WBS-3-31-2013 10Q
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
_______________________________________________________________________________
FORM 10-Q
_______________________________________________________________________________
x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2013
or
¨    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    ¨  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    ¨  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
¨
 
Non-accelerated filer
¨
 
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).    ¨  Yes    þ  No
The number of shares of common stock, par value $.01 per share, outstanding as of April 30, 2013 was 90,256,724.


 



INDEX

 
 
Page No.
 
 
 
 
Item 1.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 
 


i
Table of Contents

PART I. – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
 
March 31,
2013
December 31, 2012
(In thousands, except share data)
(Unaudited)
 
Assets:
 
 
Cash and due from banks
$
118,657

$
252,283

Interest-bearing deposits
51,352

98,205

Securities available for sale, at fair value
3,318,238

3,136,160

Securities held-to-maturity (fair value of $3,242,051 and $3,264,718)
3,111,169

3,107,529

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

155,630

Loans held for sale
96,706

107,633

Loans and leases
12,002,032

12,028,696

Allowance for loan and lease losses
(167,840
)
(177,129
)
Loans and leases, net
11,834,192

11,851,567

Deferred tax asset, net
55,656

68,681

Premises and equipment, net
127,609

134,562

Goodwill
529,887

529,887

Other intangible assets, net
9,028

10,270

Cash surrender value of life insurance policies
420,562

418,293

Prepaid FDIC premiums
16,644

16,323

Accrued interest receivable and other assets
261,960

259,742

Total assets
$
20,110,538

$
20,146,765

Liabilities and shareholders' equity:
 
 
Deposits:
 
 
Non-interest-bearing
$
2,849,355

$
2,881,131

Interest-bearing
11,774,527

11,649,704

Total deposits
14,623,882

14,530,835

Securities sold under agreements to repurchase and other short-term borrowings
1,033,767

1,076,160

Federal Home Loan Bank advances
1,902,563

1,827,612

Long-term debt
230,709

334,276

Accrued expenses and other liabilities
191,486

284,352

Total liabilities
17,982,407

18,053,235

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

28,939

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

122,710

Common stock, $.01 par value; Authorized - 200,000,000 shares:
 
 
Issued - 93,344,507 and 90,735,596 shares
933

907

Paid-in capital
1,125,095

1,145,620

Retained earnings
993,889

1,000,427

Less: Treasury stock, at cost (3,748,479 and 5,772,006 shares)
(112,524
)
(172,807
)
Accumulated other comprehensive loss
(30,911
)
(32,266
)
Total shareholders' equity
2,128,131

2,093,530

Total liabilities and shareholders' equity
$
20,110,538

$
20,146,765

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

1
Table of Contents

WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

 
Three months ended March 31,
(In thousands, except per share data)
2013
2012
Interest Income:
 
 
Interest and fees on loans and leases
$
121,061

$
120,741

Taxable interest and dividends on securities
42,257

45,888

Non-taxable interest on securities
6,128

6,980

Loans held for sale
637

498

Total interest income
170,083

174,107

Interest Expense:
 
 
Deposits
12,850

16,056

Securities sold under agreements to repurchase and other short-term borrowings
5,055

4,434

Federal Home Loan Bank advances
4,539

4,564

Long-term debt
1,843

5,685

Total interest expense
24,287

30,739

Net interest income
145,796

143,368

Provision for loan and lease losses
7,500

4,000

Net interest income after provision for loan and lease losses
138,296

139,368

Non-interest Income:
 
 
Deposit service fees
23,994

23,363

Loan related fees
4,585

4,869

Wealth and investment services
7,766

7,221

Mortgage banking activities
7,031

4,383

Increase in cash surrender value of life insurance policies
3,384

2,517

Net gain on sale of investment securities
106

—

Other income
1,412

1,633

Total non-interest income
48,278

43,986

Non-interest Expense:
 
 
Compensation and benefits
66,050

68,619

Occupancy
12,879

12,882

Technology and equipment
15,353

15,582

Intangible assets amortization
1,242

1,397

Marketing
4,811

4,100

Professional and outside services
2,150

2,692

Deposit insurance
5,174

5,709

Other expense
17,876

16,832

Total non-interest expense
125,535

127,813

Income before income tax expense
61,039

55,541

Income tax expense
18,922

16,603

Net income
42,117

38,938

Preferred stock dividends
(2,886
)
(615
)
Net income available to common shareholders
$
39,231

$
38,323


Net income per common share:
 
 
 
 
 
Basic
$
0.46

$
0.44

 
 
 
Diluted
0.44

0.42

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.


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Table of Contents

WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
 
 
Three months ended March 31,
(In thousands)
2013
2012
Net income
$
42,117

$
38,938

Other comprehensive income, net of tax
1,355

13,759

Comprehensive income
$
43,472

$
52,697

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.


3
Table of Contents

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

$
907

$
1,145,620

$
1,000,427

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

Net income
—

—

—

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
)
Net shares acquired related to employee share-based compensation plans
—

—

—

—

(92
)
—

(92
)
Stock-based compensation, net of tax effects
—

—

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

 
 
 
 
 
 
 
 
 
Three months ended March 31, 2012
(In thousands, except per share data)
Preferred
Stock

Common
Stock

Paid-In
Capital

Retained
Earnings

Treasury
Stock

Accumulated
Other
Comprehensive
Loss

Total
Equity

Balance at December 31, 2011
$
28,939

$
907

$
1,145,346

$
865,427

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

Net income
—

—

—

38,938

—

—

38,938

Other comprehensive income, net of tax
—

—

—

—

—

13,759

13,759

Dividends paid on common stock of $0.05 per share
—

—

—

(4,377
)
—

—

(4,377
)
Dividends paid on Series A preferred stock $21.25 per share
—

—

—

(615
)
—

—

(615
)
Exercise of stock options
—

—

(526
)
—

790

—

264

Net shares acquired related to employee share-based compensation plans
—

—

—

—

(1,643
)
—

(1,643
)
Stock-based compensation, net of tax effects
—

—

1,222

(1,342
)
2,863

—

2,743

Issuance of common stock
—

—

99

—

—

—

99

Balance at March 31, 2012
$
28,939

$
907

$
1,146,141

$
898,031

$
(132,631
)
$
(46,445
)
$
1,894,942

 See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

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Table of Contents

WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 
Three months ended March 31,
(In thousands)
2013
2012
Operating Activities:
 
 
Net income
$
42,117

$
38,938

Adjustments to reconcile income from continuing operations to net cash provided by operating activities:
 
 
Provision for loan and lease losses
7,500

4,000

Deferred tax expense
12,256

17,310

Depreciation and amortization
26,827

25,646

Stock-based compensation
2,526

1,735

Excess tax benefits from stock-based compensation
(20
)
(1,022
)
Gain on sale and write-down of foreclosed and repossessed assets
(284
)
(784
)
Write-down of premises and equipment
9

—

Loss on sale of premises and equipment
74

104

Loss on fair value adjustment of private equities
264

760

Gain on fair value adjustment of derivative instruments
(52
)
(156
)
Net gain on the sale of investment securities
(106
)
—

Increase in cash surrender value of life insurance policies
(3,384
)
(2,517
)
Gain from life insurance policies
(653
)
—

Gain on sale of loans held for sale
(7,031
)
(4,383
)
Loans originated for sale, net of proceeds from loans sold
17,710

2,159

Net decrease (increase) in accrued interest receivable and other assets
678

(11,381
)
Net decrease in accrued expenses and other liabilities
(32,628
)
(35,598
)
Net cash provided by operating activities
65,803

34,811

Investing Activities:
 
 
Net decrease in interest-bearing deposits
46,853

18,141

Purchases of available for sale securities
(482,860
)
(436,757
)
Proceeds from maturities and principal payments of available for sale securities
216,013

174,454

Proceeds from sales of available for sale securities
11,771

—

Purchases of held-to-maturity securities
(215,783
)
(280,945
)
Proceeds from maturities and principal payments of held-to-maturity securities
207,321

171,539

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

Net decrease (increase) in loans
6,836

(117,970
)
Proceeds from life insurance policies
1,768

—

Proceeds from the sale of foreclosed properties and repossessed assets
1,748

2,307

Proceeds from the sale of premises and equipment
226

516

Purchases of premises and equipment
(1,758
)
(2,477
)
Net cash used for investing activities
(211,113
)
(469,913
)
Financing Activities:
 
 
Net increase in deposits
93,047

288,472

Proceeds from Federal Home Loan Bank advances
900,000

800,000

Repayments of Federal Home Loan Bank advances
(825,043
)
(700,032
)
Net (decrease) increase in securities sold under agreements to repurchase and other short-term borrowings
(42,393
)
103,883

Repayment of long-term debt
(102,579
)
(74,901
)
Cash dividends paid to common shareholders
(8,504
)
(4,377
)
Cash dividends paid to preferred shareholders
(2,886
)
(615
)
Exercise of stock options
—

264

Excess tax benefits from stock-based compensation
20

1,022

Issuance of common stock
144

99

Common stock repurchased
(92
)
(1,643
)
Common stock warrants repurchased
(30
)
—

Net cash provided by financing activities
11,684

412,172

Net decrease in cash and due from banks
(133,626
)
(22,930
)
Cash and due from banks at beginning of period
252,283

195,957

Cash and due from banks at end of period
$
118,657

$
173,027

 
 
 
Supplemental disclosure of cash flow information:
 
 
Interest paid
$
23,828

$
32,023

Income taxes paid
6,929

3,814

Noncash investing and financing activities:
 
 
Transfer of loans and leases, net to foreclosed properties and repossessed assets
$
2,627

$
2,508

Transfer of loans from portfolio to loans-held-for-sale
248

—

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

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Table of Contents

NOTE 1: Summary of Significant Accounting Policies
Nature of Operations. Webster Financial Corporation (collectively, with its consolidated subsidiaries, “Webster” or the “Company”), is a bank holding company and financial holding company under the Bank Holding Company Act of 1956, as amended, headquartered in Waterbury, Connecticut and incorporated under the laws of Delaware in 1986. At March 31, 2013, Webster Financial Corporation's principal asset was all of the outstanding capital stock of Webster Bank, National Association (“Webster Bank”).
Webster, through Webster Bank and various non-banking financial services subsidiaries, delivers financial services to individuals, families and businesses throughout southern New England and into Westchester County, New York. Webster provides business and consumer banking, mortgage lending, financial planning, trust and investment services through banking offices, ATMs, telephone banking, mobile banking and its Internet website (www.websterbank.com). Webster Bank offers, through its HSA Bank division, health savings accounts on a nationwide basis. Webster also offers equipment financing, commercial real estate lending, and asset-based lending.
Basis of Presentation. The Condensed Consolidated Financial Statements include the accounts of Webster Financial Corporation and all other entities in which it has a controlling financial interest. All significant intercompany balances and transactions have been eliminated in consolidation. The accounting and financial reporting policies Webster follows conform, in all material respects, to accounting principles generally accepted in the United States (“GAAP”) and to general practices within the financial services industry.
The Company determines whether it has a controlling financial interest in an entity by first evaluating whether the entity is a voting interest entity or a variable interest entity (“VIE”) under GAAP. Voting interest entities are entities in which the total equity investment at risk is sufficient to enable the entity to finance itself independently and provides the equity holder with the obligation to absorb losses, the right to receive residual returns and the right to make decisions about the entity’s activities. The Company consolidates voting interest entities in which it has all or at least a majority of, the voting interest. VIEs are entities that lack one or more of the characteristics of a voting interest entity. A controlling financial interest in a VIE is present when the Company has both the power 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 trusts which have issued trust preferred securities. These trusts are VIEs in which the Company is not the primary beneficiary and therefore are not consolidated. The trusts’ only assets are junior subordinated debentures issued by the Company, which were acquired by the trusts using the proceeds from the issuance of the trust preferred securities and common stock. The junior subordinated debentures are included in long-term debt and the Company’s equity interests in the trusts are included in other assets in the accompanying Condensed Consolidated Balance Sheets. Interest expense on the junior subordinated debentures is reported in interest expense on long-term debt in the accompanying Condensed Consolidated Statements of Income. See Note 9 - Long-Term Debt.
Certain prior period amounts have been reclassified to conform to the current year's presentation. These reclassifications had no impact on the Company's consolidated financial position, results of operations or net change in cash or cash equivalents.
Use of Estimates. The preparation of the Condensed Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Condensed Consolidated Financial Statements. Actual results could differ from those estimates. The allowance for loan and lease losses, the fair value measurements of financial instruments and valuation of investments for other-than-temporary impairment (“OTTI”), the valuation of goodwill, the deferred tax asset valuation allowance and pension and other postretirement benefits, as well as the status of contingencies are particularly subject to change.
Cash Equivalents and Cash Flows. For the purposes of the Condensed Consolidated Statements of Cash Flows, cash equivalents include cash on hand and due from banks, interest-bearing deposits in the Federal Reserve Bank or other short-term money market investments. Webster classifies financial instruments with maturities of one year or less at the date of purchase as interest-bearing deposits. These deposits are carried at cost, which approximates fair value.
Cash flows from loans, either originated or acquired, are classified at that time according to management's original intent to either sell or hold the loan for the foreseeable future. When management's intent is to to sell the loan, the cash flows of that loan are presented as operating cash flows. When management's intent is to hold the loan for the foreseeable future, the cash flows of that loan are presented as investing cash flows.

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Table of Contents

Investment Securities. Investment securities are classified at the time of purchase as “available for sale”, or “held-to-maturity”. Classification is re-evaluated each quarter to ensure appropriate classification and to maintain consistency with corporate objectives. Debt securities held-to-maturity are those which Webster has the ability and intent to hold to maturity. Securities held-to-maturity are recorded at amortized cost. Amortized cost includes the amortization of premiums or accretion of discounts. Such amortization and accretion is included in interest income from securities. Securities classified as available for sale are recorded at fair value. Unrealized gains and losses, net of taxes, are calculated each reporting period and presented as a separate component of other comprehensive income (“OCI”). Securities transferred from available for sale to held-to-maturity are recorded at fair value at the time of transfer. The respective gain or loss is reclassified as a separate component of OCI and amortized as an adjustment to interest income over the remaining life of the security.
Investment securities are reviewed quarterly for OTTI. All securities classified as available for sale or held-to-maturity that are in an unrealized loss position are evaluated for OTTI. The evaluation considers several qualitative factors including the amount of the unrealized loss and the period of time the security has been in a loss position. If the Company intends to sell the security or, if it is more than likely the Company will be required to sell the security prior to recovery of its amortized cost basis, the security is written down to fair value and the 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 if it is more likely than not that the Company will not be required to sell the security prior to recovery of its amortized cost basis, only the credit component of any impairment charge of a debt security would be recognized as a loss in non-interest income in the accompanying Condensed Consolidated Statements of Income. The remaining loss component would be recorded in OCI. A decline in the value of an equity security that is considered OTTI is recorded as a loss in non-interest income in the accompanying Condensed Consolidated Statements of Income.
The specific identification method is used to determine realized gains and losses on sales of securities.
Loans Held for Sale. Loans held for sale are primarily residential real estate mortgage loans. Loans typically are assigned this classification upon origination based on management's intent to sell when the loans are underwritten. Loans held for sale are carried at the lower of cost or fair value. Non-residential mortgage loans held for sale are carried at lower of cost or fair value and are valued on individual asset basis. Any cost amount in excess of fair value is recorded as a valuation allowance and recognized as a reduction of other income. Gains or losses on the sale of loans held for sale are included in non-interest income in the accompanying Condensed Consolidated Statements of Income. Direct loan origination costs and fees are deferred and are recognized at the time of sale.
Loans. Loans are stated at the principal amounts outstanding, net of charged off amounts and unamortized premiums and discounts and net of deferred loan fees and/or costs which are recognized as a yield adjustment using the interest method. These yield adjustments are amortized over the contractual life of the related loans adjusted for estimated prepayments when applicable. Interest on loans is credited to interest income as earned based on the interest rate applied to principal amounts outstanding. Loans are placed on non-accrual status when timely collection of principal and interest in accordance with contractual terms is doubtful. A loan is transferred to a non-accrual basis generally when principal or interest payments become 90 days delinquent, unless the loan is well secured and in process of collection, or sooner if management concludes circumstances indicate that the borrower may be unable to meet contractual principal or interest payments.
Accrual of interest is discontinued if the loan is placed on non-accrual status. Residential real estate and consumer loans are placed on non-accrual status at 90 days past due and a charge-off is recorded at 180 days if the loan balance exceeds the fair value of the collateral less costs to sell. All commercial, commercial real estate and equipment finance loans are subject to a detailed review by the Company’s credit risk team to determine accrual status.
When a loan is put on non-accrual status, unpaid accrued interest is reversed and charged against interest income. If ultimate repayment of a non-accrual loan is expected, any payments received are applied in accordance with contractual terms. If ultimate repayment is not expected on commercial, commercial real estate and equipment finance loans, any payment received on a non-accrual loan is applied to principal until the unpaid balance has been fully recovered. Any excess is then credited to interest income when received. If the Company determines, through a current valuation analysis, that principal can be repaid on residential real estate and consumer loans, interest payments may be taken into income as received or on a cash basis. Loans are removed from non-accrual status when they become current as to principal and interest or demonstrate a period of performance under contractual terms and, in the opinion of management, are fully collectible as to principal and interest.

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Table of Contents

Allowance for Credit Losses. The allowance for credit losses includes the allowance for loan and lease losses and the reserve for unfunded credit commitments.
Allowance for Loan and Lease Losses (“ALLL”). The allowance for loan and lease losses is a reserve established through a provision for loan and lease losses charged to expense, and represents management’s best estimate of probable losses that may be incurred within the existing loan portfolio as of the balance sheet date. The level of the allowance reflects management’s view of trends in loan loss activity, current loan portfolio quality and present economic, political and regulatory conditions. Portions of the allowance may be allocated for specific loans; however, the entire allowance is available for any loan that is charged off. A charge-off is recorded on a case-by-case basis when all or a portion of the loan 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 loan portfolio, economic conditions, interest rate sensitivity and the view of the regulatory authorities regarding loan classifications.
The Company’s allowance for loan and lease losses consists of three elements: (i) specific valuation allowances established for probable losses on impaired loans; (ii) quantitative valuation allowances calculated using loan loss experience for like loans with similar characteristics and trends, adjusted, as necessary, to reflect the impact of current conditions; and (iii) qualitative factors determined based on general economic conditions and other qualitative risk factors both internal and external to the Company.
Loans are considered impaired when, based on current information and events, it is probable the Company will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. Impairment is evaluated on a pooled basis for smaller-balance homogeneous residential and consumer loans. Commercial, commercial real estate and equipment financing loans over a specific dollar amount and all troubled debt restructurings are evaluated individually for impairment. A loan identified as a 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 factored into the impaired reserve calculation 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 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. The reserve for unfunded credit commitments is reported as a component of accrued expenses and other liabilities in the accompanying Condensed Consolidated Balance Sheets and associated provision expense is recorded as a component of other non-interest expense in the accompanying Condensed Consolidated Statements of Income.
Troubled Debt Restructurings. A modified loan is considered a TDR when two conditions are met: (1) the borrower is experiencing financial difficulties and (2) the modification constitutes a concession. The Company considers all aspects of the restructuring in determining whether a concession has been granted, including the debtor's ability to access market rate funds. 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 and thus impaired at the date of discharge and charged down to the fair value of collateral less cost to sell.
The Company’s policy is to place all consumer loan TDRs on non-accrual status for a minimum period of six 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 six 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 six 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 circumstances that a loan is removed from TDR classification it is the Company’s policy to continue to base its measure of loan impairment on the contractual terms specified by the loan agreement.

8
Table of Contents

Transfers and Servicing of Financial Assets. Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is generally considered to have been surrendered when (1) the transferred assets are legally isolated from the Company or its consolidated affiliates, even in bankruptcy or other receivership, (2) the transferee has the right to pledge or exchange the assets with no conditions that constrain the transferee and provide more than a trivial benefit to the Company, and (3) the Company does not maintain the obligation or unilateral ability to reclaim or repurchase the assets.
The Company sells financial assets in the normal course of business, the majority of which are residential mortgage 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 the 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 initially recognized at fair value.
Comprehensive Income. Comprehensive income includes all changes in shareholders’ equity during a period, except those resulting from transactions with shareholders. In addition to net income, Webster's components of other comprehensive income consists of the after-tax effect of changes in net unrealized gain/loss on securities available for sale, changes in net unrealized gain/loss on derivative instruments and changes in net actuarial gain/loss and prior service cost for defined benefit pension and other post-retirement benefit plans. Comprehensive income is reported in the accompanying Condensed Consolidated Statements of Shareholders' Equity and Condensed Consolidated Statements of Comprehensive Income.
Recently Adopted Accounting Standards Updates
ASU No. 2011-11, “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities”. The ASU expands required disclosures of information related to the nature of an entity’s rights of setoff and related arrangements associated with its financial instruments and derivative instruments, in an effort to enhance comparability between financial statements prepared with GAAP and IFRS. The requirements include disclosure of net and gross positions in covered financial instruments and derivative instruments which are either (1) offset in accordance with ASC Sections 210-20-45 or 815-10-45, or (2) subject to an enforceable netting or other similar arrangement. The disclosures required by this ammendment were applied retrospectively for all comparative periods presented. The amendments did not have a material impact on the Company's financial statements.
ASU 2013-01- Balance Sheet (Topic 210): "Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities". The ASU amends Update 2011-11 to clarify that the scope applies to derivatives, repurchase and reverse repurchase agreements, and securities borrowing and lending transactions that are either offset in accordance with Section 210-20-45 or Section 815-10-45 or subject to master netting or similar arrangements. Other types of financial assets and liabilities subject to master netting or similar arrangements are not subject to the disclosure requirements in Update 2011-11. The amendments are effective for fiscal years beginning on or after January 1, 2013, and interim periods within those annual periods. The amendments did not have a material impact on the Company's financial statements.
ASU 2013-02- Comprehensive Income (Topic 220): "Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income". The ASU requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. The amendments are effective prospectively for reporting periods beginning after December 15, 2012. The amendments did not have a material impact on the Company's financial statements.



9
Table of Contents

NOTE 2: Investment Securities
A summary of the amortized cost, carrying value, and fair value of Webster’s investment securities is presented below:

 
At March 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:
 
 
 
 
 
 
 
Agency collateralized mortgage obligations (“CMOs”)
$
1,131,178

$
23,802

$
(101
)
$
1,154,879

$
—

$
—

$
1,154,879

Agency mortgage-backed securities (“MBS”)
1,270,845

17,636

(4,334
)
1,284,147

—

—

1,284,147

Commercial mortgage-backed securities (“CMBS”)
389,521

39,514

(1,352
)
427,683

—

—

427,683

Collateralized loan obligations ("CLOs")
248,070

829

(55
)
248,844

—

—

248,844

Pooled trust preferred securities (1)
45,923

—

(15,453
)
30,470

—

—

30,470

Single issuer trust preferred securities
51,225

—

(5,173
)
46,052

—

—

46,052

Corporate debt securities
110,702

6,420

—

117,122

—

—

117,122

Equity securities - financial institutions (2)
6,307

2,734

—

9,041

—

—

9,041

Total available for sale
$
3,253,771

$
90,935

$
(26,468
)
$
3,318,238

$
—

$
—

$
3,318,238

Held-to-maturity:
 
 
 
 
 
 
 
Agency CMOs
438,407

—

—

438,407

15,093

—

453,500

Agency MBS
1,931,928

—

—

1,931,928

75,576

(3,700
)
2,003,804

Municipal bonds and notes
528,788

—

—

528,788

28,186

(155
)
556,819

CMBS
199,516

—

—

199,516

15,796

(223
)
215,089

Private Label MBS
12,530

—

—

12,530

309

—

12,839

Total held-to-maturity
$
3,111,169

$
—

$
—

$
3,111,169

$
134,960

$
(4,078
)
$
3,242,051

 
 
 
 
 
 
 
 
Total investment securities
$
6,364,940

$
90,935

$
(26,468
)
$
6,429,407

$
134,960

$
(4,078
)
$
6,560,289


(1)
Amortized cost is net of $10.5 million of credit related other-than-temporary impairment at March 31, 2013.
(2)
Amortized cost is net of $21.3 million of other-than-temporary impairment at March 31, 2013.

10
Table of Contents

 
At December 31, 2012
 
 
Recognized in OCI
 
Not Recognized in OCI
 
(In thousands)
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Carrying
Value
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
Available for sale:
 
 
 
 
 
 
 
U.S. Treasury Bills
$
200

$
—

$
—

$
200

$
—

$
—

$
200

Agency CMOs
1,284,126

25,972

(92
)
1,310,006

—

—

1,310,006

Agency MBS
1,121,941

21,437

(1,098
)
1,142,280

—

—

1,142,280

CMBS
359,438

42,086

(3,493
)
398,031

—

—

398,031

CLOs
88,765

—

(225
)
88,540

—

—

88,540

Pooled trust preferred securities (1)
46,018

—

(19,811
)
26,207

—

—

26,207

Single issuer trust preferred securities
51,181

—

(6,766
)
44,415

—

—

44,415

Corporate debt securities
111,281

6,918

—

118,199

—

—

118,199

Equity securities - financial institutions (2)
6,232

2,054

(4
)
8,282

—

—

8,282

Total available for sale
$
3,069,182

$
98,467

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

$
—

$
—

$
3,136,160

Held-to-maturity:
 
 
 
 
 
 
 
Agency CMOs
500,369

—

—

500,369

16,643

(8
)
517,004

Agency MBS
1,833,677

—

—

1,833,677

88,082

(474
)
1,921,285

Municipal bonds and notes
559,131

—

—

559,131

34,366

(110
)
593,387

CMBS
199,810

—

—

199,810

18,324

—

218,134

Private Label MBS
14,542

—

—

14,542

366

—

14,908

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

$
—

$
—

$
3,107,529

$
157,781

$
(592
)
$
3,264,718

 
 
 
 
 
 
 
 
Total investment securities
$
6,176,711

$
98,467

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

$
157,781

$
(592
)
$
6,400,878


(1)
Amortized cost is net of $10.5 million of credit related other-than-temporary impairment at December 31, 2012.
(2)
Amortized cost is net of $21.3 million of other-than-temporary impairment at December 31, 2012.
The amortized cost and fair value of debt securities at March 31, 2013, by contractual maturity, are set forth below:
 
 
Available for Sale
 
Held-to-Maturity
(In thousands)
Amortized
Cost
Fair
Value
 
Amortized
Cost
Fair
Value
Due in one year or less
$
9,544

$
8,750

 
$
5,265

$
5,267

Due after one year through five years
105,581

111,062

 
43,616

46,413

Due after five through ten years
80,059

81,452

 
154,987

163,509

Due after ten years
3,052,280

3,107,933

 
2,907,301

3,026,862

Total debt securities
$
3,247,464

$
3,309,197

 
$
3,111,169

$
3,242,051

For the purposes of the maturity schedule, mortgage-backed securities and collateralized loan obligations, which are not due at a single maturity date, have been allocated over maturity groupings based on the expected maturity of the underlying collateral. Actual maturities may differ from contractual maturities because certain borrowers have the right to call or prepay obligations with or without call or prepayment penalties. At March 31, 2013, the Company had $779.2 million carrying value of callable securities in its investment portfolio.
Securities with a carrying value totaling $2.5 billion at March 31, 2013 and December 31, 2012 were pledged to secure public funds, trust deposits, repurchase agreements and for other purposes, as required or permitted by law. At March 31, 2013 and December 31, 2012, the Company had no investments in obligations of individual states, counties, or municipalities which exceed 10% of consolidated shareholders’ equity.

11
Table of Contents

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, 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
$
12,616

$
(20
)
$
12,786

$
(81
)
3

$
25,402

$
(101
)
Agency MBS
480,213

(4,263
)
6,809

(71
)
50

487,022

(4,334
)
CMBS
40,323

(98
)
23,154

(1,254
)
4

63,477

(1,352
)
CLOs
13,176

(55
)
—

—

2

13,176

(55
)
Pooled trust preferred securities
—

—

30,470

(15,453
)
8

30,470

(15,453
)
Single issuer trust preferred securities
—

—

46,052

(5,173
)
9

46,052

(5,173
)
Total available for sale
$
546,328

$
(4,436
)
$
119,271

$
(22,032
)
76

$
665,599

$
(26,468
)
Held-to-maturity:
 
 
 
 
 
 
 
Agency MBS
618,571

(3,700
)
—

—

32

618,571

(3,700
)
Municipal bonds and notes
4,521

(87
)
3,241

(68
)
11

7,762

(155
)
CMBS
15,595

(223
)
—

—

1

15,595

(223
)
Total held-to-maturity
$
638,687

$
(4,010
)
$
3,241

$
(68
)
44

$
641,928

$
(4,078
)
 
 
 
 
 
 
 
 
Total investment securities
$
1,185,015

$
(8,446
)
$
122,512

$
(22,100
)
120

$
1,307,527

$
(30,546
)
 
 
At December 31, 2012
 
Less Than Twelve Months
Twelve Months or Longer
Total
(Dollars in thousands)
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
# of
Holdings
Fair
Value
Unrealized
Losses
Available for sale:
 
 
 
 
 
 
 
Agency CMOs
$
69,936

$
(92
)
$
—

$
—

4

$
69,936

$
(92
)
Agency MBS
275,818

(1,098
)
—

—

28

275,818

(1,098
)
CMBS
14,947

(17
)
20,909

(3,476
)
2

35,856

(3,493
)
CLOs
44,775

(225
)
—

—

2

44,775

(225
)
Pooled trust preferred securities
—

—

26,207

(19,811
)
8

26,207

(19,811
)
Single issuer trust preferred securities
—

—

44,415

(6,766
)
9

44,415

(6,766
)
Equity securities-financial institutions
144

(4
)
—

—

1

144

(4
)
Total available for sale
$
405,620

$
(1,436
)
$
91,531

$
(30,053
)
54

$
497,151

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

(8
)
—

—

1

18,741

(8
)
Agency MBS
161,057

(474
)
—

—

12

161,057

(474
)
Municipal bonds and notes
5,990

(51
)
2,858

(59
)
11

8,848

(110
)
Total held-to-maturity
$
185,788

$
(533
)
$
2,858

$
(59
)
24

$
188,646

$
(592
)
 
 
 
 
 
 
 
 
Total investment securities
$
591,408

$
(1,969
)
$
94,389

$
(30,112
)
78

$
685,797

$
(32,081
)

12
Table of Contents

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, 2013. Unless otherwise noted for an investment security type, management does not intend to sell these investments and has determined, based upon available evidence, that it is more likely than not that the Company will not be required to sell these securities before the recovery of its amortized cost.
Agency CMOs – There were $101 thousand in unrealized losses in the Company’s investment in agency CMOs at March 31, 2013 compared to $92 thousand at December 31, 2012. The unrealized loss is limited to three securities which have exhibited higher short term prepayment speeds than initially projected at purchase and an increase in interest rates this quarter. 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, 2013.
Agency mortgage-backed securities – There were $4.3 million in unrealized losses in the Company’s investment in residential mortgage-backed securities issued by government agencies at March 31, 2013, compared to $1.1 million in unrealized losses at December 31, 2012. The increase in unrealized losses was primarily due to the impact of higher interest rates on low coupon holdings in mortgage-backed securities which saw a slight decrease in price during the current 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, 2013.
Commercial mortgage-backed securities (CMBS)– The unrealized losses on the Company’s investment in commercial mortgage-backed securities issued by entities other than government agencies decreased to $1.4 million at March 31, 2013, from $3.5 million at December 31, 2012. This decrease in unrealized loss is primarily the result of a continued tightening in credit spreads during the three months ended March 31, 2013. Internal and external metrics are considered when evaluating potential OTTI on credit sensitive instruments. Internal stress tests are performed on individual bonds to monitor potential loss in either base or high stress scenarios. In addition, market analytics are performed to validate internal results. Contractual cash flows for the bonds continue to perform as expected. The Company does not consider these securities to be other-than-temporarily impaired at March 31, 2013.
Collateralized loan obligations (CLO)– There were $55 thousand in unrealized losses in the Company’s investment in collateralized loan obligations at March 31, 2013, compared to $225 thousand at December 31, 2012. This unrealized loss represents the bid/ask spread on two newly purchased positions in the portfolio. These securities have been stress tested and this unrealized loss does not signify any change in perceived credit quality. The Company does not consider these securities to be other-than-temporarily impaired at March 31, 2013.
Pooled trust preferred securities – At March 31, 2013, the fair value of the pooled trust preferred securities was $30.5 million, an increase of $4.3 million from the fair value of $26.2 million at December 31, 2012. The fair value decreased slightly as a result of principal payments received during the quarter and was offset by an improvement in credit spreads. The unrealized losses in the Company's investment in the pooled trust preferred securities were $15.5 million at March 31, 2013, a decrease of $4.3 million from a balance of $19.8 million at December 31, 2012. The decrease in unrealized losses was attributable to improvements in credit spreads and collateral performance along with incorporating the effect of higher projected LIBOR rates which serves to increase future interest cash flows.
For the three months ended March 31, 2013, the Company recognized no credit or non-credit related other-than-temporary impairment ("OTTI") for these securities. The pooled trust preferred portfolio consists of collateralized debt obligations (“CDOs”) containing predominantly bank and insurance company collateral that are investment grade and below investment grade. An internal model is used to value the securities due to the continued inactive market and illiquid nature of pooled trust preferred securities. The Company employs an internal CDO model for projection of future cash flows and discounting those cash flows to a net present value. Each underlying issuer in the pools is rated internally using the latest financial data on each institution with future deferrals, defaults and losses estimated on the basis of continued stress in the financial markets. Further, all current and projected deferrals are not assumed to cure, and all current and projected defaults are assumed to have no recovery value. The resulting net cash flows are then discounted at current market levels for similar types of products that are actively trading. To determine potential OTTI due to credit losses, management compares the amortized cost to the present value of expected cash flows adjusted for deferrals and defaults using the discount margin at the time of purchase. Other factors considered include an analysis of excess subordination and temporary interest shortfall coverage. Based on the valuation analysis as of March 31, 2013, management expects to fully recover the remaining amortized cost of those securities not deemed to be other than temporarily impaired. However, additional interest deferrals, defaults, or ratings changes could result in future OTTI charges.

13
Table of Contents

The following table summarizes pertinent information that was considered by management in evaluating Trust Preferred Securities – Pooled Issuers for OTTI in the current reporting period: 
Trust Preferred Securities - Pooled Issuers
Deal Name
Class
Amortized
Cost (1)
Gross
Unrealized
Losses
Fair
Value
Lowest Credit
Ratings as of
March 31,
2013 (2)
Total OTTI thru
March 31,
2013
% of
Performing
Bank/
Insurance
Issuers

Deferrals/
Defaults
(As a % of
Current
Collateral)
(Dollars in thousands)
 
 
 
 
 
 
 
 
Security H
B
$
3,486

$
(1,328
)
$
2,158

B
$
(352
)
91.7
%
7.5
%
Security I
B
4,467

(1,708
)
2,759

CCC
(365
)
87.5
%
17.2
%
Security J
B
5,309

(2,244
)
3,065

CCC
(806
)
92.0
%
9.9
%
Security K
A
7,410

(2,638
)
4,772

CCC
(2,040
)
70.0
%
32.4
%
Security L
B
8,725

(3,436
)
5,289

CCC
(867
)
91.3
%
13.2
%
Security M
A
7,156

(3,326
)
3,830

D
(4,926
)
60.7
%
34.6
%
Security N
A
9,370

(773
)
8,597

A
(1,104
)
92.0
%
9.9
%
 
 
$
45,923

$
(15,453
)
$
30,470

 
$
(10,460
)
 
 

(1)For the securities previously deemed impaired, the amortized cost is reflective of previous OTTI recognized in earnings.
(2)The Company utilized credit ratings provided by Moody’s, S&P and Fitch in its evaluation of issuers.
Single issuer trust preferred securities - At March 31, 2013, the fair value of the single issuer trust preferred portfolio was $46.1 million, an increase of $1.7 million from the fair value of $44.4 million at December 31, 2012, attributable to improvements in credit and liquidity spreads. The gross unrealized loss of $5.2 million at March 31, 2013 is primarily attributable to changes in interest rates and wider credit spreads over the holding period of these securities. The single issuer portfolio consists of five investments issued by three large capitalization money center financial institutions, which continue to service the debt and showed significantly improved capital levels in recent years and remain well above current regulatory capital standards. Based on the review of the qualitative and quantitative factors presented above, the Company does not consider these securities to be other-than-temporarily impaired at March 31, 2013.
The following table summarizes pertinent information that was considered by management in evaluating the Trust Preferred Securities - Single Issuers portfolio for OTTI in the current reporting period:
Trust Preferred Securities - Single Issuers
Deal Name
Amortized
Cost
Gross
Unrealized
Losses
Fair
Value
Lowest Credit
Ratings as of
March 31,
2013 (1)
(Dollars in thousands)
 
 
 
 
Security B
$
6,902

$
(940
)
$
5,962

BB
Security C
8,684

(678
)
8,006

BBB
Security D
9,544

(794
)
8,750

B
Security E
11,779

(1,045
)
10,734

BBB
Security F
14,316

(1,716
)
12,600

BBB
 
$
51,225

$
(5,173
)
$
46,052

 

(1)The Company utilized credit ratings provided by Moody’s, S&P and Fitch in its evaluation of issuers.
Corporate debt securities – There were no unrealized losses in the Company’s investment in senior corporate debt securities at March 31, 2013 and December 31, 2012.
Equity securities – There were no unrealized losses on the Company’s investment in equity securities at March 31, 2013, compared to $4 thousand at December 31, 2012. This portfolio consists primarily of investments in the common stock of small capitalization financial institutions based in New England. When estimating the recovery period for equity securities in an unrealized loss position, management utilizes analyst forecasts, earnings assumptions and other company-specific financial performance metrics. In addition, this assessment incorporates general market data, industry and sector cycles and related trends to determine a reasonable recovery period. The Company evaluated the near-term prospects of the issuers in relation to the severity and duration of the impairment. The Company does not consider these securities to be other-than-temporarily impaired at March 31, 2013.

14
Table of Contents

The following discussion summarizes, by investment security type, the basis for the conclusion that the applicable investment securities within the Company’s held-to-maturity portfolio were not other-than-temporarily impaired at March 31, 2013. 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 three months ended March 31, 2013.
Agency CMOs – There were no unrealized losses on the Company’s investment in agency CMOs at March 31, 2013, compared to $8 thousand at December 31, 2012. The contractual cash flows for this investment are performing as expected. The Company does not consider these securities to be other-than-temporarily impaired at March 31, 2013.
Agency mortgage-backed securities – There were unrealized losses on the Company’s investment in residential mortgage-backed securities issued by government agencies of $3.7 million at March 31, 2013, compared to $474 thousand at December 31, 2012. The increase was primarily due to the impact of higher interest rates on lower coupon mortgages. The contractual cash flows for these investments are performing as expected. The Company does not consider these securities to be other-than-temporarily impaired at March 31, 2013.
Municipal bonds and notes – There were unrealized losses of $155 thousand on the Company’s investment in municipal bonds and notes at March 31, 2013 compared to $110 thousand at December 31, 2012. This increase is primarily the result of wider credit spreads and robust supply in the current quarter. The municipal portfolio is primarily comprised of bank qualified bonds, over 94.2% with credit ratings of A or better.  These ratings do not consider prefunded municipal holdings to be rated AA. If this were the case, the percentage of holdings rated A or better would be slightly over 97.0%. In addition, the portfolio is comprised of 84.6% general obligation bonds, 15.0% revenue bonds and 0.4% other bonds. The Company does not consider these securities to be other-than-temporarily impaired at March 31, 2013.
CMBS – There were unrealized losses of $223 thousand on the Company’s investment in commercial mortgage-backed securities issued by entities other than government agencies at March 31, 2013 compared to no unrealized losses at December 31, 2012. This current unrealized loss is the result of higher rates, offsetting spread tightening on one position the company owns, which is currently externally rated AAA/Aaa. This security is currently performing as expected. The Company does not consider these securities to be other-than-temporarily impaired at March 31, 2013.
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, 2013 or December 31, 2012. The Company does not consider these securities to be other-then-temporarily impaired at March 31, 2013.
The following is a roll forward of the amount of credit related OTTI recognized in earnings for the three months ended March 31:
(In thousands)
2013
2012
Balance of credit related OTTI, beginning of period
$
10,460

$
10,460

Reduction for payment of deferred interest
—

—

Reduction for securities sold
—

—

Additions for credit related OTTI not previously recognized
—

—

Balance of credit related OTTI, end of period
$
10,460

$
10,460

There were no additions to credit related OTTI for the three months ended March 31, 2013 or 2012. To the extent that changes in interest rates, credit movements and other factors that influence the fair value of investments occur, the Company may be required to record impairment charges for OTTI in future periods.
There were no securities sales for the three months ended March 31, 2012. The following table summarizes the proceeds from the sale of securities for the three months ended March 31, 2013:
(In thousands)
2013
Available for sale:
 
Agency MBS
$
11,771

Total available for sale
$
11,771


15
Table of Contents

There were no realized gains or losses from the sale of securities for the three months ended March 31, 2012. The following table summarizes the impact of realized gains and losses from the sale of securities and the impact of the recognition of OTTI for the three months ended March 31, 2013:
 
2013
(In thousands)
Gains
Losses
OTTI
Net
Available for sale:
 
 
 
 
Agency MBS
$
106

—

—

$
106

Total available for sale
$
106

—

—

$
106

Investments in private equity funds - In addition to investment securities, the Company has investments in private equity funds. These investments, which totaled $11.3 million at March 31, 2013 and $11.6 million at December 31, 2012, are included in other assets in the accompanying Condensed Consolidated Balance Sheets. The Company recognized losses of $264 thousand and $705 thousand, including both mark to market and OTTI charges on these investments, for the three months ended March 31, 2013 and 2012, respectively. These amounts are included in other non-interest income in the accompanying Condensed Consolidated Statements of Income.


NOTE 3: Loans and Leases

Recorded Investment in Loans and Leases. The following tables summarize recorded investment; the principal amounts outstanding, net of unamortized premiums and discounts, net of deferred fees and/or costs, plus accrued interest, in loans and leases, by portfolio segment at March 31, 2013 and December 31, 2012:
 
 
At At March 31, 2013
(In thousands)
Residential
Consumer
Commercial
Commercial
Real Estate
Equipment
Financing
Total
Loans and Leases:
 
 
 
 
 
 
Ending balance (1)
$
3,287,072

$
2,577,523

$
2,941,886

$
2,790,954

$
404,597

$
12,002,032

Accrued interest
10,245

7,943

9,797

7,900

—

35,885

Recorded investment
$
3,297,317

$
2,585,466

$
2,951,683

$
2,798,854

$
404,597

$
12,037,917

Recorded investment: individually evaluated for impairment
$
145,753

$
54,707

$
63,405

$
173,849

$
1,643

$
439,357

Recorded investment: collectively evaluated for impairment
$
3,151,564

$
2,530,759

$
2,888,278

$
2,625,005

$
402,954

$
11,598,560

 
 
At At December 31, 2012
(In thousands)
Residential
Consumer
Commercial
Commercial
Real Estate
Equipment
Financing
Total
Loans and Leases:
 
 
 
 
 
 
Ending balance (1)
$
3,291,724

$
2,630,867

$
2,903,733

$
2,783,061

$
419,311

$
12,028,696

Accrued interest
10,271

8,095

9,453

7,541

—

35,360

Recorded investment
$
3,301,995

$
2,638,962

$
2,913,186

$
2,790,602

$
419,311

$
12,064,056

Recorded investment: individually evaluated for impairment
$
146,944

$
54,793

$
69,426

$
154,978

$
1,980

$
428,121

Recorded investment: collectively evaluated for impairment
$
3,155,051

$
2,584,169

$
2,843,760

$
2,635,624

$
417,331

$
11,635,935

 
(1)
The ending balance includes net deferred fees and unamortized premiums of $12.3 million and $12.7 million at March 31, 2013 and December 31, 2012, respectively.
As of March 31, 2013, the Company had pledged $4.3 billion of eligible loan collateral to support available borrowing capacity at either the FHLB of Boston or the Federal Reserve discount window.

16
Table of Contents

Loans and Leases Portfolio Aging. The following tables summarize the recorded investment of the Company’s loan and lease portfolio aging by class at March 31, 2013 and December 31, 2012:
 
At March 31, 2013
(In thousands)
30-59 Days
Past Due and
Accruing
60-89 Days
Past Due and
Accruing
> 90 Days Past
Due and Accruing
Non-accrual
Total Past Due
Current
Total Loans
and Leases
Residential:
 
 
 
 
 
 
 
1-4 family
$
8,391

$
8,073

$
—

$
94,010

$
110,474

$
3,143,279

$
3,253,753

Construction
—

363

—

823

1,186

42,378

43,564

Consumer:
 
 
 
 
 
 
 
Home equity loans
10,061

4,290

—

48,343

62,694

2,360,964

2,423,658

Liquidating portfolio-home equity loans
2,219

644

—

7,370

10,233

107,315

117,548

Other consumer
283

140

—

139

562

43,698

44,260

Commercial:
 
 
 
 
 
 
 
Commercial non-mortgage
2,714

1,111

—

16,339

20,164

2,385,878

2,406,042

Asset-based loans
—

—

—

—

—

545,641

545,641

Commercial real estate:
 
 
 
 
 
 
 
Commercial real estate
523

829

—

24,458

25,810

2,613,080

2,638,890

Commercial construction
—

—

—

49

49

132,131

132,180

Residential development
—

—

—

4,794

4,794

22,990

27,784

Equipment financing
819

181

—

2,801

3,801

400,796

404,597

Total
$
25,010

$
15,631

$
—

$
199,126

$
239,767

$
11,798,150

$
12,037,917

 
At December 31, 2012
(In thousands)
30-59 Days
Past Due and
Accruing
60-89 Days
Past Due and
Accruing
> 90 Days Past
Due and Accruing
Non-accrual
Total Past Due
Current
Total Loans
and Leases
Residential:
 
 
 
 
 
 
 
1-4 family
$
16,955

$
8,250

$
—

$
94,853

$
120,058

$
3,142,220

$
3,262,278

Construction
—

360

—

823

1,183

38,535

39,718

Consumer:
 
 
 
 
 
 
 
Home equity loans
17,745

6,993

—

49,516

74,254

2,396,944

2,471,198

Liquidating portfolio-home equity loans
2,063

1,626

—

8,200

11,889

111,760

123,649

Other consumer
338

195

—

135

668

43,446

44,114

Commercial:
 
 
 
 
 
 
 
Commercial non-mortgage
2,248

552

347

17,547

20,694

2,386,775

2,407,469

Asset-based loans
—

—

—

—

—

505,717

505,717

Commercial real estate:
 
 
 
 
 
 
 
Commercial real estate
1,081

13,784

910

15,658

31,433

2,617,213

2,648,646

Commercial construction
—

—

—

49

49

114,097

114,146

Residential development
—

—

—

5,044

5,044

22,766

27,810

Equipment financing
1,593

333

—

3,325

5,251

414,060

419,311

Total
$
42,023

$
32,093

$
1,257

$
195,150

$
270,523

$
11,793,533

$
12,064,056

Loans and Leases on Non-accrual Status. Accrual of interest is discontinued if a loan or lease is placed on non-accrual status. When placed on non-accrual status, unpaid accrued interest is reversed and charged against interest income. Residential and consumer loans are placed on non-accrual status after 90 days past due or at the date when the Company is notified that the borrower is discharged in bankruptcy. All commercial and commercial real estate loans and equipment financing leases are subject to a detailed review by the Company’s credit risk team when 90 days past due or when payment is uncertain and a specific determination is made to put a loan or lease on non-accrual status.
Interest on non-accrual loans and leases that would have been recorded as additional interest income for the three months ended March 31, 2013 and 2012, had the loans and leases been current in accordance with their original terms, totaled $3.9 million and $4.5 million, respectively.

17
Table of Contents

Allowance for Loan and Lease Losses. The following tables summarize the ALLL by portfolio segment for the three months ending March 31, 2013 and 2012: 
 
Three months ended March 31, 2013
(In thousands)
Residential
Consumer
Commercial
Commercial
Real Estate
Equipment
Financing
Unallocated
Total
Allowance for loan and lease losses:
 
 
 
 
 
 
 
Balance, beginning of period
$
29,474

$
54,254

$
46,566

$
30,834

$
4,001

$
12,000

$
177,129

Provision (benefit) charged to expense
1,103

4,700

224

3,579

(1,106
)
(1,000
)
7,500

Losses charged off
(2,936
)
(10,407
)
(4,339
)
(3,760
)
(87
)
—

(21,529
)
Recoveries
250

1,822

1,599

241

828

—

4,740

Balance, end of period
$
27,891

$
50,369

$
44,050

$
30,894

$
3,636

$
11,000

$
167,840

Ending balance: individually evaluated for impairment
$
13,871

$
3,520

$
4,310

$
5,511

$
8

$
—

$
27,220

Ending balance: collectively evaluated for impairment
$
14,020

$
46,849

$
39,740

$
25,383

$
3,628

$
11,000

$
140,620

 
 
Three months ended March 31, 2012
(In thousands)
Residential
Consumer
Commercial
Commercial
Real Estate
Equipment
Financing
Unallocated
Total
Allowance for loan and lease losses:
 
 
 
 
 
 
 
Balance, beginning of period
$
34,565

$
67,785

$
60,681

$
45,013

$
8,943

$
16,500

$
233,487

Provision (benefit) charged to expense
448

4,475

3,516

(78
)
(2,861
)
(1,500
)
4,000

Losses charged off
(3,115
)
(10,051
)
(14,994
)
(5,848
)
(634
)
—

(34,642
)
Recoveries
141

2,054

1,800

1,100

2,348

—

7,443

Balance, end of period
$
32,039

$
64,263

$
51,003

$
40,187

$
7,796

$
15,000

$
210,288

Ending balance: individually evaluated for impairment
$
16,976

$
4,441

$
6,309

$
4,977

$
22

$
—

$
32,725

Ending balance: collectively evaluated for impairment
$
15,063

$
59,822

$
44,694

$
35,210

$
7,774

$
15,000

$
177,563




18
Table of Contents

Impaired Loans and Leases. The following tables summarize impaired loans and leases by class as of March 31, 2013 and December 31, 2012:
 
At March 31, 2013
(In thousands)
Unpaid
Principal
Balance
Total
Recorded
Investment
Recorded
Investment
No Allowance
Recorded
Investment
With Allowance
Related
Valuation
Allowance
Residential:
 
 
 
 
 
1-4 family
$
160,598

$
145,492

$
23,031

$
122,461

$
13,866

Construction
446

261

156

105

5

Consumer:
 
 
 
 
 
Home equity loans
55,037

47,832

24,402

23,430

2,900

Liquidating portfolio-home equity loans
8,948

6,875

3,698

3,177

620

Commercial:
 
 
 
 
 
Commercial non-mortgage
86,622

63,405

20,012

43,393

4,310

Commercial real estate:
 
 
 
 
 
Commercial real estate
146,322

140,069

73,885

66,184

5,498

Commercial construction
7,117

7,128

7,128

—

—

Residential development
13,719

12,903

4,894

8,009

13

Equipment financing
1,716

1,643

938

705

8

Totals:
 
 
 
 
 
Residential
161,044

145,753

23,187

122,566

13,871

Consumer
63,985

54,707

28,100

26,607

3,520

Commercial
86,622

63,405

20,012

43,393

4,310

Commercial real estate
167,158

160,100

85,907

74,193

5,511

Equipment financing
1,716

1,643

938

705

8

Total
$
480,525

$
425,608

$
158,144

$
267,464

$
27,220

 

19
Table of Contents

 
At December 31, 2012
(In thousands)
Unpaid
Principal
Balance
Total
Recorded
Investment
Recorded
Investment
No Allowance
Recorded
Investment
With Allowance
Related
Valuation
Allowance
Residential:
 
 
 
 
 
1-4 family
$
160,490

$
146,683

$
24,267

$
122,416

$
14,726

Construction
446

261

156

105

5

Consumer:
 
 
 
 
 
Home equity loans
56,815

47,755

23,967

23,788

2,960

Liquidating portfolio-home equity loans
11,788

7,038

3,663

3,375

651

Commercial:
 
 
 
 
 
Commercial non-mortgage
90,627

69,426

21,942

47,484

6,423

Commercial real estate:
 
 
 
 
 
Commercial real estate
123,861

121,193

65,212

55,981

2,572

Commercial construction
7,177

7,185

7,185

—

—

Residential development
13,444

12,771

5,029

7,742

111

Equipment financing
2,357

1,980

1,781

199

1

Totals:
 
 
 
 
 
Residential
160,936

146,944

24,423

122,521

14,731

Consumer
68,603

54,793

27,630

27,163

3,611

Commercial
90,627

69,426

21,942

47,484

6,423

Commercial real estate
144,482

141,149

77,426

63,723

2,683

Equipment financing
2,357

1,980

1,781

199

1

Total
$
467,005

$
414,292

$
153,202

$
261,090

$
27,449


20
Table of Contents

The following table summarizes interest income recognized by class of impaired loans and leases for the periods presented:
 
Three months ended March 31,
 
2013
 
2012
(In thousands)
Average
Recorded
Investment
Total
Interest
Income
 
Average
Recorded
Investment
Total
Interest
Income
Residential:
 
 
 
 
 
1-4 family
$
146,088

$
1,474

 
$
135,441

$
1,390

Construction
261

2

 
117

—

Consumer:
 
 
 
 
 
Home equity loans
47,794

571

 
30,518

351

Liquidating portfolio-home equity loans
6,957

118

 
5,173

67

Other consumer
—

—

 
7

—

Commercial:
 
 
 
 
 
Commercial non-mortgage
66,415

708

 
98,539

1,132

Asset-based loans
—

—

 
1,659

—

Commercial real estate:
 
 
 
 
 
Commercial real estate
130,631

1,401

 
164,805

1,192

Commercial construction
7,156

67

 
7,363

74

Residential development
12,837

92

 
14,438

89

Equipment financing
1,811

7

 
2,791

14

Totals:
 
 
 
 
 
Residential
146,349

1,476

 
135,558

1,390

Consumer
54,751

689

 
35,698

418

Commercial
66,415

708

 
100,198

1,132

Commercial real estate
150,624

1,560

 
186,606

1,355

Equipment financing
1,811

7

 
2,791

14

Total
$
419,950

$
4,440

 
$
460,851

$
4,309

Of the total interest income recognized for the residential and consumer portfolios, $927.8 thousand and $351.0 thousand of interest income was recognized on a cash basis method of accounting for the three months ended March 31, 2013 and 2012, respectively.

Credit Risk Management. The Company has certain credit policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. Management reviews and approves these policies and procedures on a regular basis and frequently reviews reports related to loan production, loan quality, concentration of credit, loan delinquencies and non-performing and potential problem loans.

Commercial and industrial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and prudently expand its business. Underwriting standards are designed to promote relationships rather than transactional banking. Once it is determined that the borrower’s management possesses sound ethics and solid business acumen, the Company’s management examines current and projected cash flows to determine the ability of the borrower to repay obligations as agreed. Commercial and industrial loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial and industrial loans are secured by the assets being financed and may incorporate a personal guarantee; however, some loans may be made on an unsecured basis.

Commercial real estate loans are subject to underwriting standards and processes similar to commercial and industrial loans, in addition to those specific to real estate loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is largely dependent on the successful operation of the property securing the loan, the market in which the property is located and the tenants that conduct business at the property securing the loan. Commercial real estate loans may be adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Company’s commercial real estate portfolio are diverse in terms of type and geographic location, which help reduce the Company's exposure to adverse economic

21
Table of Contents

events that may affect any single market or industry. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. The Company also utilizes third-party experts to provide insight and guidance about economic conditions and trends affecting its loan portfolio.
Construction loans on commercial properties have unique risk characteristics and are provided to experienced developers/sponsors with strong track records of successful completion and sound financial condition and are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analysis of absorption and lease rates and financial analysis of the developers and property owners. Construction loans are generally based upon estimates of costs and value associated with the complete project. These estimates may be subject to change as the construction project proceeds. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or interim loan commitments from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections by third party professionals and internal staff.
To monitor and manage consumer loan risk, policies and procedures are developed and modified, as needed, jointly by line and Risk Management personnel. Policies and procedures, coupled with relatively small loan amounts, and predominately collateralized structures spread across many individual borrowers, minimize risk. Trend and outlook reports are reviewed by management on a regular basis. Underwriting factors for mortgage and home equity loans include the borrower’s FICO score, the loan amount relative to property value and the borrower’s debt to income level and are also influenced by statutory requirements.
Credit Quality Indicators. To measure credit risk for the commercial, commercial real estate and equipment financing portfolios, the Company employs a dual grade credit risk grading system for estimating the probability of borrower default and the loss given default. The credit risk grade system assigns a rating to each borrower and to the facility, which together form a Composite Credit Risk Profile (“CCRP”). The credit risk grading system categorizes borrowers by common financial characteristics that measure the credit strength of borrowers and facilities by common structural characteristics. The CCRP has ten grades, with each grade corresponding to a progressively greater risk of default. Grades 1 through 6 are considered pass ratings and 7 through 10 are criticized as defined by the regulatory agencies. The rating model assumptions are actively reviewed and tested against industry data and actual experience. Risk ratings are assigned to differentiate risk within the portfolio and are reviewed on an ongoing basis and revised, if needed, to reflect changes in the borrowers’ current financial positions and outlook, risk profiles and the related collateral and structural positions. Loan officers review updated financial information for all pass rated loans to review the accuracy of the risk grade on at least an annual basis. Criticized loans are assigned to an officer and undergo reviews for problem asset resolution, as well as enhanced and ongoing monitoring of the underlying borrowers.
A “Special Mention” (7) credit has the potential weakness that, if left uncorrected may result in deterioration of the repayment prospects for the asset. “Substandard” (8) assets have a well defined weakness that jeopardizes the full repayment of the debt. An asset rated “Doubtful” (9) has all the same weaknesses as substandard credit with the added characteristic that the weakness makes collection or liquidation in full, given current facts, conditions, and values, improbable. Assets classified as “Loss” (10) in accordance with regulatory guidelines are considered uncollectible and charged off.
The recorded investment in commercial and commercial real estate loans and equipment financing leases segregated by risk rating exposure is as follows:
 
(In thousands)
Commercial
 
Commercial Real Estate
 
Equipment Financing
 
At March 31,
2013
 
At December 31,
2012
 
At March 31,
2013
 
At December 31,
2012
 
At March 31,
2013
 
At December 31,
2012
(1) - (6) Pass
$
2,742,707

 
$
2,701,061

 
$
2,602,927

 
$
2,588,987

 
$
374,789

 
$
381,304

(7) Special Mention
52,595

 
43,856

 
37,624

 
56,023

 
7,091

 
12,893

(8) Substandard
155,398

 
167,485

 
157,747

 
143,904

 
22,717

 
25,114

(9) Doubtful
983

 
784

 
556

 
1,688

 
—

 
—

(10) Loss
—

 
—

 
—

 
—

 
—

 
—

Total
$
2,951,683

 
$
2,913,186

 
$
2,798,854

 
$
2,790,602

 
$
404,597

 
$
419,311

For residential and consumer loans, the Company considers factors such as updated FICO scores, employment status, home prices, loan to value, geography, loans discharged in bankruptcy, and the status of first lien position loans on second lien position loans, as credit quality indicators. On an ongoing basis for portfolio monitoring purposes, the Company estimates the current value of property secured as collateral for both home equity and residential first mortgage lending products (“current LTV”). The estimate is based on home price indices compiled by the S&P/Case-Shiller Home Price Indices. The Case-Shiller data indicates trends for Metropolitan Statistical Areas (“MSA”). The trend data is applied to the loan portfolios taking into account the age of the most recent valuation and geographic area.

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Table of Contents

Troubled Debt Restructurings. The following table summarizes the information for the Company’s TDRs at March 31, 2013 and December 31, 2012:
(Dollars in thousands)
At March 31,
2013
 
At December 31,
2012
Recorded investment of TDRs:
 
 
 
Accrual status
$
289,391

 
$
288,578

Non-accrual status
118,455

 
115,583

Total recorded investment
$
407,846

 
$
404,161

Accruing TDRs performing under modified terms more than one year
59.4
%
 
60.2
%
TDR specific reserves included in the balance of allowance for loan and lease losses
$
27,165

 
$
27,317

Additional funds committed to borrowers in TDR status (1)
2,651

 
3,263

 
(1)
This amount may be limited by contractual rights and/or the underlying collateral supporting the loan or lease.
For the three months ended March 31, 2013 and 2012, Webster charged off $5.0 million and $19.0 million, respectively, for the portion of TDRs deemed to be uncollectible.
The following table provides information on loans and leases modified as TDRs for the periods presented:
 
Three months ended March 31,
 
2013
 
2012
(Dollars in thousands)
Number of
Loans and
Leases
Pre-
Modification
Recorded
Investment
Post-
Modification
Recorded
Investment
Post-
Modification
Coupon
Rate
 
Number of
Loans and
Leases
Pre-
Modification
Recorded
Investment
Post-
Modification
Recorded
Investment
Post-
Modification
Coupon
Rate
Residential:
 
 
 
 
 
 
 
 
 
1-4 family
32

$
6,413

$
6,413

3.9
%
 
24

$
4,060

$
4,060

4.0
%
Consumer:
 
 
 
 
 
 
 
 
 
Home equity loans
37

2,397

2,397

4.2

 
12

953

953

4.1

Liquidating portfolio-home equity loans
5

89

89

7.3

 
2

—

—

3.0

Commercial:
 
 
 
 
 
 
 
 
 
Commercial non-mortgage
3

888

888

5.3

 
12

11,228

11,228

7.2

Commercial real estate:
 
 
 
 
 
 
 
 
 
Commercial real estate
2

11,675

11,675

2.7

 
1

245

245

6.0

Residential development
2

189

189

5.3

 
—

—

—

—

Equipment financing
—

—

—

—

 
3

200

200

6.9

Total TDRs
81

$
21,651

$
21,651

3.4
%
 
54

$
16,686

$
16,686

6.2
%
 
TDR loans may be modified by means of extended maturity, below market adjusted interest rates, a combination of rate and maturity, or by other means including covenant modifications, or other concessions.


23
Table of Contents

The following table provides information on how loans and leases were modified as TDRs for the periods presented:
 
Three months ended March 31,
 
2013
 
2012
(In thousands)
Extended
Maturity
Adjusted
Interest
Rates
Combination
of Rate and
Maturity
Other (1)
Total
 
Extended
Maturity
Adjusted
Interest
Rates
Combination
of Rate and
Maturity
Other (1)
Total
Residential:
 
 
 
 
 
 
 
 
 
 
 
1-4 family
$
905

$
741

$
3,349

$
1,418

$
6,413

 
$
632

$
283

$
2,404

$
741

$
4,060

Consumer:





 





Home equity loans
108

154

1,084

1,051

2,397

 
64

107

638

144

953

Liquidating portfolio-home equity loans
—

—

—

89

89

 
—

—

—

—

—

Commercial:





 





Commercial non-mortgage
502

—

347

39

888

 
27

—

286

10,915

11,228

Commercial real estate:





 





Commercial real estate
—

—

11,675

—

11,675

 
—

—

245

—

245

Residential development
189

—

—

—

189

 
—

—

—

—

—

Equipment financing
—

—

—

—

—

 
—

—

40

160

200

Total TDRs
$
1,704

$
895

$
16,455

$
2,597

$
21,651

 
$
723

$
390

$
3,613

$
11,960

$
16,686


(1)
Includes covenant modifications, forbearance, loans discharged under Chapter 7 bankruptcy (2013 only), and/or other concessions.

The Company’s loan and lease portfolio at March 31, 2013 included eleven loans with an A Note/B Note structure, with a combined recorded investment of $38.8 million. The loans were restructured into A Note/B Note structures as a result of evaluating the cash flow of the borrowers to support repayment. Webster immediately charged off the balance of B Notes totaling $17.0 million. TDR classification has been removed from two A Notes with the combined recorded investment of $13.7 million, as the borrowers passed the minimum compliance with the modified terms requirements. The restructuring agreement specifies an interest rate equal to that which would be provided to a borrower with similar credit at the time of restructuring. The A Notes are paying under the terms of the modified loan agreements. Of the eleven A Notes, eight are on accrual status as the borrowers are paying under the terms of the loan agreements prior to and subsequent to the modification. The remaining A Notes are on non-accrual status due to the continuing financial difficulties of the borrower.
The following table provides information on loans and leases modified as a TDR within the previous 12 months and for which there was a payment default during the three months ended March 31, 2013 and 2012:
 
Three months ended March 31,
 
2013
 
2012
(Dollars in thousands)
Number of
Loans and
Leases
Recorded
Investment
 
Number of
Loans and
Leases
Recorded
Investment
Residential:
 
 
 
 
 
1-4 family
1

$
198

 
3

$
547

Consumer:
 
 
 
 
 
Home equity loans
4

87

 
2

79

Commercial:
 
 
 
 
 
Commercial non-mortgage
—

—

 
4

4,068

Commercial real estate:
 
 
 
 
 
Commercial real estate
—

—

 
1

670

Total
5

$
285

 
10

$
5,364



24
Table of Contents

The recorded investment in commercial, commercial real estate and equipment financing TDRs segregated by risk rating exposure at March 31, 2013 and December 31, 2012, is as follows:
 
(In thousands)
At March 31,
2013
 
At December 31,
2012
(1) - (6) Pass
$
64,730

 
$
56,661

(7) Special Mention
3,060

 
—

(8) Substandard
139,146

 
143,903

(9) Doubtful
450

 
1,860

(10) Loss
—

 
—

Total
$
207,386

 
$
202,424



NOTE 4: Transfers of Financial Assets and Mortgage Servicing Rights
Transfers of Financial 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 the 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. For loans sold under participation agreements, the Company also considers the terms of the loan participation agreement and whether they meet the definition of a participating interest and thus qualify for derecognition. 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. See a further discussion of the representation and warranties in Note 18 - Commitments and Contingencies.
The Company sold $227.4 million and $133.6 million of residential loans for the three months ended March 31, 2013 and 2012, respectively. Servicing rights were retained on $220.2 million and $131.4 million of the residential loans sold for the three months ended March 31, 2013 and 2012, respectively. The net gain on the sale of loans of $7.0 million and $4.4 million for the three months ended March 31, 2013 and 2012, respectively, is included as mortgage banking activities in the accompanying Condensed Consolidated Statements of Income. This includes a gain on commercial loan sales of $336 thousand and $18 thousand for the three months ended March 31, 2013 and 2012, respectively.
Mortgage Servicing Rights
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 initially recognized at fair value. See a further discussion of fair value in Note 14 - Fair Value Measurement.
The Company serviced consumer loans for others totaling $2.2 billion at March 31, 2013 and $2.1 billion at December 31, 2012. Loan servicing fees, net of mortgage servicing right amortization, was $1.4 million and $0.7 million for the three months ended March 31, 2013 and 2012, respectively, and is included as a component of loan related fees in the accompanying Condensed Consolidated Statements of Income.


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Table of Contents

NOTE 5: Goodwill and Other Intangible Assets
The following tables set forth the carrying values of goodwill and other intangible assets, net of accumulated amortization:
 
(In thousands)
At March 31,
2013
 
At December 31,
2012
Balances not subject to amortization:
 
 
 
Goodwill allocated to business segments:
 
 
 
Community Banking
$
516,560

 
$
516,560

Other (HSA Bank)
13,327

 
13,327

Goodwill
529,887

 
529,887

Balances subject to amortization:
 
 
 
Core deposits allocated to business segments:
 
 
 
Community Banking
9,028

 
10,270

Total goodwill and other intangible assets
$
538,915

 
$
540,157


The gross carrying value and accumulated amortization of other intangible assets and the reporting unit to which they relate are as follows:
 
At March 31, 2013
 
At December 31, 2012
(In thousands)
Gross Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
 
Gross Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
Core deposits
 
 
 
 
 
 
 
Community Banking
$
49,420

$
(40,392
)
$
9,028

 
$
49,420

$
(39,150
)
$
10,270

Other (HSA Bank)
—

—

—

 
4,699

(4,699
)
—

Total
$
49,420

$
(40,392
)
$
9,028

 
$
54,119

$
(43,849
)
$
10,270


Amortization of intangible assets for the three months ended March 31, 2013 and 2012, totaled $1.2 million and $1.4 million, respectively. Estimated annual amortization expense of current intangible assets with finite useful lives, absent any future impairment or change in estimated useful lives, is summarized below for the current full year and for each of the next four years:
(In thousands)
 
Years ending December 31,
 
2013
$
4,919

2014
2,685

2015
1,523

2016
1,143

Thereafter
—

Goodwill is not amortized and is instead tested for impairment at least annually, or on an interim basis if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying value. Webster annually tests its goodwill for impairment as of August 31st. There was no impairment indicated as a result of the Step 1 test performed August 31, 2012, as the estimated fair value for the reporting units that carry goodwill exceeded their corresponding carrying values. There were no circumstances identified during the three months ended March 31, 2013, that would require reassessment of the carrying value of goodwill.

26
Table of Contents


NOTE 6: Deposits
A summary of deposits by type follows:
(In thousands)
At March 31,
2013
At
At December 31,
2012
Non-interest-bearing:
 
 
 
Demand
$
2,849,355

 
$
2,881,131

Interest-bearing:
 
 
 
Checking
1,855,277

 
1,810,040

Health savings accounts
1,431,263

 
1,269,727

Money market
2,165,744

 
2,205,072

Savings
3,885,394

 
3,819,713

Time deposits
2,436,849

 
2,545,152

Total interest-bearing
11,774,527

 
11,649,704

Total deposits
$
14,623,882

 
$
14,530,835

 
 
 
 
Demand deposit overdrafts reclassified as loan balances
$
1,684

 
$
1,654

At March 31, 2013, the scheduled maturities of time deposits (certificates of deposit and brokered deposits) were as follows:
(In thousands)
 
Years ending December 31:
 
2013
$
1,153,992

2014
643,901

2015
357,727

2016
185,612

2017
64,708

Thereafter
30,909

Total time deposits
$
2,436,849

The following table presents additional information about the Company’s brokered deposits:
(In thousands)
At March 31,
2013
At
At December 31,
2012
Interest-bearing checking obtained through brokers
$
42,860

 
$
43,693

Time deposits obtained through brokers
144,408

 
126,299

Total brokered deposits
$
187,268

 
$
169,992



27
Table of Contents

NOTE 7: Securities Sold Under Agreements to Repurchase and Other Short-term Borrowings
The following table summarizes securities sold under agreements to repurchase and other short-term borrowings:
 
(In thousands)
At March 31,
2013
 
At December 31,
2012
Securities sold under agreements to repurchase:
 
 
 
Original maturity of one year or less
$
283,767

 
$
326,160

Callable at the option of the counterparty
200,000

 
300,000

Non-callable
450,000

 
450,000

 
933,767

 
1,076,160

Other short-term borrowings:
 
 
 
Federal funds purchased
100,000

 
—

Total securities sold under agreements to repurchase and other short-term borrowings
$
1,033,767

 
$
1,076,160

Repurchase agreements are used as a source of borrowed funds in addition to FHLB advances. These repurchase agreements are collateralized by U.S. Government agency mortgage-backed securities. The collateral for these repurchase agreements is delivered to broker/dealers. Repurchase agreements with broker/dealers are limited to primary dealers in government securities or commercial and municipal customers through Webster’s Treasury Sales desk. Repurchase agreements with dealer counterparties have the right to pledge, transfer or hypothecate purchased securities during the term of the transaction.


NOTE 8: Federal Home Loan Bank Advances
Advances payable to the Federal Home Loan Bank are summarized as follows:
 
At March 31, 2013
 
At December 31, 2012
(Dollars in thousands)
Total
Outstanding
Weighted
Average Contractual Coupon Rate
 
Total
Outstanding
Weighted
Average Contractual Coupon Rate
Stated Maturity:
 
 
 
 
 
2013
$
1,450,000

0.26
%
 
$
1,425,000

0.34
%
2016
145,934

1.80

 
145,934

1.80

2017
500

5.66

 
500

5.66

2018-2032
306,050

1.25

 
256,093

1.29

 
1,902,484

0.54
%
 
1,827,527

0.59
%
Unamortized premiums
79

 
 
85

 
Total Federal Home Loan Bank advances
$
1,902,563

 
 
$
1,827,612

 
At March 31, 2013, Webster Bank had pledged loans with an aggregate carrying value of $4.1 billion as collateral for borrowings and had additional borrowing capacity from the FHLB of approximately $0.7 billion, as well as an unused line of credit of approximately $5.0 million. At December 31, 2012, Webster Bank had pledged loans with an aggregate carrying value of $3.7 billion as collateral for borrowings and had additional borrowing capacity from the FHLB of approximately $0.5 billion, as well as an unused line of credit of approximately $5.0 million. At March 31, 2013 and December 31, 2012, Webster Bank was in compliance with FHLB collateral requirements.


28
Table of Contents


NOTE 9: Long-Term Debt
Long-term debt consists of the following:
(Dollars in thousands)
Maturity Date
Stated Interest Rate
At March 31,
2013
 
At December 31,
2012
Senior fixed-rate notes
2014
5.125
%
$
150,000

 
$
150,000

Subordinated fixed-rate notes (a)
2013
5.875
%
—

 
102,579

Junior subordinated debt related to Webster Statutory Trust I, floating-rate notes (b)
2033
3.230
%
77,320

 
77,320

Total notes and subordinated debt
 
 
227,320

 
329,899

Unamortized discount, net
 
 
(75
)
 
(93
)
Hedge accounting adjustments
 
 
3,464

 
4,470

Total long-term debt
 
 
$
230,709

 
$
334,276

(a)
The Bank used cash on hand to pay off the subordinated fixed-rate notes which matured on January 15, 2013.
(b)
The interest rate on Webster Statutory Trust I floating-rate notes, which varies quarterly based on 3-month LIBOR plus 2.95%, was 3.230% at March 31, 2013 and 3.258% at December 31, 2012.

NOTE 10: Other Comprehensive Income
The following tables summarize the changes in accumulated other comprehensive (loss) income by component:
 
 
Three months ended March 31, 2013
(In thousands)
Derivative Instruments
Available For Sale and Transferred Securities
Defined Benefit Pension and Postretirement Benefit Plans
Total
Beginning balance
$
(27,902
)
$
42,741

$
(47,105
)
$
(32,266
)
Other comprehensive income (loss) before reclassifications
299

(1,482
)
484

(699
)
Amounts reclassified from accumulated other comprehensive income
1,642

(68
)
480

2,054

Net current-period other comprehensive income (loss), net of tax
1,941

(1,550
)
964

1,355

Ending balance
$
(25,961
)
$
41,191

$
(46,141
)
$
(30,911
)
 
 
Three months ended March 31, 2012
(In thousands)
Derivative Instruments
Available For Sale and Transferred Securities
Defined Benefit Pension and Postretirement Benefit Plans
Total
Beginning balance
$
(28,884
)
$
15,967

$
(47,287
)
$
(60,204
)
Other comprehensive income before reclassifications
93

11,658

346

12,097

Amounts reclassified from accumulated other comprehensive income
948

—

714

1,662

Net current-period other comprehensive income, net of tax
1,041

11,658

1,060

13,759

Ending balance
$
(27,843
)
$
27,625

$
(46,227
)
$
(46,445
)



29
Table of Contents

The following tables summarize the reclassifications out of accumulated other comprehensive (loss) income:
 
 
Three months ended March 31, 2013
Details About Accumulated Other Comprehensive (Loss) Income Components
Amount Reclassified From Accumulated Other Comprehensive Income (Loss)
Affected Line Item in the Condensed Consolidated Statements Of Income
(In thousands)
 
 
Derivative instruments:
 
 
Cash flow hedges
$
(2,558
)
Total interest expense
Tax benefit
916

Income tax expense
Net of tax
$
(1,642
)
 
Available for sale and transferred securities:
 
 
Unrealized gains and losses on available for sale securities
$
106

Net gain on sale of investment securities
Tax expense
(38
)
Income tax expense
Net of tax
$
68

 
Defined benefit pension and postretirement benefit plans:
 
 
Amortization of net loss
$
(729
)
Compensation and benefits
Prior service costs
(18
)
Compensation and benefits
Tax benefit
267

Income tax expense
Net of tax
$
(480
)
 
 
 
 
 
Three months ended March 31, 2012
Details About Accumulated Other Comprehensive (Loss) Income Components
Amount Reclassified From Accumulated Other Comprehensive Income (Loss)
Affected Line Item in the Condensed Consolidated Statements Of Income
(In thousands)
 
 
Derivative instruments:
 
 
Cash flow hedges
$
(1,476
)
Total interest expense
Tax benefit
528

Income tax expense
Net of tax
$
(948
)
 
Defined benefit pension and postretirement benefit plans:
 
 
Amortization of net loss
$
(1,095
)
Compensation and benefits
Prior service costs
(18
)
Compensation and benefits
Tax benefit
399

Income tax expense
Net of tax
$
(714
)
 
 
 
 


NOTE 11: Regulatory Matters
Regulatory Capital Requirements. Banks and bank holding companies are subject to various regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weighting and other factors.

30
Table of Contents

Quantitative measures established by regulations to ensure capital adequacy require the maintenance of minimum amounts and ratios (set forth in the following table) of Total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined in the regulations), and of Tier 1 capital to adjusted quarterly average assets (as defined in the regulations).
The Tier 1 and Total capital ratios are calculated by dividing the respective capital amounts by risk-weighted assets. Risk-weighted assets are calculated based on regulatory requirements and include total assets, excluding goodwill and other intangible assets, allocated by risk weight category, and certain off-balance sheet items (primarily loan commitments). The leverage ratio is calculated by dividing Tier 1 capital by adjusted quarterly average total assets, which exclude goodwill and other intangible assets.
The following tables provide information on the capital ratios for Webster Financial Corporation and Webster Bank:
 
Actual
Capital Requirements
Well Capitalized
(Dollars in thousands)
Amount
Ratio
Amount
Ratio
Amount
Ratio
At March 31, 2013
 
 
 
 
 
 
Webster Financial Corporation
 
 
 
 
 
 
Total risk-based capital
$
1,874,679

14.0
%
$
1,070,294

8.0
%
$
1,337,867

10.0
%
Tier 1 capital
1,706,145

12.8

535,147

4.0

802,720

6.0

Tier 1 leverage capital
1,706,145

8.8

778,503

4.0

973,129

5.0

Webster Bank, N.A.
 
 
 
 
 
 
Total risk-based capital
$
1,744,948

13.1
%
$
1,066,384

8.0
%
$
1,332,980

10.0
%
Tier 1 capital
1,578,247

11.8

533,192

4.0

799,788

6.0

Tier 1 leverage capital
1,578,247

8.1

776,984

4.0

971,230

5.0

At December 31, 2012
 
 
 
 
 
 
Webster Financial Corporation
 
 
 
 
 
 
Total risk-based capital
$
1,840,736

13.7
%
$
1,072,749

8.0
%
$
1,340,936

10.0
%
Tier 1 capital
1,672,009

12.5

536,375

4.0

804,562

6.0

Tier 1 leverage capital
1,672,009

8.7

767,289

4.0

959,111

5.0

Webster Bank, N.A.
 
 
 
 
 
 
Total risk-based capital
$
1,718,564

12.9
%
$
1,069,652

8.0
%
$
1,337,064

10.0
%
Tier 1 capital
1,551,238

11.6

534,826

4.0

802,239

6.0

Tier 1 leverage capital
1,551,238

8.1

766,025

4.0

957,532

5.0

Webster is subject to the regulatory capital requirements administered by the Federal Reserve, while Webster Bank is subject to the regulatory capital requirements administered by the Office of the Comptroller of the Currency ("OCC" ) and the Federal Deposit Insurance Corporation. Regulatory authorities can initiate certain mandatory actions if Webster or Webster Bank fails to meet minimum capital requirements, which could have a direct material effect on the Company’s financial statements.
Dividend Restrictions. In the ordinary course of business, Webster is dependent upon dividends from Webster Bank to provide funds for the payment of dividends to shareholders and to provide for other cash requirements. Banking regulations may limit the amount of dividends that may be paid. Approval by regulatory authorities is required if the effect of dividends declared would cause the regulatory capital of Webster Bank to fall below specified minimum levels, or if dividends declared exceed the net profits for that year combined with the retained net profits for the preceding two years. In addition, the OCC has the discretion to prohibit any otherwise permitted capital distribution on general safety and soundness grounds. Dividends paid by Webster Bank to the Company during the three months ended March 31, 2013 and 2012 totaled $20.0 million and $70.0 million, respectively.
Trust Preferred Securities. In accordance with the applicable accounting standard related to variable interest entities, the common stock of trusts which have issued trust preferred securities have not been consolidated. At March 31, 2013 and December 31, 2012, $75.0 million in trust preferred securities have been included in the Tier 1 capital of Webster Financial Corporation for regulatory reporting purposes pursuant to the Federal Reserve's capital adequacy guidelines. Certain provisions of the Basel III proposal will require the Company to exclude all trust preferred securities from the Company's Tier 1 capital. Excluding trust preferred securities from the Tier 1 capital at March 31, 2013 and December 31, 2012 would not affect the Company's ability to meet all capital adequacy requirements to which it is subject. Trust preferred securities will continue to be entitled to be treated as Tier 2 capital after they are phased out of Tier 1 capital.


31
Table of Contents

NOTE 12: Earnings Per Common Share
The calculation of basic and diluted earnings per common share follows:
 
Three months ended March 31
(In thousands, except per share data)
2013
2012
Earnings for basic and diluted earnings per common share:
 
 
Net income available to common shareholders
$
39,231

$
38,323

Less: Dividends to participating shares
(33
)
(21
)
Income allocated to participating shares
(118
)
(160
)
Net income allocated to common shareholders
$
39,080

$
38,142

 
 
 
Shares:
 
 
Weighted average common shares outstanding - basic
85,501

87,216

Effect of dilutive securities:
 
 
Stock options and restricted stock
247

294

Warrants - Series A1 and A2
3,781

4,145

Warrants - other
133

127

Weighted average common shares outstanding - diluted
89,662

91,782

 
 
 
Earnings per common share:
 
 
Basic
$
0.46

$
0.44

Diluted
$
0.44

$
0.42

Stock Options
Options to purchase 2.1 million and 2.0 million shares for the three months ended March 31, 2013 and 2012, respectively, were excluded from the calculation of diluted earnings per share because the options’ exercise prices were greater than the average market price of Webster's common stock for the respective periods.
Restricted Stock
Non-participating restricted stock awards of 262.3 thousand and 163.1 thousand for the three months ended March 31, 2013 and 2012, respectively, whose issuance is contingent upon the satisfaction of certain performance conditions, were deemed to be anti-dilutive and, therefore, are excluded from the calculation of diluted earnings per share for the respective periods.
Series A Preferred Stock
The Series A Preferred Stock at March 31, 2013 and 2012 represents potential issuable common stock of 1.1 million shares for each period. The weighted average effect of the potential issuable common stock associated with the Series A Preferred Stock was deemed to be anti-dilutive and, therefore, is excluded from the calculation of diluted earnings per share for the three months ended March 31, 2013 and 2012.
Warrants
Series A1 and A2: Series A1 and A2 warrants issued in connection with the Warburg investment represent an aggregate 8.6 million potential issuable shares of common stock while outstanding. On March 22, 2013, the Company issued 4,564,930 shares of its common stock to Warburg in exchange for all outstanding Series A1 and A2 warrants in a cashless exercise based on an exercise price of $11.50 per share. The weighted average dilutive effect of these warrants is included in the calculation of diluted earnings per share because the exercise price of the warrants was less than the average market price of Webster's common stock for the three months ended March 31, 2013 and 2012.
Other: Warrants initially issued to the U.S. Treasury and sold in a secondary public offering on June 8, 2011 represent 0.7 million potential issuable shares of common stock at both March 31, 2013 and 2012. The weighted average dilutive effect of these warrants is included in the calculation of diluted earnings per share because the exercise price of the warrants was less than the average market price of Webster’s common stock for the respective periods.


32
Table of Contents

NOTE 13: Derivative Financial Instruments
Risk Management Objective of Using Derivatives
Webster is exposed to certain risks arising from both its business operations and economic conditions. Webster principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. Webster manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of its debt funding and the use of derivative financial instruments. Specifically, Webster enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. Webster’s derivative financial instruments are used to manage differences in the amount, timing, and duration of Webster’s known or expected cash receipts and its known or expected cash payments principally related to its investments and borrowings.
Cash Flow Hedges of Interest Rate Risk
Webster’s primary objective in using interest rate derivatives is to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, Webster uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges are designed to manage the risk associated with a forecasted event or an uncertain variable rate cash flow.
Webster uses forward-settle interest rate swaps to protect the Company against adverse fluctuations in interest rates by reducing its exposure to variability in cash flows relating to interest payments on forecasted debt issuances. All forward-settle swaps are expected to be cash settled at debt issuance. The change in fair value of the forward-settle swaps is marked through OCI during the swap term. Upon termination, the OCI gain or loss at the time of debt issuance is amortized into interest expense over the life of the debt. The interest rate swap balance is recorded in OCI related to future-settle cash flow swaps was a net $0.4 million loss as of March 31, 2013.
Webster has two $25 million forward-settle interest rate swap hedges outstanding as of March 31, 2013, which qualify for cash flow hedge accounting. The swaps, entered into in July 2012, protect the Company against adverse fluctuations in interest rates by reducing exposure to variability in cash flows related to interest payments on forecasted issuance of five-year debt. Each swap will pay a fixed rate and receive 1-month LIBOR indexed floating rate, effective on July 2, 2013, and maturing on July 2, 2018. Cash settlement is expected to occur on the effective date and the forecasted five-year debt issuances are anticipated to occur before January 2, 2014.
The Company terminated two $25 million forward-settle interest rate swap hedge transactions, which qualified for cash flow hedge accounting during March 2013. The swap terminations were cash settled upon entering into two five-year FHLB advances effective March 28, 2013. The termination loss of $0.7 million is recorded in OCI and will be amortized into interest expense over the term of the advances maturing on March 28, 2018.
Previously terminated forward-settle swap losses are recorded in OCI and are amortized into earnings over the respective term of the associated issued debt instrument. At March 31, 2013, the remaining unamortized loss on the termination of cash flow hedges was $39.9 million. Over the next twelve months the Company will reclassify $9.0 million from OCI as an increase to interest expense. There was no hedge ineffectiveness for the three months ended March 31, 2013.
In addition, the Company has an accruing $100 million interest rate swap which became effective April 2010 and is designated as a cash flow hedge transaction against the risk of changes in cash flows related to the Company’s $100 million 3-month LIBOR indexed floating rate FHLB advance maturing April 29, 2013. The swap’s change in fair value is marked through OCI and a component of OCI is reclassified to interest expense on a quarterly basis. The balance in OCI related to this cash flow hedge is a $0.1 million loss as of March 31, 2013.
Amounts reported in OCI related to current cash flow derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. Over the next twelve months, the Company estimates that $0.4 million will be reclassified as an increase to interest expense.

33
Table of Contents

The table below presents the fair value of Webster’s derivative financial instruments designated as cash flow hedges as well as their classification in the accompanying Condensed Consolidated Balance Sheets at March 31, 2013 and December 31, 2012:
 
 
At March 31, 2013
 
At December 31, 2012
(Dollars in thousands)
Balance Sheet
Classification
# of
Instruments
Notional
Amount
Estimated
Fair
Value
 
# of
Instruments
Notional
Amount
Estimated
Fair
Value
Interest rate derivatives designated as cash flow hedges:
 
 
 
 
 
 
 
 
Interest rate swap on FHLB advances
Other liabilities
1
$
100,000

$
(118
)
 
1
$
100,000

$
(497
)
Forward settle interest rate swap on anticipated debt
Other liabilities
2
50,000

(369
)
 
4
100,000

(1,130
)
The net impact on interest expense related to cash flow hedges for the three months ended March 31, 2013, and 2012 is presented below:
 
Three months ended March 31,
 
2013
 
2012
(In thousands)
Interest
Expense

Deferred
Loss
(Gain)
Net
Impact
 
Interest
Expense

Deferred
Loss
(Gain)
Net
Impact
Impact reported as an increase or (reduction) in interest expense on borrowings
 
 
 
 
 
 
 
Interest rate swaps on FHLB advances
$
380

$
1,732

$
2,112

 
$
331

$
1,139

$
1,470

Interest rate swaps on subordinated debt
—

(3
)
(3
)
 
—

(27
)
(27
)
Interest rate swaps repurchase agreement
—

830

830

 
—

469

469

Interest rate swaps on Trust Preferred Securities
—

—

—

 
—

(45
)
(45
)
Net impact on interest expense on borrowings
$
380

$
2,559

$
2,939

 
$
331

$
1,536

$
1,867

Fair Value Hedges of Interest Rate Risk
Webster is exposed to changes in the fair value of certain of its fixed-rate obligations due to changes in benchmark interest rates. Webster uses interest rate swaps to manage its exposure to changes in fair value on these obligations attributable to changes in the benchmark interest rate. Interest rate swaps designated as fair value hedges involve the receipt of fixed-rate amounts from a counterparty in exchange for Webster making variable-rate payments over the life of the agreements without the exchange of the underlying notional amount. Webster did not have any derivative financial instruments designated as fair value hedges as of March 31, 2013 and December 31, 2012.
For derivatives designated and that qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk is recognized in interest expense. Webster includes the gain or loss from the period end mark to market (“MTM”) adjustments on the hedged items in the same line item as the offsetting loss or gain on the related derivatives. The impact of derivative net settlements, hedge ineffectiveness, basis amortization adjustments and amortization of deferred hedge terminations are also recognized in interest expense. At March 31, 2013, the remaining unamortized gain on the termination of fair value hedges was $3.5 million.
The net impact on interest expense related to fair value hedges for the three months ended March 31, 2013, and 2012 is presented in the table below:
 
Three months ended March 31,
 
2013
 
2012
(In thousands)
Interest
Income
MTM
Gain
Deferred
(Gain)
Loss
Net
Impact
 
Interest
Income
MTM
Gain
Deferred
(Gain)
Loss
Net
Impact
Impact reported as a (reduction) or increase in interest expense on borrowings
 
 
 
 
 
 
 
 
 
Interest rate swaps on senior notes
$
—

$
—

$
(799
)
$
(799
)
 
$
—

$
—

$
(799
)
$
(799
)
Interest rate swaps on subordinated debt
—

—

(207
)
(207
)
 
—

—

(787
)
(787
)
Interest rate swaps on FHLB advances
—

—

—

—

 
—

—

—

—

Net impact on interest expense on borrowings
$
—

$
—

$
(1,006
)
$
(1,006
)
 
$
—

$
—

$
(1,586
)
$
(1,586
)

34
Table of Contents

Non-Hedge Accounting Derivatives / Non-designated Hedges
Derivatives not designated as hedges for accounting are not speculative and are used to manage Webster’s exposure to interest rate movements and other identified risks but do not meet the hedge accounting requirements of ASC 815, “Derivatives and Hedging”. Changes in the fair value of these instruments are recorded as a component of non-interest income in the accompanying Condensed Consolidated Statements of Income.
At March 31, 2013 and December 31, 2012, Webster had the following outstanding interest rate swaps and caps that were not designated for hedge accounting:
 
 
 
At March 31, 2013
 
At December 31, 2012
(Dollars in thousands)
Balance Sheet
Classification
# of
Instruments
Notional
Amount
Estimated
Fair Value
 
# of
Instruments
Notional
Amount
Estimated
Fair Value
Webster with customer position:
 
 
 
 
 
 
 
 
Commercial loan interest rate swaps
Other assets
165

$
939,447

$
43,335

 
167

$
986,504

$
48,995

Commercial loan interest rate swaps
Other liabilities
4

59,170

(805
)
 
—

—

—

Commercial loan interest rate swaps with floors
Other assets
11

22,841

1,793

 
11

23,119

1,974

Commercial loan interest rate caps
Other liabilities
23

191,521

(130
)
 
23

193,946

(124
)
Total customer position
 
203

$
1,212,979

$
44,193

 
201

$
1,203,569

$
50,845

 
 
 
 
 
 
 
 
 
Webster with counterparty position:
 
 
 
 
 
 
 
 
Commercial loan interest rate swaps
Other liabilities
132

763,254

(35,423
)
 
146

862,972

(40,320
)
Commercial loan interest rate swaps
Other liabilities
30

235,305

2,135

 
14

123,475

419

Commercial loan interest rate swaps with floors
Other liabilities
11

22,841

(1,482
)
 
11

23,119

(1,645
)
Commercial loan interest rate caps
Other liabilities
23

191,521

130

 
23

193,946

125

Total counterparty position
 
196

$
1,212,921

$
(34,640
)
 
194

$
1,203,512

$
(41,421
)
Webster reported the changes in the fair value of non-hedge accounting derivatives as a component of other non-interest income in the accompanying Condensed Consolidated Statements of Income as follows:
 
Three months ended March 31,
 
2013
 
2012
(In thousands)
Interest
Income
MTM
(Loss)
Gain and Fees
Net
Impact
 
Interest
Income
MTM
(Loss)
Gain and Fees
Net
Impact
Impact reported in other non-interest income:
 
 
 
 
 
 
 
Visa swap
$
—

$
(25
)
$
(25
)
 
$
—

$
(452
)
$
(452
)
Commercial loan interest rate derivatives, net
469

208

677

 
315

779

1,094

Fed funds futures contracts
—

52

52

 
—

156

156

Net impact on other non-interest income
$
469

$
235

$
704

 
$
315

$
483

$
798

Offsetting Derivatives
Webster has entered into transactions with its counterparties that are subject to an enforceable master netting agreement. In accordance with ASC 815, “Derivatives and Hedging”, and the recently adopted ASU 2013-01, the Company recognized those financial instruments subject to master netting agreements or similar agreements.

35
Table of Contents

The table below presents the offsetting of financial assets and derivatives assets in the accompanying Condensed Consolidated Balance Sheets as of March 31, 2013 and December 31, 2012 with the following counterparties:
 
At March 31, 2013
 
 
 
Hedge Accounting Positions (1)
 
Non-Hedge Accounting Positions
 
 
 
 
(In thousands)
Notional Outstanding
 
  Gain
  Loss
 
  Gain
 Loss
Net Position (2)
 
Total Gain (Loss)
Cash Collateral
Net Exposure (3)
Counterparty:
 
 
 
 
 
 
 
 
 
 
 
 
Dealer A
$
514,810

 
$
—

$
(263
)
 
$
907

$
(14,797
)
$
(13,890
)
 
$
(14,153
)
$
15,400

$
1,247

Dealer B
370,345

 
—

(224
)
 
585

(13,629
)
(13,044
)
 
(13,268
)
13,600

332

Dealer C
15,038

 
—

—

 
1

(1,870
)
(1,869
)
 
(1,869
)
—

—

Dealer D
208,004

 
—

—

 
340

(2,107
)
(1,767
)
 
(1,767
)
2,100

333

Dealer E
254,725

 
—

—

 
431

(4,501
)
(4,070
)
 
(4,070
)
4,400

330

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
$
1,362,922

 
$
—

$
(487
)
 
$
2,264

$
(36,904
)
$
(34,640
)
 
$
(35,127
)
$
35,500

 
 
At December 31, 2012
 
 
 
Hedge Accounting Positions (1)
 
Non-Hedge Accounting Positions
 
 
 
 
(In thousands)
Notional Outstanding
 
  Gain
  Loss
 
  Gain
 Loss
Net Position (2)
 
Total Gain (Loss)
Cash Collateral
Net Exposure (3)
Counterparty:
 
 
 
 
 
 
 
 
 
 
 
 
Dealer A
$
561,716

 
$
—

$
(985
)
 
$
199

$
(16,721
)
$
(16,522
)
 
$
(17,507
)
$
17,900

$
393

Dealer B
403,097

 
—

(642
)
 
139

(15,281
)
(15,142
)
 
(15,784
)
16,980

1,196

Dealer C
15,221

 
—

—

 
1

(2,038
)
(2,037
)
 
(2,037
)
—

—

Dealer D
184,648

 
—

—

 
53

(2,506
)
(2,453
)
 
(2,453
)
2,600

147

Dealer E
238,830

 
—

—

 
152

(5,419
)
(5,267
)
 
(5,267
)
5,290

23

 
 
 
 
 
 
 
 
 
 
 
 
 
Total
$
1,403,512

 
$
—

$
(1,627
)
 
$
544

$
(41,965
)
$
(41,421
)
 
$
(43,048
)
$
42,770

 
(1) Hedge accounting positions are recorded on a gross basis in other assets (liabilities)
(2) Net gain (loss) position recorded in other assets (liabilities)
(3) Net exposure is calculated by dealer. The net positive exposure represents an over collateralized loss positions.
Counterparty Credit Risk. Derivative contracts involve the risk of dealing with both bank customers and institutional derivative counterparties and their ability to meet contractual terms. The Company has master International Swap Derivative Association ("ISDA") agreements with all derivative counterparties. Additionally, the Company has executed a Credit Support Annex ("CSA") to the master agreement with each of its institutional derivative counterparties. The ISDA master agreements provide that on each payment date all amounts otherwise owing the same currency under the same transaction are netted so that only a single amount is owed in that currency. The ISDA master agreements also provide, if the parties so elect, for such netting of amounts in the same currency among all transactions identified as being subject to such election that have common payment dates and booking offices. Under the CSA daily net exposure in excess of our negotiated threshold is secured by posted collateral. The Company has adopted a zero threshold with the majority of its approved financial institution counterparties. In accordance with Webster policies, institutional counterparties must be analyzed and approved through the Company’s credit approval process. The Company’s credit exposure on interest rate swaps is limited to the net favorable value and interest payments of all swaps by each of the counterparties for the amounts up to the established threshold for collateralization. Credit exposure may be reduced by the amount of collateral pledged by the counterparty. The Company’s credit exposure related to derivatives with approved financial institutions is zero as the positions each had a net unfavorable market value. In accordance with our CSA Agreements, approximately $35.5 million of collateral was pledged to those counterparties at March 31, 2013. Collateral levels for approved financial institution counterparties are monitored on a daily basis and adjusted as necessary. In the event of default, should the collateral not be returned, the exposure would be offset by terminating the transactions.
The Company evaluates the credit risk of its counterparties, taking into account such factors as the likelihood of default, its net exposures, and remaining contractual life, among other things, in determining if any adjustments related to credit risk are required. The Company's net current credit exposure relating to interest rate swaps with Webster Bank customers was $45.1 million at March 31, 2013. In addition, the Company monitors potential future exposure, representing our best estimate of exposure to

36
Table of Contents

remaining contractual maturity. The potential future exposure relating to interest rate swaps with Webster Bank customers totaled $8.9 million at March 31, 2013. The credit exposure is mitigated as transactions with customers are secured by the collateral securing the underlying transaction being hedged. No losses on derivative instruments have occurred as a result of counterparty nonperformance.
Futures Contracts. On March 30, 2010, to hedge against a rise in short-term rates over the next twelve months, Webster entered into a $600 million short-selling of a one year strip of Fed funds future contracts with serial maturities between May 2010 and April 2011. Throughout 2010 and into 2013, Webster continued to roll the futures contracts but reduced the notional amount to $400 million beginning with the September 2011 contracts. Beginning in March 2013, the notional amounts were increased to $800 million. This transaction is designed to work in conjunction with floating rate assets with interest rate floors which will not be affected if there is an increase in short-term interest rates. The fair value of the contracts is a gain of $29 thousand and is reflected as other assets in the accompanying Condensed Consolidated Balance Sheets and the related income impact as non-interest income in the accompanying Condensed Consolidated Statements of Income. During the three months ended March 31, 2013 and 2012, the Company recognized $52 thousand and $156 thousand in mark to market gains, respectively.
Mortgage Banking Derivatives. Certain derivative instruments, primarily forward sales of mortgage loans and MBS are utilized by Webster in its efforts to manage risk of loss associated with its mortgage loan commitments and mortgage loans held for sale. Prior to closing and funding certain single-family residential mortgage loans, an interest rate lock commitment is generally extended to the borrower. During the period from commitment date to closing date, Webster is subject to the risk that market rates of interest may change. If market rates rise, investors generally will pay less to purchase such loans resulting in a reduction in the gain on sale of the loans or, possibly, a loss. In an effort to mitigate such risk, forward delivery sales commitments, under which Webster agrees to deliver whole mortgage loans to various investors or issue MBS, are established. At March 31, 2013, outstanding rate locks totaled approximately $152.7 million and the outstanding commitments to sell residential mortgage loans totaled approximately $212.4 million. Forward sales, which include mandatory forward commitments of approximately $201.4 million at March 31, 2013, establish the price to be received upon the sale of the related mortgage loan, thereby mitigating certain interest rate risk. There is, however, still certain execution risk specifically related to Webster’s ability to close and deliver to its investors the mortgage loans it has committed to sell. The interest rate locked loan commitments and forward sales commitments are recorded at fair value, with changes in fair value recorded as non-interest income in the accompanying Condensed Consolidated Statements of Income. As of March 31, 2013 and December 31, 2012, the fair value of interest rate locked loan commitments and forward sales commitments totaled $2.9 million and were recorded as a component of other assets in the accompanying Condensed Consolidated Balance Sheets.
Foreign Currency Derivatives. The Company enters into foreign currency forward contracts that are not designated as hedging instruments, primarily to accommodate the business needs of its customers. Upon the origination of a foreign currency forward contract with a customer, the Company simultaneously enters into an offsetting contract with a third party to negate the exposure to fluctuations in foreign currency exchange rates. The notional amounts and fair values of open foreign currency forward contracts were not material at March 31, 2013 and December 31, 2012.


NOTE 14: Fair Value Measurements
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined using quoted market prices. However, in many instances, quoted market prices are not available. In such instances, fair values are determined using various valuation techniques. Various assumptions and observable inputs must be relied upon in applying these techniques. Accordingly, the fair value estimates may not be realized in an immediate transfer of the respective asset or liability.
Fair Value Hierarchy
The three levels within the fair value hierarchy are as follows:
•
Level 1: Valuation is based upon unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
•
Level 2: Fair value is calculated using inputs other than quoted market prices that are directly or indirectly observable for the asset or liability. The valuation may rely on quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in inactive markets, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit ratings, etc.) or inputs that are derived principally or corroborated by market data by correlation or other means.
•
Level 3: Inputs for determining the fair value of the respective assets or liabilities are not observable. Level 3 valuations are reliant upon pricing models and techniques that require significant management judgment or estimation.

37
Table of Contents

Categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Securities
When quoted prices are available in an active market, the Company classifies securities within Level 1 of the valuation hierarchy. Level 1 securities include equity securities in financial institutions and U.S. Treasury Bills.
If quoted market prices are not available, the Company employs an independent pricing service that utilizes matrix pricing to calculate fair value. Such fair value measurements consider observable data such as dealer quotes, market spreads, cash flows, yield curves, live trading levels, trade execution data, market consensus prepayments speeds, credit information, and respective terms and conditions for debt instruments. The Company employs procedures to monitor the pricing service's assumptions and establishes processes to challenge the pricing service's valuations that appear unusual or unexpected. Level 2 securities include agency CMOs, corporate debt, single-issuer trust preferred securities, agency mortgage-backed securities, commercial mortgage backed securities and auction rate preferred securities.
When a market is illiquid or there is a lack of transparency around the inputs to valuation, the securities are classified as Level 3 and reliance is placed upon internally developed models, and management judgment and evaluation for valuation. The Company has investments in CLOs for which independent vendor pricing is not available. Multiple dealer price indications are obtained and averaged to calculate fair value. Accordingly, CLO investments are currently classified as Level 3.
Pooled trust preferred securities are currently classified as Level 3. Due to the continued inactive market and illiquid nature of pooled trust preferred securities in the entire capital structure, an internal cash flow model is used to value these securities on a quarterly basis. The Company employs an internal CDO model for projection of future cash flows and discounting those cash flows to a net present value. Each underlying issuer in the pool is rated internally using the latest financial data on each institution, and future deferrals, defaults and losses are then estimated on the basis of continued stress in the financial markets. Further, all current and projected deferrals are not assumed to cure, and all current and projected defaults are assumed to have no recovery value. The resulting net cash flows are then discounted at current market levels for similar types of products that are actively trading.
Investments in Private Equity Funds
The Company generally accounts for its percentage ownership of investments in private equity funds at cost, subject to impairment testing, while certain funds are included at fair value based upon the net asset value of the respective fund. At March 31, 2013, investments in private equity funds consisted of $1.3 million recorded at fair value and $10.0 million recorded at cost. These are private investments that cannot be redeemed since the Company’s investment is distributed as the underlying investments are liquidated, which generally takes 10 years. There are currently no plans to sell any of these investments prior to their liquidation. The investments in private equity funds included at fair value are classified within Level 3 of the fair value hierarchy. The investments in private equity funds that are carried at cost are considered to be measured at fair value on a non-recurring basis when there is impairment. The Company has $1.5 million in unfunded commitments remaining for its investments in private equity funds as of March 31, 2013.
Investments Held in Rabbi Trust
The investments held in a Rabbi Trust primarily include mutual funds that invest in equity and fixed income securities. Shares of mutual funds are valued based on net asset value, which represents quoted market prices for the underlying shares held in the mutual fund. Therefore, investments held in the Rabbi Trust are classified within Level 1 of the fair value hierarchy. The Company has elected to measure the investments in the Rabbi Trust at fair value. The Company consolidates the invested assets of the trust along with the total deferred compensation obligations and includes them in other assets and other liabilities, respectively, in the accompanying Consolidated Balance Sheets. Earnings in the Rabbi Trust, including appreciation or depreciation, are reflected as other non-interest income and changes in the corresponding liability are reflected as compensation and benefits in the accompanying Condensed Consolidated Statements of Income. The cost basis of the investments held in the Rabbi Trust is $5.1 million as of March 31, 2013.
Derivative Instruments
Derivative instruments are valued using third party valuation tools which consider the present value of cash flows discounted using observable forward rate assumptions. The resulting fair values are validated against valuations performed by independent third parties and are classified within Level 2 of the fair value hierarchy. Fed funds futures contracts are valued based on unadjusted quoted prices in active markets and are classified within Level 1 of the fair value hierarchy. In determining if any fair value adjustments related to credit risk are required, the Company evaluates the credit risk of its counterparties by considering factors such as the likelihood of default by the Company and its counterparties, its net exposures, the remaining contractual life, as well

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Table of Contents

as the amount of collateral securing the position. The Company reviews its counterparty exposure on a regular basis, and, when necessary, appropriate business actions are taken to adjust the exposure. When determining fair value, the Company applies the portfolio exception with respect to measuring counterparty credit risk for all of its derivative transactions subject to a master netting arrangement. To date, the Company has not realized any losses due to a counterparty's inability to pay any net uncollateralized position. The change in value of derivative assets and liabilities attributable to credit risk was not significant during the reported periods.
Mortgage Banking Derivatives
Mortgage-backed securities are utilized by Webster in its efforts to manage risk of loss associated with its mortgage loan commitments and mortgage loans held for sale. Prior to closing and funding certain single-family residential mortgage loans, an interest rate lock commitment is generally extended to the borrower. During the period from commitment date to closing date, Webster is subject to the risk that market rates of interest may change. If market rates rise, investors generally will pay less to purchase such loans resulting in a reduction in the gain on sale of the loans or, possibly, a loss. In an effort to mitigate such risk, forward delivery sales commitments, under which Webster agrees to deliver whole mortgage loans to various investors or issue MBS, are established.

A summary of fair values for assets and liabilities measured at fair value on a recurring basis is as follows:
 
At March 31, 2013
(In thousands)
Carrying
Balance
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable  Inputs
(Level 2)
Significant
Unobservable  Inputs
(Level 3)
Financial assets held at fair value:
 
 
 
 
Available for sale securities:
 
 
 
 
Agency CMOs
$
1,154,879

$
—

$
1,154,879

$
—

Agency MBS
1,284,147

—

1,284,147

—

CMBS
427,683

—

427,683

—

CLOs
248,844

—

—

248,844

Pooled trust preferred securities
30,470

—

—

30,470

Single issuer trust preferred securities
46,052

—

46,052

—

Corporate debt
117,122

—

117,122

—

Equity securities
9,041

8,766

275

—

Total available for sale securities
3,318,238

8,766

3,030,158

279,314

Derivative instruments:
 
 
 
 
Interest rate swaps
45,128

—

45,128

—

Fed Fund futures contracts
29

29

—

—

Mortgage banking derivatives
2,863

—

2,863

—

Investments held in Rabbi Trust
5,657

5,657

—

—

Investments in private equity funds
1,268

—

—

1,268

Total financial assets held at fair value
$
3,373,183

$
14,452

$
3,078,149

$
280,582

Financial liabilities held at fair value:
 
 
 
 
Derivative instruments:
 
 
 
 
Interest rate swaps
$
36,062

$
—

$
36,062

$
—

Visa swap
4

—

4

—

Total financial liabilities held at fair value
$
36,066

$
—

$
36,066

$
—

 

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Table of Contents

 
At December 31, 2012
(In thousands)
Carrying
Balance
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable  Inputs
(Level 2)
Significant
Unobservable  Inputs
(Level 3)
Financial assets held at fair value:
 
 
 
 
Available for sale securities:
 
 
 
 
U.S. Treasury Bills
$
200

$
200

$
—

$
—

Agency CMOs
1,310,006

—

1,310,006

—

Agency MBS
1,142,280

—

1,142,280

—

CMBS
398,031

—

398,031

—

CLOs
88,540

—

—

88,540

Pooled trust preferred securities
26,207

—

—

26,207

Single issuer trust preferred securities
44,415

—

44,415

—

Corporate debt
118,199

—

118,199

—

Equity securities
8,282

8,082

200

—

Total available for sale securities
3,136,160

8,282

3,013,131

114,747

Derivative instruments:
 
 
 
 
Interest rate swaps
50,969

—

50,969

—

Mortgage banking derivatives
2,898

—

2,898

—

Investments held in Rabbi Trust
5,741

5,741

—

—

Investments in private equity funds
1,533

—

—

1,533

Total financial assets held at fair value
$
3,197,301

$
14,023

$
3,066,998

$
116,280

Financial liabilities held at fair value:
 
 
 
 
Derivative instruments:
 
 
 
 
Interest rate swaps
$
43,172

$
—

$
43,172

$
—

Fed Fund futures contracts
125

125

—

—

Visa swap
4

—

4

—

Total financial liabilities held at fair value
$
43,301

$
125

$
43,176

$
—


The following table presents the changes in Level 3 assets and liabilities that are measured at fair value on a recurring basis.
 
Three months ended March 31,
(In thousands)
2013
2012
Level 3, beginning of period
$
116,280

$
32,814

Transfers out of Level 3 (1)
—

(975
)
Change in unrealized loss included in other comprehensive income
5,357

1,126

Unrealized loss included in net income
(265
)
(720
)
Purchases/capital calls
159,303

126

Accretion/amortization
42

(6
)
Calls/paydowns
(135
)
(303
)
Level 3, end of period
$
280,582

$
32,062


(1)
As of January 1, 2012, auction rate preferred securities were transferred from Level 3 to Level 2. These securities are considered to be Level 2 based upon observable market activity at full par value for recent transactions.

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Table of Contents

The following table presents information about quantitative inputs and assumptions for items categorized in Level 3 of the fair value hierarchy: 
 
At March 31, 2013
(In thousands)
Fair Value
Valuation
Technique
Unobservable
Input
Range
(Weighted Average)
Pooled trust preferred securities
$
30,470

Discounted cash flow
Discount rate
5.9 - 9.5%
(8.56%)
 
 
 
Credit spread
292-654 bps (557 bps)
CLOs
$
248,844

Average broker quotes
Bid price
99.7 - 102.2
(100.2)
Discount rates are derived for each security depending on the original rating or a notched down rating based on management's judgment. The discount represents a market rate used to discount expected cash flows to determine the fair value of the security. Components of the calculated discount rate are the twelve month rolling average of published industry credit spreads and the 30 year swap rate. When discount rates increase as a result of an increase in rate or credit spread, there is a direct inverse correlation with fair value; as discount rates increase, fair value decreases. An increase in credit spreads correlates to an increase in discount rate and, therefore, a decrease in fair value.
Pooled trust preferred security issuer financials are reviewed on a quarterly basis and an internal credit rating (“shadow rating”) is updated for individual issuers in the model. The shadow rating is correlated to a Moody’s loss table to determine the loss impact on expected cash flows. There is a direct relationship between shadow rating and fair value; as shadow ratings decline the loss probability increases, expected cash flows decline and, therefore, fair value decreases. There may be instances when a one notch downgrade in credit ratings may not significantly impact the fair value of securities depending on the amount of collateral in the deal that is already rated “D” for which Webster Bank assumes 100% loss.
CLOs are valued using multiple dealer price indications which are reflective of market activity. The fair value of our CLOs is inversely related to the market spreads. Increases in market spreads would decrease the fair value of our CLOs while decreases in the market spreads would increase our fair value.
Assets Measured at Fair Value on a Non-Recurring Basis
Certain assets are measured at fair value on a non-recurring basis; that is, the assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). The following is a description of valuation methodologies used for assets measured on a non-recurring basis.
Impaired Loans
Impaired loans for which repayment of the loan is expected to be provided solely by the value of the underlying collateral are considered collateral dependent and are valued based on the estimated fair value of such collateral using Level 3 inputs based on customized discounting criteria.
Loans Held for Sale
Loans held for sale are accounted for at the lower of cost or market and are considered to be recognized at fair value when they are recorded at below cost. The fair value of loans held for sale is based on quoted market prices of similar loans sold in conjunction with securitization transactions, adjusted as required for changes in loan characteristics and are classified within Level 3 of the fair value hierarchy.
Other Real Estate Owned (OREO) and Repossessed Assets
The total book value of OREO and repossessed assets is $4.5 million as of March 31, 2013. OREO and repossessed assets are accounted for at the lower of cost or market and are considered to be recognized at fair value when they are recorded at below cost. The fair value of OREO is based on independent appraisals or internal valuation methods, less estimated selling costs. The fair value of repossessed assets is based on available pricing guides, auction results and price opinions, less estimated selling costs. Certain assets require assumptions about factors that are not observable in an active market in the determination of fair value and are classified as Level 3.
Mortgage Servicing Assets
The Company accounts for mortgage servicing assets at cost, subject to impairment testing. When the carrying cost exceeds fair value, a valuation allowance is established to reduce the carrying cost to fair value. Fair value is calculated as the present value of estimated future net servicing income and relies on market based assumptions for loan prepayment speeds, servicing costs, discount rates, and other economic factors. As such, mortgage servicing assets are classified within Level 3 of the fair value hierarchy.

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Table of Contents

The table below presents the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a non-recurring basis at March 31, 2013:
(Dollars in thousands)
 
 
 
 
Asset
Fair Value
Valuation Methodology
Unobservable Inputs
Range of Inputs
Impaired Loans
$
38,241

Real Estate Appraisals
Discount for dated appraisal
0% - 20%
 
 
 
Discount for costs to sell
3.0% - 8.0%
Other Real Estate
$
2,270

Appraisals
Discount for costs to sell
8%
 
 
 
Discount for appraisal type
20% - 50%
Mortgage Servicing Rights
$
18,599

Discounted cash flow
Constant prepayment rate
6.4% - 26.6%
 
 
 
Discount Rates
3.9% - 5.9%
Assets and Liabilities Disclosed at Fair Value
The Company is required to disclose estimated fair value of financial instruments, both assets and liabilities, for which it is practicable to estimate fair value and the following is a description of valuation methodologies used for those assets and liabilities.
Cash, Due from Banks, and Interest-bearing Deposits
The carrying amount of cash, due from banks, and interest-bearing deposits is used to approximate fair value, given the short time frame to maturity and as such assets do not present unanticipated credit concerns. Cash, due from banks, and interest-bearing deposits are classified within Level 1 of the fair value hierarchy.
Loans and Lease Receivables
The estimated fair value of loans and leases held for investment are calculated using a discounted cash flow analysis, using future prepayments and market interest rates for comparable loans. The associated cash flows are adjusted for credit and other potential losses. Fair value for impaired loans is estimated using the net present value of the expected cash flows or the fair value of the underlying collateral if repayment is collateral dependent. Loans and lease receivables are classified within Level 3 of the fair value hierarchy.
Deposit Liabilities
The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. Deposit liabilities are classified within Level 2 of the fair value hierarchy.
Securities Sold Under Agreements to Repurchase and Other Short-Term Borrowings
Carrying value is an estimate of fair value for those securities sold under agreements to repurchase and other short-term borrowings that mature within 90 days. The fair values of all other short-term borrowings are estimated using discounted cash flow analyses based on current market rates adjusted, as appropriate, for associated credit risks. Securities sold under agreements to repurchase and other short-term borrowings are classified within Level 2 of the fair value hierarchy.
Federal Home Loan Bank Advances and Other Long-Term Debt
The fair value of long-term debt is estimated using a discounted cash flow technique. Discount rates are matched with the time period of the expected cash flow and are adjusted, as appropriate, to reflect credit risk. Long-term debt and Federal Home Loan Bank advances are classified within Level 2 of the fair value hierarchy.

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Table of Contents

A summary of estimated fair values of significant financial instruments consisted of the following:
 
At March 31, 2013
(In thousands)
Carrying
Balance
Quoted Prices in
Active  Markets for
Identical Assets
(Level 1)
Significant Other
Observable  Inputs
(Level 2)
Significant
Unobservable  Inputs
(Level 3)
Assets
 
 
 
 
Securities available for sale
$
3,318,238

$
8,766

$
3,030,158

$
279,314

Securities held-to-maturity
3,111,169

—

3,242,051

—

Loans held for sale
96,706

—

—

96,706

Loans, net
11,834,192

—

—

11,978,934

Mortgage servicing assets (a)
16,779

—

—

18,599

Investments in private equity funds
11,315

—

—

11,315

Derivative instruments
48,020

29

47,991

—

Investments held in Rabbi Trust
5,657

5,657

—

—

Liabilities
 
 
 
 
Deposits other than time deposits
12,187,033

—

12,187,033

—

Time deposits
2,436,849

—

2,470,668

—

Securities sold under agreements to repurchase and other short-term borrowings
1,033,767

—

1,083,104

—

Federal Home Loan Bank advances (b)
1,902,563

—

1,920,253

—

Long-term debt (c)
230,709

—

223,789

—

Derivative instruments
36,066

—

36,066

—


 
At December 31, 2012
(In thousands)
Carrying
Balance
Quoted Prices in
Active  Markets for
Identical Assets
(Level 1)
Significant Other
Observable  Inputs
(Level 2)
Significant
Unobservable  Inputs
(Level 3)
Assets
 
 
 
 
Securities available for sale
$
3,136,160

$
8,282

$
3,013,131

$
114,747

Securities held-to-maturity
3,107,529

—

3,264,718

—

Loans held for sale
107,633

—

—

107,633

Loans, net
11,851,567

—

—

12,005,555

Mortgage servicing assets (a)
14,027

—

—

15,881

Investments in private equity funds
11,623

—

—

11,623

Derivative instruments
50,969

—

50,969

—

Investments held in Rabbi Trust
5,741

5,741

—

—

Liabilities
 
 
 
 
Deposits other than time deposits
11,985,683

—

11,985,683

—

Time deposits
2,545,152

—

2,584,921

—

Securities sold under agreements to repurchase and other short-term borrowings
1,076,160

—

1,134,614

—

Federal Home Loan Bank advances (b)
1,827,612

—

1,843,615

—

Long-term debt (c)
334,276

—

298,807

—

Derivative instruments
43,301

125

43,176

—


(a)
The carrying amount of mortgage servicing assets is net of $0.8 million and $1.8 million reserves at March 31, 2013 and December 31, 2012, respectively. The estimated fair value does not include such adjustments.
(b)
The carrying amount of FHLB advances is net of $79 thousand and $85 thousand in unamortized premiums at March 31, 2013 and December 31, 2012, respectively. The estimated fair value does not include such adjustments.
(c)
The carrying amount of long-term debt is net of $3.4 million and $4.4 million in hedge accounting adjustments and discounts at March 31, 2013 and December 31, 2012, respectively. The estimated fair value does not include such adjustments.

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Table of Contents

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the entire holdings or any part of a particular financial instrument. Because no active market exists for a significant portion of Webster’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These factors are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

NOTE 15: Pension and Other Postretirement Benefits
 
The following table provides the components of net periodic benefit cost for the three months ended March 31,
  
Webster Pension
Webster SERP
Other Benefits
(In thousands)
2013
2012
2013
2012
2013
2012
Net Periodic Benefit Cost Recognized in Net Income:
 
 
 
 
 
 
Service cost (benefits earned during the period)
$
10

$
44

$
—

$
—

$
—

$
—

Interest cost on benefit obligations
1,812

1,815

74

80

30

44

Expected return on plan assets
(2,775
)
(2,521
)
—

—

—

—

Amortization of prior service cost
—

—

—

—

18

18

Recognized net loss
1,540

1,587

31

20

7

26

Net periodic benefit cost recognized in net income
$
587

$
925

$
105

$
100

$
55

$
88

The Webster Bank Pension Plan and the supplemental pension plans were frozen effective December 31, 2007. No additional benefits have been accrued since that time. Additional contributions to the Webster Bank Pension Plan will be made as deemed appropriate by management in conjunction with information provided by the Plan’s actuaries.
The Bank is also a sponsor of a multiple-employer plan, EIN/Pension Plan Number 13-5645888/333 (the "Fund”), administered by Pentegra for the benefit of former employees of a bank acquired by Webster. The Fund does not segregate the assets or liabilities of its participating employers in the ongoing administration of this plan. All benefit accruals were frozen as of September 1, 2004.
According to the Fund’s administrators, as of July 1, 2012, the date of the latest actuarial valuation, Webster’s portion of the plan was underfunded by $1.0 million. Webster made $0.2 million and $0.4 million in contributions for the three months ended March 31, 2013 and 2012, respectively.
Webster's portion of the plan was underfunded by $5.9 million as of July 1, 2011. The decrease in the underfunded liability is due to the adoption of the Moving Ahead for Progress in the 21 Century Act ("MAP-21") which was enacted on July 6, 2012. MAP-21 provides for higher interest rates for 2012 and the following two or three years for calculating the Fund's liability.


NOTE 16: Stock-Based Compensation Plans
Webster has established stock-based compensation plans that cover employees and directors, and a non-employee director compensation plan (collectively, the “Plans”). Compensation cost related to the Plans, based on the grant-date fair value, is included as a component of compensation and benefits reflected in non-interest expense, on a straight-line basis over the requisite service period of such awards, net of estimated forfeitures. The costs of an award to retirement eligible employees is recognized immediately, however, the award is subject to a one year minimum hold before vesting. Stock-based compensation expense recognized in the accompanying Condensed Consolidated Statements of Income was $2.5 million and $1.7 million, consisting of (1) stock options expense of $0.8 million and $0.2 million and (2) restricted stock expense of $1.7 million and $1.5 million for the three months ended March 31, 2013 and 2012, respectively.

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Table of Contents

Stock Options
The fair value of each option award is estimated on the date of grant using the Black-Scholes Option-Pricing Model with the following weighted-average assumptions:

 
2013
2012
Weighted-average assumptions:
 
 
Expected term
6.9 years

6.6 years

Expected dividend yield
1.80
%
1.00
%
Expected forfeiture rate
10.00
%
9.00
%
Expected volatility
58.97
%
61.03
%
Risk-free interest rate
1.36
%
1.30
%
Fair value of option at grant date
$10.96
$11.71

The following table provides a summary of stock option activity, under the plans, for the three months ended March 31, 2013:
 
 
Number of
Shares
Weighted-Average
Exercise Price
Options outstanding, at beginning of year
2,476,645

$
28.99

Options granted
436,043

23.00

Options exercised
—

—

Options forfeited or expired
6,435

28.20

Options outstanding, at end of year
2,906,253

$
28.10

Options exercisable, at end of year
2,200,487

$
29.73

Options expected to vest, at end of year
612,741

$
22.97

At March 31, 2013, total options outstanding included 2,630,543 non-qualified and 275,710 incentive stock options.
Restricted Stock
The Company grants both time-based and performance-based restricted stock awards. The performance-based awards vest after three years in a range from zero to 200% of the target number of shares under the grant. On February 20, 2013, the Company granted 163,519 performance shares of which 50% are dependent upon Webster's ranking for total shareholder return versus the peer group companies of the KBW Regional Banking Index ("KRX") and the remaining 50% are dependent upon Webster's return on equity over the three year vesting period. The KRX peer group companies are utilized because they represent the mix of size and type of financial institutions that best compare with Webster. Webster records compensation expense over the vesting period, based on a fair value calculated using the Monte-Carlo simulation model which allows for the incorporation of the performance condition for the 50% of the performance shares tied to total shareholder return verses the KRX, and based on the fair value calculated on the date of grant, adjusted for management's assessment for meeting the ROE performance condition, of the remaining 50% of performance shares tied to Webster's return on equity.
As of March 31, 2013, there was $14.3 million of unrecognized compensation cost related to non-vested restricted stock awards. That cost is expected to be recognized over a remaining weighted-average vesting period of 2.2 years.

45
Table of Contents

The following tables summarize restricted stock activity under the plans, for the three months ended March 31, 2013:
 
Time - Based
 
Performance - Based
 
Number of
Shares
Weighted-average
Grant Date
Fair Value
 
Number of
Shares
Weighted-average
Grant Date
Fair Value
Restricted stock, at beginning of period
249,294

$
22.12

 
94,407

$
25.44

Granted
177,609

22.53

 
163,519

24.04

Vested (1)
46,443

22.14

 
15,871

18.37

Forfeited/Modified
7,213

22.09

 
1,519

25.47

Restricted stock, at end of period
373,247

$
22.31

 
240,536

$
24.52


 
Time-Based
 
Number of Units
Weighted- average Grant Date Fair Value
Restricted units, at beginning of period
33,742

$
22.12

Vested (1)
6,858

22.17

Restricted units, at end of period
26,884

$
22.11

(1) Shares vested for purposes of recording compensation expense. Shares legally vest after a period of 1-5 years.


NOTE 17: Business Segments
Webster’s operations are divided into three reportable business segments that represent its core businesses – Commercial Banking, Community Banking and Other. Community Banking includes operating segments, Personal Bank and Business Banking and Other includes HSA Bank and Private Banking. These segments reflect how executive management responsibilities are assigned by the chief operating decision maker for each of the core businesses, the products and services provided and the type of customer served, and reflect how discrete financial information is currently evaluated. The Company’s Treasury unit and consumer liquidating portfolio are included in the Corporate and Reconciling category along with the amounts required to reconcile profitability metrics to GAAP reported amounts.

At December 31, 2012, Webster's operations were divided into four reportable segments that represented its core business - Commercial Banking, Retail Banking, Consumer Finance and Other. In the first quarter 2013, the Company combined the Retail and Consumer Finance segments and realigned the reporting of the management of its small business and consumer related businesses. Beginning in 2013, some business and mass-market consumer business units have been consolidated under the president and chief operating officer. This change results in a new reportable segment, "Community Banking", which comprises several similar operating segments. Community Banking includes the Personal Bank (Consumer Finance, Consumer Deposits, Webster Investment Services, the Customer Care Center, eBanking, our ATM network) and Business Banking. This strategic choice organizes our business units more effectively around the customer in an effort to deliver banking products and services when and where the customer desires and in a manner that respects customers' clear and growing preference to do their banking remotely. It also enables Webster to meet most of its customers personal needs from a single business segment. The 2012 business segment results have been adjusted for comparability to the 2013 segment presentation.
Webster’s business segment results are intended to reflect each segment as if it were a stand-alone business. Webster uses an internal profitability reporting system to generate information by operating segment, which is based on a series of management estimates and allocations regarding funds transfer pricing, the provision for loan and lease losses, non-interest expense, income taxes and equity capital. These estimates and allocations, certain of which are subjective in nature, are continually being reviewed and refined. Changes in estimates and allocations that affect the reported results of any operating segment do not affect the consolidated financial position or results of operations of Webster as a whole. The full profitability measurement reports which are prepared for each operating segment reflect non-GAAP reporting methodologies. The differences between the full profitability and GAAP measures are reconciled in the Corporate and Reconciling category.
The Company uses a matched maturity funding concept, also known as coterminous funds transfer pricing (“FTP”), to allocate interest income and interest expense to each business while also transferring the primary interest rate risk exposures to the Corporate and Reconciling category. The allocation process considers the specific interest rate risk and liquidity risk of financial instruments

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and other assets and liabilities in each line of business. The “matched maturity funding concept” considers the origination date and the earlier of the maturity date or the repricing date of a financial instrument to assign an FTP rate for loans and deposits originated each day. Loans are assigned an FTP rate for funds “used” and deposits are assigned an FTP rate for funds “provided.” From a governance perspective, this process is executed by the Company’s Financial Planning and Analysis division, and the process is overseen by the Company’s Asset/Liability Committee (ALCO).
Webster attributes the provision for loan and lease losses to each segment based on management’s estimate of the inherent loss content in each of the specific loan portfolios. Provision expense, for certain elements of risk that are not deemed specifically attributable to a business segment, such as environmental factors, and provision for the consumer liquidating portfolio, are shown as other reconciling. For the three months ended March 31, 2013 and 2012, 115.9% and 52.0%, respectively, of the provision expense is specifically attributable to business segments and reported accordingly.
Webster allocates a majority of non-interest expense to each business segment using a full-absorption costing process. Costs, including corporate overhead, are analyzed, pooled by process, and assigned to the appropriate business segment. Income tax expense is allocated to each business segment based on the effective income tax rate for the period shown.
The following tables present the results for Webster’s business segments for the three months ended March 31, 2013 and 2012 and incorporate the allocation of the provision for loan and lease losses and income tax expense to each of Webster’s business segments for the periods then ended:

 
Three months ended March 31, 2013
(In thousands)
Commercial
Banking
Community Banking
Other
Total Business
Segments
Corporate and
Reconciling
Consolidated
Total
Net interest income
$
51,160

$
84,667

$
9,288

$
145,115

$
681

$
145,796

Provision (benefit) for loan and lease losses
2,001

6,713

(19
)
8,695

(1,195
)
7,500

Net interest income after provision for loan and lease losses
49,159

77,954

9,307

136,420

1,876

138,296

Non-interest income
4,832

30,561

8,145

43,538

4,740

48,278

Non-interest expense
25,270

85,869

12,811

123,950

1,585

125,535

Income from continuing operations before income taxes
28,721

22,646

4,641

56,008

5,031

61,039

Income tax expense
8,903

7,020

1,439

17,362

1,560

18,922

Net income attributable to Webster Financial Corporation
$
19,818

$
15,626

$
3,202

$
38,646

$
3,471

$
42,117



 
Three months ended March 31, 2012(a)
(In thousands)
Commercial
Banking
Community Banking
Other
Total Business
Segments
Corporate and
Reconciling
Consolidated
Total
Net interest income
$
43,909

$
83,708

$
7,919

$
135,536

$
7,832

$
143,368

(Benefit) provision for loan and lease losses
(910
)
3,069

(78
)
2,081

1,919

4,000

Net interest income after provision for loan and lease losses
44,819

80,639

7,997

133,455

5,913

139,368

Non-interest income
6,893

27,659

7,133

41,685

2,301

43,986

Non-interest expense
24,693

86,850

11,533

123,076

4,737

127,813

Income from continuing operations before income taxes
27,019

21,448

3,597

52,064

3,477

55,541

Income tax expense
8,077

6,412

1,075

15,564

1,039

16,603

Net income attributable to Webster Financial Corporation
$
18,942

$
15,036

$
2,522

$
36,500

$
2,438

$
38,938

(a) Reclassified to conform to the 2013 presentation.

 
Total Assets
(In thousands)
Commercial
Banking
Community Banking
Other
Total Business
Segments
Corporate and
Reconciling
Consolidated
Total
At March 31, 2013
$
5,100,138

$
7,625,455

$
292,353

$
13,017,946

$
7,092,592

$
20,110,538

At December 31, 2012
$
5,113,898

$
7,708,159

$
282,414

$
13,104,471

$
7,042,294

$
20,146,765


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NOTE 18: Commitments and Contingencies
Lease Commitments. At March 31, 2013, Webster was obligated under various non-cancellable operating leases for properties used as banking offices and other office facilities. The leases contain renewal options and escalation clauses which provide for increased rental expense based primarily upon increases in real estate taxes over a base year. It is expected that certain leases will be renewed, or equipment replaced with new leased equipment, as these leases expire. Rental expense under leases was $5.1 million and $5.0 million for the three months ended March 31, 2013 and 2012, respectively, and is recorded as a component of occupancy expense in the accompanying Condensed Consolidated Statements of Income. Rental income from sub-leases on certain of these properties is recorded as a component of occupancy expense in the accompanying Condensed Consolidated Statements of Income, while rental income under various non-cancellable operating leases for properties owned is recorded as a component of other non-interest income in the accompanying Condensed Consolidated Statements of Income. Rental income was $0.2 million and $0.3 million for the three months ended March 31, 2013 and 2012, respectively. There has been no significant change in future minimum lease payments payable since December 31, 2012. See Webster's 2012 Form 10-K for additional information regarding these commitments.
Credit-Related Financial Instruments. The Company is a party to credit-related financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and commercial letters of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The Company’s exposure to credit loss is represented by the contractual amount of these commitments as it is for on-balance sheet instruments.
The following table summarizes outstanding financial instruments whose contract amounts represent credit risk:
(In thousands)
At March 31,
2013
 
At December 31,
2012
Unused commitments to extend credit
$
3,846,582

 
$
3,801,013

Standby letters of credit
132,329

 
139,789

Commercial letters of credit
3,927

 
6,535

Total financial instruments with off-balance sheet risk
$
3,982,838

 
$
3,947,337

Unused commitments to extend credit. The Company makes commitments under various terms to lend funds to customers. These commitments include revolving credit arrangements, term loan commitments and short-term borrowing agreements. Many of these loans have fixed expiration dates or other termination clauses where a fee may be required. Since commitments are expected to expire without being funded, the total commitment amounts do not necessarily represent future liquidity requirements.
Standby letters of credit. Standby letters of credit are also issued to customers, which commit the Company to make payments on behalf of customers if certain specified future events occur. The Company has recourse against the customer for any amount required to be paid to a third party under a standby letter of credit. Historically, a large percentage of standby letters of credit expire without being funded. The contractual amount of standby letters of credit represents the maximum potential amount of future payments the Company could be required to make and represents the Company's maximum credit risk.
Commercial letters of credit. Commercial letters of credit are issued to facilitate domestic or foreign trade transactions for customers. As a general rule, drafts will be drawn when the goods underlying the transaction are in transit.
The reserve for unfunded credit commitments is reported as a component of accrued expenses and other liabilities in the accompanying Condensed Consolidated Balance Sheets. The following table provides activity details for the Company’s reserve for unfunded credit commitments for the periods presented:
 
Three months ended March 31,
(In thousands)
2013
2012
Beginning balance
$
5,662

$
5,449

Reserve release
(525
)
(245
)
Ending balance
$
5,137

$
5,204


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Reserve for Loan Repurchases. In connection with the sale of mortgage loans, the Company enters into agreements containing representations and warranties about certain characteristics of the mortgage loans sold and the Company’s origination process. The Company may be required to repurchase a loan in the event of certain breaches of these representations and warranties or in the event of default of the borrower within 90 days of origination. The reserve for loan repurchases provides for estimated losses associated with the repurchase of loans sold in connection with the Company’s mortgage banking operations. The reserve reflects management’s continual evaluation of loss experience and the quality of loan originations. It also reflects management’s expectation of losses from repurchase requests for which management has not yet been notified. Factors considered in the evaluation process for establishing the reserves include the identity of counterparty, the vintage of the loans sold, the amount of open repurchase requests, specific loss estimates for each open request, current level of loan losses in similar vintages held in the residential loan portfolio, and estimated recoveries on the underlying collateral. While management uses its best judgment and information available, the adequacy of this reserve is dependent upon factors outside the Company’s control including the performance of loans sold and the quality of the servicing provided by the acquirer.
The following table provides detail of activity in the Company’s reserve for loan repurchases for the periods presented:
 
 
Three months ended March 31,
(In thousands)
2013
2012
Beginning balance
$
2,617

$
2,269

Provision
458

342

Loss on repurchased loans and settlements
(981
)
(293
)
Ending balance
$
2,094

$
2,318

The provision recorded at the time of loan sale is netted from mortgage banking activities and is included as a component of non-interest income, while any incremental provision, post loan sale, is recorded in other non-interest expense, in the accompanying Condensed Consolidated Statements of Income.
Litigation Reserves. Webster is involved in routine legal proceedings occurring in the ordinary course of business and is subject to loss contingencies related to such litigation and claims arising therefrom. Webster evaluates these contingencies based on information currently available, including advice of counsel and assessment of available insurance coverage. Webster establishes accruals for litigation and claims when a loss contingency is considered probable and the related amount is reasonably estimable. These accruals are periodically reviewed and may be adjusted as circumstances change. Webster also estimates certain loss contingencies for possible litigation and claims, whether or not there is an accrued probable loss. Webster believes it has defenses to all the claims asserted against it in existing litigation matters and intends to defend itself in all matters.
Based upon its current knowledge, after consultation with counsel and after taking into consideration its current litigation accruals, Webster believes that as of March 31, 2013 any reasonably possible losses in addition to amounts accrued are not material to Webster’s consolidated financial condition. However, in light of the uncertainties involved in such actions and proceedings, there is no assurance that the ultimate resolution of these matters will not significantly exceed the reserves currently accrued by Webster or that the Company’s litigation reserves will not need to be adjusted in future periods. Such an outcome could be material to the Company’s operating results in a particular period, depending on, among other factors, the size of the loss or liability imposed and the level of the Company’s income for that period.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company’s Consolidated Financial Statements, and Notes thereto, for the year ended December 31, 2012, included in its 2012 Form 10-K, and in conjunction with the Condensed Consolidated Financial Statements and Notes thereto included in Item 1 of this report. Operating results for the three months ended March 31, 2013 are not necessarily indicative of the results for the full year ending December 31, 2013, or any future period.
Forward-Looking Statements and Factors that Could Affect Future Results
Certain statements contained in this Quarterly Report on Form 10-Q that are not statements of historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Act”), notwithstanding that such statements are not specifically identified as such. In addition, certain statements may be contained in the Company’s future filings with the SEC, in press releases, and in oral and written statements made by or with the approval of the Company that are not statements of historical fact and constitute forward-looking statements within the meaning of the Act. Examples of forward-looking statements include, but are not limited to: (i) projections of revenues, expenses, income or loss, earnings or loss per share, the payment or non-payment of dividends, capital structure and other financial items; (ii) statements of plans, objectives and expectations of Webster or its management or Board of Directors, including those relating to products or services or the impact or expected outcome of various legal proceedings; (iii) statements of future economic performance; and (iv) statements of assumptions underlying such statements. Words such as “believes”, “anticipates”, “expects”, “intends”, “targeted”, “continue”, “remain”, “will”, “should”, “may” and other similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.
Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those in such statements. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to:
•
Local, regional, national and international economic conditions and the impact they may have on the Company and its customers and the Company’s assessment of that impact.
•
Volatility and disruption in national and international financial markets.
•
Government intervention in the U.S. financial system.
•
Changes in the level of non-performing assets and charge-offs.
•
Changes in estimates of future reserve requirements based upon the periodic review thereof under relevant regulatory and accounting requirements.
•
Adverse conditions in the securities markets that lead to impairment in the value of securities in the Company’s investment portfolio.
•
Inflation, interest rate, securities market and monetary fluctuations.
•
The timely development and acceptance of new products and services and perceived overall value of these products and services by customers.
•
Changes in consumer spending, borrowings and savings habits.
•
Technological changes.
•
The ability to increase market share and control expenses.
•
Impairment of the Company’s goodwill or other intangible assets.
•
Changes in competitive environment among banks, financial holding companies and other financial service providers.
•
The effect of changes in laws and regulations (including laws and regulations concerning taxes, banking, securities and insurance) with which the Company and its subsidiaries must comply, including under the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Basel III update to the Basel Accords.
•
The effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, or the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters.
•
The costs and effects of legal and regulatory developments including the resolution of legal proceedings or regulatory or other governmental inquiries and the results of regulatory examinations or reviews.
•
The Company’s success at managing the risks involved in the foregoing items.
Forward-looking statements speak only as of the date on which such statements are made. The Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made, or to reflect the occurrence of unanticipated events.

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Critical Accounting Policies
The Company’s significant accounting policies are described in Note 1 to the Consolidated Financial Statements included in its 2012 Form 10-K and in Note 1 to the Condensed Consolidated Financial Statements included in Item 1 of this report. The preparation of the Condensed Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States (“GAAP”) and to general practices within the financial services industry requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and to disclose contingent assets and liabilities. Actual results could differ from those estimates.
Management has identified accounting for (i) the allowance for loan and lease losses, (ii) fair value measurements for valuation of financial instruments and valuation of investments for OTTI, (iii) valuation of goodwill, (iv) deferred tax asset valuation allowance and (v) pension and other post retirement benefits as the Company’s most critical accounting policies and estimates in that they are important to the portrayal of the Company’s financial condition and results, and they require management’s subjective and complex judgment as a result of the need to make estimates about the effects of matters that are inherently uncertain. These accounting policies, including the nature of the estimates and types of assumptions used, are described throughout this Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Webster's 2012 Form 10-K.


RESULTS OF OPERATIONS
Summary of Performance
Webster’s net income available to common shareholders was $39.2 million, or $0.44 per diluted share for the three months ended March 31, 2013, an increase of $0.9 million when compared to $38.3 million or $0.42 per diluted share for the three months ended March 31, 2012. The $0.9 million increase in net income for the three months ended March 31, 2013 is due to a $2.4 million increase in net interest income, a $4.3 million increase in non-interest income and a decrease of $2.3 million in non-interest expense, partially offset by an increase of $3.5 million in provision for loan and lease losses, a $2.3 million increase in income tax expense and an increase of $2.3 million in preferred stock dividends.

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Selected financial highlights are presented in the following table:
 
At or for the three months ended March 31,
(In thousands, except per share and ratio data)
2013
2012
Earnings:
 
 
Net interest income
$
145,796

$
143,368

Provision for loan and lease losses
7,500

4,000

Total non-interest income
48,278

43,986

Total non-interest expense
125,535

127,813

Net income attributable to Webster Financial Corporation
42,117

38,938

Net income available to common shareholders
39,231

38,323

Per Share Data:
 
 
Weighted-average common shares - diluted
89,662

91,782

Net income available to common shareholders per common share - diluted (a)
0.44

0.42

Dividends declared per common share
0.10

0.05

Dividends declared per Series A preferred share
21.25

21.25

Dividends declared per Series E preferred share
448.89

—

Book value per common share
21.90

21.24

Tangible book value per common share
15.93

15.05

Selected Ratios:
 
 
Return on average assets (b)
0.84
%
0.82
%
Return on average common shareholders' equity (b)
8.01

8.30

Return on average tangible common shareholders' equity
11.28

12.04

Net interest margin
3.23

3.36

Efficiency ratio
62.16

65.63

Tangible common equity ratio
7.35

7.11

Tier 1 common equity to risk weighted assets
11.06

10.96

 
(a)
For the three months ended March 31, 2013 and 2012, the effect of the Series A Preferred Stock on the computation of diluted earnings per share was anti-dilutive; therefore, the effect of this security was not included in the determination of diluted average shares.
(b)
Annualized, based on net income before preferred dividend.

The Company evaluates its business based on certain ratios that utilize tangible equity, a non-GAAP financial measure.
The efficiency ratio, which measures the costs expended to generate a dollar of revenue, is calculated excluding foreclosed property expense, amortization of intangibles, gain or loss on securities and other non-recurring items. Accordingly, this is also a non-GAAP financial measure. The Company believes the use of these non-GAAP financial measures provides additional clarity in assessing the results of the Company. Other companies may define or calculate supplemental financial data differently.

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Table of Contents

See the following tables for reconciliations of these non-GAAP financial measures with financial measures defined by GAAP at or for the three months ended March 31, 2013 and 2012.

(Dollars in thousands)
 
 
At or for the three months ended March 31,
Return on average tangible common shareholders' equity (non-GAAP):
2013
2012
Net income available to common shareholders (GAAP)
$
39,231

$
38,323

Intangible assets amortization, tax-affected at 35% (GAAP)
807

908

Net income adjusted for amortization of intangibles (non-GAAP)
$
40,038

$
39,231

Annualized net income used in the return on average tangible common shareholders' equity
$
160,152

$
156,924

Average shareholders' equity (non-GAAP)
$
2,110,937

$
1,876,774

Less: Average Preferred stock (non-GAAP)
151,649

28,939

Average Goodwill and other intangible assets (non-GAAP)
539,522

544,860

Average tangible common equity (non-GAAP)
$
1,419,766

$
1,302,975

Return on average tangible common shareholders' equity (non-GAAP)
11.28
%
12.04
%
 
 
 
 
At or for the three months ended March 31,
Efficiency ratio (non-GAAP):
2013
2012
Non-interest expense (GAAP)
$
125,535

$
127,813

Less: Foreclosed property expense (GAAP)
175

467

Intangible assets amortization (GAAP)
1,242

1,397

Other expense (non-GAAP)
1,352

551

Non-interest expense (non-GAAP)
$
122,766

$
125,398

Net interest income (GAAP)
$
145,796

$
143,368

Add back: FTE adjustment (non-GAAP)
3,523

3,718

Non-interest income (GAAP)
48,278

43,986

Less: Net gain on sale of investment securities (GAAP)
106

—

Income (non-GAAP)
$
197,491

$
191,072

Efficiency ratio (non-GAAP)
62.16
%
65.63
%
 
 
 
 
At or for the three months ended March 31,
Tangible common equity ratio (non-GAAP):
2013
2012
Shareholders' equity (GAAP)
$
2,128,131

$
1,894,942

Less: Preferred stock (GAAP)
151,649

28,939

         Goodwill and other intangible assets (GAAP)
538,915

544,180

Tangible common shareholders' equity (non-GAAP)
$
1,437,567

$
1,321,823

Total Assets (GAAP)
$
20,110,538

$
19,134,142

Less: Goodwill and other intangible assets (GAAP)
538,915

544,180

Tangible assets (non-GAAP)
$
19,571,623

$
18,589,962

Tangible common equity ratio (non-GAAP)
7.35
%
7.11
%

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Table of Contents

(Dollars and shares in thousands, except per share data)
 
 
 
At March 31,
Tangible book value per common share (non-GAAP):
2013
2012
Shareholders' equity (GAAP)
$
2,128,131

$
1,894,942

Less: Preferred equity (GAAP)
151,649

28,939

         Goodwill and other intangible assets (GAAP)
538,915

544,180

Tangible common equity (non-GAAP)
$
1,437,567

$
1,321,823

Common shares outstanding
90,237

87,849

Tangible book value per common share (non-GAAP)
$
15.93

$
15.05

 
 
 
 
At March 31,
Tier 1 common equity to risk weighted assets (non-GAAP):
2013
2012
Shareholders' equity (GAAP)
$
2,128,131

$
1,894,942

Less: Preferred equity (GAAP)
151,649

28,939

         Goodwill and other intangible assets (GAAP)
538,915

544,180

Disallowed excess servicing assets (regulatory)
40

—

Add back: Accumulated other comprehensive loss (GAAP)
(30,911
)
(46,445
)
DTL (DTA) related to goodwill and other intangibles (regulatory)
11,067

12,428

Tier 1 common equity (regulatory)
$
1,479,505

$
1,380,696

Risk-weighted assets (regulatory)
$
13,378,672

$
12,597,284

Tier 1 common equity to risk weighted assets (non-GAAP)
11.06
%
10.96
%

The following table summarizes the Company's average balances (average balances are daily averages), interest and yields on major categories of Webster's interest-earning assets and interest-bearing liabilities on a fully tax equivalent basis.

 
Three months ended March 31,
 
2013
2012
(Dollars in thousands)
Average
Balance
Interest (a)
Average
Yields
Average
Balance
Interest (a)
Average
Yields
Assets
 
 
 
 
 
 
Interest-earning assets:
 
 
 
 
 
 
Loans
$
12,024,588

$
121,061

4.04
%
$
11,275,333

$
120,741

4.27
%
Securities (b)
6,194,885

51,015

3.33

5,961,336

55,680

3.76

Federal Home Loan and Federal Reserve Bank stock
156,261

847

2.20

143,551

876

2.45

Interest-bearing deposits
82,215

46

0.22

77,435

30

0.15

Loans held for sale
89,334

637

2.85

51,705

498

3.85

Total interest-earning assets
18,547,283

173,606

3.76

17,509,360

177,825

4.06

Noninterest-earning assets
1,504,196

 
 
1,394,077

 
 
Total assets
20,051,479

 
 
18,903,437

 
 
 
 
 
 
 
 
 
Liabilities and equity
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
Demand deposits
$
2,836,051

$
—

—
%
$
2,435,197

$
—

—
%
Savings, checking & money market deposits
9,318,300

4,622

0.20

8,628,048

5,794

0.27

Time deposits
2,500,450

8,228

1.33

2,810,203

10,262

1.47

Total deposits
14,654,801

12,850

0.36

13,873,448

16,056

0.47

 












Securities sold under agreements to repurchase and other short-term borrowings
1,091,437

5055

1.85

1,166,550

4,434

1.50

Federal Home Loan Bank advances
1,747,858

4,539

1.04

1,260,217

4,564

1.43

Long-term debt
247,077

1,843

2.98

507,116

5,685

4.48

Total borrowings
3,086,372

11,437

1.48

2,933,883

14,683

1.99

Total interest-bearing liabilities
17,741,173

24,287

0.55

16,807,331

30,739

0.73

Noninterest-bearing liabilities
199,369

 
 
219,332

 
 
Total liabilities
17,940,542

 
 
17,026,663

 
 
 
 
 
 
 
 
 
Preferred Stock
151,649

 
 
28,939

 
 
Common shareholders' equity
1,959,288

 
 
1,847,835

 
 
Webster Financial Corp. shareholders' equity
2,110,937

 
 
1,876,774

 
 
Total liabilities and equity
$
20,051,479

 
 
$
18,903,437

 
 
Tax-equivalent net interest income
 
149,319

 
 
147,086

 
Less: tax equivalent adjustments
 
(3,523
)
 
 
(3,718
)
 
Net interest income
 
$
145,796

 
 
$
143,368

 
Net interest margin
 
 
3.23
%
 
 
3.36
%
 
(a)
On a fully tax-equivalent basis.
(b)
Average balances and yields of securities available for sale are based upon the historical amortized cost.

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Net Interest Income
Net interest income is the difference between interest income on earning assets, such as loans and securities, and interest expense on liabilities, such as deposits and borrowings, which are used to fund those assets. Net interest income is the Company's largest source of revenue, representing 75.1% of total revenue for the three months ended March 31, 2013. Net interest margin is the ratio of taxable-equivalent net interest income to average earning assets for the period. The level of interest rates and the volume and mix of interest-earning assets and interest-bearing liabilities impact net interest income and net interest margin.
Since net interest income is affected by changes in interest rates, loan and deposit pricing strategies, competitive conditions, the volume and mix of interest-earning assets and interest-bearing liabilities as well as the level of non-performing assets, Webster manages the risk of changes in interest rates on its net interest income through an Asset/Liability Management Committee ("ALCO")and through related interest rate risk monitoring and management policies. Four main tools are used for managing interest rate risk: (1) the size and duration of the investment portfolio, (2) the size, duration and credit risk of the wholesale funding portfolio, (3) off-balance sheet interest rate contracts and (4) the pricing and structure of loans and deposits. ALCO meets at least monthly to make decisions on the investment and funding portfolios based on the economic outlook, the Committee’s interest rate expectations, the risk position and other factors. See the “Asset/Liability Management and Market Risk” section for further discussion of Webster’s interest rate risk position.
The following table describes the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have impacted interest income and interest expense during the periods indicated. Information is provided in each category with respect to the impact attributable to changes in volume (change in volume multiplied by prior rate), changes attributable to rates (change in rates multiplied by prior volume) and the total net change. The change attributable to the combined impact of volume and rate has been allocated proportionately to the change due to volume and the change due to rate. The table below is based upon reported net interest income.
 
 
Three months ended March 31,
2013 vs. 2012
Increase (decrease) due to
(In thousands)
Rate
Volume
Total
Interest on interest-earning assets:
 
 
 
Loans
$
(7,018
)
$
7,338

$
320

Loans held for sale
(154
)
293

139

Investment securities
(6,537
)
2,054

(4,483
)
Total interest income
$
(13,709
)
$
9,685

$
(4,024
)
Interest on interest-bearing liabilities:



Deposits
$
(4,064
)
$
858

$
(3,206
)
Borrowings
(3,960
)
714

(3,246
)
Total interest expense
$
(8,024
)
$
1,572

$
(6,452
)
Net change in net interest income
$
(5,685
)
$
8,113

$
2,428


Net interest income totaled $145.8 million for the three months ended March 31, 2013 compared to $143.4 million for the three months ended March 31, 2012, an increase of $2.4 million. The increase in net interest income during the three months ended March 31, 2013 was primarily related to an increase in average interest earning assets, partially offset by a decrease in the net interest margin. Average interest-earning assets for the year ended March 31, 2013 increased $1.0 billion from the year ended March 31, 2012. The net interest margin decreased 13 basis points from 3.36% for the three months ended March 31, 2012 to 3.23% for the three months ended March 31, 2013. The decrease in net interest margin is due to a greater decline in the yield of interest-earning assets than the decline in cost on interest-bearing liabilities, primarily due to growth in the average investment portfolio at lower yields and lower yields in the loan portfolio, partially offset by a decline in the cost of deposits and borrowings. The average yield on interest-earning assets decreased 30 basis points from 4.06% for the three months ended March 31, 2012 to 3.76% for the three months ended March 31, 2013. The average yield on interest-earning assets is primarily impacted by changes in market interest rates as well as changes in the volume and relative mix of interest-earning assets. Market interest rates have remained at historically low levels during the reported periods.
Average loans increased $749.3 million for the three months ended March 31, 2013 as compared to the three months ended March 31, 2012. The loan portfolio yield decreased 23 basis points to 4.04% for the three months ended March 31, 2013 and comprised 64.83% of the average interest-earning assets at March 31, 2013, compared to the loan portfolio yield of 4.27% for the three months ended March 31, 2012 which comprised 64.40% of the average interest-earning assets at March 31, 2012. The

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decrease in the yield on the average loan portfolio is due to the repayment of higher yielding loans and the origination of lower yielding loans in a low interest rate environment.
The average securities portfolio increased $233.5 million for the three months ended March 31, 2013 as compared to the three months ended March 31, 2012. The yield on investment securities decreased 43 basis points to 3.33% for the three months ended March 31, 2013 and comprised 33.40% of average interest-earning assets at March 31, 2013, compared to the yield on investment securities of 3.76% for the three months ended March 31, 2012, which comprised 34.05% of the average interest-earning assets at March 31, 2012. The decrease in the yield on securities is due to principal repayments and lower reinvestment rates. The growth in the securities portfolio is part of the Company's strategy to protect earnings in anticipation of declines in long-term interest rates and a protracted low rate environment.
Average deposits increased $781.4 million for the three months ended March 31, 2013 as compared to the three months ended March 31, 2012. The increase is due to a $400.9 million increase in non-interest bearing deposits and an increase of $380.5 million in interest-bearing deposits. The average cost of deposits decreased 11 basis points to 0.36% for the three months ended March 31, 2013 from 0.47% for the three months ended March 31, 2012. The decrease in the average cost of deposits is the result of decreased pricing offered on certain deposit products and product mix as the proportion of higher costing certificates of deposits to total interest-bearing deposits decreased to 21.2% for the three months ended March 31, 2013 from 24.6% for the three months ended March 31, 2012.
Average total borrowings increased $152.5 million for the three months ended March 31, 2013 as compared to the three months ended March 31, 2012. The increase is due to a $487.6 million increase in average Federal Home Loan Bank advances, partially offset by decreases of $260.0 million in average long-term debt and $75.1 million in securities sold under agreements to repurchase and other short-term borrowings. The increase in short-term borrowings is due to the replacement of long-term funding and a net increase in borrowings to fund growth in investments and to maintain a relatively neutral interest rate risk profile in this protracted low rate environment. The decrease in average long-term debt is due to the repayment of all the $102.6 million outstanding principal amount of Subordinated Fixed Rate Notes on January 15, 2013, which also resulted in reduction in the cost of long-term debt.


Provision for Loan and Lease Losses
The provision for loan and lease losses was $7.5 million and $4.0 million for the three months ended March 31, 2013 and 2012, respectively, a $3.5 million increase for the three months ended March 31, 2013 as compared to the three months ended March 31, 2012.
Management performs a quarterly review of the loan portfolio to determine the adequacy of the allowance for loan and lease losses. Several factors influence the level of the provision, including loan growth, portfolio composition, credit performance changes in the levels of non-performing loans and leases, net charge-offs and changes in the economic environment. At March 31, 2013, the allowance for loan and lease losses totaled $167.8 million or 1.40% of total loans and leases compared to $177.1 million or 1.47% of total loans and leases at December 31, 2012. For the three months ended March 31, 2013, total net charge-offs were $16.8 million compared to $27.2 million for the three months ended March 31, 2012.
See the “Allowance for Loan and Lease Losses Methodology” section for further details.

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Non-Interest Income
Total non-interest income was $48.3 million for the three months ended March 31, 2013, an increase of $4.3 million from the three months ended March 31, 2012. The increase for the three months ended March 31, 2013 is primarily attributable to growth in mortgage banking activities, increase in cash surrender value of life insurance policies and deposit service fees.

 
Three months ended March 31,
Increase (decrease)
(In thousands)
2013
2012
Amount
Percent
Non-Interest Income:
 
 
 
 
Deposit service fees
$
23,994

$
23,363

$
631

2.7
 %
Loan related fees
4,585

4,869

(284
)
(5.8
)
Wealth and investment services
7,766

7,221

545

7.5

Mortgage banking activities
7,031

4,383

2,648

60.4

Increase in cash surrender value of life insurance policies
3,384

2,517

867

34.4

Net gain on sale of investment securities
106

—

106

100.0

Other income
1,412

1,633

(221
)
(13.5
)
Total non-interest income
$
48,278

$
43,986

$
4,292

9.8
 %
Deposit Service Fees. Deposit service fees were $24.0 million for the three months ended March 31, 2013, an increase of $0.6 million from the comparable period in 2012, primarily due to an increase in monthly account fees from volume growth, coupled with an increase in HSA debit card income driven by an increase in transaction volume.
Loan Related Fees. Loan related fees were $4.6 million for the three months ended March 31, 2013, a decrease of $0.3 million from the comparable period in 2012 due to a decreased volume of amendment fees and increased mortgage servicing right amortization, partially offset by a reduction in the related MSR reserve.
Wealth and Investment Services. Wealth and investment services income was $7.8 million for the three months ended March 31, 2013, an increase of $0.5 million from the comparable period in 2012 due primarily to an increase in income from Webster Investment Services driven by increased referral activity as a result of the Company's focus on relationship banking, as well as an increase in trust fees at the Private Bank.
Mortgage Banking Activities. Mortgage banking activities net revenue was $7.0 million for the three months ended March 31, 2013, an increase of $2.6 million from the comparable period in 2012. The $2.6 million increase is primarily due to the doubling of the loan originator sales force which resulted in originations of $229.0 million for three months ended March 31, 2013 compared to $131.4 million from the comparable period and the Company implementing a strategy of selling a higher percentage of conforming fixed-rate loans, combined with favorable pricing in the secondary markets. This increase was also a result of a positive fair value adjustment on mortgage banking derivatives.
Increase in Cash Surrender Value of Life Insurance Policies. Increase in cash surrender value of life insurance polices was $3.4 million for the three months ended March 31, 2013, an increase of $0.9 million from the comparable period in 2012 primarily due to $100 million of additional purchases in September 2012.
Other. Other non-interest income was $1.4 million and $1.6 million for the three months ended March 31, 2013 and 2012, respectively. The decrease of $0.2 million for the three months ended March 31, 2013, as compared to the three months ended March 31, 2012, is primarily due to a write down of $1.5 million in the current quarter on a loan previously transferred to held for sale. This decrease was offset by positive fair value adjustments on treasury derivatives related to increased client swap activity as well as positive fair value adjustments to the Company's private equity funds for the three months ended March 31, 2013 from the comparable period in 2012.

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Non-Interest Expense
Total non-interest expense was $125.5 million for the three months ended March 31, 2013, a decrease of $2.3 million from the three months ended March 31, 2012.

 
Three months ended March 31,
Increase (decrease)
(In thousands)
2013
2012
Amount
Percent
Non-Interest Expense:
 
 
 
 
Compensation and benefits
$
66,050

$
68,619

$
(2,569
)
(3.7
)%
Occupancy
12,879

12,882

(3
)
—

Technology and equipment
15,353

15,582

(229
)
(1.5
)
Intangible assets amortization
1,242

1,397

(155
)
(11
)
Marketing
4,811

4,100

711

17.3

Professional and outside services
2,150

2,692

(542
)
(20.1
)
Deposit insurance
5,174

5,709

(535
)
(9.4
)
Other expense
17,876

16,832

1,044

6.2

Total non-interest expense
$
125,535

$
127,813

$
(2,278
)
(1.8
)%
Compensation and Benefits. Compensation and benefits expense was $66.1 million for the three months ended March 31, 2013 a decrease of $2.6 million from the comparable period in 2012. The decrease is primarily due a decrease in incentive compensation coupled with a decrease in group insurance due to a decrease in claim volume.
Technology and Equipment. Technology and equipment expense was $15.4 million for the three months ended March 31, 2013, a decrease of $0.2 million from the comparable period in 2012. The decrease is primarily due to a decrease in depreciation, resulting from branch optimization offset by an increase in technology service contracts related to the Company's data center co-location initiative (i.e., the migration of IT applications to third-party hosted data centers).
Marketing. Marketing expense was $4.8 million for the three months ended March 31, 2013, an increase of $0.7 million from the comparable period in 2012. The increase is due to expanded branding of Company's facilities and programs.
Deposit Insurance. Deposit insurance was $5.2 million for the three months ended March 31, 2013, a decrease of $0.5 million from the comparable period in 2012. The reduction of underperforming assets supported by an increase in tier 1 equity resulted in a decrease to the FDIC insurance expense for the three months ended March 31, 2013 from March 2012.
Other. Other non-interest expense was $17.9 million for the three months ended March 31, 2013, an increase of $1.0 million from the comparable period in 2012 primarily attributable to an increases in service contracts, non-loan related broker fees, FHLB collateralizing fees and legal settlements.

Income Taxes
During the three months ended March 31, 2013 and 2012 Webster recognized income tax expense of $18.9 million and $16.6 million and an effective tax rate of 31.0% and 29.9%, respectively. The increase in the effective rate principally reflects the increase in estimated pre-tax income and a $0.7 million state tax benefit ($0.5 million, net of federal effects) recognized in the three months ended March 31, 2012 related to a net decrease in unrecognized tax benefits applicable to uncertain tax positions.
For more information on Webster's income taxes, including its deferred tax assets and uncertain tax positions, see Note 8 - Income Taxes in the Notes to Consolidated Financial Statements included in the Company's 2012 Form 10-K.

Business Segment Results
Webster’s operations are divided into three reportable business segments that represent its core businesses – Commercial Banking, Community Banking and Other. Community Banking includes operating segments, Personal Bank and Business Banking and Other includes HSA Bank and Private Banking. These segments reflect how executive management responsibilities are assigned by the chief operating decision maker for each of the core businesses, the products and services provided and the type of customer served, and reflect how discrete financial information is currently evaluated. The Company’s Treasury unit and consumer liquidating portfolio are included in the Corporate and Reconciling category along with the amounts required to reconcile profitability metrics to GAAP reported amounts.


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At December 31, 2012, Webster's operations were divided into four reportable segments that represented its core business - Commercial Banking, Retail Banking, Consumer Finance and Other. In the first quarter 2013, the Company combined the Retail and Consumer Finance segments and realigned the reporting of the management of its small business and consumer related businesses. Beginning in 2013, some business and mass-market consumer business units have been consolidated under the president and chief operating officer. This change results in a new reportable segment, "Community Banking", which comprises several similar operating segments. Community Banking includes the Personal Bank (Consumer Finance, Consumer Deposits, Webster Investment Services, the Customer Care Center, eBanking, our ATM network) and Business Banking. This strategic choice organizes our business units more effectively around the customer in an effort to deliver banking products and services when and where the customer desires and in a manner that respects customers' clear and growing preference to do their banking remotely. It also enables Webster to meet most of its customers personal needs from a single business segment. The 2012 business segment results have been adjusted for comparability to the 2013 segment presentation.
Webster’s business segment results are intended to reflect each segment as if it were a stand-alone business. Webster uses an internal profitability reporting system to generate information by operating segment, which is based on a series of management estimates and allocations regarding funds transfer pricing, the provision for loan and lease losses, non-interest expense, income taxes and equity capital. These estimates and allocations, certain of which are subjective in nature, are continually being reviewed and refined. Changes in estimates and allocations that affect the reported results of any operating segment do not affect the consolidated financial position or results of operations of Webster as a whole. The full profitability measurement reports which are prepared for each operating segment reflect non-GAAP reporting methodologies. The differences between the full profitability and GAAP measures are reconciled in the Corporate and Reconciling category. The 2012 business segment results have been adjusted for comparability to the 2013 segment presentation.
The following tables present the results for Webster’s business segments for the three months ended March 31, 2013 and 2012 and incorporate the allocation of the provision for loan and lease losses and income tax expense to each of Webster’s business segments for the periods then ended:
 
 
Three months ended March 31,
(In thousands)
2013
2012(a)
Net income:
 
 
Commercial Banking
$
19,818

$
18,942

Community Banking
15,626

15,036

Other
3,202

2,522

Total Business Segments
38,646

36,500

Corporate and Reconciling
3,471

2,438

Net income attributable to Webster Financial Corporation
$
42,117

$
38,938

(a) Reclassified to conform to the 2013 presentation.
Webster’s business segments results are intended to reflect each segment as if it were a stand-alone business. Webster uses an internal profitability reporting system to generate information by operating segment, which is based on a series of management estimates and allocations regarding funds transfer pricing, the provision for loan and lease losses, non-interest expense, income taxes and equity capital. These estimates and allocations, certain of which are subjective in nature, are continually being reviewed and refined. Changes in estimates and allocations that affect the reported results of any operating segment do not affect the consolidated financial position or results of operations of Webster as a whole. The full profitability measurement reports which are prepared for each operating segment reflect non-GAAP reporting methodologies. The differences between the full profitability and GAAP measures are reconciled in the Corporate and Reconciling category.
The Company uses a matched maturity funding concept, also known as coterminous funds transfer pricing (“FTP”), to allocate interest income and interest expense to each business while also transferring the primary interest rate risk exposures to the Corporate and Reconciling category. The allocation process considers the specific interest rate risk and liquidity risk of financial instruments and other assets and liabilities in each line of business. The “matched maturity funding concept” considers the origination date and the earlier of the maturity date or the repricing date of a financial instrument to assign an FTP rate for loans and deposits originated each day. Loans are assigned an FTP rate for funds “used” and deposits are assigned an FTP rate for funds “provided.” From a governance perspective, this process is executed by the Company’s Financial Planning and Analysis division, and the process is overseen by the Company’s ALCO Committee.

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Webster attributes the provision for loan and lease losses to each segment based on management’s estimate of the inherent loss content in each of the specific loan portfolios. Provision expense, for certain elements of risk that are not deemed specifically attributable to a business segment, such as environmental factors and provision for the consumer liquidating portfolio, are shown as other reconciling. For the three months ended March 31, 2013 and 2012, 115.9% and 52.0% of the provision expense is specifically attributable to business segments.
Webster allocates a majority of non-interest expense to each business segment using a full-absorption costing process. Costs, including corporate overhead, are analyzed, pooled by process and assigned to the appropriate business segment. Income tax expense is allocated to each business segment based on the effective income tax rate for the period shown.

Commercial Banking
The Commercial Banking segment includes middle market, asset-based lending, commercial real estate, equipment finance, and treasury and payment services, which includes government and institutional banking. Webster’s Commercial Banking group takes a direct relationship approach to providing lending, deposit and cash management services to middle market companies in its franchise territory. Additionally, it serves as a referral source to Private Banking and Community Banking.
Commercial Banking Results:
 
Three months ended March 31,
(In thousands)
2013
2012(a)
Net interest income
$
51,160

$
43,909

Provision (benefit) for loan and lease losses
2,001

(910
)
Net interest income after provision
49,159

44,819

Non-interest income
4,832

6,893

Non-interest expense
25,270

24,693

Income before income taxes
28,721

27,019

Income tax expense
8,903

8,077

Net income
$
19,818

$
18,942

(a) Reclassified to conform to the 2013 presentation.
(In thousands)
At March 31, 2013
At December 31, 2012
Total assets
$
5,100,138

$
5,113,898

Total loans
5,043,979

5,037,307

Total deposits
2,645,559

2,633,327

Net interest income increased $7.3 million in the three months ended March 31, 2013 from the comparable period in 2012. The increase is primarily due to continuing lower cost of funds and greater loan and deposit volumes. The provision for loan and lease losses increased $2.9 million in the three months ended March 31, 2013 from the comparable period in 2012. Webster continues to provide for losses within the lending portfolios although the provision is below portfolio charge-offs. The change in provision is primarily for maintaining a reserve level that management deems adequate to cover inherent losses in the Commercial Banking portfolio. Commercial Banking continues to experience improvement in asset quality, including the levels of accruing delinquency, nonperforming and classified loans, which allows the overall loan loss coverage to decline. Non-interest income decreased $2.1 million in the three months ended March 31, 2013 from the comparable period in 2012, primarily due to less interest rate management services activity. Non-interest expense increased $0.6 million in the three months ended March 31, 2013, from the comparable period in 2012. The increase was primarily attributable to increased charges for corporate administration and other overhead costs. Loans increased $6.7 million from December 31, 2012 as loan growth was primarily flat due to loan production being pulled into the fourth quarter. Loan originations in the three months ended March 31, 2013 were $296.0 million compared to $413.7 million in the three months ended March 31, 2012. Total deposits increased $12.2 million for the period ended March 31, 2013, compared to December 31, 2012. Deposits are cyclically flat during this time period.



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Community Banking
Community Banking serves consumer and small business customers primarily throughout southern New England and into Westchester County, New York. The business segment is comprised of the following reporting units: The Personal Bank, Business Banking and a Distribution network consisting of 168 banking centers and 294 ATMs, a Customer Care Center and a full range of Internet and mobile banking services.

The Personal Bank includes the following consumer products: Deposits and fee-based services, residential mortgages, home equity lines/loans, unsecured consumer loans and credit cards. In addition, Webster Investment Services (“WIS”) offers investment and securities-related services, including brokerage and investment advice through a strategic partnership with LPL Financial (“LPL”). Webster has employees who are LPL registered representatives, located throughout its branch network, offering customers an array of insurance and investment products including stocks and bonds, mutual funds, annuities and managed accounts. Brokerage and online investing services are available for customers. At March 31, 2013, Webster had $2.4 billion of assets under administration in its strategic partnership with LPL compared to $2.3 billion at December 31, 2012.

These assets are not included in the Condensed Consolidated Balance Sheets. LPL, a provider of investment and insurance programs in financial institutions' branches, is a broker dealer registered with the Securities and Exchange Commission, a registered investment advisor under federal and applicable state laws, a member of the Financial Industry Regulatory Authority (“FINRA”), and a member of the Securities Investor Protection Corporation (“SIPC”).

Business Banking offers a suite of credit, deposit and cash flow management products targeted to businesses and professional service firms with annual revenues up to $10 million. This unit works to build full customer relationships through business bankers and business certified banking center managers supported by a team of customer care center bankers and industry and product specialists.
Community Banking Results:
 
Three months ended March 31,
(In thousands)
2013
2012(a)
Net interest income
$
84,667

$
83,708

Provision for loan and lease losses
6,713

3,069

Net interest income after provision
77,954

80,639

Non-interest income
30,561

27,659

Non-interest expense
85,869

86,850

Income before income taxes
22,646

21,448

Income tax expense
7,020

6,412

Net income
$
15,626

$
15,036

(a) Reclassified to conform to the 2013 presentation.
(In thousands)
At March 31, 2013
At December 31, 2012
Total assets
$
7,625,455

$
7,708,159

Total loans
6,635,825

6,668,712

Total deposits
10,157,396

10,188,750

Net interest income increased $1.0 million in the three months ended March 31, 2013 from the comparable period in 2012. The increase is primarily a result of growth in the Business Banking loan and deposit components of the balance sheet. The provision for loan and lease losses increased $3.6 million in the three months ended March 31, 2013 from the comparable period in 2012. Webster continues to provide for losses within the lending portfolios although the provision is below portfolio charge-offs. The change in provision is primarily due to management's evaluation of the level of inherent losses in this segment's existing book of business and management's belief in the adequacy of the overall reserve levels. The Business Banking loan portfolio has shown continued improvement in levels of accruing delinquencies and non-performing loans over the past year, however, classified loan levels remain elevated with the weak recovery in a sluggish economy. Non-interest income increased $2.9 million in the three months ended March 31, 2013 from the comparable period in 2012. The increase in non-interest income is related to a combination of balance sheet management strategies and a continued low interest rate environment which increased the amount of mortgage loans sold in the secondary market from the comparable period in 2012. This increased level of loan sales coupled with optimal pricing in the secondary markets resulted in significantly higher gains from loan sales. Also contributing were increases in other

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deposit related, investment service fees and credit card fee income. Non-interest expense decreased $1.0 million in the three months ended March 31, 2013 from the comparable period in 2012. The decrease is reflective of reduced branch staffing costs and the Company's continued focus on improving efficiencies through disciplined expense management.
Total loans decreased $32.9 million for the period ended March 31, 2013, compared to December 31, 2012. The net decrease in loans is primarily due to a higher percentage of residential mortgage loans sold into the secondary markets and continued prepayments of consumer loans. Loan originations in the three months ended March 31, 2013 were $594.2 million compared to $490.1 million in the three months ended March 31, 2012. Total Mortgage originations for the first quarter increased by $82.3 million or 28.1% over the same period last year. 61.0% of these loans were originated for sale in 2013 versus 44.8% in 2012. The overall decrease in Consumer loans was almost completely offset by an increase in Business Banking balances due to growth in loan originations from an expanded team of dedicated Business Bankers and Branch Managers who have recently completed Webster's Business Banking certification program. Business Banking loan originations during the first quarter were $72.9 million up 3.1% from the same period last year.
Total deposits decreased $31.4 million for the period ended March 31, 2013 compared to December 31, 2012 primarily due to due to runoff of maturing CD balances that was mostly offset by growth in Business Banking and Consumer core transaction balances.
Other
Other includes HSA Bank ("HSA") and Private Banking.
HSA Bank is a bank custodian of health savings accounts. These accounts are required for high deductible health plans offered by employers or directly to consumers.
Private Banking provides local full relationship banking that serves high net worth clients, not-for-profit organizations and business clients for asset management, trust, loan and deposit products and financial planning services.
Other Results:
 
 
Three months ended March 31,
(In thousands)
2013
2012(a)
Net interest income
$
9,288

$
7,919

Benefit for loan and lease losses
(19
)
(78
)
Net interest income after provision
9,307

7,997

Non-interest income
8,145

7,133

Non-interest expense
12,811

11,533

Income before income taxes
4,641

3,597

Income tax expense
1,439

1,075

Net income
$
3,202

$
2,522

(a) Reclassified to conform to the 2013 presentation.
(In thousands)
At March 31, 2013
At December 31, 2012
Total assets
$
292,353

$
282,414

Total loans
270,540

259,835

Total deposits
1,623,178

1,454,129


Net interest income increased $1.4 million in the three months ended March 31, 2013 from the comparable period in 2012. Of the $1.4 million increase, $1.0 million was due to HSA deposit growth, account growth and pricing initiatives and a $0.3 million was due to higher loan and deposit balances for Private Banking for the period ended March 31, 2013. Non-interest income increased $1.0 million in three months ended March 31, 2013 from the comparable period in 2012. The increase in non-interest income is primarily due to primarily due to account growth. Non-interest expense increased $1.3 million in the three months ended March 31, 2013 from the comparable period in 2012, primarily due to an increase in processing costs to support growth in HSA accounts and strategic headcount investments in Private Banking.

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Total loans increased $10.7 million due to loan growth in Private Banking. Loan originations in the three months ended March 31, 2013 were $29.3 million million an increase of 59.3% compared to $18.4 million in the three months ended March 31, 2012. Private Banking had approximately $1.99 billion of client assets under management and administration at March 31, 2013 compared to $1.95 billion at December 31, 2012. Total deposits increased $169.0 million for the period ended March 31, 2013 compared to December 31, 2012, primarily as a result of growth in HSA balances. At March 31, 2013 HSA had $432.5 million in linked brokerage accounts compared to $378.7 million at December 31, 2012.


Financial Condition
Webster had total assets of $20.1 billion at March 31, 2013 and December 31, 2012. Total loans and leases, net, of $11.8 billion, with allowance for loan and lease losses of $167.8 million at March 31, 2013 decreased $17.4 million when compared to total loans and leases, net, of $11.9 billion, with allowance for loan and lease losses of $177.1 million at December 31, 2012. Total deposits of $14.6 billion at March 31, 2013 increased $93.0 million when compared to total deposits of $14.5 billion at December 31, 2012. Non-interest-bearing deposits and interest-bearing deposits both increased 1.1% during the period. Webster’s loan-to-deposit ratio was 82.07% at March 31, 2013, compared to 82.78% at December 31, 2012 and 81.12% at March 31, 2012.
At March 31, 2013, total shareholders' equity of $2.1 billion increased $34.6 million when compared to total shareholders' equity of $2.1 billion at March 31, 2012. Changes in shareholders' equity for the three months ended March 31, 2013 consisted of increases for net income of $42.1 million and $1.4 million of other comprehensive income primarily related to net unrealized gains on securities available for sale, and decreases for $8.5 million of dividends to common shareholders and $2.9 million of dividends to preferred shareholders. The quarterly cash dividend to common shareholders increased to $0.15 per common share on April 22, 2013 from $0.10 per common share since April 23, 2012. At March 31, 2013, the tangible common equity ratio was 7.35%, compared to 7.11% at March 31, 2012. See Note 11 - Regulatory Matters in the Notes to Condensed Consolidated Financial Statements contained elsewhere in this report for information on Webster’s regulatory capital levels and ratios.

Investment Securities Portfolio
Webster Bank may acquire and hold various types of investment securities in accordance with the guidelines of applicable federal regulations and its internal corporate investment policy. The type of investments that it may invest in include: interest-bearing deposits of federally insured banks, federal funds, U.S. government treasury and agency securities, including MBS and collateralized mortgage obligations (“CMOs”), collateralized loan obligations ("CLOs"), private issue MBSs and CMOs, commercial mortgage backed securities (“CMBS”), municipal securities, corporate debt, commercial paper, banker’s acceptances, trust preferred securities, mutual funds and, subject to restrictions applicable to federally charted institutions, equity securities. The investment securities portfolio is managed within the regulatory guidelines and corporate policy, which includes limitations on aspects such as concentrations in and type of investment and investment grade, to manage risks associated with investing in securities. While there may be no statutory limit on certain categories of investments, the Office of the Comptroller of the Currency may establish an individual limit on such investments, if the concentration in such investments presents a safety and soundness concern. The Company has ceased use of trading securities in its investment securities portfolio.
Webster, either directly or through Webster Bank, maintains through its Corporate Treasury Unit, an investment securities portfolio that is primarily structured to provide a source of liquidity for operating needs, to generate interest income and as a means to balance interest-rate sensitivity. The portfolio is classified into two major categories: available for sale and held-to-maturity. At March 31, 2013, Webster Bank’s portfolio consisted primarily of agency MBS, agency CMOs and municipal securities in held-to-maturity and agency CMOs, agency MBS, CLO's and CMBS in available for sale. The Companys combined investment securities portfolio totaled $6.4 billion at March 31, 2013 compared to $6.2 billion at December 31, 2012, an increase of $185.7 million. Available for sale securities increased by $182.1 million, primarily due to new purchases of CLOs and CMBS securities, while the held-to-maturity portfolio increased by $3.6 million, primarily due to the purchases of longer duration agency MBS replacing certain agency CMOs and municipal securities. On a tax-equivalent basis, the yield in the securities portfolio for the three months ended March 31, 2013 and 2012 was 3.33% and 3.76%, respectively.
During the first quarter of 2013, the Federal Reserve maintained the Fed Funds rate flat, at or below 0.25%, in response to the economic environment. Concerns about the European debt crisis, slowing momentum in the U.S. economy and additional monetary policy accommodation by the Federal Reserve kept market yields lower during the three months ended March 31, 2013. Credit spreads generally tightened as the prospects for a sustained low interest rate environment drove investors to take more credit risk. Overall, these developments were generally positive for the investment securities portfolio.

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A summary of the amortized cost, carrying value, and fair value of Webster’s investment securities is presented below:
 
At March 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:
 
 
 
 
 
 
 
Agency collateralized mortgage obligations (“CMOs”)
$
1,131,178

$
23,802

$
(101
)
$
1,154,879

$
—

$
—

$
1,154,879

Agency mortgage-backed securities (“MBS”)
1,270,845

17,636

(4,334
)
1,284,147

—

—

1,284,147

Commercial mortgage-backed securities (“CMBS”)
389,521

39,514

(1,352
)
427,683

—

—

427,683

Collateralized loan obligations ("CLOs")
248,070

829

(55
)
248,844

—

—

248,844

Pooled trust preferred securities (1)
45,923

—

(15,453
)
30,470

—

—

30,470

Single issuer trust preferred securities
51,225

—

(5,173
)
46,052

—

—

46,052

Corporate debt
110,702

6,420

—

117,122

—

—

117,122

Equity securities-financial institutions (2)
6,307

2,734

—

9,041

—

—

9,041

Total available for sale
$
3,253,771

$
90,935

$
(26,468
)
$
3,318,238

$
—

$
—

$
3,318,238

Held-to-maturity:
 
 
 
 
 
 
 
Agency CMOs
$
438,407

$
—

$
—

$
438,407

$
15,093

$
—

$
453,500

Agency MBS
1,931,928

—

—

1,931,928

75,576

(3,700
)
2,003,804

Municipal bonds and notes
528,788

—

—

528,788

28,186

(155
)
556,819

CMBS
199,516

—

—

199,516

15,796

(223
)
215,089

Private Label MBS
12,530

—

—

12,530

309

—

12,839

Total held-to-maturity
$
3,111,169

$
—

$
—

$
3,111,169

$
134,960

$
(4,078
)
$
3,242,051

 
 
 
 
 
 
 
 
Total investment securities
$
6,364,940

$
90,935

$
(26,468
)
$
6,429,407

$
134,960

$
(4,078
)
$
6,560,289

 
(1)
Amortized cost is net of $10.5 million of credit related other-than-temporary impairment at March 31, 2013.
(2)
Amortized cost is net of $21.3 million of other-than-temporary impairment at March 31, 2013.

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At December 31, 2012
 
 
Recognized in OCI
 
Not Recognized in OCI
 
(In thousands)
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Carrying
Value
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
Available for sale:
 
 
 
 
 
 
 
U.S. Treasury Bills
$
200

$
—

$
—

$
200

$
—

$
—

$
200

Agency CMOs
1,284,126

25,972

(92
)
1,310,006

—

—

1,310,006

Agency MBS
1,121,941

21,437

(1,098
)
1,142,280

—

—

1,142,280

CMBS
359,438

42,086

(3,493
)
398,031

—

—

398,031

CLOs
88,765

—

(225
)
88,540

—

—

88,540

Pooled trust preferred securities (1)
46,018

—

(19,811
)
26,207

—

—

26,207

Single issuer trust preferred securities
51,181

—

(6,766
)
44,415

—

—

44,415

Corporate Debt
111,281

6,918

—

118,199

—

—

118,199

Equity securities-financial institutions (2)
6,232

2,054

(4
)
8,282

—

—

8,282

Total available for sale
$
3,069,182

$
98,467

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

$
—

$
—

$
3,136,160

Held-to-maturity:







Agency CMOs
500,369

—

—

500,369

16,643

(8
)
517,004

Agency MBS
1,833,677

—

—

1,833,677

88,082

(474
)
1,921,285

Municipal bonds and notes
559,131

—

—

559,131

34,366

(110
)
593,387

CMBS
199,810

—

—

199,810

18,324

—

218,134

Private Label MBS
14,542

—

—

14,542

366

—

14,908

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

$
—

$
—

$
3,107,529

$
157,781

$
(592
)
$
3,264,718

 














Total investment securities
$
6,176,711

$
98,467

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

$
157,781

$
(592
)
$
6,400,878

 
(1)
Amortized cost is net of $10.5 million of credit related other-than-temporary impairment at December 31, 2012.
(2)
Amortized cost is net of $21.3 million of other-than-temporary impairment at December 31, 2012.
The Company held $1.3 billion in investment securities that are in an unrealized loss position at March 31, 2013. Approximately $1.2 billion of this total had been in an unrealized loss position for less than twelve months while the remainder, $122.5 million, had been in an unrealized loss position for twelve months or longer. The total unrealized loss was $30.5 million at March 31, 2013. These investment securities were evaluated by management and were determined not to be other-than-temporarily impaired. The Company does not have the intent to sell these investment securities, and it is more-likely-than-not that it will not have to sell these securities before the recovery of its cost basis. During the three months ended March 31, 2013, the Company recorded no write-downs for other-than-temporary impairments of its available for sale securities. To the extent that credit movements and other related factors influence the fair value of investments, the Company may be required to record impairment charges for other-than-temporary impairment in future periods. At March 31, 2013, one available for sale investment security valued at $3.8 million remains in non-accruing status. For additional information on the investment securities portfolio, see Note 2 - Investment Securities in the Notes to Condensed Consolidated Financial Statements contained elsewhere in this report.
Webster Bank has the ability to use the investment portfolio, as well as interest-rate financial instruments within internal policy guidelines, to hedge and manage interest-rate risk as part of its asset/liability strategy. See Note 13 - Derivative Financial Instruments in the Notes to Condensed Consolidated Financial Statements contained elsewhere in this report for additional information concerning derivative financial instruments.


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Loan and Lease Portfolio
The table below provides the Company's loan and lease portfolio composition for the following periods:
 
 
At March 31, 2013
 
At December 31, 2012
(Dollars in thousands)
Amount
%
 
Amount
%
Residential:
 
 
 
 
 
1-4 family
$
3,238,306

26.9
 
$
3,246,586

26.9
Construction
43,133

0.4
 
39,359

0.3
Total residential
3,281,439

27.3
 
3,285,945

27.2
Consumer:
 
 
 
 
 
Home equity loans
2,401,210

20.0
 
2,448,207

20.4
Liquidating portfolio
115,928

1.0
 
121,875

1.0
Other consumer
43,783

0.4
 
43,672

0.4
Total consumer loans
2,560,921

21.4
 
2,613,754

21.8
Commercial:
 
 
 
 
 
Commercial non-mortgage
2,407,754

20.1
 
2,409,816

20.0
Asset-based loans
545,421

4.5
 
505,425

4.2
Total commercial loans
2,953,175

24.6
 
2,915,241

24.2
Commercial real estate:
 
 
 
 
 
Commercial real estate
2,634,027

21.9
 
2,644,229

22.0
Commercial construction
132,205

1.1
 
114,309

1.0
Residential development
27,714

0.2
 
27,761

0.2
Total commercial real estate
2,793,946

23.2
 
2,786,299

23.2
Equipment financing loans and leases
400,252

3.3
 
414,783

3.4
Net unamortized premiums
5,927

0.1
 
6,254

0.1
Net deferred costs
6,372

0.1
 
6,420

0.1
Total loans and leases
$
12,002,032

100.0
 
$
12,028,696

100.0
Accrued interest receivable
35,885

 
 
35,360

 
Total recorded investment in loans and leases
$
12,037,917

 
 
$
12,064,056

 
 
Total residential loans were $3.3 billion at March 31, 2013, a decrease of $4.5 million from December 31, 2012. The decrease in the residential portfolio reflects loan payoffs and payments outpacing originations during the three months ended March 31, 2013. In line with balance sheet strategies, subsequent originations of these asset types are more frequently sold into the secondary markets since the second half of 2012.
Total consumer loans were $2.6 billion at March 31, 2013, a decrease of $52.8 million from December 31, 2012. The decrease is primarily due to continued high loan prepayments outpacing loan originations and line advances in the continuing portfolio and a reduction of $5.9 million in the liquidating consumer portfolio as a result of charge-offs taken during the three months ended March 31, 2013.
Total commercial loans were $3.0 billion at March 31, 2013, an increase of $37.9 million from December 31, 2012. The growth in commercial loans reflects the impact of fundings primarily related to new originations of $227.5 million in commercial non-mortgage for the three months ended March 31, 2013. Asset-based loans increased $40.0 million from December 31, 2012, reflective of $39.0 million in advances during the three months ended March 31, 2013.
Commercial real estate loans were $2.8 billion at March 31, 2013, an increase of $7.6 million from December 31, 2012 as a result of the impact of fundings on existing lines and new originations of $111.4 million during the three months ended March 31, 2013.
Equipment financing loans and leases were $400.3 million at March 31, 2013, a decrease of $14.5 million from December 31, 2012. The decrease primarily reflects pay downs and payoffs outpacing originations.

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Commercial Loans with Interest Reserves
At March 31, 2013 and December 31, 2012, there were 12 construction-related loans, employing bank-funded interest reserves. Such reserves are established at the time of loan origination. The decision to establish a loan-funded interest reserve is made during the underwriting process and considers the feasibility of the project, the creditworthiness and expertise of the borrower, and the debt coverage provided by the real estate and other pledged collateral. The commitments on these loans totaled $134.0 million and $124.3 million and the loans had outstanding balances of $69.2 million and $50.8 million at March 31, 2013 and December 31, 2012, respectively. Contractually committed interest reserves for this loan type totaled $4.7 million and $5.0 million at March 31, 2013 and December 31, 2012, respectively. Interest income of $0.5 million and $0.2 million was recognized during the three months ended March 31, 2013 and 2012, respectively. The 12 loans are performing under the original terms as of March 31, 2013.
It is the Company’s policy to recognize income for this interest component as long as the project is progressing as agreed and if there has been no material deterioration in the financial standing of the borrower or the underlying project. A project is subject to on-site inspections, as provided for in the loan agreement, throughout the life of the project. Inspections and reviews are performed upon a request for funding, which typically occurs every four to eight weeks. If there is monetary or non-monetary loan default, the Company will cease any interest accrual. At March 31, 2013 and December 31, 2012, there were no situations where additional interest reserves were advanced to keep a loan from becoming non-performing.
Asset Quality
Management strives to maintain asset quality within established risk tolerance levels through its underwriting standards, servicing and management of loans. Non-performing assets, loan delinquency and credit loss levels are considered to be key measures of asset quality.
Key asset quality ratios for the following periods:

At March 31, 2013
 
At December 31, 2012
Non-accrual and restructured loans as a percentage of total loans and leases
1.66
%
 
1.62
%
Non-performing assets as a percentage of:
 
 
 
Total assets
1.01

 
0.98

Total loans, leases and OREO
1.69

 
1.65

Net charge-offs as a percentage of average loans and leases (1)
0.56

 
0.68

Allowance for loan and lease losses as a percentage of total loans and leases
1.40

 
1.47

Allowance for loan and lease losses as a percentage of total non-performing loans and leases
84.42

 
90.93

 
 
 
 
Ratio of allowance for loans and lease losses to net charge-offs
2.50x

 
2.28x

(1) Calculated based on year to date net charge-offs, annualized, for the March 31, 2013 period.


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Non-performing Assets
Additional information regarding Webster's lending-related non-performing assets for the periods presented:
 
At March 31, 2013
 
At December 31, 2012
(Dollars in thousands)
Amount (1)
% (2)
 
Amount (1)
% (2)
Loans:
 
 
 
 
 
Residential:
 
 
 
 
 
1-4 family
$
93,894

2.90
 
$
94,723

2.90
Construction
817

1.89
 
817

2.08
Total residential
94,711

2.89
 
95,540

2.91
Consumer:
 
 
 
 
 
Home equity loans
48,231

2.01
 
49,402

2.02
Liquidating portfolio - home equity loans
7,323

6.32
 
8,133

6.67
Other consumer
139

0.32
 
135

0.31
Total consumer
55,693

2.18
 
57,670

2.21
Commercial:
 
 
 
 
 
Commercial non-mortgage
16,328

0.68
 
17,538

0.73
Commercial real estate:
 
 
 
 
 
Commercial real estate
24,435

0.93
 
15,634

0.59
Commercial construction
49

0.04
 
49

0.04
Residential development
4,793

17.3
 
5,043

18.2
Total commercial real estate
29,277

1.05
 
20,726

0.74
Equipment financing loans and leases
2,801

0.70
 
3,325

0.80
Total non-performing loans and leases (3)
$
198,810

1.66
 
$
194,799

1.62
Deferred costs and unamortized premiums
316


 
351


Total recorded investment in non-performing loans and leases
$
199,126


 
$
195,150

 
 
 
 
 
 
 
Total non-performing loans and leases (3)
$
198,810

 
 
$
194,799

 
Foreclosed and repossessed assets:
 
 
 
 
 
Residential and consumer
3,146

 
 
2,659

 
Commercial
1,399

 
 
723

 
Total foreclosed and repossessed assets
$
4,545

 
 
$
3,382

 
Total non-performing assets (4)
$
203,355

 
 
$
198,181

 
 
(1)
Loan balances by class of loan exclude the impact of net deferred costs and unamortized premiums.
(2)
Represents the principal balance of non-performing loans and leases as a percentage of the outstanding principal balance within the comparable loan and lease category. The percentage excludes the impact of deferred costs and unamortized premiums.
(3)
Includes non-accrual restructured loans and leases of $118.5 million and $115.5 million at March 31, 2013 and December 31, 2012, respectively.
(4)
Excludes one non-accrual available for sale security of $3.8 million and $3.1 million at March 31, 2013 and December 31, 2012, respectively.
It is Webster’s policy that residential and consumer loans 90 or more days past due are placed on non-accrual status. Commercial and commercial real estate loans and equipment financing leases are subject to a detailed review by the Company’s credit risk team when payment is uncertain and a specific determination is made to put a loan or lease on non-accrual status. Residential and consumer loans for which the borrower has been discharged under Chapter 7 bankruptcy are considered collateral dependent TDRs and thus impaired at the date of discharge and placed on non-accrual status. There are, on occasion, circumstances that cause commercial loans to be placed in the 90 days past due and accruing category, for example, loans that are considered to be well

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secured and in the process of collection or renewal. See “Delinquent Loans” contained elsewhere within this section for further information concerning loans past due 90 days and still accruing.
Interest on non-accrual loans at March 31, 2013 and 2012 that would have been recorded as additional interest income for the three months ended March 31, 2013 and 2012 had the loans been current in accordance with their original terms approximated $3.9 million and $4.5 million, respectively. See Note 1-Summary of Significant Accounting Policies in the Notes to Condensed Consolidated Financial Statements for information on the Company's policy for non-accrual loans.
The following table provides detail of non-performing loan and lease activity for the periods presented:
 
Three months ended March 31,
(In thousands)
2013
2012
Non-performing loans and leases, beginning of period
$
194,799

$
188,079

New non-performing status (1)
48,495

75,194

Paydowns/draws on existing loans, net
(25,109
)
(48,999
)
Charge-offs
(16,447
)
(33,378
)
Other reductions
(2,928
)
(2,631
)
Non-performing loans and leases, end of period
$
198,810

$
178,265

(1)
Included in new non-performing status for the three months ended March 31, 2013 are $2.2 million of consumer loans where the borrower’s obligation has been discharged in bankruptcy which are reported in accordance with a recent regulatory interpretation of GAAP which requires a loan discharged under Chapter 7 bankruptcy and not reaffirmed by the borrower to be considered a TDR, regardless of delinquency status.
Impaired Loans and Leases
Loans are considered impaired when, based on current information and events, it is probable the Company will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. Impairment is evaluated on a pooled basis for smaller-balance loans of a similar nature, primarily for residential and consumer loans. Consumer and residential loans for which the borrower has been discharged in Chapter 7 bankruptcy are considered collateral dependent impaired loans at the date of discharge. Commercial, commercial real estate and equipment financing loans over a specific dollar amount, risk rated substandard or worse and non-accruing, and all troubled debt restructurings are evaluated individually for impairment. Impairment may be evaluated at the present value of estimated future cash flows using the original interest rate of the loan, or at the fair value of collateral less estimated selling costs. To the extent that an impaired loan balance is collateral dependent, the Company determines the fair value of the collateral.
For residential and consumer collateral dependent loans, if the loan value is in excess of $250,000 a third-party appraisal is obtained, and if the loan value is under $250,000 internal valuation methods are performed. Fair value of the collateral for residential and consumer collateral dependent loans is reevaluated every six months. Fair value is reassessed, with any excess amount charged off for all consumer loans that reach 180 days past due for compliance with Federal Financial Institutions Examination Council guidelines. For commercial, commercial real estate and equipment financing collateral dependent loans, Webster's impairment process requires the Company to determine the fair value of the collateral by obtaining a third-party appraisal or asset valuation, an interim valuation analysis, blue book reference or other internal methods. Fair value of the collateral for commercial loans is reevaluated on a quarterly basis. Whenever the Company has a third-party real estate appraisal performed by independent licensed appraisers, a licensed in-house appraisal officer or qualified reviewer will review these appraisals for compliance with the Financial Institutions Reform Recovery and Enforcement Act and the Uniform Standards of Professional Appraisal Practice.
Any fair value shortfall is recorded as an impairment reserve against the allowance for loan and lease losses. Subsequent to an appraisal or other fair value estimate, should reliable information come to management's attention that the value has declined further, additional impairment may be recorded to reflect the particular situation, thereby increasing the allowance for loan and lease losses. Any impaired loan for which no specific valuation allowance was necessary at March 31, 2013 and December 31, 2012 is the result of either sufficient cash flow or sufficient collateral coverage, or previous charge-off amounts that reduced the book value of the loan to an amount equal to or below the current fair value of the collateral.
At March 31, 2013, there were 1,830 impaired loans and leases with a recorded investment balance of $425.6 million, which included loans and leases of $267.5 million with an impairment allowance of $27.2 million. There were loans and leases of $276.5 million measured using the present value of expected cash flows and $149.1 million measured using the fair value of associated collateral. Approximately 53.4% of the $149.1 million of the collateral dependent loans at March 31, 2013 relied on current third party appraisals to assist in measuring impairment. At December 31, 2012, there were 1,932 impaired loans and leases with a recorded investment balance of $414.3 million, which included loans and leases of $261.1 million with an impairment allowance of $27.4 million. There were loans and leases of $293.7 million measured using the present value of expected cash flows and

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$120.6 million measured using the fair value of associated collateral. Approximately 35.6% of the $120.6 million of the collateral dependent loans at December 31, 2012 relied on current third party appraisals to assist in measuring impairment.
Troubled Debt Restructurings
A modified loan is considered a TDR when two conditions are met: (1) the borrower is experiencing financial difficulties and (2) the modification constitutes a concession. Modified terms are dependent upon the financial position and needs of the individual borrower. The Company considers all aspects of the restructuring in determining whether a concession has been granted, including the debtor's ability to access market rate funds. In general, a concession exists when, the modified terms of the loan are more attractive to the borrower than standard market terms. 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 and thus impaired at the date of discharge and charged down to the fair value of collateral less cost to sell.
The Company’s policy is to place all consumer loan TDRs on non-accrual status for a minimum period of six 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 six months. Initially, all TDRs are reported as impaired. Generally, TDRs are classified as impaired loans and TDRs for the remaining life of the loan. Impaired and TDR classification may be removed if the borrower demonstrates compliance with the modified terms for a minimum of six 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 risk at the time of restructuring. In the limited circumstances that a loan is removed from TDR classification it is the Company’s policy to continue to base its measure of loan impairment on the contractual terms specified by the loan agreement.
The following tables provide detail of TDR balance and activity for the periods presented:
(In thousands)
At March 31, 2013
 
At December 31, 2012
Recorded investment of TDRs:
 
 
 
Accrual status
$
289,391

 
$
288,578

Non-accrual status
118,455

 
115,583

Total recorded investment
$
407,846

 
$
404,161

Accruing TDRs performing under modified terms more than one year
59.4
%
 
60.2
%
TDR specific reserves included in the balance of allowance for loan losses
$
27,165

 
$
27,317

Additional funds committed to borrowers in TDR status (1)
2,651

 
3,263


 
Three months ended March 31,
(In thousands)
2013
2012
TDRs, beginning of period
$
404,161

$
444,312

New TDR status (2)
18,165

15,677

Paydowns/draws on existing TDRs, net
(8,616
)
(12,075
)
Charge-offs post modification
(5,044
)
(19,028
)
Loan sales
—

(7,730
)
Other reductions (3)
(820
)
(10,606
)
TDRs, end of period
$
407,846

$
410,550

 
(1)
This amount may be limited by contractual rights and/or the underlying collateral supporting the loan or lease.
(2)
Included in new TDR status for the three months ended March 31, 2013 are $2.2 million of consumer loans where the borrower’s obligation has been discharged in bankruptcy which are reported in accordance with a recent regulatory interpretation of GAAP which requires a loan discharged under Chapter 7 bankruptcy and not reaffirmed by the borrower to be considered a TDRs, regardless of delinquency status.
(3)
Other reductions include change in TDR status and transfers to OREO.

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See Note 3 - Loans and Leases in the Notes to Condensed Consolidated Financial Statements for a discussion of the amount of modified loans, modified loan characteristics and Webster’s evaluation of the success of its modification efforts.

Delinquent loans
The following table sets forth information regarding over 30-day delinquent loans and leases, excluding loans held for sale and non-accrual loans and leases for the periods presented:
 
At March 31, 2013
 
At December 31, 2012
(Dollars in thousands)
Amount (1)
% (2)
 
Amount (1)
% (2)
Residential:
 
 
 
 
 
1-4 family
$
16,215

0.50
 
$
24,826

0.76
Construction
356

0.83
 
356

0.91
Consumer:
 
 
 
 
 
Home equity loans
14,128

0.59
 
24,344

0.99
Liquidating portfolio - home equity loans
2,794

2.41
 
3,588

2.94
Other consumer
410

0.94
 
516

1.18
Commercial:
 
 
 
 
 
Commercial non-mortgage
3,788

0.16
 
2,769

0.11
Commercial real estate:
 
 
 
 
 
Commercial real estate
1,328

0.05
 
14,710

0.56
Equipment financing loans and leases
1,000

0.25
 
1,926

0.46
Total loans and leases past due 30-89 days
40,019

0.33
 
73,035

0.61
Past due 90 days or more accruing:
 
 
 
 
 
Commercial non-mortgage
—

—
 
346

0.01
Commercial real estate
—

—
 
891

0.03
Total loans and leases past due 90 days and accruing
—

 
 
1,237

 
Total loans and leases over 30 day delinquent loans
$
40,019

 
 
$
74,272

 
 
 
 
 
 
 
Deferred costs and unamortized premiums
139

 
 
214

 
Accrued interest
483

 
 
887

 
Total recorded investment over 30 day delinquent loans
$
40,641

 
 
$
75,373

 
 
(1)
Past due loan and lease balances exclude the impact of deferred costs and unamortized premiums.
(2)
Represent the principal balance of past due loans and leases as a percentage of the outstanding principal balance within the comparable loan and lease category. The percentage excludes the impact of deferred costs and unamortized premiums.

Allowance for Loan and Lease Losses Methodology
The allowance for loan and lease losses and the reserve for unfunded credit commitments are maintained at a level estimated by management to provide for probable losses inherent within the loan and lease portfolio. Probable losses are estimated based upon a quarterly review of the loan and lease portfolios, which include historic default and loss experience, specific problem loans, risk rating profiles, economic conditions and other pertinent factors which, in management’s judgment, warrant current recognition in the loss estimation process. Webster’s Credit Risk Management Committee meets quarterly to review and conclude on the adequacy of the reserves and to present their recommendation to executive management.
Management considers the adequacy of the ALLL a critical accounting policy. The adequacy of the ALLL is subject to considerable assumptions and judgment used in its determination. Therefore, actual losses could differ materially from management’s estimate if actual conditions differ significantly from the assumptions utilized. These conditions include economic factors in Webster’s market and nationally, industry trends and concentrations, real estate values and trends, and the financial condition and performance of individual borrowers. While management believes the ALLL is adequate as of March 31, 2013, actual results may prove different and the differences could be significant.

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Webster’s methodology for assessing the appropriateness of the ALLL includes several key elements. Problem loans and leases are analyzed for specific reserves and segregated from the portfolio. The remaining loans and leases are segmented into pools with similar type and risk characteristics. Historic portfolio performance metrics are analyzed to support the segmentation and used in the loss estimation process. Analysis of metrics include risk ratings, historic delinquency trends, defaults and net loss trend information.
Probable losses in the portfolio are estimated by calculating formula allowances for homogeneous pools of loans and leases and for impaired loans and leases with specific reserves. The formula allowances are calculated by applying loss factors to the loan and lease pools that are based on historic default and loss rates, internal risk ratings, and other risk-based characteristics. Changes in risk ratings, and other risk factors, for both performing and non-performing loans affect the calculation of the allowances. Loss factors are based on Webster’s default and loss experience, and may be adjusted for significant conditions that, in management’s judgment, affect the collectability of the portfolio as of the evaluation date. The following are considered when determining probable losses: historic loss experience, borrower and facility risk ratings, industry and borrower concentrations, collateral values, portfolio trends, accrual status and current market conditions. Back-testing is performed by comparing original estimated losses to actual observed losses, resulting in ongoing refinements.
The ALLL incorporates the range of probable outcomes as part of the loss estimation process, as well as an estimate of risk not captured in quantitative modeling and methodologies. Examples include: imprecision in loss estimate methodologies, asset quality trends, changes in portfolio characteristics and loan mix, volatility in historic loss experience, uncertainty associated with industry trends, the economy and other pertinent external factors.
The table below provides, as of the dates indicated, an allocation of the allowance for loan and lease losses by loan type; however, allocation of a portion of the allowance to one category of loans and leases does not preclude its availability to absorb losses in other categories.
 
At March 31,
At December 31,
At March 31,
 
2013
2012
2012
(Dollars in thousands)
Amount
% (1)
Amount
% (1)
Amount
% (1)
Residential
$
27,891

0.85
%
$
29,474

0.90
%
$
32,039

0.90
%
Consumer
50,369

1.97

54,254

2.08

64,263

2.00

Commercial
44,050

1.49

46,566

1.60

51,003

1.90

Commercial real estate
30,894

1.11

30,834

1.11

40,187

1.30

Equipment financing
3,636

0.91

4,001

0.96

7,796

0.90

Unallocated
11,000

—

12,000

—

15,000

—

Total ALLL
$
167,840

1.40
%
$
177,129

1.47
%
$
210,288

1.61
%

(1) Percentage represents allocated allowance for loan and lease losses to total loans and leases within the comparable category.

At March 31, 2013, the allowance for loan and lease losses is $167.8 million, or 1.40% of the total loan portfolio, and 84.42% of total non-performing loans and leases. This compares with an allowance of $177.1 million, or 1.47% of the total loan and lease portfolio, and 90.93% of total non-performing loans and leases at December 31, 2012. Net charge-offs for the three months ended March 31, 2013 were $16.8 million and consisted of $2.7 million in net charge-offs for residential loans, $8.6 million for consumer loans, $2.7 million for commercial loans, $3.5 million for commercial real estate loans, and net recoveries of $0.7 million for equipment financing loans. Net charge-offs decreased by $10.4 million during the three months ended March 31, 2013 as compared to the three months ended March 31, 2012. The decrease in net charge-off activity reflects lower levels of losses and recoveries of previous charged-off, coupled with improved portfolio performance and loan quality metrics for the three months ended March 31, 2013. The decrease in the allowance for loan and lease losses year over year reflects improved portfolio quality and economic conditions across all lines of business, effectively reducing estimated probable losses.
The reserve associated with loans and leases individually evaluated for impairment at March 31, 2013, decreased $229.0 thousand when compared to December 31, 2012 and decreased $5.5 million when compared to March 31, 2012. The reduction in the reserve is primarily due to the requirement to charge loans discharged in a Chapter 7 bankruptcy down to the fair value of the collateral less cost to sell along with the resolution of larger commercial credits through payoff or sale, offset by the addition of new commercial impaired loans.
As of March 31, 2013, the reserve allocated to the residential loan portfolio decreased $1.6 million and $4.1 million compared to December 31, 2012 and March 31, 2012, respectively. The decrease is due to the decrease in delinquent and non-performing loans as well as a decrease in estimated forward looking losses and reduced impairment levels on modified loans.

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The reserve allocated to the consumer portfolio at March 31, 2013 decreased $3.9 million and $13.9 million compared to December 31, 2012 and March 31, 2012, respectively. The decrease is due to a reduction in the consumer loan balances and improved delinquency and nonaccrual trends. Net charge-offs decreased by $0.6 million for the three months ended March 31, 2013 and the forward looking loss projection continues to decline. The general reserve excludes loans classified as TDRs.
The reserve allocated to the commercial loan portfolio at March 31, 2013 decreased $2.5 million and $7.0 million compared to December 31, 2012 and March 31, 2012, respectively. The decrease is due to improved risk profile driven primarily by loan growth, and improved classified and non-accrual trends due to payoffs and upgrades.
The reserve allocated to the commercial real estate portfolio at March 31, 2013 remained flat and decreased $9.3 million compared to December 31, 2012 and March 31, 2012, respectively. The decrease from the prior year comparable period is due to the decline in classified loans due to payoffs which improved the risk profile as well as the estimated potential loss at March 31, 2013 as compared to March 31, 2012.
As of March 31, 2013, the reserve allocated to the equipment financing portfolio decreased $0.4 million and $4.2 million compared to December 31, 2012 and March 31, 2012, respectively. The decrease is based on lower outstanding balances as well as improved credit metrics. There were reductions in delinquency, non-accrual and classified loans and leases during the quarter.
The unallocated portion of the ALLL represents general valuation allowances that are not allocated to a specific loan portfolio. The unallocated portion of the ALLL at March 31, 2013 decreased $1.0 million and $4.0 million compared to December 31, 2012 and March 31, 2012, respectively. The decrease is due to continued improvement in the Company’s risk rating accuracy and overall improvements in credit risk management processes combined with improved commercial and consumer related economic factors during the periods.
Detail of activity in the Company's allowance for credit losses follows:
 
Three months ended March 31,
(In thousands)
2013
2012
Beginning balance
$
177,129

$
233,487

Provision
7,500

4,000

Charge-offs:


Residential
(2,936
)
(3,115
)
Consumer
(10,407
)
(10,051
)
Commercial
(4,339
)
(14,994
)
Commercial real estate
(3,760
)
(5,848
)
Equipment financing
(87
)
(634
)
Total charge-offs
(21,529
)
(34,642
)
Recoveries:


Residential
250

141

Consumer
1,822

2,054

Commercial
1,599

1,800

Commercial real estate
241

1,100

Equipment financing
828

2,348

Total recoveries
4,740

7,443

Net charge-offs
(16,789
)
(27,199
)
Ending balance
$
167,840

$
210,288

 
 
 
Reserve for unfunded credit commitments:


Beginning balance
$
5,662

$
5,449

Provision
—

—

Benefit
(525
)
(245
)
Ending balance
$
5,137

$
5,204



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A summary of net charge-offs to average outstanding loans and leases by category follows:
 
Three months ended March 31,

2013
2012
Net charge-offs (1)


Residential
0.33
 %
0.37
 %
Consumer
1.32

1.17

Commercial
0.37

2.16

Commercial real estate
0.51

0.80

Equipment financing
(0.73
)
(1.50
)
Total net charge-offs to total average loans and leases
0.56
 %
0.96
 %

(1) Calculated based on period to date net charge-offs, annualized.

Sources of Funds
The primary source of Webster Bank’s cash flows for use in lending and meeting its general operational needs is deposits. Additional sources of funds are from the Federal Home Loan Bank (“FHLB”) advances and other borrowings, loan and mortgage-backed securities repayments, securities sales proceeds and maturities, and earnings. While scheduled loan and securities repayments are a relatively stable source of funds, loan and investment security prepayments and deposit inflows are influenced by prevailing interest rates and local economic conditions and are inherently uncertain.
Deposits
Webster Bank offers a wide variety of deposit products for checking and savings (including: ATM and check card use, direct deposit, ACH payments, combined statements, automated mobile banking services, Internet-based banking, bank by mail as well as overdraft protection via line of credit or transfer from another deposit account) designed to meet the transactional, savings and investment needs of our consumer and business customers throughout 168 banking centers within our primary market area.
Webster manages the flow of funds in its deposit accounts and provides an assortment of accounts and rates consistent with FDIC regulations. Webster’s Retail Pricing Committee and its Commercial and Institutional Liability Pricing Committee meet regularly to determine pricing and marketing initiatives. Total deposits were $14.6 billion at March 31, 2013 as compared to $14.5 billion at December 31, 2012 and $13.9 billion at March 31, 2012. Deposits have increased most significantly for health savings accounts and non-interest bearing classifications. See Note 6 - Deposits in the Notes to Condensed Consolidated Financial Statements for additional information.
Federal Home Loan Bank and Federal Reserve Bank Stock
Webster Bank is a member of the Federal Home Loan Bank System, which consists of twelve district Federal Home Loan Banks, each subject to the supervision and regulation of the Federal Housing Finance Agency. Capital stock is required in order for Webster Bank to access advances and other extensions of credit for liquidity and funding purposes. The capital stock investment is restricted in that there is no market for it, and it can only be redeemed by the Federal Home Loan Bank of Boston. Based on requirements to hold a certain amount of capital stock for membership and for advances and other extensions of credit, Webster Bank was required to hold $83.2 million of FHLB stock on March 31, 2013 and $104.9 million on December 31, 2012. At March 31, 2013, Webster Bank had $108.2 million of capital stock invested in the FHLB. The FHLB most recently declared a cash dividend equal to an annual yield of 0.37% on March 4, 2013.
At March 31, 2013, Webster Bank had $50.7 million of capital stock invested in the Federal Reserve Bank (FRB). Webster is required to have FRB stock equal to 6% of its capital and surplus of which 50% is paid. The remaining 50% is subject to call when deemed necessary by the Board of Governors of the Federal Reserve System. The capital stock investment is restricted in that there is no market for it, and it can only be redeemed by the FRB. The FRB pays a dividend of 6% annualized.
Borrowings
Total borrowed funds, including long-term debt, was $3.2 billion at March 31, 2013 and December 31, 2012. Borrowings represented 15.7% and 16.1% of total assets at March 31, 2013 and December 31, 2012, respectively, and 16.2% of assets at March 31, 2012. See Note 7-Securities Sold Under Agreements to Repurchase and Other Short-term Borrowings, Note 8-Federal Home Loan Bank Advances and Note 9-Long-term Debt in the Notes to Condensed Consolidated Financial Statements for additional information.

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Liquidity
Liquidity management allows Webster to meet cash needs at a reasonable cost under various operating environments. Liquidity at the Company level and at the Webster Bank level is actively managed and reviewed in order to maintain stable, cost effective funding to promote strength in its balance sheet. Liquidity comes from a variety of sources such as the cash flow from operating activities including principal and interest payments on loans and investments, unpledged securities which can be sold or utilized to secure funding and by the ability to attract new deposits. Webster has a commitment to maintain a strong, increasing base of core deposits to support growth in its loan portfolios.
Company Liquidity:
Webster’s primary sources of liquidity at the Company level are dividends from Webster Bank, investment income and net proceeds from borrowings, investment sales and capital offerings. The main uses of liquidity are the payment of principal and interest to holders of senior notes and capital securities, the payment of dividends to common and preferred shareholders, repurchases of Webster’s common stock and purchases of available for sale securities. There are certain restrictions on the payment of dividends by Webster Bank to the Company, which are described in the section captioned “Supervision and Regulation” in Item 1 as included in Webster’s 2012 Form 10-K. At March 31, 2013, there were $76.4 million of retained earnings available for the payment of dividends by Webster Bank to the Company. Webster Bank paid the Company $20.0 million in dividends during the three months ended March 31, 2013.
During the three months ended March 31, 2013 , a total of 4,723 shares of common stock were repurchased at a cost of approximately $101.5 thousand. Of the shares repurchased during 2013, all 4,723 were for employee compensation plans.
Webster Bank Liquidity:
Webster Bank's primary source of funding is deposits, consisting of demand, checking, savings, health savings accounts, money market deposits, time deposits and foreign deposits. On a consolidated basis, the Company’s gross loan to total deposit ratio was 82.1%.
At March 31, 2013 and December 31, 2012, FHLB advances outstanding totaled $1.9 billion and $1.8 billion, respectively. Webster Bank had additional borrowing capacity from the FHLB of approximately $0.7 billion and $0.5 billion at March 31, 2013 and December 31, 2012, respectively. In addition, unpledged securities could have been used to increase borrowing capacity at the FHLB by an additional $2.7 billion at March 31, 2013 or used to collateralize other borrowings, such as repurchase agreements. At March 31, 2013, Webster Bank also had additional borrowing capacity from unused collateral at the FRB of $0.6 billion. Alternatively, unpledged securities could have been used to increase borrowing capacity at the FRB by an additional $3.3 billion at March 31, 2013
Webster Bank is required by regulations adopted by the OCC to maintain liquidity sufficient to ensure safe and sound operations. Adequate liquidity, as assessed by the OCC, may vary from institution to institution depending on such factors as the overall asset/liability structure, market conditions, competition and the nature of the institution’s deposit and loan customers. At March 31, 2013, Webster Bank exceeded all regulatory requirements.
Applicable OCC regulations require Webster Bank, as a commercial bank, to satisfy certain minimum leverage and risk-based capital requirements. As an OCC regulated commercial institution, it is also subject to a minimum tangible capital requirement. At March 31, 2013, Webster Bank was in full compliance with all applicable capital requirements and met the FDIC requirements for a “well capitalized” institution. On June 7, 2012, the FRB approved three proposals implementing the Basel III capital standards. The Basel III proposals could fundamentally change how banks calculate their regulatory capital requirements. The proposals would increase the minimum levels of required capital, narrow the definition of capital, and place greater emphasis on common equity. The Company is still in the process of assessing the impacts of these complex proposals, however, we believe we will continue to exceed all estimated well capitalized regulatory requirements on a fully phased-in basis.
The liquidity position of the Company is continuously monitored and adjustments are made to the balance between sources and uses of funds as deemed appropriate. Management is not aware of any events that are reasonably likely to have a material adverse effect on the Company’s liquidity, capital resources or operations. In addition, management is not aware of any regulatory recommendations regarding liquidity, which if implemented would have a material adverse effect on the Company. Webster has a detailed liquidity contingency plan which is designed to respond to liquidity concerns in a prompt and comprehensive manner. It is designed to provide early detection of potential problems and details specific actions required to address liquidity stress scenarios.

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Off-Balance Sheet Arrangements
In the normal course of operations, Webster engages in a variety of financial transactions that, in accordance with GAAP, are not recorded in the financial statements, or are recorded in amounts that differ from the notional amounts. These transactions involve to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used for general corporate purposes or for customer needs. Corporate purpose transactions are used to help manage credit, interest rate and liquidity risk or to optimize capital. Customer transactions are used to manage customers’ requests for funding. For the three months ended March 31, 2013, Webster did not engage in any off-balance sheet transactions that would have a material effect on its financial condition.

Asset/Liability Management and Market Risk
An effective asset/liability management process must balance the risks and rewards from both short and long-term interest rate risks in determining management strategy and action. To facilitate and manage this process, Webster has an ALCO Committee. The primary goal of ALCO is to manage interest rate risk to maximize net income and net economic value over time in changing interest rate environments subject to Board of Director approved risk limits. The Board sets limits for earnings at risk for parallel ramps in interest rates over 12 months of plus and minus 100, 200 and 300 basis points. Economic value or “equity at risk” limits are set for parallel shocks in interest rates of plus and minus 100 and 200 basis points. Based on the historic lows in short-term interest rates as of March 31, 2013, the declining interest rate scenarios for both the earnings at risk for parallel ramps and the equity as risk for parallel shocks have been temporarily suspended per ALCO policy. ALCO also regularly reviews earnings at risk scenarios for non-parallel changes in rates, as well as longer-term earnings at risk for up to four years in the future.
Management measures interest rate risk using simulation analysis to calculate earnings and equity at risk. These risk measures are quantified using simulation software from one of the leading firms in the field of asset/liability modeling. Key assumptions relate to the behavior of interest rates and spreads, prepayment speeds and the run-off of deposits. From such simulations, interest rate risk is quantified and appropriate strategies are formulated and implemented.
Earnings at risk is defined as the change in earnings (excluding provision for loan and lease losses and income tax expense) due to changes in interest rates. Interest rates are assumed to change up or down in a parallel fashion and earnings results are compared to a flat rate scenario as a base. The flat rate scenario holds the end of the period yield curve constant over the twelve month forecast horizon. Earnings simulation analysis incorporates assumptions about balance sheet changes such as asset and liability growth, loan and deposit pricing and changes to the mix of assets and liabilities. It is a measure of short-term interest rate risk. Equity at risk is defined as the change in the net economic value of assets and liabilities due to changes in interest rates compared to a base net economic value. Equity at risk analyzes sensitivity in the present value of cash flows over the expected life of existing assets, liabilities and off-balance sheet contracts. It is a measure of the long-term interest rate risk to future earnings streams embedded in the current balance sheet.
Key assumptions underlying the present value of cash flows include the behavior of interest rates and spreads, asset prepayment speeds and attrition rates on deposits. Cash flow projections from the model are compared to market expectations for similar collateral types and adjusted based on experience with Webster Bank's own portfolio. The model's valuation results are compared to observable market prices for similar instruments whenever possible. The behavior of deposit and loan customers is studied using historical time series analysis to model future customer behavior under varying interest rate environments.
The equity at risk simulation process uses multiple interest rate paths generated by an arbitrage-free trinomial lattice term structure model. The Base Case rate scenario, against which all others are compared, uses the month-end LIBOR/Swap yield curve as a starting point to derive forward rates for future months. Using interest rate swap option volatilities as inputs, the model creates multiple rate paths for this scenario with forward rates as the mean. In shock scenarios, the starting yield curve is shocked up or down in a parallel fashion. Future rate paths are then constructed in a similar manner to the Base Case.
Cash flows for all instruments are generated using product specific prepayment models and account specific system data for properties such as maturity date, amortization type, coupon rate, repricing frequency and repricing date. The asset/liability simulation software is enhanced with a mortgage prepayment model and a Collateralized Mortgage Obligation database. Instruments with explicit options (i.e., caps, floors, puts and calls) and implicit options (i.e., prepayment and early withdrawal ability) require such a rate and cash flow modeling approach to more accurately quantify value and risk. On the asset side, risk is impacted the most by mortgage loans and mortgage-backed securities, which can typically prepay at any time without penalty and may have embedded caps and floors. On the liability side, there is a large concentration of customers with indeterminate maturity deposits who have options to add or withdraw funds from their accounts at any time. Webster Bank also has the option to change the interest rate paid on these deposits at any time.

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Webster's earnings at risk model incorporates net interest income and non-interest income and expense items, some of which vary with interest rates. These items include mortgage banking income, mortgage servicing rights and derivative mark to market adjustments.
Four main tools are used for managing interest rate risk: (1) the size and duration of the investment portfolio, (2) the size and duration of the wholesale funding portfolio, (3) off-balance sheet interest rate contracts and (4) the pricing and structure of loans and deposits. ALCO meets at least monthly to make decisions on the investment and funding portfolios based on the economic outlook, the Committee's interest rate expectations, the risk position and other factors. ALCO delegates pricing and product design responsibilities to individuals and sub-committees but monitors and influences their actions on a regular basis.
Various interest rate contracts, including futures and options, interest rate swaps and interest rate caps and floors can be used to manage interest rate risk. These interest rate contracts involve, to varying degrees, credit risk and interest rate risk. Credit risk is the possibility that a loss may occur if a counter party to a transaction fails to perform according to the terms of the contract. The notional amount of interest rate contracts is the amount upon which interest and other payments are based. The notional amount is not exchanged; therefore, the notional amounts should not be taken as a measure of credit risk. See Note 1 - Summary of Significant Accounting Policies and Note 13 - Derivative Financial Instruments in the Notes to Condensed Consolidated Financial Statements contained elsewhere within this report for additional information.
Certain derivative instruments, primarily forward sales of mortgage-backed securities, are utilized by Webster Bank in its efforts to manage risk of loss associated with its mortgage banking activities. Prior to closing and funds disbursement, an interest-rate lock commitment is generally extended to the borrower. During such time, Webster Bank is subject to risk that market rates of interest may change impacting pricing on loan sales. In an effort to mitigate this risk, forward delivery sales commitments are established, thereby setting the sales price.
The following table summarizes the estimated impact that gradual parallel changes in interest rates of 100 and 200 basis points over a twelve month period starting March 31, 2013 and December 31, 2012 might have on Webster’s pre-tax, pre-provision earnings for the subsequent twelve month period, compared to earnings assuming no change in interest rates.
 
 
-200bp
-100bp
+100bp
+200bp
March 31, 2013
N/A
N/A
0.3%
1.4%
December 31, 2012
N/A
N/A
(0.3)%
0.3%
Interest rates are assumed to change up or down in a parallel fashion and net income results are compared to a flat rate scenario as a base. The flat rate scenario holds the end of period yield curve constant over a twelve month forecast horizon. Webster is within policy limits for all scenarios. The flat rate scenario at both the end of 2012 and as of March 31, 2013 assumed a federal funds rate of 0.25%. The decrease in earnings at risk to higher rates since year end is primarily due to the sale of interest rate futures. As the federal funds rate was at 0.25% on March 31, 2013, the -100 and -200 basis point scenarios have been excluded. The interest rate risk position continues to take advantage of the moderately steep yield curve and extended period of short-term interest rates. Webster is well within policy limits for all scenarios.
Webster can also hold futures and options positions to minimize the price volatility of certain assets held as trading securities. Changes in the market value of these positions are recognized in the Condensed Consolidated Statements of Income.
The following table summarizes the estimated impact that immediate non-parallel changes in interest rates might have on Webster’s net income for the subsequent twelve month period starting March 31, 2013 and December 31, 2012.
 
 
Short End of the Yield Curve
Long End of the Yield Curve
 
-100bp
-50bp
+50bp
+100bp
-100bp
-50bp
+50bp
+100bp
March 31, 2013
N/A
N/A
(1.6
)%
(3.1
)%
(7.7
)%
(3.6
)%
2.5
%
5.1
%
December 31, 2012
N/A
N/A
(2.2
)%
(4.4
)%
(7.4
)%
(3.4
)%
2.7
%
5.4
%

The non-parallel scenarios are modeled with the short end of the yield curve moving up or down 50 and 100 basis points while the long end of the yield curve remains unchanged and vice versa. The short end of the yield curve is defined as terms less than 18 months and the long end as terms of greater than 18 months. Webster's earnings generally benefit from a fall in short-term interest rates since more new and existing liabilities than assets are tied to short-term rates. The ultimate benefit Webster derives from this mismatch is dependent on the pricing elasticity of its large managed rate core deposit base and the impact of any rate floors on those deposits. An increase in short-term interest rates has the opposite effect on earnings. Webster's earnings generally benefit from a rise in long-term interest rates since more new and existing assets than liabilities are tied to long-term rates. The

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decrease in earnings from a fall in long-term rates is typically greater than the increase in earnings from a rise in long-term rates due to the acceleration of asset prepayment activity as rates fall. These results reflect the annualized impact to earnings of immediate rate changes. The actual impact can be uneven during the year especially in the Short End scenarios where asset yields tied to Prime or LIBOR change immediately while certain deposit rate changes take more time. The decrease in earnings at risk to the short end of the yield curve moving up is primarily due to the sale of interest rate futures. The increase in earnings at risk to the long end of the yield curve moving down is due primarily to incrementally higher forecast of residential mortgage prepayment speeds. Webster is within policy for all scenarios.
The following table summarizes the estimated economic value of assets, liabilities and off-balance sheet contracts at March 31, 2013 and December 31, 2012 and the projected change to economic values if interest rates instantaneously increase or decrease by 100 basis points.
 
  
Book
Value
Estimated
Economic
Value
Estimated Economic Value Change
 
(Dollars in thousands)
-100 BP
+100 BP
March 31, 2013
 
 
 
 
Assets
$
20,110,538

$
20,062,780

N/A
$
(396,402
)
Liabilities
17,982,407

17,704,487

N/A
(395,188
)
Total
$
2,128,131

$
2,358,293

N/A
$
(1,214
)
Net change as % base net economic value
 
 
 
(0.1
)%
December 31, 2012
 
 
 
 
Assets
$
20,146,765

$
20,154,666

N/A
$
(352,358
)
Liabilities
18,053,235

17,912,452

N/A
(424,867
)
Total
$
2,093,530

$
2,242,214

N/A
$
72,509

Net change as % base net economic value
 
 
 
3.2
 %

Changes in economic value can be best described using duration. Duration is a measure of the price sensitivity of financial instruments for small changes in interest rates. For fixed rate instruments it can also be thought of as the weighted average expected time to receive future cash flows. For floating rate instruments it can be thought of as the weighted average expected time until the next rate reset. The longer the duration, the greater the price sensitivity for given changes in interest rates. Floating rate instruments may have durations as short as one day and therefore have very little price sensitivity due to changes in interest rates. Increases in interest rates typically reduce the value of fixed rate assets as future discounted cash flows are worth less at higher discount rates. A liability's value decreases for the same reason in a rising rate environment. A reduction in value of a liability is a benefit, however, as this is an obligation of Webster.
Duration gap is the difference between the duration of assets and the duration of liabilities. A duration gap near zero implies that the balance sheet is matched and would exhibit no change in estimated economic value for a small change in interest rates. Webster's duration gap was negative 0.6 years at March 31, 2013. At the end of 2012, the duration gap was negative 0.9 years. A negative duration gap implies that liabilities are longer than assets and therefore, they have more price sensitivity than assets and will reset their interest rates slower than assets. Consequently, Webster's net estimated economic value would increase when interest rates rise as the increased value of liabilities would more than offset the decreased value of assets. The opposite would occur when interest rates fall. Earnings would also generally be expected to increase when interest rates rise and decrease when rates fall over the longer term absent the effects of new business booked in the future. The change in Webster's duration gap is due to asset duration increasing from 1.6 years to 1.8 years driven primarily by lower forecast MBS prepayment speeds and liability duration declining from 2.5 years to 2.4 years driven primarily by deposit mix change.
These estimates assume that management does not take any action to mitigate any positive or negative effects from changing interest rates. The earnings and economic values estimates are subject to factors that could cause actual results to differ. Management believes that Webster's interest rate risk position at March 31, 2013 represents a reasonable level of risk given the current interest rate outlook. Management, as always, is prepared to act in the event that interest rates do change rapidly.
Impact of Inflation and Changing Prices
The Condensed Consolidated Financial Statements and related data presented herein have been prepared in accordance with U.S. generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation.

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Unlike most industrial companies, substantially all of the assets and liabilities of a banking institution are monetary in nature. As a result, interest rates have a more significant impact on Webster's performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the price of goods and services.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information regarding quantitative and qualitative disclosures about market risk appears under Part 1, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, under the caption “Asset/Liability Management and Market Risk”.


ITEM 4. CONTROLS AND PROCEDURES
As of March 31, 2013, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including its Chief Executive Officer and its Chief Financial Officer, of the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934). Based on this evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of March 31, 2013 for recording, processing, summarizing and reporting the information the Company is required to disclose in the reports it files under the Securities Exchange Act of 1934, within the time periods specified in the SEC's rules and forms. There were no changes made in the Company’s internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS
From time to time, Webster and its subsidiaries are subject to certain legal proceedings and claims in the ordinary course of business. Management presently believes that the ultimate outcome of these proceedings, individually and in the aggregate, will not be material to Webster or its consolidated financial position. Webster establishes reserves for specific legal matters when it determines that the likelihood of an unfavorable outcome is probable and the loss is reasonably estimable. Legal proceedings are subject to inherent uncertainties, and unfavorable rulings could occur that could cause Webster to adjust its litigation reserves or could have, individually or in the aggregate, a material adverse effect on its business, financial condition, or operating results.

ITEM 1A. RISK FACTORS
During the three months ended March 31, 2013, there were no material changes to the risk factors as previously disclosed in Webster's Annual Report on Form 10-K for the year ended December 31, 2012.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table provides information with respect to any purchase of shares of Webster common stock made by or on behalf of Webster or any “affiliated purchaser” for the quarter ended March 31, 2013:
 
Period
Total
Number of
Shares
Purchased (1)
Average Price
Paid Per
Share
Total
Number of
Warrants
Purchased (2)
Average Price
Paid Per
Warrant
Total
Number of
Shares
Purchased
as a Part of
Publicly
Announced
Plans or
Programs
Maximum
Dollar Amount Available for Repurchase
Under the
Plans or
Programs (1)
January 1-31, 2013
2,473

$
20.41

4,000

$
7.59

—

50,000,000

February 1-28, 2013
667

22.25

—

—

—

50,000,000

March 1-31, 2013
1,583

22.87

—

—

—

50,000,000

Total
4,723

$
21.49

4,000

$
7.59

—

50,000,000


(1)
The Company’s current stock repurchase program, which was reconfigured on December 6, 2012, authorized the Company to repurchase $100 million of common stock. The program will remain in effect until fully utilized or until modified, superseded or terminated. All 4,316 shares repurchased during the three months ended March 31, 2013 were repurchased outside of the repurchase program in the open market to fund equity compensation plans.
(2)
Warrants to purchase common stock at an exercise price of $18.28 per share, listed on the NYSE under the symbol “WBS WS”.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable

ITEM 4. MINE SAFETY DISCLOSURES
Not applicable

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ITEM 5. OTHER INFORMATION
The following tabular information supersedes the corresponding numerical disclosure set forth under the heading "Summary Compensation Table" in the Company's definitive proxy statement on Schedule 14A filed with the Securities and Exchange Commission on March 15, 2013 (the "Proxy Statement"). The footnotes to such table continue to apply to the corresponding portions of the revised disclosure below. The columns which contain revised numerical disclosure are indicated by an asterisk. There were no summary compensation table adjustments for prior years. The revisions have no effect on the Company's financial statements, which valued long-term equity compensation in accordance with ASC Topic 718.
The valuations of stock awards and option awards in the Proxy Statement have been revised to reflect computation of the aggregate grant date fair value in accordance with FASB ASC Topic 718. The valuation of stock awards in the Proxy Statement reflected current market value, whereas ASC Topic 718 requires a forward looking valuation for the portion of performance shares based on total shareholder return compared to the Company's Compensation Peer Group. The valuation of option awards in the Proxy Statement reflected a fixed valuation ratio adopted by the Compensation Committee.
Name and Principal Position
Year
Salary ($)
Bonus ($)
* Stock Awards ($)
* Option Awards ($)
Non-Equity Incentive Plan Compensation ($)
Change in Pension Value and Non-qualified Deferred Compensation Earnings ($)
All Other Compensation ($)
* Total ($)
James C. Smith Chairman and Chief Executive Officer
2012
879,800

—

1,071,805

1,315,864

1,059,279

699,100

757,685

5,783,533

 
 
 
 
 
 
 
 
 
 
Gerald P. Plush President and Chief Operating Officer
2012
535,000

—

445,672

547,138

450,898

5,300

227,964

2,211,972

 
 
 
 
 
 
 
 
 
 
Glenn I. MacInnes EVP and Chief Financial Officer
2012
400,000

—

230,467

282,960

301,000

—

20,091

1,234,518

 
 
 
 
 
 
 
 
 
 
Joseph J. Savage EVP, Commercial Banking
2012
330,500

—

203,480

249,833

291,518

40,400

91,289

1,207,020

 
 
 
 
 
 
 
 
 
 
Anne M. Slattery Former EVP, Retail Banking
2012
310,000

—

173,518

213,028

211,978

—

50,476

959,000

 
 
 
 
 
 
 
 
 
 
Jeffrey N. Brown Former EVP, Human Resources, Marketing and Communications
2012
257,372

50,000

219,011

209,550

140,398

54,900

158,140

1,089,371

 
 
 
 
 
 
 
 
 
 

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The following tabular information supersedes the corresponding numerical disclosure set forth under the heading "Grant of Plan-Based Awards" in the Proxy Statement. The footnotes to such table continue to apply to the corresponding portions of the revised disclosure below. The column which contains revised numerical disclosure is indicated by an asterisk.
Name
Grant Date
* Grant Date Fair Value of Stock and Option Awards ($)
James C. Smith
2/22/2012
2,387,669

Gerald P. Plush
2/22/2012
992,810

Glenn I. MacInnes
2/22/2012
513,427

Joseph J. Savage
2/22/2012
453,313

Anne M. Slattery
2/22/2012
386,546

Jeffrey N. Brown
2/22/2012
428,561



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ITEM 6. EXHIBITS
3.1
  
Third Amended and Restated Certificate of Incorporation (filed as Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, filed with the SEC on May 2, 2012 and incorporated herein by reference).
 
 
3.2
  
Certificate of Designations establishing the rights of the Company’s 8.50% Series A Non-Cumulative Perpetual Convertible Preferred Stock (filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on June 11, 2008 and incorporated herein by reference).
 
 
3.3
  
Certificate of Designations establishing the rights of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series B (filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on November 24, 2008 and incorporated herein by reference).
 
 
3.4
  
Certificate of Designations establishing the rights of the Company’s Perpetual Participating Preferred Stock, Series C (filed as exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on July 31, 2009 and incorporated herein by reference).
 
 
3.5
  
Certificate of Designations establishing the rights of the Company’s Non-Voting Perpetual Participating Preferred Stock, Series D (filed as exhibit 3.2 to the Company’s Current Report on Form 8-K filed with the SEC on July 31, 2009 and incorporated herein by reference).
 
 
3.6
 
Certificate of Designations establishing the rights of the Company's 6.40% Series E Non-Cumulative Perpetual Preferred Stock (filed as Exhibit 3.3 to the Company's Registration Statement on Form 8-A filed with the SEC on December 4, 2012 and incorporated herein by reference).
 
 
 
3.7
  
Bylaws, as amended effective October 22, 2012 (filed as Exhibit 3.1 to the Company's Current Report on Form 8-K filed with the SEC on October 26, 2012, and incorporated herein by reference).

 
 
4.1
 
Deposit Agreement, dated as December 4, 2012, by and among the Company, Computershare Shareowner Services LLC, as Depository, and the Holders of Depository Receipts (filed as Exhibit 4.1 to the Company's Current Report on Form 8-K filed with the SEC on December 4, 2012 and incorporated herein by reference).
 
 
 
31.1
  
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, signed by the Company’s Chief Executive Officer.
 
 
31.2
  
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, signed by the Company’s Chief Financial Officer.
 
 
32.1 +
  
Written Statement pursuant to 18 U.S.C. § 1350, as created by section 906 of the Sarbanes-Oxley Act of 2002, signed by the Company’s Chief Executive Officer.
 
 
32.2 +
  
Written Statement pursuant to 18 U.S.C. § 1350, as created by section 906 of the Sarbanes-Oxley Act of 2002, signed by the Company’s Chief Financial Officer.
 
 
101
  
The following materials from the Webster Financial Corporation Quarterly Report on Form 10-Q for the quarter ended September 30, 2012 formatted in eXtensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Comprehensive Income, (iv) the Condensed Consolidated Statements of Shareholders' Equity, (v) the Condensed Consolidated Statements of Cash Flows and (vi) the Notes to Condensed Consolidated Financial Statements tagged as blocks of text and in detail.
 
+
 
This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.



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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
WEBSTER FINANCIAL CORPORATION
 
 
 
 
Registrant
 
 
 
 
 
Date: May 3, 2013
 
 
By:
/S/    JAMES C. SMITH        
 
 
 
 
James C. Smith
 
 
 
 
Chairman and Chief Executive Officer
 
 
 
 
 
Date: May 3, 2013
 
 
By:
/S/    GLENN I. MACINNES        
 
 
 
 
Glenn I. MacInnes
 
 
 
 
Executive Vice President and
 
 
 
 
Chief Financial Officer
 
 
 
 
(Principal Financial Officer)
 
 
 
 
 
Date: May 3, 2013
 
 
By:
/S/    GREGORY S. MADAR        
 
 
 
 
Gregory S. Madar
 
 
 
 
Senior Vice President and
 
 
 
 
Chief Accounting Officer
 
 
 
 
(Principal Accounting Officer)


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Table of Contents

WEBSTER FINANCIAL CORPORATION
EXHIBIT INDEX
 
3.1
  
Third Amended and Restated Certificate of Incorporation (filed as Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, filed with the SEC on May 2, 2012 and incorporated herein by reference).
 
 
3.2
  
Certificate of Designations establishing the rights of the Company’s 8.50% Series A Non-Cumulative Perpetual Convertible Preferred Stock (filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on June 11, 2008 and incorporated herein by reference).
 
 
3.3
  
Certificate of Designations establishing the rights of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series B (filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on November 24, 2008 and incorporated herein by reference).
 
 
3.4
  
Certificate of Designations establishing the rights of the Company’s Perpetual Participating Preferred Stock, Series C (filed as exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on July 31, 2009 and incorporated herein by reference).
 
 
3.5
  
Certificate of Designations establishing the rights of the Company’s Non-Voting Perpetual Participating Preferred Stock, Series D (filed as exhibit 3.2 to the Company’s Current Report on Form 8-K filed with the SEC on July 31, 2009 and incorporated herein by reference).
 
 
3.6
 
Certificate of Designations establishing the rights of the Company's 6.40% Series E Non-Cumulative Perpetual Preferred Stock (filed as Exhibit 3.3 to the Company's Registration Statement on Form 8-A filed with the SEC on December 4, 2012 and incorporated herein by reference).
 
 
 
3.7
  
Bylaws, as amended effective October 22, 2012 (filed as Exhibit 3.1 to the Company's Current Report on Form 8-K filed with the SEC on October 26, 2012, and incorporated herein by reference).

 
 
4.1
 
Deposit Agreement, dated as December 4, 2012, by and among the Company, Computershare Shareowner Services LLC, as Depository, and the Holders of Depository Receipts (filed as Exhibit 4.1 to the Company's Current Report on Form 8-K filed with the SEC on December 4, 2012 and incorporated herein by reference).
 
 
 
31.1
  
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, signed by the Company’s Chief Executive Officer.
 
 
31.2
  
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, signed by the Company’s Chief Financial Officer.
 
 
32.1 +
  
Written Statement pursuant to 18 U.S.C. § 1350, as created by section 906 of the Sarbanes-Oxley Act of 2002, signed by the Company’s Chief Executive Officer.
 
 
32.2 +
  
Written Statement pursuant to 18 U.S.C. § 1350, as created by section 906 of the Sarbanes-Oxley Act of 2002, signed by the Company’s Chief Financial Officer.
 
 
101
  
The following materials from the Webster Financial Corporation Quarterly Report on Form 10-Q for the quarter ended September 30, 2012 formatted in eXtensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Comprehensive Income, (iv) the Condensed Consolidated Statements of Shareholders' Equity, (v) the Condensed Consolidated Statements of Cash Flows and (vi) the Notes to Condensed Consolidated Financial Statements tagged as blocks of text and in detail.
 
+
This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.


    


85