10-Q 1 d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2011.

or

 

¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number: 001-31486

 

 

LOGO

WEBSTER FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   06-1187536

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

145 Bank Street (Webster Plaza), Waterbury, Connecticut   06702
(Address of principal executive offices)   (Zip Code)

(203) 578-2202

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    þ  Yes    ¨  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

þ  Yes    ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   þ    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  þ

The number of shares of common stock, par value $.01 per share, outstanding as of April 29, 2011 was 87,537,448.

 

 

 

 


Table of Contents

 

INDEX

 

     Page No.  

PART I – FINANCIAL INFORMATION

  

Item 1.

 

Financial Statements

     3   

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     47   

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

     72   

Item 4.

 

Controls and Procedures

     72   

PART II - OTHER INFORMATION

  

Item 1.

 

Legal Proceedings

     73   

Item 1A.

 

Risk Factors

     74   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     74   

Item 3.

 

Defaults Upon Senior Securities

     74   

Item 4.

 

[Removed and Reserved]

     74   

Item 5.

 

Other Information

     74   

Item 6.

 

Exhibits

     75   

SIGNATURES

     76   

EXHIBIT INDEX

     77   

 

2


Table of Contents

PART I. – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

(In thousands, except share and per share data)

   March 31,
2011
    December 31,
2010
 
     (Unaudited)        

Assets:

    

Cash and due from banks

   $ 170,691      $ 159,849   

Interest-bearing deposits

     104,982        52,811   

Trading securities, at fair value

     —          11,554   

Securities available for sale, at fair value

     2,195,109        2,413,776   

Securities held-to-maturity (fair value of $3,284,722 and $3,141,775)

     3,211,047        3,072,453   

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

     143,874        143,874   

Loans held for sale

     10,809        52,224   

Loans

     11,014,050        11,024,639   

Allowance for loan losses

     (297,948     (321,665
                

Loans, net

     10,716,102        10,702,974   

Deferred tax asset, net

     95,209        104,774   

Premises and equipment, net

     155,464        157,724   

Goodwill

     529,887        529,887   

Other intangible assets, net

     19,880        21,277   

Cash surrender value of life insurance policies

     300,683        298,149   

Prepaid FDIC premiums

     52,121        57,548   

Accrued interest receivable and other assets

     259,088        259,194   
                

Total assets

   $ 17,964,946      $ 18,038,068   
                

Liabilities and Equity:

    

Deposits:

    

Non-interest bearing

   $ 2,183,665      $ 2,216,987   

Interest bearing

     11,941,003        11,391,798   
                

Total deposits

     14,124,668        13,608,785   

Federal Home Loan Bank advances

     403,297        768,005   

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

     857,394        1,091,477   

Long-term debt

     570,637        582,837   

Accrued expenses and other liabilities

     184,320        203,898   
                

Total liabilities

     16,140,316        16,255,002   
                

Shareholders’ equity:

    

Preferred stock, $.01 par value; Authorized - 3,000,000 shares:

    

Series A issued and outstanding - 28,939 shares

     28,939        28,939   

Common stock, $.01 par value; Authorized - 200,000,000 shares

    

Issued - 90,694,337 shares and 90,688,879 shares

     907        907   

Paid-in capital

     1,160,929        1,160,690   

Retained earnings

     776,968        746,057   

Less: Treasury stock, (at cost; 3,764,429 shares and 3,830,050 shares)

     (146,711     (149,462

Accumulated other comprehensive loss, net

     (5,979     (13,709
                

Total Webster Financial Corporation shareholders’ equity

     1,815,053        1,773,422   

Non controlling interests

     9,577        9,644   
                

Total equity

     1,824,630        1,783,066   
                

Total liabilities and equity

   $ 17,964,946      $ 18,038,068   
                

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

 

     Three months ended
March 31,
 

(In thousands, except per share data)

   2011     2010  

Interest Income:

    

Interest and fees on loans and leases

   $ 121,231      $ 123,350   

Taxable interest and dividends on securities

     46,493        46,625   

Non-taxable interest and dividends on securities

     7,351        7,531   

Loans held for sale

     422        314   
                

Total interest income

     175,497        177,820   
                

Interest Expense:

    

Deposits

     22,769        31,951   

Repurchase agreements and other short-term borrowings

     3,562        4,003   

Federal Home Loan Bank advances

     3,355        4,418   

Long-term debt

     6,362        6,064   
                

Total interest expense

     36,048        46,436   
                

Net interest income

     139,449        131,384   

Provision for loan losses

     10,000        43,000   
                

Net interest income after provision for loan losses

     129,449        88,384   
                

Non-interest Income:

    

Deposit service fees

     25,340        27,784   

Loan related fees

     4,829        6,005   

Wealth and investment services

     6,722        5,835   

Mortgage banking activities

     1,253        (138

Increase in cash surrender value of life insurance policies

     2,533        2,578   

Net loss on trading securities

     (1,799     —     

Net gain on sale of investment securities

     2,176        4,318   

Total other-than-temporary impairment losses on securities

     —          (8,214

Portion of the loss recognized in other comprehensive income

     —          4,534   
                

Net impairment losses recognized in earnings

     —          (3,680

Other income

     3,248        4,314   
                

Total non-interest income

     44,302        47,016   
                

Non-interest Expense:

    

Compensation and benefits

     67,071        60,956   

Occupancy

     14,735        14,440   

Technology and equipment expense

     15,392        15,268   

Intangible assets amortization

     1,397        1,397   

Marketing

     5,520        4,791   

Professional and outside services

     2,430        2,602   

Deposit insurance

     5,781        6,085   

Other expenses

     16,799        28,085   
                

Total non-interest expense

     129,125        133,624   
                

Income from continuing operations before income tax expense

     44,626        1,776   

Income tax expense

     12,326        355   
                

Income from continuing operations

     32,300        1,421   

Income from discontinued operations, net of tax

     1,995        —     
                

Consolidated net income

     34,295        1,421   

Less: Net loss attributable to non controlling interests

     (1     —     
                

Net income attributable to Webster Financial Corporation

     34,296        1,421   

Preferred stock dividends

     (831     (5,455

Accretion of preferred stock discount and gain on extinguishment

     —          (2,035
                

Net income (loss) available to common shareholders

   $ 33,465      $ (6,069
                

Net income (loss) per common share:

    

Basic

    

Income (loss) from continuing operations

   $ 0.36      $ (0.08

Net income (loss) available to common shareholders

     0.38        (0.08

Diluted

    

Income (loss) from continuing operations

     0.34        (0.08

Net income (loss) available to common shareholders

     0.36        (0.08

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

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WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited)

 

     Three months ended March 31, 2010  

(In thousands, except share and per
share data)

   Preferred
Stock
    Common
Stock
     Paid-In
Capital
    Retained
Earnings
    Treasury
Stock
    Accumulated
Other
Comprehensive
(Loss) Income
    Non
Controlling
Interests
     Total  

Balance, December 31, 2009

   $ 422,109      $ 820       $ 1,007,740      $ 708,024      $ (161,911   $ (28,389   $ 9,641       $ 1,958,034   
                                                                  

Comprehensive income:

                  

Net income

     —          —           —          1,421        —          —          —           1,421   

Other comprehensive income (loss), net of taxes:

                  

Net change in unrealized gain on securities available for sale

     —          —           —          —          —          4,273        —           4,273   

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

     —          —           —          —          —          (2,947     —           (2,947

Amortization of unrealized loss on securities transferred to held to maturity

     —          —           —          —          —          85        —           85   

Net unrealized gain on derivative instruments

                271           271   

Net actuarial gain and prior service cost for pension and other postretirement benefits

     —          —           —          —          —          387        —           387   
                                                                  

Other comprehensive income, net of taxes

     —          —           —          —          —          2,069        —           2,069   
                                                                  

Total comprehensive income, net of taxes

                     3,490   

Dividends declared on common stock of $.01 per share

     —          —           —          (782     —          —          —           (782

Dividends declared on Series A preferred stock $21.25 per share

     —          —           —          (615     —          —          —           (615

Dividends incurred on Series B prefered stock $12.50 per share

     —          —           —          (4,583     —          —          —           (4,583

Redemption of Preferred Stock

     (98,365     —           —          (1,635     —          —          —           (100,000

Subsidiary preferred stock dividends $0.2156 per share

     —          —           —          (216     —          —          —           (216

Exercise of stock options

     —          —           308          110        —          —           418   

Net shares acquired related to employee share-based compensation plans

     —          —           —          —          (288     —          —           (288

Stock-based compensation expense

     —          —           (927     (813     1,493        —          —           (247

Accretion of preferred stock discount

     400        —           —          (400     —          —          —           —     

Issuance of common stock

     —          —           32        (759     1,233        —          —           506   
                                                                  

Balance, March 31, 2010

   $ 324,144      $ 820       $ 1,007,153      $ 699,642      $ (159,363   $ (26,320   $ 9,641       $ 1,855,717   
                                                                  

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited), continued

 

     Three months ended March 31, 2011  

(In thousands, except share and per
share data)

   Preferred
Stock
     Common
Stock
     Paid-In
Capital
    Retained
Earnings
    Treasury
Stock
    Accumulated
Other
Comprehensive
(Loss)
    Non
Controlling
Interests
    Total  

Balance, December 31, 2010

   $ 28,939       $ 907       $ 1,160,690      $ 746,057      $ (149,462   $ (13,709   $ 9,644      $ 1,783,066   
                                                                  

Comprehensive income:

                  

Net income

     —           —           —          34,296        —          —          (1     34,295   

Other comprehensive income (loss), net of taxes:

                  

Net change in unrealized gain on securities available for sale

     —           —           —          —          —          4,308        —          4,308   

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

     —           —           —          —          —          746        —          746   

Amortization of unrealized loss on securities

     —           —           —          —          —          28        —          28   

Transferred to held to maturity

     —           —           —          —          —          —          —          —     

Net unrealized gain on derivative instruments

     —           —           —          —          —          1,865        —          1,865   

Net actuarial gain and prior service cost for pension and other postretirement benefits

     —           —           —          —          —          783        —             783   
                                                                  

Other comprehensive income, net of taxes

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

Total comprehensive income, net of taxes

                     42,025   

Dividends declared on common stock of $.01 per share

     —           —           —          (871     —          —          —          (871

Dividends declared on Series A preferred stock $21.25 per share

     —           —           —          (615     —          —          —          (615

Subsidiary preferred stock dividends $0.2156 per share

     —           —           —          (216     —          —          —          (216

Exercise of stock options

     —           —           (35     —          58        —          —          23   

Net shares acquired related to employee share-based compensation plans

     —           —           —          —          (237     —          —          (237

Stock-based compensation expense

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

Issuance of common stock

     —           —           22        (250     560        —          —          332   

Other

     —           —           —          —          —          —          (66     (66
                                                                  

Balance, March 31, 2011

   $ 28,939       $ 907       $ 1,160,929      $ 776,968      $ (146,711   $ (5,979   $ 9,577      $ 1,824,630   
                                                                  

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 

     Three months ended
March 31,
 

(In thousands)

   2011     2010  

Operating Activities:

    

Consolidated net income

   $ 34,295      $ 1,421   

Income from discontinued operations, net of tax

     1,995        —     
                

Income from continuing operations Income from continuing operations

     32,300        1,421   

Adjustments to reconcile income from continuing operations to net cash provided by (used for) operating activities:

    

Provision for loan losses

     10,000        43,000   

Deferred tax expense (benefit)

     7,803        (1,554

Depreciation and amortization

     21,212        21,966   

Stock-based compensation

     1,189        (247

Net (gain) loss on the sale of foreclosed properties

     (315     2,061   

Write-down of premises and equipment

     —          9   

Gain on sale of premises and equipment

     (49     —     

Loss on write-down of investments to fair value

     —          3,680   

Gain on fair value adjustment of direct investments

     (1,103     (694

Loss on fair value adjustment of derivative instruments

     119        —     

Net gain on the sale of investment securities

     (2,176     (4,318

Net decrease in trading securities

     11,554        —     

Increase in cash surrender value of life insurance policies

     (2,534     (1,300

Net decrease (increase) in loans held for sale

     41,415        (17,262

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

     322        (154,026

Net decrease in accrued expenses and other liabilities

     (12,778     (2,392
                

Net cash provided by (used for) operating activities

     106,959        (109,656
                

Investing Activities:

    

Net (increase) decrease in interest-bearing deposits

     (52,171     228,117   

Purchases of available for sale securities

     (84,144     (528,208

Proceeds from maturities and principal payments of available for sale securities

     214,698        164,095   

Proceeds from sales of available for sale securities

     91,921        120,622   

Purchases of held-to-maturity securities

     (302,064     (378,214

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

     160,429        119,500   

Net (increase) decrease in loans

     (30,492     89,448   

Proceeds from sale of foreclosed properties

     4,348        3,842   

Proceeds from sale of premises and equipment

     769        675   

Purchases of premises and equipment

     (6,754     (2,575
                

Net cash used for investing activities

     (3,460     (182,698
                

Financing Activities:

    

Net increase in deposits

     515,883        361,399   

Proceeds from Federal Home Loan Bank advances

     45,934        243,000   

Repayments of Federal Home Loan Bank advances

     (410,425     (213,115

Net decrease in securities sold under agreements to repurchase and other short-term debt

     (234,084     (6,489

Redemption of preferred stock

     —          (100,000

Repayment of long-term debt

     (10,310     —     

Cash dividends paid to common shareholders

     (871     (782

Cash dividends paid to preferred shareholders of consolidated affiliate

     (216     —     

Cash dividends paid to preferred shareholders

     (615     (5,414

Exercise of stock options

     23        418   

Common stock issued

     332        506   

Common stock repurchased

     (237     (288

Other

     (66     —     
                

Net cash (used for) provided by financing activities

     (94,652     279,235   
                

Cash Flows from Discontinued Operations:

    

Operating Activities

     1,995        —     
                

Net cash provided by discontinued operations

     1,995        —     
                

Net increase (decrease) in cash and due from banks

     10,842        (13,119

Cash and due from banks at beginning of period

     159,849        171,184   
                

Cash and due from banks at end of period

   $ 170,691      $ 158,065   
                

Supplemental disclosure of cash flow information:

    

Interest paid

   $ 37,347      $ 45,968   

Income taxes paid

     6,194        91   

Noncash investing and financing activities:

    

Transfer of loans and leases, net to foreclosed properties

   $ 4,283      $ 7,390   

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

NOTE 1: Summary of Significant Accounting Policies

Nature of Operations. Webster Financial Corporation (together, with its consolidated subsidiaries, “Webster”, the “Company”, our company, we or us), is a bank holding company and financial holding company under the Bank Holding Company Act of 1956, as amended, headquartered in Waterbury, Connecticut and incorporated under the laws of Delaware in 1986. Webster’s principal assets at March 31, 2011 were 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 New England and into Westchester County, New York. Webster provides business and consumer banking, mortgage lending, financial planning, trust and investment services through 176 banking offices, 488 ATMs, mobile banking and its Internet website (www.websteronline.com). Webster Bank offers, through its HSA Bank division, health savings accounts on a nationwide basis. Webster also offers equipment financing, commercial real estate lending and asset-based lending.

Basis of Presentation. The Condensed Consolidated Financial Statements include the accounts of Webster and all other entities in which Webster has a controlling financial interest (collectively referred to as “Webster” or the “Company”). All significant intercompany balances and transactions have been eliminated in consolidation. The accounting and financial reporting policies Webster follows conform, in all material respects, to accounting principles generally accepted in the United States (“GAAP”) and to general practices within the financial services industry.

The Company determines whether it has a controlling financial interest in an entity by first evaluating whether the entity is a voting interest entity or a variable interest entity under accounting principles generally accepted in the United States. 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 holders with the obligation to absorb losses, the right to receive residual returns and the right to make decisions about the entity’s activities. Subsidiaries of the Company that have issued trust preferred securities are not consolidated.

The Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q have not been audited by an independent registered public accounting firm, but, in the opinion of management, reflect all adjustments necessary for a fair presentation of the Company’s financial position and results of operations. All such adjustments were of a normal and recurring nature. The Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q adopted by the Securities and Exchange Commission (“SEC”). Accordingly, the Condensed Consolidated Financial Statements do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the Company’s Consolidated Financial Statements, and notes thereto, for the year ended December 31, 2010, included in Webster’s Annual Report on Form 10-K filed with the SEC on February 25, 2011 (the “2010 Form 10-K”). Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period.

Use of Estimates. The preparation of the Condensed Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Condensed Consolidated Financial Statements. Actual results could differ from those estimates. The allowance for loan losses, the fair values of financial instruments, the deferred tax asset valuation allowance, status of contingencies and the goodwill evaluation are particularly subject to change.

Loans. Loans are stated at the principal amounts outstanding, net of 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 nonaccrual status when timely collection of principal and interest in accordance with contractual terms is doubtful. Loans are transferred to a nonaccrual basis generally when principal or interest payments become 90 days delinquent, unless the loan is well secured and in process of collection, or sooner when management concludes circumstances indicate that borrowers may be unable to meet contractual principal or interest payments.

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

 

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the Company’s credit risk team when 90 days past due and a specific determination is made to put a loan on non-accrual status. A charge off is recorded on a case by case basis when all or a portion of the loan is deemed to be uncollectible.

When a loan is put on nonaccrual status, unpaid accrued interest is reversed and charged against interest income. If ultimate repayment of a nonaccrual 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 nonaccrual 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 nonaccrual status when they become current as to principal and interest or demonstrate a period of performance under contractual terms and, in the opinion of management, are fully collectible as to principal and interest.

Allowance for Credit Losses. The allowance for credit losses includes the allowance for loan losses and the reserve for unfunded credit commitments.

Allowance for Loan Losses. The allowance for loan losses is a reserve established through a provision for loan losses charged to expense, which represents management’s best estimate of probable losses that have been incurred within the existing portfolio of loans at the balance sheet date. The allowance, in the judgment of management, is necessary to reserve for estimated losses inherent in the loan portfolio. The level of the allowance reflects management’s continuing evaluation of industry concentrations, specific credit risks, loan loss experience, current loan portfolio quality, present economic, political and regulatory conditions, as well as trends in the foregoing. Portions of the allowance may be allocated for specific loans; however, the entire allowance is available for any loan that, in management’s judgment, should be charged off. While management utilizes its best judgment and information available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond the Company’s control, including the performance of the Company’s loan portfolio, the economy, changes in interest rates and the view of the regulatory authorities toward loan classifications.

The Company’s allowance for loan losses consists of three elements: (i) specific valuation allowances established for probable losses on specific loans; (ii) historical valuation allowances calculated based on historical loan loss experience for similar 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, if 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. Loans identified as troubled debt restructurings (“TDR”) are considered impaired loans for the entire term of the loan, with very limited exceptions. Impairment is evaluated on a pooled basis for smaller-balance loans of a similar nature and on an individual loan basis depending on risk rating, accrual status and loan balance for other loans, primarily commercial loans. If a loan is impaired, a specific valuation allowance is established, if necessary, so that the loan is reported net, at the present value of estimated future cash flows using the loan’s original rate or at the fair value of collateral if repayment is expected solely from the collateral. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. Impaired loans, or portions thereof, are charged off when deemed uncollectible. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due.

Reserve for Unfunded Commitments. The reserve for unfunded commitments provides for probable losses inherent in lending related commitments, including unused commitments to extend credit, letters of credit, and financial guarantees.

Troubled Debt Restructurings. A modified loan is considered a TDR when two conditions are met: 1) the borrower is experiencing documented financial difficulty and 2) concessions are made by the Company that would not otherwise be considered for a borrower with similar credit characteristics. The most common types of modifications include below market rate reductions and/or maturity extensions. Modified terms are dependent upon the financial position and needs of the individual borrower, as the Company does not employ modification programs for temporary or trial periods. All modifications are permanent. The modified loan does not revert back to its original terms, even if the modified loan agreement is violated. If the modification agreement is violated, the loan is handled by the Company’s Restructuring and Recovery group for resolution, which may result in foreclosure.

The Company’s policy is to place all Consumer loan TDRs on non-accrual status for a minimum period of six months. Loans qualify for return to accrual status once they have demonstrated performance with the restructured terms of the loan agreement for a minimum of six months. Commercial TDRs are evaluated on a case by case basis. All TDRs are reported as impaired. Impaired and TDR classification may be removed if the borrower demonstrates compliance with the modified terms and the restructuring agreement specifies an interest rate equal to that which would be provided to a borrower with similar credit at the time of restructuring. The majority of TDRs are classified as impaired loans and TDRs for the remaining life of the loan.

 

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Earnings Per Share. Earnings per common share is computed using the two-class method. Basic earnings per common share is computed by dividing net earnings allocated to common stock by the weighted-average number of common shares outstanding during the applicable period, excluding outstanding participating securities. Diluted earnings per common share is computed using the weighted-average number of shares determined for the basic earnings per common share computation plus the dilutive effect of stock compensation using the treasury stock method. A reconciliation of the weighted-average shares used in calculating basic earnings per common share and the weighted average common shares used in calculating diluted earnings per common share for the reported periods is provided in Note 11 – Earnings Per Common Share.

Comprehensive Income. Comprehensive income includes all changes in shareholders’ equity during a period, except those resulting from transactions with shareholders. In addition to net income, other components of Webster’s comprehensive income include the after-tax effect of changes in the net unrealized gain/loss on securities available for sale, changes in the net actuarial gain/loss on defined benefit post-retirement benefit plans and changes in the accumulated gain/loss on effective cash flow hedging instruments.

Reclassifications. Certain items in prior financial statements have been reclassified to conform to current presentation. These reclassifications had no impact on the Company’s consolidated financial position, results of operations or net change in cash and cash equivalents.

There have been no changes to our significant accounting policies that were disclosed in the 2010 Form 10-K.

Accounting Standards Updates

ASU No. 2011-02, “Receivables (Topic 310) — A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring.” On April 5, 2011, the FASB issued ASU No. 2011-02 to clarify when a loan modification or restructuring is considered a troubled debt restructuring (“TDR”). The changes apply to a lender that modifies a receivable covered by Subtopic 310-40, “Receivables—Troubled Debt Restructurings by Creditors.” In evaluating whether a restructuring constitutes a TDR, a creditor must separately conclude that both of the following exist: (i) the restructuring constitutes a concession and (ii) the debtor is experiencing financial difficulties. A creditor may determine that a debtor is experiencing financial difficulties, even though the debtor is not currently in default, if the creditor determines it is probable that the debtor would default on its payments for any of its debts in the foreseeable future without the loan modification. Lenders who determine that they are making a concession on the terms of the loan to a borrower who is having financial problems should follow the guidance found in ASU No. 2011-02. The guidance on identifying and disclosing TDRs is effective for interim and annual reporting periods beginning on or after June 15, 2011 and applies retrospectively to restructuring occurring on or after the beginning of the year. The guidance on measuring the impairment of a receivable restructured in a troubled debt restructuring is effective on a prospective basis. The Company is currently evaluating the impact of the adoption of this accounting standards update on the Company’s financial statements.

NOTE 2: Restructuring and Repositioning

During the three months ended March 31, 2011, Webster recognized net costs of $0.3 in branch facility optimization expense, of which $0.2 related to an early lease termination payment on a facility which the Company plans to vacate by the end of 2011. These costs are included in other non-interest expense in the Condensed Consolidated Statements of Operations.

On April 1, 2011, as previously announced, Webster closed five branches in response to changing customer usage patterns and its initiative to optimize branch operations. Three of the branches are owned by Webster and two of the branch facilities are leased. Webster recorded a $3.1 million liability related to lease termination and the write-off of leasehold improvements for the two leased branches during the fourth quarter of 2010.

Activity in the restructuring and repositioning liability for the three months ended March 31, 2011 is presented in the following table.

 

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Three months ended March 31, 2011 (In thousands)

   Charged  to
Expense
     Liability  
     

Beginning Balance

   $ —         $ 4,823   

Facility consolidation

     273         135   
                 

Total Accrued

   $ 273       $ 4,958   

Payments related to:

     

Severance and other employee related costs

        119   
                 

Total Payments

        119   
                 

Restructuring and Repositioning Reserve Balance

   $ 273       $ 4,839   
                 

NOTE 3: Investment Securities

A summary of the amortized cost, carrying value, and fair value of Webster’s investment securities, excluding trading securities, is presented below.

 

     March 31, 2011  
            Recognized in OCI            Not Recognized in OCI        

(Dollars in thousands)

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

Available for sale:

                  

U.S. Treasury Bills

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

Agency collateralized mortgage obligations (“CMOs”) - GSE

     1,199,247         12,069         (5,003     1,206,313         —           —          1,206,313   

Pooled trust preferred securities (a)

     62,756         1,862         (10,480     54,138         —           —          54,138   

Single issuer trust preferred securities

     50,892         66         (4,900     46,058         —           —          46,058   

Equity securities-financial institutions (b)

     5,806         1,150         (152     6,804         —           —          6,804   

Mortgage-backed securities - GSE

     546,408         26,706         —          573,114         —           —          573,114   

Commercial mortgage-backed securities (CMBS)

     293,920         16,628         (2,066     308,482         —           —          308,482   
                                                            

Total available for sale

   $ 2,159,229       $ 58,481       $ (22,601   $ 2,195,109       $ —         $ —        $ 2,195,109   
                                                            

Held to maturity:

                  

Municipal bonds and notes

   $ 669,639         —           —        $ 669,639       $ 9,978       $ (14,644   $ 664,973   

Agency collateralized mortgage obligations (“CMOs”) - GSE

     817,785         —           —          817,785         14,733         (191     832,327   

Mortgage-backed securities - GSE

     1,616,670         —           —          1,616,670         69,524         (6,282     1,679,912   

CMBS/Private Label MBS

     106,953         —           —          106,953         772         (215     107,510   
                                                            

Total held to maturity

   $ 3,211,047       $ —         $ —        $ 3,211,047       $ 95,007       $ (21,332   $ 3,284,722   
                                                            

Total investment securities

   $ 5,370,276       $ 58,481       $ (22,601   $ 5,406,156       $ 95,007       $ (21,332   $ 5,479,831   
                                                            

 

(a) Amortized cost is net of $21.3 million of credit related other-than-temporary impairments at March 31, 2011.
(b) Amortized cost is net of $21.6 million of other-than-temporary impairments at March 31, 2011.

 

 

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     December 31, 2010  
            Recognized in OCI            Not Recognized in OCI        

(Dollars in thousands)

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

Available for sale:

                  

U.S. Treasury Bills

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

Agency notes - GSE

     100,020         29         —          100,049         —           —          100,049   

Agency collateralized mortgage obligations (“CMOs”) - GSE

     1,172,942         12,524         (6,307     1,179,159         —           —          1,179,159   

Pooled trust preferred securities (a)

     65,054         2,693         (14,558     53,189         —           —          53,189   

Single issuer trust preferred securities

     50,852         —           (8,577     42,275         —           —          42,275   

Equity securities-financial

institutions (b)

     6,510         1,064         (233     7,341         —           —          7,341   

Mortgage-backed securities - GSE

     691,567         32,103         (88     723,582         —           —          723,582   

Commercial mortgage-backed securities (CMBS)

     296,730         14,736         (3,485     307,981         —           —          307,981   
                                                            

Total available for sale

   $ 2,383,875       $ 63,149       $ (33,248   $ 2,413,776       $ —         $ —        $ 2,413,776   
                                                            

Held to maturity:

                  

Municipal bonds and notes

   $ 670,287       $ —         $ —        $ 670,287       $ 7,978       $ (25,199   $ 653,066   

Agency collateralized mortgage obligations (“CMOs”) - GSE

     643,189         —           —          643,189         13,292         (515     655,966   

Mortgage-backed securities - GSE

     1,707,893         —           —          1,707,893         77,204         (4,263     1,780,834   

CMBS/Private Label MBS

     51,084         —           —          51,084         825         —          51,909   
                                                            

Total held to maturity

   $ 3,072,453       $ —         $ —        $ 3,072,453       $ 99,299       $ (29,977   $ 3,141,775   
                                                            

Total investment securities

   $ 5,456,328       $ 63,149       $ (33,248   $ 5,486,229       $ 99,299       $ (29,977   $ 5,555,551   
                                                            

 

(a) Amortized cost is net of $26.3 million of credit related other-than-temporary impairments at December 31, 2010.
(b) Amortized cost is net of $21.7 million of other-than-temporary impairments at December 31, 2010.

Securities with a carrying value totaling $2.6 billion at March 31, 2011 and December 31, 2010 were pledged to secure public funds, trust deposits, repurchase agreements and for other purposes, as required or permitted by law.

At March 31, 2011 and December 31, 2010, the Company had no investments in obligations of individual states, counties, or municipalities which exceed 10% of consolidated shareholders’ equity

The amortized cost and fair value of debt securities at March 31, 2011, by contractual maturity, are set for the below.

 

     Available for Sale      Held to Maturity  

(Dollars in thousands)

   Amortized
Cost
     Fair
Value
     Amortized
Cost
     Fair
Value
 

Due in one year or less

   $ 200       $ 200       $ 19,070       $ 19,087   

Due after one year through five years

     —           —           4,991         5,126   

Due after five years through ten years

     40,567         38,578         320,196         336,116   

Due after ten years

     2,112,656         2,149,527         2,866,790         2,924,393   
                                   

Totals

   $  2,153,423       $ 2,188,305       $ 3,211,047       $ 3,284,722   
                                   

For the purposes of the maturity schedule, mortgage-backed securities, which are not due at a single maturity date, have been allocated over maturity groupings based on the expected maturity of the underlying collateral. Actual maturities may differ from contractual maturities because certain borrowers have the right to call or prepay obligations with or without call or prepayment penalties. At March 31, 2011, the Company had $693.3 million of callable securities in its investment portfolio.

Management evaluates securities for other than temporary impairment (“OTTI”) on a quarterly basis. All securities classified as held to maturity or available for sale that are in an unrealized loss position are evaluated for OTTI. Consideration is given to, among other qualitative factors; current market conditions, fair value in relationship to cost, extent and nature of change in fair value, issuer rating changes and trends, volatility of earnings, current analysts’ evaluations, and all available information relevant to the collectability of debt securities. If the Company intends to sell the security or, if it is more likely than not that the Company will be required to sell the security prior to recovery of its amortized cost basis, the security’s amortized cost is written down to fair value and the respective loss is recorded as non-interest expense in the Condensed Consolidated Statement of Operations. If the Company does not intend to sell the security and if it is more likely than not that the Company will not be required to sell the security prior to recovery of its amortized cost basis, only the credit component of the impairment charge of a debt security is

 

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recognized as a loss in non-interest income in the Condensed Consolidated Statements of Operations. The remaining non credit impairment component is recorded in other comprehensive income (“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 Condensed Consolidated Statements of Operations.

The following table provides 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, 2011.

 

            March 31, 2011  
      Less Than
Twelve Months
    Twelve Months or
Longer
    Total  

(Dollars in thousands)

   # of
Holdings
     Fair Value      Unrealized
Losses
    Fair Value      Unrealized
Losses
    Fair Value      Unrealized
Losses
 

Available for Sale:

                  

Agency CMOs - GSE

     9       $ 439,590       $ (5,003   $ —         $ —        $ 439,590       $ (5,003

Pooled trust preferred securities

     7         7,325         (337     35,371         (10,143     42,696         (10,480

Single issuer trust preferred securities

     7         —           —          37,794         (4,900     37,794         (4,900

Equity securities

     13         221         (29     1,101         (123     1,322         (152

Commercial mortgage-backed securities (CMBS)

     2         4,502         (9     22,141         (2,057     26,643         (2,066
                                                            

Total available for sale

     38       $ 451,638       $ (5,378   $ 96,407       $ (17,223   $ 548,045       $ (22,601
                                                            

Held-to-maturity:

                  

Municipal bonds and notes

     311       $ 287,354       $ (13,472   $ 10,256       $ (1,172   $ 297,610       $ (14,644

Agency CMOs - GSE

     1         51,251         (191     —           —          51,251         (191

Mortgage backed securities - GSE

     11         293,411         (6,282     —           —          293,411         (6,282

CMBS/Private Label MBS

     3         33,929         (215     —           —          33,929         (215
                                                            

Total held-to-maturity

     326       $ 665,945       $ (20,160   $ 10,256       $ (1,172   $ 676,201       $ (21,332
                                                            

Total investment securities

     364       $ 1,117,583       $ (25,538   $ 106,663       $ (18,395   $ 1,224,246       $ (43,933
                                                            

 

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The following table provides 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 December 31, 2010.

 

            Less Than Twelve
Months
    Twelve Months or
Longer
    Total  

(Dollars in thousands)

   # of
Holdings
     Fair Value      Unrealized
Losses
    Fair Value      Unrealized
Losses
    Fair Value      Unrealized
Losses
 

Available for Sale:

                  

Agency CMOs - GSE

     9       $ 450,099       $ (6,307   $ —         $ —        $ 450,099       $ (6,307

Pooled trust preferred securities

     9         8,126         (1,534     40,147         (13,024     48,273         (14,558

Single issuer trust preferred securities

     9         —           —          42,275         (8,577     42,275         (8,577

Equity securities

     14         1,328         (222     138         (11     1,466         (233

Mortgage-backed securities-GSE

     1         28,391         (88     —           —          28,391         (88

Commercial mortgage-backed securities (CMBS)

     3         —           —          55,817         (3,485     55,817         (3,485
                                                            

Total available for sale

     45       $ 487,944       $ (8,151   $ 138,377       $ (25,097   $ 626,321       $ (33,248
                                                            

Held-to-maturity:

                  

Municipal bonds and notes

     410       $ 357,771       $ (23,621   $ 11,737       $ (1,578   $ 369,508       $ (25,199

Agency CMOs - GSE

     1         51,874         (515     —           —          51,874         (515

Mortgage-backed securities - GSE

     11         301,305         (4,263     —           —          301,305         (4,263
                                                            

Total held-to-maturity

     422       $ 710,950       $ (28,399   $ 11,737       $ (1,578   $ 722,687       $ (29,977
                                                            

Total investment securities

     467       $ 1,198,894       $ (36,550   $ 150,114       $ (26,675   $ 1,349,008       $ (63,225
                                                            

The following 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, 2011.

Trust Preferred Securities – Pooled Issuers – At March 31, 2011, the fair value of the pooled trust preferred securities was $54.1million, an increase of $0.9 million from the fair value of $53.2 million at December 31, 2010. The increase in fair value is the result of both market expectations of higher future interest rates, as a rise in interest rates for variable rate securities will increase future cash flows, and improving overall market conditions compared to December 31, 2010, partially offset by one issuer deferral resulting in a reduction of unrealized gains. In addition the Company sold one security with an amortized cost of $2.0 million at a loss of $1.0 million. The gross unrealized loss of $10.5 million at March 31, 2011 is primarily attributable to changes in interest rates including a liquidity spread premium to reflect the inactive and illiquid nature of the trust preferred securities market at this time. For the three months ended March 31, 2011, the Company recognized no credit related OTTI for these securities. As a result, there was no additional non credit related OTTI recognized in OCI during the three months ended March 31, 2011. The pooled trust preferred portfolio consists of collateralized debt obligations (“CDOs”) containing predominantly bank and insurance collateral that are investment grade and below investment grade. The Company employs an internal CDO model for projection of future cash flows and discounting those cash flows to a net present value. An internal model is used to value the securities due to the continued inactive market and illiquid nature of pooled trust preferred in the entire capital structure. Each underlying issuer in the pools is rated internally using the latest financial data on each institution, and future deferrals, defaults and losses are then estimated on the basis of continued stress in the financial markets. Further, all current and projected deferrals are not assumed to cure, and all current and projected defaults are assumed to have no recovery value. The resulting net cash flows are then discounted at current market levels for similar types of products that are actively trading. To determine potential OTTI due to credit losses, management compares the amortized cost to the present value of expected cash flows adjusted for deferrals and defaults using the discount margin at the time of purchase. Other factors considered include an analysis of excess subordination and temporary interest shortfall coverage. Based on the valuation analysis as of March 31, 2011, 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.

 

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The following table summarizes pertinent information that was considered by management in evaluating Trust Preferred Securities – Pooled Issuers for OTTI.

Trust Preferred Securities - Pooled Issuers

 

           Amortized      Unrealized     Fair      Lowest Credit
Ratings as of
March 31,
  

Total

Credit Related
Other-Than-
Temporary
Impairment thru

    % of
Performing
Bank/
Insurance
     Current
Deferrals/
Defaults
(As a % of
Original
 

Deal Name (c)

   Class    Cost (b)      Gains      (Losses)     Value      2011 (a)    March 31, 2011     Issuers      Collateral)  
(Dollars in thousands)                                                         

Security F

   C    $ 3,014       $ 1,785       $ (544   $ 4,255       C    $ (10,850     82.6         23.1   

Security H

   B      3,483         —           (1,114     2,369       B      (352     100.0         —     

Security I

   B      4,463         —           (1,444     3,019       CCC      (365     94.1         9.0   

Security J

   B      5,262         —           (1,878     3,384       CCC      (806     90.6         11.6   

Security K

   A      7,328         —           (110     7,218       CCC      (2,040     65.8         37.2   

Security L

   B      8,717         —           (2,877     5,840       CCC      (867     96.0         5.8   

Security M

   A      7,369         77         (9     7,437       D      (4,942     56.0         39.6   

Security N

   A      23,120         —           (2,504     20,616       A      (1,104     90.6         11.6   
                                                      
      $ 62,756       $ 1,862       $ (10,480   $ 54,138          $ (21,326     
                                                      

 

(a) The Company utilized credit ratings provided by Moody’s, S&P and Fitch in its evaluation of issuers.
(b) For the securities deemed impaired, the amortized cost reflects previous OTTI recognized in earnings.
(c) One security (Security G) with an amortized cost of $2.0 million was sold during the three months ended March 31, 2011 for a loss of $1.0 million.

Trust Preferred Securities - Single Issuers – At March 31, 2011, the fair value of the single issuer trust preferred portfolio was $46.1 million, an increase of $3.8 million from the fair value of $42.3 million at December 31, 2010. The gross unrealized loss of $4.9 million at March 31, 2011 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 continued to service debt and showed indications of stabilization in their capital structures. Based on the review of the qualitative and quantitative factors presented above, these securities were not deemed to be other than temporarily impaired at March 31, 2011 as the Company does not intend to sell these investments and has determined, based upon available evidence, that it is more likely than not that the Company will not be required to sell the security before the recovery of its amortized cost.

 

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

Trust Preferred Securities - Single Issuers

 

Deal Name

   Amortized
Cost
     Unrealized     Fair
Value
     Lowest Credit
Ratings as of
March 31,
2011
     Total
Other-Than-
Temporary
Impairment
thru March
31, 2011
 
      Gains      Losses          
(Dollars in thousands)                                         

Security B

   $ 6,826       $ —         $ (1,044   $ 5,782         BB       $ —     

Security C

     8,600         —           (286     8,314         BBB         —     

Security D

     9,540         —           (1,840     7,700         BB         —     

Security E

     11,680         39         (700     11,019         BBB         —     

Security F

     14,246         27         (1,030     13,243         BBB         —     
                                              
   $ 50,892       $ 66       $ (4,900   $ 46,058          $ —     
                                              

Agency CMOs – GSE – There were $5.0 million in unrealized losses in the Company’s investment in agency CMOs at March 31, 2011 compared to $6.3 million at December 31, 2010. The improvement in unrealized losses was the result of tighter market spreads during the first quarter 2011. The contractual cash flows for these investments are performing as expected. The Company does not consider these investments to be other than temporarily impaired at March 31, 2011 as the Company does not intend to sell these investments and has determined, based on available evidence, that it is more likely than not that the Company will not be required to sell the security before the recovery of its amortized cost.

Equity securities – The unrealized losses on the Company’s investment in equity securities decreased to $152 thousand at March 31, 2011 from $233 thousand at December 31, 2010. This portfolio consists primarily of investments in the common stock of small capitalization financial institutions based in New England ($5.6 million of the total fair value at March 31, 2011) and auction rate preferred securities ($1.2 million of the total fair value at March 31, 2011). When estimating the recovery period for equity securities in an unrealized loss position, management utilizes analyst forecasts, earnings assumptions and other company specific financial performance metrics. In addition, this assessment incorporates general market data, industry and sector cycles and related trends to determine a reasonable recovery period. The Company evaluated the near-term prospects of the issuers in relation to the severity and duration of the impairment. The Company determined its holdings of equity securities were not deemed to be other than temporarily impaired at March 31, 2011.

Mortgage-backed securities – GSE –There were no unrealized losses in the Company’s investment in residential mortgage-backed securities issued by the GSEs at March 31, 2011 compared to $88 thousand in unrealized losses at December 31, 2010. The contractual cash flows for these investments are performing as expected with the exception of unexpected principal prepayments resulting from GSE buyout programs initiated in 2010. With tighter market spreads during the three months ended March 31, 2011, these securities are all at unrealized gains.

Commercial mortgage backed securities – The unrealized losses on the Company’s investment in commercial mortgage-backed securities issued by entities other than GSEs decreased to $2.1 million at March 31, 2011 from $3.5 million at December 31, 2010. This decrease is primarily the result of improvement in credit spreads in 2011 compared to 2010 and the recent overall drop in credit spreads during the three months ended March 31, 2011. The contractual cash flows for these investments are performing as expected. The decline in market value is attributable to cumulative changes in interest rates and not due to underlying credit deterioration. The Company does not intend to sell these investments and has determined, based upon available evidence, it is more likely than not that the Company will not be required to sell the securities before the recovery of its amortized cost, therefore the Company has determined that these investments were not other than temporarily impaired at March 31, 2011.

The following 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, 2011:

Municipal bonds and notes – The unrealized losses on the Company’s investment in municipal bonds and notes decreased to $14.6 million at March 31, 2011 from $25.2 million at December 31, 2010. This decrease is primarily the result of credit spread improvement in 2011 compared to 2010. The municipal portfolio is comprised of bank qualified bonds, over 90% with credit ratings ranging from AAA to A. In addition, the portfolio is comprised of 87% General Obligation bonds and 13% Revenue bonds. The Company does not intend to sell these investments and has determined,

 

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based upon available evidence, it is more likely than not that the Company will not be required to sell the securities before the recovery of its amortized cost, therefore the Company has determined that these investments were not other-than-temporarily impaired at March 31, 2011.

Agency collateralized mortgage obligations – GSE – The unrealized losses on the Company’s investment in agency CMOs are attributable to one security at March 31, 2011 were $0.2 million compared to $0.5 million at December 31, 2010. The contractual cash flows for this investment is performing as expected. With tighter market spreads during the three months ended March 31, 2011, the remainder of agency CMO securities are all at unrealized gains.

Mortgage-backed securities – GSE – The unrealized losses on the Company’s investment in residential mortgage-backed securities issued by the GSEs increased to $6.3 million at March 31, 2011 from $4.3 million at December 31, 2010. The contractual cash flows for these investments are performing as expected with the exception of unexpected principal prepayments resulting from GSE buyout programs initiated in 2010. As the decrease in market value is attributable to cumulative changes in interest rates versus underlying credit deterioration, and because management does not have the intent to sell the securities and, based upon available evidence, it is more likely than not that the Company will not be required to sell the securities before the recovery of its amortized cost, the Company does not consider these investments to be other-than-temporarily impaired at March 31, 2011.

CMBS and Private Label CMOs – There were unrealized losses of $0.2 million on the Company’s investment in commercial and residential mortgage-backed securities issued by entities other than GSEs at March 31, 2011 compared to no losses at December 31, 2010. These securities carry AAA ratings and are currently performing as expected.

There were no significant credit downgrades on held to maturity securities during the three months ended March 31, 2011, and these securities are currently performing as anticipated. The Company does not intend to sell these investments and has determined, based upon available evidence, that it is more likely than not that the Company will not be required to sell the securities before the recovery of its amortized cost

For the three months ended March 31, 2011 and 2010, proceeds from sale of available for sale securities were $91.9 million and $120.6 million, respectively. Gross gains realized from the sale of available for sale securities were $3.2 million and $4.3 million for the three months ended March 31, 2011 and 2010, respectively. Gross losses realized from the sale of available for sale securities were $1.0 million and zero for the three months ended March 31, 2011 and 2010, respectively. When securities are sold, the adjusted cost of the specific security sold is used to compute the gain or loss on the sale.

The following tables summarize the impact of net realized gains and losses on sales of securities, excluding trading securities, and the impact of the recognition of other than temporary impairments for the three months ended March 31, 2011 and 2010.

 

     Three months ended March 31,  
     2011     2010  

(In thousands)

   Gains      Losses     OTTI
Charges
     Net     Gains      Losses      OTTI
Charges
    Net  

Available for sale:

                    

Agency notes - GSE

   $ —         $ —        $ —         $ —        $ —         $ —         $ —        $ —     

Agency CMOs - GSE

     —           —          —           —          —           —           —          —     

Pooled trust preferred securities

     —           (974     —           (974     —           —           (3,613     (3,613

Single issuer trust preferred securities

     —           —          —           —             —             —     

Equity securities

     374         —          —           374        —           —           (67     (67

Mortgage-backed securities-GSE

     2,776         —          —           2,776        4,318         —           —          4,318   

Commercial mortgage-backed securities

     —           —          —           —          —           —           —          —     
                                                                    

Total available for sale

   $ 3,150       $ (974   $ —         $ 2,176      $ 4,318       $ —         $ (3,680   $ 638   
                                                                    

The following is a roll forward of the amount of credit related OTTI for the three months ended March 31, 2011 and 2010:

 

     Three months ended
March 31,
 

(in thousands)

   2011     2010  

Balance of credit related OTTI, beginning of period

   $ 26,320      $ 43,492   

Additions for credit related OTTI not previously recognized

     —          3,613   

Reduction for securities sold

     (4,994     —     

Reduction for non-credit related OTTI previously recognized when there is no intent and/or requirement to sell before recovery of the amortized cost basis

     —          —     
                

Subtotal of additions and reductions, net

     (4,994     3,613   
                

Balance of credit-related OTTI, end of period

   $ 21,326      $ 47,105   
                

 

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To the extent that changes in interest rates, credit movements and other factors that influence the fair value of investments occur, the Company may be required to record impairment charges for other than temporary impairment in future periods.

There were no additions to credit related OTTI for the three months ended March 31, 2011. There was a reduction in outstanding credit-related OTTI due to the sale of one security during the three months ended March 31, 2011.

Investments in Private Equity Funds

In addition to investment securities, the Company carries investments in private equity funds. These investments, which totaled $12.5 million at March 31, 2011, are included in other assets in the Condensed Consolidated Balance Sheets. The Company recognized a gain of $1.1 million during the three months ended March 31, 2011 and a gain of $0.7 million, net of OTTI charges on these investments, during the three months ended March 31, 2010. These amounts are included in other non-interest income on the Condensed Consolidated Statement of Operations.

Trading Securities

During the three months ended March 31, 2011, the Company sold the remaining 571,143 shares of Higher One’s common stock and recorded a loss of $1.8 million in the Condensed Consolidated Statements of Operations.

 

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NOTE 4: Loans, Net

Recorded Investment in Loans. The following table summarizes recorded investment in loans by portfolio segment at March 31, 2011 and December 31, 2010:

 

     March 31, 2011  

(In thousands)

   Residential      Consumer      Commercial      Commercial
Real Estate
     Equipment
Financing
     Total  

Loans:

                 

Ending balance (a)

   $ 3,150,269       $ 2,811,568       $ 2,192,619       $ 2,216,206       $ 643,388       $ 11,014,050   
                                                     

Ending balance: individually evaluated for impairment

   $ 146,994       $ 40,533       $ 126,022       $ 287,191       $ 11,277       $ 612,017   
                                                     

Ending balance: collectively evaluated for impairment

   $ 3,003,275       $ 2,771,035       $ 2,066,597       $ 1,929,015       $ 632,111       $ 10,402,033   
                                                     

 

(a) The total loan balance includes $9.3 million of net unamortized premiums and $26.1 million of net deferred costs as of March 31, 2011.

 

     December 31, 2010  

(In thousands)

   Residential      Consumer      Commercial      Commercial
Real Estate
     Equipment
Financing
     Total  

Loans:

                 

Ending balance (a)

   $ 3,147,492       $ 2,859,221       $ 2,109,013       $ 2,197,988       $ 710,925       $ 11,024,639   
                                                     

Ending balance: individually evaluated for impairment

   $ 138,921       $ 41,366       $ 148,064       $ 247,049       $ 15,702       $ 591,102   
                                                     

Ending balance: collectively evaluated for impairment

   $ 3,008,571       $ 2,817,855       $ 1,960,949       $ 1,950,939       $ 695,223       $ 10,433,537   
                                                     

 

(a) The total loan balance includes $10.1 million of net unamortized premiums and $28.2 million of net deferred costs as of December 31, 2010.

Allowance for Loan Losses. The following table summarizes the allowance for loan losses by portfolio segment for the three months ending March 31, 2011 and 2010:

 

     March 31, 2011  

(In thousands)

   Residential     Consumer     Commercial     Commercial
Real Estate
    Equipment
Financing
    Unallocated     Total  

Allowance for loan losses:

              

Balance, beginning of period

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

Provision (benefit) charged to expense

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

Losses charged off

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

Recoveries

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

Balance, end of period

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

Ending balance: individually evaluated for impairment

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

Ending balance: collectively evaluated for impairment

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

 

     March 31, 2010  

(In thousands)

   Residential     Consumer     Commercial     Commercial
Real Estate
    Equipment
Financing
    Unallocated      Total  

Allowance for loan losses:

               

Balance, beginning of period

   $ 26,895      $ 102,017      $ 88,406      $ 74,753      $ 29,113      $ 20,000       $ 341,184   

Provision charged to expense

     5,449        19,259        6,631        6,955        2,706        2,000         43,000   

Losses charged off

     (4,525     (19,211     (7,640     (6,592     (5,107     —           (43,075

Recoveries

     382        659        769        —          952        —           2,762   
                                                         

Balance, end of period

   $ 28,201      $ 102,724      $ 88,166      $ 75,116      $ 27,664      $ 22,000       $ 343,871   
                                                         

Ending balance: individually evaluated for impairment

   $ 8,518      $ 1,836      $ 14,900      $ 5,681      $ 423      $ —         $ 31,358   
                                                         

Ending balance: collectively evaluated for impairment

   $ 19,683      $ 100,888      $ 73,266      $ 69,435      $ 27,241      $ 22,000       $ 312,513   
                                                         

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. Management 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 or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

Commercial real estate loans are subject to underwriting standards and processes similar to commercial and industrial loans, in addition to those of 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 generally largely dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more 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. This diversity helps reduce the Company’s exposure to adverse economic events that 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 market areas it serves.

 

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With respect to loans to developers and builders that are secured by non-owner occupied properties that the Company may originate from time to time, the Company generally requires the borrower and/or sponsor to have had an existing relationship with the Company and have a proven record of success. Construction loans 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 inaccurate. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing.

To monitor and manage consumer loan risk, policies and procedures are developed and modified, as needed, jointly by line and Risk Management personnel. This activity, coupled with relatively small loan amounts that are spread across many individual borrowers, minimizes risk. Additionally, 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 to property value, and the borrower’s debt to income level and are also influenced by statutory requirements.

Impaired Loans. A loan is deemed impaired when the contractual amounts of principal and interest are not expected to be collected in accordance with the contractual provisions. The amount of impairment is calculated using the fair value of expected cash flows or collateral, in accordance with the most likely means of recovery. A specific valuation allowance is established equal to the calculated amount of impairment.

Impairment analysis is performed for all modified loans that are deemed to TDRs and specific reserves are established as appropriate. For those TDRs where recovery is cash flow dependent, the original contractual interest rate for the loan is used as the discount rate for fixed rate loans. The current or weighted average (for multiple notes within a commercial borrowing arrangement) rate is used as the discount rate when the interest rate floats with a specified index. A change in terms or payments would be included in the impairment calculation.

At March 31, 2011, the recorded investment balance of impaired loans totaled $616.4 million and included $360.4 million of loans with $37.9 million of established specific reserves. The $616.4 million of impaired loans at March 31, 2011 included $495.1 million of TDRs. At December 31, 2010, the recorded investment of impaired loans totaled $595.1 million and included $363.0 million of loans with specific reserves of $36.0 million. The increase in impaired loans is the result of an increase in troubled debt restructurings.

 

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The following tables summarize impaired loans by class as of March 31, 2011 and December 31, 2010:

 

     At March 31, 2011  

(In thousands)

   Recorded
Investment
     Unpaid
Principal
Balance
     Related Valuation
Allowance
     Average Investment
in Impaired Loans
 

Loans without a specific valuation allowance

           

Residential:

           

1-4 family

   $ 12,064       $ 16,284       $ —         $ 13,122   

Permanent-NCLC

     2,450         4,508         —           2,556   

Construction

     436         661         —           218   

Liquidating portfolio-construction loans

     15         9,057         —           16   

Consumer:

           —        

Home equity loans

     4,257         51,830         —           5,473   

Liquidating portfolio-home equity loans

     1,740         46,279         —           2,250   

Other consumer

     —           —           —           —     

Commercial:

           

Commercial non-mortgage

     60,794         63,386         —           56,783   

Asset-based loans

     7,420         7,864         —           8,901   

Commercial real estate:

           

Commercial real estate

     104,463         107,947         —           96,551   

Commercial construction

     18,333         18,249         —           18,078   

Residential development

     30,950         31,176         —           26,044   

Equipment Financing

     13,160         23,430         —           14,090   

Total:

           

Residential

     14,965         30,510         —           15,912   

Consumer

     5,997         98,109         —           7,723   

Commercial

     68,214         71,250         —           65,684   

Commercial real estate

     153,746         157,372         —           140,673   

Equipment Financing

     13,160         23,430         —           14,090   
                                   

Total loans without a specific valuation allowance

   $ 256,082       $ 380,671       $ —         $ 244,082   
                                   

Loans with a specific valuation allowance

           

Residential:

           

1-4 family

   $ 121,941       $ 128,655       $ 11,884       $ 117,099   

Permanent-NCLC

     10,300         10,971         2,247         10,205   

Construction

     134         131         3         67   

Liquidating portfolio-construction loans

     —           —           —           —     

Consumer:

           

Home equity loans

     28,857         30,372         2,711         27,713   

Liquidating portfolio-home equity loans

     5,789         6,649         911         5,618   

Other consumer

     8         8         1         8   

Commercial:

           

Commercial non-mortgage

     55,299         59,372         9,110         68,736   

Asset-based loans

     3,050         5,050         502         3,237   

Commercial real estate:

           

Commercial real estate

     117,601         124,165         9,560         104,550   

Commercial construction

     16,213         21,662         881         17,343   

Residential development

     643         1,212         95         5,633   

Equipment Financing

     519         519         2         1,489   

Total:

           

Residential

     132,375         139,757         14,134         127,371   

Consumer

     34,654         37,029         3,623         33,339   

Commercial

     58,349         64,422         9,612         71,973   

Commercial real estate

     134,457         147,039         10,536         127,526   

Equipment Financing

     519         519         2         1,489   
                                   

Total loans with a specific valuation allowance

   $ 360,354       $ 388,766       $ 37,907       $ 361,698   
                                   

Total

   $ 616,436       $ 769,437       $ 37,907       $ 605,780   
                                   

 

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     At December 31, 2010  

(In thousands)

   Recorded
Investment
     Unpaid
Principal
Balance
     Related Valuation
Allowance
     Average Investment
in Impaired Loans
 

Loans without a specific valuation allowance

           

Residential:

           

1-4 family

   $ 14,179       $ 18,906       $ —         $ 16,182   

Permanent-NCLC

     2,662         4,508         —           6,491   

Construction

     —           —           —           23   

Liquidating portfolio-construction loans

     17         10,008         —           1,271   

Consumer:

           

Home equity loans

     6,689         49,702         —           7,323   

Liquidating portfolio-home equity loans

     2,761         48,083         —           3,096   

Other consumer

     —           —           —           43   

Commercial:

           

Commercial non-mortgage

     52,772         56,872         —           46,918   

Asset-based loans

     10,382         10,826         —           8,871   

Commercial real estate:

           

Commercial real estate

     88,638         91,310         —           86,810   

Commercial construction

     17,823         17,770         —           28,105   

Residential development

     21,139         21,587         —           37,256   

Equipment Financing

     15,020         26,458         —           16,105   

Total:

           

Residential

     16,858         33,422         —           23,967   

Consumer

     9,450         97,785         —           10,462   

Commercial

     63,154         67,698         —           55,789   

Commercial real estate

     127,600         130,667         —           152,171   

Equipment Financing

     15,020         26,458         —           16,105   
                                   

Total loans without a specific valuation allowance

   $ 232,082       $ 356,030       $ —         $ 258,494   
                                   

Loans with a specific valuation allowance

           

Residential:

           

1-4 family

   $ 112,256       $ 117,842       $ 11,358       $ 74,245   

Permanent-NCLC

     10,111         10,789         2,204         9,102   

Construction

     —           —           —           —     

Liquidating portfolio-construction loans

     —           —           —           —     

Consumer:

           

Home equity loans

     26,569         27,879         2,577         15,700   

Liquidating portfolio-home equity loans

     5,446         6,458         888         3,672   

Other consumer

     8         8         1         4   

Commercial:

           

Commercial non-mortgage

     82,172         83,412         10,589         76,562   

Asset-based loans

     3,425         4,905         133         4,976   

Commercial real estate:

           

Commercial real estate

     91,499         92,211         5,054         47,036   

Commercial construction

     18,473         21,698         2,015         9,564   

Residential development

     10,624         11,495         1,097         16,700   

Equipment Financing

     2,459         2,601         81         2,353   

Total:

           

Residential

     122,367         128,631         13,562         83,347   

Consumer

     32,023         34,345         3,466         19,376   

Commercial

     85,597         88,317         10,722         81,538   

Commercial real estate

     120,596         125,404         8,166         73,300   

Equipment Financing

     2,459         2,601         81         2,353   
                                   

Total loans with a specific valuation allowance

   $ 363,042       $ 379,298       $ 35,997       $ 259,914   
                                   

Total

   $ 595,124       $ 735,328       $ 35,997       $ 518,408   
                                   

 

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Table of Contents

The following table summarizes interest income recognized by class for the three months ended March 31, 2011 and 2010:

 

(In thousands)

   Interest Income
recognized for the three
months ended

March 31, 2011
     Interest Income
recognized for the three
months ended

March 31, 2010
 

Loans without a specific valuation allowance

     

Residential:

     

1-4 family

   $ 21       $ 195   

Permanent-NCLC

     —           12   

Construction

     —           —     

Liquidating portfolio-construction loans

     7         —     

Consumer:

     

Home equity loans

     163         114   

Liquidating portfolio-home equity loans

     81         73   

Other consumer

     —           —     

Commercial:

     

Commercial non-mortgage

     640         192   

Asset-based loans

     92      

Commercial real estate:

     

Commercial real estate

     999         576   

Commercial construction

     247         —     

Residential development

     162         238   

Equipment Financing

     12         74   

Total:

     

Residential

     28         207   

Consumer

     244         187   

Commercial

     732         192   

Commercial real estate

     1,408         814   

Equipment Financing

     12         74   
                 

Total loans without a specific valuation allowance

   $ 2,424       $ 1,474   
                 

Loans with a specific valuation allowance

     

Residential:

     

1-4 family

   $ 1,200       $ 329   

Permanent-NCLC

     99         64   

Construction

     2         9   

Liquidating portfolio-construction loans

     —           —     

Consumer:

     

Home equity loans

     361         52   

Liquidating portfolio-home equity loans

     122         21   

Other consumer

     —           —     

Commercial:

     

Commercial non-mortgage

     776         418   

Asset-based loans

     —           —     

Commercial real estate:

     

Commercial real estate

     972         167   

Commercial construction

     75         12   

Residential development

     —           —     

Equipment Financing

     10         54   

Total:

     

Residential

     1,301         402   

Consumer

     483         73   

Commercial

     776         418   

Commercial real estate

     1,047         179   

Equipment Financing

     10         54   
                 

Total loans with a specific valuation allowance

   $ 3,617       $ 1,126   
                 

Total

   $ 6,041       $ 2,600   
                 

Of the total interest income recognized for the three months ended March 31, 2011 and March 31, 2010, $0.9 million and $0.6 million of interest income, respectively, was recognized on a cash basis method of accounting for the residential and consumer portfolio segments.

 

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Loan Portfolio Aging. The following table summarizes the Company’s loan portfolio aging by class of loan as of March 31, 2011 and December 31, 2010:

 

March 31, 2011

                                                

(In thousands)

   30-59 Days
Past Due
     60-89 Days
Past Due
     Greater Than
90 Days
     Total Past Due      Current      Total Loans
Receivable (a)
     Total Loans >
90 Days and
Accruing
 

Residential:

                    

1-4 family

   $ 9,785       $ 8,732       $ 87,595         106,112       $ 2,989,410       $ 3,095,522       $ —     

Permanent-NCLC

     —           563         6,844         7,407         9,701         17,108         —     

Construction

     —           —           1,311         1,311         29,949         31,260         —     

Liquidating portfolio-construction loans

     —           —           —           —           —           —           —     

Consumer:

                    

Home equity loans

     11,388         5,625         31,616         48,629         2,538,897         2,587,526         —     

Liquidating portfolio-home equity loans

     3,767         2,199         7,802         13,768         155,267         169,035         —     

Other consumer

     307         137         106         550         31,512         32,062         —     

Commercial:

                    

Commercial non-mortgage

     6,373         2,373         40,631         49,377         1,659,368         1,708,745         97   

Asset-based loans

     —           —           5,062         5,062         479,222         484,284         —     

Commercial real estate:

                    

Commercial real estate

     16,296         5,933         38,368         60,597         2,026,002         2,086,599         —     

Commercial construction

     —           —           8,727         8,727         65,756         74,483         —     

Residential development

     —           —           17,300         17,300         38,948         56,248         —     

Equipment Financing

     8,922         1,598         16,602         27,122         608,656         635,778         —     
                                                              

Total

   $ 56,838       $ 27,160       $ 261,964       $ 345,962       $ 10,632,688       $ 10,978,650       $ 97   
                                                              

 

(a)    Excludes $9.3 million of net unamortized premiums and $26.1 million of net deferred costs as of March 31, 2011.

 

       

December 31, 2010                                                 

(In thousands)

   30-59 Days
Past Due
     60-89 Days
Past Due
     Greater Than
90 Days
     Total Past Due      Current      Total Loans
Receivable (a)
     Total Loans >
90 Days and
Accruing
 

Residential:

                    

1-4 family

   $ 13,682       $ 7,305       $ 91,556       $ 112,543       $ 2,980,882       $ 3,093,425       $ —     

Permanent-NCLC

     —