NOTE 17: Fair Value Measurements

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined using quoted market prices. However, in many instances, there are no quoted market prices available. In such instances, fair values are determined using various valuation techniques. Various assumptions and observable inputs must be relied upon in applying these techniques. Accordingly, the fair value estimates may not be realized in an immediate transfer of the respective asset or liability.

Fair Value Hierarchy- The three levels within the fair value hierarchy are as follows:

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Level 1: Valuation is based upon unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

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Level 2: Fair value is calculated using inputs other than quoted market prices that are directly or indirectly observable for the asset or liability. The valuation may rely on quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in inactive markets, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit ratings, etc.) or inputs that are derived principally or corroborated by market data by correlation or other means.

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Level 3: Inputs for determining the fair value of the respective assets or liabilities are not observable. Level 3 valuations are reliant upon pricing models and techniques that require significant management judgment or estimation.

Categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

A description of the valuation methodologies used by the Company is presented below:

Cash, Due from Banks, and Interest-bearing Deposits

The carrying amount of cash, due from banks, and interest-bearing deposits is used to approximate fair value, given the short time frame to maturity and as such assets do not present unanticipated credit concerns.


	At December 31, 2011				At December 31, 2010
(In thousands)	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Assets:
Cash and due from banks	$	195,957	$	195,957	$	159,849	$	159,849
Interest-bearing deposits		96,062		96,062		52,811		52,811
Trading securities		—		—		11,554		11,554
Securities available for sale		2,874,764		2,874,764		2,413,776		2,413,776
Securities held-to-maturity		2,973,727		3,130,546		3,072,453		3,141,775
Loans held for sale		57,391		57,391		52,224		52,224
Loans, net		10,991,917		11,097,390		10,696,532		10,701,251
Mortgage servicing assets (a)		7,831		9,968		7,256		10,281
Derivative instruments		47,134		47,134		35,198		35,198
Liabilities:
Deposits other than time deposits	$	10,821,390	$	10,619,712	$	10,458,876	$	10,010,222
Time deposits		2,834,635		2,883,006		3,149,909		3,205,361
Securities sold under agreements to repurchase and other short-term borrowings		1,164,706		1,212,228		1,091,477		1,112,078
FHLB advances and other long-term debt (b)		1,805,198		1,789,506		1,350,842		1,302,718
Derivative instruments:
Interest rate swaps		58,424		58,424		37,841		37,841
Fed Fund futures contract		1,365		1,365		2,081		2,081
Visa swap		2		2		—		—

(a)	The carrying amount of mortgage servicing assets is net of $0.9 million and $0.3 million reserves at December 31, 2011 and 2010, respectively. The estimated fair value does not include such adjustments.

(b)	The carrying amount of FHLB advances and other long-term debt is net of $12.5 million and $20.9 million in hedge accounting adjustments and discounts at December 31, 2011 and 2010, respectively. The estimated fair value does not include such adjustments.

When quoted prices are available in an active market, the Company classifies securities within level 1 of the valuation hierarchy. Level 1 securities include equity securities-financial institutions and U.S. Treasury bills.

If quoted market prices are not available, the Company employs an independent pricing service who utilizes matrix pricing to calculate fair value. Such fair value measurements consider observable data such as dealer quotes, market spreads, cash flows, yield curves, live trading levels, trade execution data, market consensus prepayments speeds, credit information, and the respective terms and conditions for debt instruments. The Company employs procedures to monitor pricing services' assumptions and establishes processes to challenge pricing services' valuations that appear unusual or unexpected. Level 2 securities include agency CMOs-GSE, single-issuer trust preferred securities, mortgage-backed securities-GSE and CMBS securities.

When a market is illiquid or there is a lack of transparency around the inputs to valuation, the respective securities are classified as level 3, and reliance is placed upon internally developed models and management judgment and valuation. Pooled trust preferred securities and auction rate preferred securities are currently classified as level 3.

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. Changes in discount rate assumptions, including benchmark rate and spread assumptions could have a direct impact on fair value. 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. Additional interest deferrals, defaults, or ratings changes could result in future OTTI charges.

At December 31, 2011, auction rate preferred securities were valued at par as the Company continues to receive redemptions at full par value. The portfolio value is $1.0 million at December 31, 2011. Previously, the Company had been using a third party service to provide pricing. Based on observable increased redemption activity at full par value and the relatively insignificant value of this portfolio, these securities have not been valued by the third party service since March 31, 2011.

On a quarterly basis, management reviews the trust preferred securities pricing generated from our internal model as well as the auction rate preferred securities redemption pricing conditions.

Loans Held for Sale

Loans held for sale are accounted for at the lower of cost or market. The fair value of loans held for sale is based on quoted market prices of similar loans sold in conjunction with securitization transactions, adjusted as required for changes in loan characteristics.

Loan and Lease Receivables

The Company employs an independent third party to provide fair value estimates for loans and leases held for investment. Such estimates are calculated using discounted cash flow analysis, using market interest rates for comparable loans. The associated cash flows are adjusted for credit and other potential losses. Fair value for impaired loans is estimated using the net present value of the expected cash flows or the fair value of the underlying collateral if repayment is collateral dependent.

Mortgage Servicing Assets

The Company accounts for servicing assets at cost, subject to impairment testing. When the carrying value exceeds fair value, a valuation allowance is established to reduce the carrying cost to fair value. Fair value is calculated as the present value of estimated future net servicing income and relies on market based assumptions for loan prepayment speeds, servicing costs, discount rates, and other economic factors.

Deposit Liabilities

The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities.

Securities Sold Under Agreements to Repurchase and Other Short Term Borrowings

Carrying value is an estimate of fair value for securities sold under agreements to repurchase and other short term borrowings that mature within 90 days. The fair values of other short-term borrowings are estimated using discounted cash flow analyses based on current market rates adjusted, as appropriate, for associated credit and option risks.

Long Term Debt

The fair value of long term debt is estimated using a discounted cash flow technique. Discount rates are matched with the time period of the expected cash flow and are adjusted, as appropriate, to reflect credit and option risk.

Derivative Instruments

Derivative instruments are internally valued using level 2 inputs obtained from third parties. The resulting fair values are validated against valuations performed by independent third parties.

Assets and Liabilities Measured at Fair Value on a Recurring Basis


	At December 31, 2011
(In thousands)	Carrying Balance		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial assets held at fair value:
Available for sale securities:
U.S. treasury bills	$	200	$	200	$	—	$	—
Agency CMOs—GSE		1,940,242		—		1,940,242		—
Pooled trust preferred securities		28,998		—		—		28,998
Single issuer trust preferred securities		38,214		—		38,214		—
Equity securities—financial institutions		9,447		8,472		—		975
Mortgage-backed securities- GSE		527,310		—		527,310		—
CMBS		330,353		—		330,353		—

Total available for sale securities		2,874,764		8,672		2,836,119		29,973
Derivative instruments:
Interest rate swaps		47,134		—		47,134		—

Total financial assets held at fair value	$	2,921,898	$	8,672	$	2,883,253	$	29,973

Financial liabilities held at fair value:
Derivative instruments:
Interest rate swaps	$	58,424	$	—	$	58,424	$	—
Fed Fund futures contract		1,365		—		1,365		—
Visa Swap		2		—		2		—



	At December 31, 2010
(In thousands)	Carrying Balance		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial assets held at fair value:
Trading securities:
Equity securities	$	11,554	$	11,554	$	—	$	—
Available for sale securities:
U.S. treasury bills		200		200		—		—
Agency Notes—GSE		100,049		—		100,049		—
Agency CMOs—GSE		1,179,159		—		1,179,159		—
Pooled trust preferred securities		53,189		—		—		53,189
Single issuer trust preferred securities		42,275		—		42,275		—
Equity securities—financial institutions		7,341		6,013		—		1,328
Mortgage-backed securities- GSE		723,582		—		723,582		—
CMBS		307,981		—		307,981		—

Total available for sale securities		2,413,776		6,213		2,353,046		54,517
Derivative instruments:
Interest rate swaps		35,198		—		35,198		—

Total financial assets held at fair value	$	2,460,528	$	17,767	$	2,388,244	$	54,517

Financial liabilities held at fair value:
Derivative instruments:
Interest rate swaps	$	37,841	$	—	$	37,841	$	—
Fed Fund futures contract		2,081		—		2,081		—
Visa Swap		—		—		—		—

The following table presents the changes in level 3 assets and liabilities that are measured at fair value on a recurring basis:


	Years ended December 31,
(In thousands)	2011			2010
Level 3—available for sale securities, beginning of period	$	54,517		$	70,689
Transfers into Level 3 (a)		—			1,716
Change in unrealized loss included in other comprehensive income		(11,521	)		(6,225	)
Realized loss on sale of available for sale securities		(3,343	)		(593	)
Net other-than-temporary impairment charges		—			(5,771	)
Purchases		42			753
Sales/Proceeds		(1,456	)		(4,153	)
Accretion/Amortization		652			108
Calls/Paydowns		(8,680	)		(2,133	)
Other		(238	)		126

Level 3—available for sale securities, end of period	$	29,973		$	54,517

(a)	Auction rate preferred securities were transferred from Level 2 to Level 3 in March 2010 because of lack of observable market data due to a decrease in market activity for these securities.

Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis

Certain financial assets and financial liabilities are measured at fair value on a non-recurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). Financial assets measured at fair value on a non-recurring basis during 2011 include certain impaired loans reported at the fair value of the underlying collateral if repayment is expected solely from the collateral and loans held for sale measured at the lower of cost or market that were recognized at fair value (i.e. below cost) at the end of the period. Collateral values are estimated using Level 3 inputs based on customized discounting criteria. Impaired loans that were remeasured and reported at fair value based upon the fair value of the underlying collateral, excluding loans fully charged-off during 2011 and loans held for sale totaled $27.9 million at December 31, 2011.

Non-Financial Assets and Non-Financial Liabilities

The Corporation has no non-financial assets or non-financial liabilities measured at fair value on a recurring basis. Certain non-financial assets measured at fair value on a non-recurring basis include foreclosed assets (upon initial recognition or subsequent impairment), non-financial assets and non-financial liabilities measured at fair value in the second step of a goodwill impairment test, and intangible assets and other non-financial long-lived assets measured at fair value for impairment assessment.

The following table presents foreclosed and repossessed assets that were remeasured and reported at fair value:


	Years ended December 31,
(In thousands)	2011			2010
Foreclosed and repossessed assets
Remeasured at initial recognition:
Carrying value prior to remeasurement	$	6,184		$	22,995
Charge-offs recognized in the allowance for loan and lease losses		(2,102	)		(4,576	)

Fair value	$	4,082		$	18,419

Remeasured subsequent to initial recognition:
Carrying value prior to remeasurement	$	24,401		$	31,513
Write-downs included in other non-interest expense		(8,114	)		(7,234	)

Fair value	$	16,287		$	24,279

A summary of estimated fair values of significant financial instruments consisted of the following:


	At December 31, 2011				At December 31, 2010
(In thousands)	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Assets:
Cash and due from banks	$	195,957	$	195,957	$	159,849	$	159,849
Interest-bearing deposits		96,062		96,062		52,811		52,811
Trading securities		—		—		11,554		11,554
Securities available for sale		2,874,764		2,874,764		2,413,776		2,413,776
Securities held-to-maturity		2,973,727		3,130,546		3,072,453		3,141,775
Loans held for sale		57,391		57,391		52,224		52,224
Loans, net		10,991,917		11,097,390		10,696,532		10,701,251
Mortgage servicing assets (a)		7,831		9,968		7,256		10,281
Derivative instruments		47,134		47,134		35,198		35,198
Liabilities:
Deposits other than time deposits	$	10,821,390	$	10,619,712	$	10,458,876	$	10,010,222
Time deposits		2,834,635		2,883,006		3,149,909		3,205,361
Securities sold under agreements to repurchase and other short-term borrowings		1,164,706		1,212,228		1,091,477		1,112,078
FHLB advances and other long-term debt (b)		1,805,198		1,789,506		1,350,842		1,302,718
Derivative instruments:
Interest rate swaps		58,424		58,424		37,841		37,841
Fed Fund futures contract		1,365		1,365		2,081		2,081
Visa swap		2		2		—		—

(a)	The carrying amount of mortgage servicing assets is net of $0.9 million and $0.3 million reserves at December 31, 2011 and 2010, respectively. The estimated fair value does not include such adjustments.

(b)	The carrying amount of FHLB advances and other long-term debt is net of $12.5 million and $20.9 million in hedge accounting adjustments and discounts at December 31, 2011 and 2010, respectively. The estimated fair value does not include such adjustments.

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