239

Federal Home Loan Bank advances
4,002

4,007

 
7,849

8,546

Long-term debt
2,440

1,817

 
5,222

3,660

Total interest expense
22,375

23,032

 
44,853

47,319

Net interest income
155,122

147,061

 
310,423

292,857

Provision for loan and lease losses
9,250

8,500

 
18,250

16,000

Net interest income after provision for loan and lease losses
145,872

138,561

 
292,173

276,857

Non-interest Income:


 
 
 
Deposit service fees
26,302

24,622

 
51,014

48,616

Loan related fees
4,890

5,505

 
9,372

10,090

Wealth and investment services
8,829

8,920

 
17,667

16,686

Mortgage banking activities
513

5,888

 
1,288

12,919

Increase in cash surrender value of life insurance policies
3,296

3,448

 
6,554

6,832

Net gain on sale of investment securities

333

 
4,336

439

Impairment loss recognized in earnings
(73
)

 
(161
)

Other income
3,839

3,535

 
7,354

4,947

Total non-interest income
47,596

52,251

 
97,424

100,529

Non-interest Expense:


 
 
 
Compensation and benefits
65,711

65,768

 
132,082

131,818

Occupancy
11,491

11,837

 
24,250

24,716

Technology and equipment
15,737

15,495

 
30,747

30,848

Intangible assets amortization
669

1,242

 
1,837

2,484

Marketing
4,249

3,817

 
7,429

8,628

Professional and outside services
1,269

1,527

 
3,971

3,677

Deposit insurance
5,565

5,524

 
10,876

10,698

Other expense
17,894

18,394

 
36,010

36,270

Total non-interest expense
122,585

123,604

 
247,202

249,139

Income before income tax expense
70,883

67,208

 
142,395

128,247

Income tax expense
23,027

20,835

 
44,116

39,757

Net income
47,856

46,373

 
98,279

88,490

Preferred stock dividends
(2,639
)
(2,639
)
 
(5,278
)
(5,525
)
Net income available to common shareholders
$
45,217

$
43,734

 
$
93,001

$
82,965

Net income per common share:
 
 
 
 
 
 
 
 
 
 
 
Basic
$
0.50

$
0.49

 
$
1.03

$
0.94

 
 
 
 
 
 
Diluted
0.50

0.48

 
1.02

0.92

See accompanying Notes to Condensed Consolidated Financial Statements.


2


WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
 
Three months ended June 30,
 
Six months ended June 30,
(In thousands)
2014
2013
 
2014
2013
Net income
$
47,856

$
46,373

 
$
98,279

$
88,490

Other comprehensive income (loss), net of tax
13,696

(34,228
)
 
18,554

(32,873
)
Comprehensive income
$
61,552

$
12,145

 
$
116,833

$
55,617

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



98,279



98,279

Other comprehensive income, net of tax





18,554

18,554

Dividends on common stock and dividend equivalents declared $0.35 per share


23

(31,585
)


(31,562
)
Dividends on Series A preferred stock $42.50 per share



(1,230
)


(1,230
)
Dividends on Series E preferred stock $800.00 per share



(4,048
)


(4,048
)
Exercise of stock options


(1,174
)

2,726


1,552

Common stock repurchased




(10,741
)

(10,741
)
Shares acquired related to employee share-based compensation plans




(2,196
)

(2,196
)
Stock-based compensation, net of tax impact


3,431

1,285

1,530


6,246

Common stock issued


436




436

Balance at June 30, 2014
$
151,649

$
934

$
1,128,300

$
1,143,189

$
(109,599
)
$
(29,995
)
$
2,284,478

 
 
 
 
 
 
 
 
(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



88,490



88,490

Other comprehensive loss, net of tax





(32,873
)
(32,873
)
Dividends on common stock and dividend equivalents declared $0.25 per share



(21,899
)


(21,899
)
Dividends on Series A preferred stock $42.50 per share



(1,230
)


(1,230
)
Dividends on Series E preferred stock $848.89 per share



(4,295
)


(4,295
)
Common stock warrants repurchased


(30
)



(30
)
Exercise of stock options


(182
)

559


377

Shares acquired related to employee share-based compensation plans




(169
)

(169
)
Stock-based compensation, net of tax impact


1,752

(1,995
)
5,648


5,405

Common stock issued

26

(21,299
)
(36,255
)
57,697


169

Balance at June 30, 2013
$
151,649

$
933

$
1,125,861

$
1,023,243

$
(109,072
)
$
(65,139
)
$
2,127,475

See accompanying Notes to Condensed Consolidated Financial Statements.

4


WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 
Six months ended June 30,
(In thousands)
2014
2013
Operating Activities:
 
 
Net income
$
98,279

$
88,490

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Provision for loan and lease losses
18,250

16,000

Deferred tax expense
2,658

13,614

Depreciation and amortization
16,330

18,449

Amortization of earning assets and funding premium/discount, net
23,701

34,270

Stock-based compensation
5,550

5,595

Gain on sale, net of write-down, on foreclosed and repossessed assets
(834
)
(534
)
Loss (gain) on sale, net of write-down, on premises and equipment
364

(160
)
Impairment loss recognized in earnings
161


Loss on fair value adjustment of alternative investments
232

284

Loss (gain) on fair value adjustment of derivative instruments
286

(160
)
Net gain on the sale of investment securities
(4,336
)
(439
)
Increase in cash surrender value of life insurance policies
(6,554
)
(6,832
)
Gain from life insurance policies

(1,070
)
Gain on sale of loans held for sale
(1,288
)
(12,919
)
Proceeds from sale of loans held for sale
122,219

470,323

Originations of loans held for sale
(131,835
)
(435,315
)
Net (increase) decrease in accrued interest receivable and other assets
(49,472
)
79,951

Net increase (decrease) in accrued expenses and other liabilities
8,639

(23,552
)
Net cash provided by operating activities
102,350

245,995

Investing Activities:
 
 
Net decrease in interest-bearing deposits
5,054

22,834

Purchases of available-for-sale securities
(52,836
)
(631,271
)
Proceeds from maturities and principal payments of available-for-sale securities
194,468

426,129

Proceeds from sales of available-for-sale securities
21,695

36,521

Purchases of held-to-maturity securities
(421,995
)
(446,497
)
Proceeds from maturities and principal payments of held-to-maturity securities
290,671

414,444

Net purchase of Federal Home Loan Bank stock
(9,717
)
(3,248
)
Net increase in loans
(593,327
)
(252,613
)
Proceeds from life insurance policies
644

1,768

Proceeds from the sale of foreclosed properties and repossessed assets
5,138

4,056

Proceeds from the sale of premises and equipment

1,169

Purchases of premises and equipment
(14,024
)
(4,816
)
Net cash used for investing activities
(574,229
)
(431,524
)
Financing Activities:
 
 
Net increase in deposits
348,425

304,740

Proceeds from Federal Home Loan Bank advances
2,715,000

1,925,000

Repayments of Federal Home Loan Bank advances
(2,550,085
)
(2,125,083
)
Net increase in securities sold under agreements to repurchase and other borrowings
69,597

137,189

Issuance of long-term debt
150,000


Repayment of long-term debt
(150,000
)
(102,579
)
Dividends paid to common shareholders
(31,460
)
(21,868
)
Dividends paid to preferred shareholders
(5,278
)
(5,525
)
Exercise of stock options
1,552

377

Excess tax benefits from stock-based compensation
930

93

Common stock issued
436

169

Common stock repurchased
(10,741
)

Shares acquired related to employee share-based compensation plans
(2,196
)
(169
)
Common stock warrants repurchased

(30
)
Net cash provided by financing activities
536,180

112,314

See accompanying Notes to Condensed Consolidated Financial Statements.

5


WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited), continued
 
Six months ended June 30,
(In thousands)
2014
2013
Net increase (decrease) in cash and due from banks
64,301

(73,215
)
Cash and due from banks at beginning of period
223,616

252,283

Cash and due from banks at end of period
$
287,917

$
179,068

 
 
 
Supplemental disclosure of cash flow information:
 
 
Interest paid
$
52,472

$
48,081

Income taxes paid
40,411

21,620

Noncash investing and financing activities:
 
 
Transfer of loans and leases, net to foreclosed properties and repossessed assets
$
2,351

$
3,988

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, incorporated under the laws of Delaware in 1986 and headquartered in Waterbury, Connecticut. At June 30, 2014, Webster Financial Corporation's principal asset is 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 across the Northeast. 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 and 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 typically are assigned this classification upon origination based on management's intent to sell such loans. 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 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


ASU No. 2014-09 - Revenue from Contracts with Customers (Topic 606). The ASU establishes a single comprehensive model for an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled, and will supersede nearly all existing revenue recognition guidance, to clarify and converge revenue recognition principles under US GAAP and IFRS. The update outlines five steps to recognizing revenue: (i) identify the contracts with the customer; (ii) identify the separate performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the separate performance obligations; (v) recognize revenue when each performance obligation is satisfied. The update requires more comprehensive disclosures, relating to quantitative and qualitative information for amounts, timing, the nature and uncertainty of revenue, and cash flows arising from contracts with customers, which will mainly impact construction and high-tech industries. The most significant potential impact to banking entities relates to less prescriptive derecognition requirements on the sale of OREO property. The amendments are effective for annual and interim periods beginning after January 1, 2017. An entity may elect either a full retrospective or a modified retrospective application. The Company does not expect the application of this guidance to have a material impact on the Company's financial statements.
ASU No. 2014-11 - Transfers and Servicing (Topic 860) - “Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures.” The ASU requires two accounting changes: (i) the accounting for repurchase-to-maturity transactions are to be accounted for as secured borrowings; (ii) repurchase financing arrangements, separate accounting is required for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty, which will result in secured borrowing accounting for the repurchase agreement. Additionally, disclosure requirements have been expanded to include a disaggregation of collateral used for secured borrowings, and contractual maturity disclosure has been expanded to interim periods. 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. 2014-12, Compensation-Stock Compensation (Topic 718) - “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (a consensus of the FASB Emerging Issues Task Force).” The ASU provides explicit guidance to account for a performance target that could be achieved after the requisite service period as a performance condition. For awards within the scope of this Update, the Task Force decided that an entity should apply existing guidance in Topic 718 as it relates to share-based payments with performance conditions that affect vesting. Consistent with that guidance, performance conditions that affect vesting should not be reflected in estimating the fair value of an award at the grant date. Compensation cost should be recognized when it is probable that the performance target will be achieved and should represent the compensation cost attributable to the period for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The amendments are effective for annual and interim periods beginning after January 1, 2016. The Company does not expect the application of this guidance to have a material impact on the Company's financial statements.

11


NOTE 2: Investment Securities
Summaries of the amortized cost, carrying value, and fair value of Webster’s investment securities are presented below:
 
At June 30, 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
$
525

$

$

$
525

$

$

$
525

Agency collateralized mortgage obligations (“CMO”)
682,716

13,816

(723
)
695,809



695,809

Agency mortgage-backed securities (“MBS”)
1,174,246

13,492

(20,611
)
1,167,127



1,167,127

Agency commercial mortgage-backed securities (“ACMBS”)
81,046

45

(111
)
80,980



80,980

Commercial mortgage-backed securities (“CMBS”)
484,018

27,042

(24
)
511,036



511,036

Collateralized loan obligations ("CLO") (1)
357,433

449


357,882



357,882

Pooled trust preferred securities (2)
14,551


(3,216
)
11,335



11,335

Single issuer trust preferred securities
41,892

78

(3,137
)
38,833



38,833

Corporate debt securities
107,738

5,088


112,826



112,826

Equity securities - financial institutions (3)
2,314

1,364


3,678



3,678

Total available-for-sale
$
2,946,479

$
61,374

$
(27,822
)
$
2,980,031

$

$

$
2,980,031

Held-to-maturity:
 
 
 
 
 
 
 
Agency CMO
$
317,408

$

$

$
317,408

$
9,096

$
(453
)
$
326,051

Agency MBS
2,204,891



2,204,891

59,881

(19,924
)
2,244,848

Agency CMBS
279,926



279,926

585

(232
)
280,279

Municipal bonds and notes
380,268



380,268

15,047

(71
)
395,244

CMBS
289,090



289,090

11,238

(1,609
)
298,719

Private Label MBS
7,220



7,220

137


7,357

Total held-to-maturity
$
3,478,803

$

$

$
3,478,803

$
95,984

$
(22,289
)
$
3,552,498

 
 
 
 
 
 
 
 
Total investment securities
$
6,425,282

$
61,374

$
(27,822
)
$
6,458,834

$
95,984

$
(22,289
)
$
6,532,529

(1)
Amortized cost is net of $2.8 million of other-than-temporary impairments at June 30, 2014.
(2)
Amortized cost is net of $7.0 million of other-than-temporary impairments at June 30, 2014.
(3)
Amortized cost is net of $20.4 million of other-than-temporary impairments at June 30, 2014.


12


 
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 CMO
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 CMO
$
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 impairments at December 31, 2013.
(2)
Amortized cost is net of $14.0 million of other-than-temporary impairments at December 31, 2013.
(3)
Amortized cost is net of $20.4 million of other-than-temporary impairments at December 31, 2013.
The amortized cost and fair value of debt securities at June 30, 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
$
15,513

$
15,586

 
$
15

$
16

Due after one year through five years
107,904

112,992

 
76,845

80,553

Due after five through ten years
254,326

254,743

 
75,060

78,411

Due after ten years
2,566,422

2,593,032

 
3,326,883

3,393,518

Total debt securities
$
2,944,165

$
2,976,353

 
$
3,478,803

$
3,552,498

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 June 30, 2014, the Company had a carrying value of $813.9 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 $2.7 billion at June 30, 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 June 30, 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.

13


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 type and length of time that individual investment securities have been in a continuous unrealized loss position:
 
At June 30, 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 CMO
$
23,805

$
(38
)
$
42,979

$
(685
)
7
$
66,784

$
(723
)
Agency MBS
28,323

(51
)
689,531

(20,560
)
68
717,854

(20,611
)
Agency CMBS
44,365

(111
)


2
44,365

(111
)
CMBS


9,382

(24
)
2
9,382

(24
)
Pooled trust preferred securities


11,335

(3,216
)
2
11,335

(3,216
)
Single issuer trust preferred securities


34,583

(3,137
)
7
34,583

(3,137
)
Total available-for-sale in an unrealized loss position
$
96,493

$
(200
)
$
787,810

$
(27,622
)
88
$
884,303

$
(27,822
)
Held-to-maturity:
 
 
 
 
 
 
 
Agency CMO
$
17,636

$
(413
)
$
9,494

$
(40
)
2
$
27,130

$
(453
)
Agency MBS
112,994

(254
)
697,179

(19,670
)
51
810,173

(19,924
)
Agency CMBS
109,610

(232
)


5
109,610

(232
)
Municipal bonds and notes
5,084

(21
)
5,621

(50
)
10
10,705

(71
)
CMBS


73,750

(1,609
)
7
73,750

(1,609
)
Total held-to-maturity in an unrealized loss position
$
245,324

$
(920
)
$
786,044

$
(21,369
)
75
$
1,031,368

$
(22,289
)
 
 
 
 
 
 
 
 
Total investment securities in an unrealized loss position
$
341,817

$
(1,120
)
$
1,573,854

$
(48,991
)
163
$
1,915,671

$
(50,111
)
 
 
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 CMO
$
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 CMO
$
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
)

14


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 June 30, 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 (CMO) – There were $0.7 million in unrealized losses in the Company’s investment in agency CMOs at June 30, 2014 compared to $1.9 million at December 31, 2013. Unrealized losses decreased due to lower market rates which resulted in higher prices since December 31, 2013. 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 June 30, 2014.
Agency mortgage-backed securities (MBS) – There were $20.6 million in unrealized losses in the Company’s investment in residential mortgage-backed securities issued by government agencies at June 30, 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 since December 31, 2013. 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 June 30, 2014.
Agency commercial mortgage-backed securities (ACMBS) - There were $0.1 million in unrealized losses in the Company's investment in commercial mortgage-backed securities issued by government agencies at June 30, 2014, compared to $0.8 million at December 31, 2013. Unrealized losses decreased due to lower market rates which resulted in higher prices since December 31, 2013. The Company does not consider these securities to be other-than-temporarily impaired at June 30, 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 $24 thousand at June 30, 2014, from $1.0 million at December 31, 2013. Unrealized losses decreased due to lower market rates which resulted in higher prices since December 31, 2013. 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 June 30, 2014.
Collateralized loan obligations (CLO) – There were no unrealized losses on the Company’s investment in collateralized loan obligations at June 30, 2014 or December 31, 2013. The Company continues to recognize the full write down of CLO positions to market value based if they meet the definition of a covered fund under the Volcker Rule effective December 10, 2013.
Pooled trust preferred securities – This portfolio consists of two non-investment grade pooled trust preferred securities containing primarily bank collateral. The unrealized losses in the Company's investment in pooled trust preferred securities were $3.2 million at June 30, 2014, a decrease of $0.2 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, 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 valuation 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 June 30, 2014.









15


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 June 30, 2014
(Dollars in thousands)
Amortized
Cost (1)
Gross
Unrealized
Losses
Fair
Value
Lowest Credit
Ratings as of
June 30,
2014 (2)
Total OTTI through June 30,
2014
% of
Performing
Bank
Issuers
Deferrals/
Defaults
(As a % of
Current
Collateral)
Deal Name:
 
 
 
 
 
 
 
   Security K
$
7,468

$
(1,246
)
$
6,222

CCC
$
(2,040
)
75.0
%
29.3
%
   Security M
7,083

(1,970
)
5,113

D
(4,926
)
65.2
%
32.6
%
   Pooled trust preferred securities
$
14,551

$
(3,216
)
$
11,335

 
$
(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.
Single issuer trust preferred securities - The unrealized losses in the Company's investment in single issuer trust preferred securities were $3.1 million at June 30, 2014, a decrease of $3.7 million from $6.9 million at December 31, 2013. Unrealized losses decreased due to lower market spreads which resulted in higher prices since 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. 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 June 30, 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 June 30, 2014:
(Dollars in thousands)
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Lowest Credit
Ratings as of
June 30, 2014 (1)
Deal Name:
 
 
 
 
 
Security B
$
6,951

$

$
(576
)
$
6,375

BB
Security C
8,738


(392
)
8,346

BBB
Security E
11,843

78

(569
)
11,352

BBB
Security F
14,360


(1,600
)
12,760

BBB
Single issuer trust preferred securities
$
41,892

$