Webster Financial - 10-Q quarterly report FY2013 Q3

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_______________________________________________________________________________

FORM 10-Q

_______________________________________________________________________________

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

For the quarterly period ended September 30, 2013

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

Commission File Number: 001-31486

_______________________________________________________________________________

WEBSTER FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

_______________________________________________________________________________



Delaware		06-1187536
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

145 Bank Street (Webster Plaza), Waterbury, Connecticut 06702
(Address and zip code of principal executive offices)

(203) 578-2202
(Registrant's telephone number, including area code)


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

______________________________________________________________________________

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). þ Yes o No

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



Large accelerated filer	þ	Accelerated filer	o	Non-accelerated filer	o	Smaller reporting company	o

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

The number of shares of common stock, par value $.01 per share, outstanding as of October 31, 2013 was 90,343,433

INDEX



		Page No.
PART I – FINANCIAL INFORMATION

Item 1.	Financial Statements	1

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	53

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	87

Item 4.	Controls and Procedures	87

PART II – OTHER INFORMATION		88

Item 1.	Legal Proceedings	88

Item 1A.	Risk Factors	88

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	88

Item 3.	Defaults Upon Senior Securities	88

Item 4.	Mine Safety Disclosures	88

Item 5.	Other Information	88

Item 6.	Exhibits	88

SIGNATURES		91

EXHIBIT INDEX		92

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PART I. – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS



	At September 30, 2013			At December 31, 2012
(In thousands, except share data)	(Unaudited)
Assets:
Cash and due from banks	$	266,747		$	252,283
Interest-bearing deposits	18,192			98,205
Securities available for sale, at fair value	3,193,772			3,136,160
Securities held-to-maturity (fair value of $3,248,620 and $3,264,718)	3,205,999			3,107,529
Federal Home Loan Bank and Federal Reserve Bank stock, at cost	158,878			155,630
Loans held for sale	40,193			107,633
Loans and leases	12,477,965			12,028,696
Allowance for loan and lease losses	(157,545		)	(177,129		)
Loans and leases, net	12,320,420			11,851,567
Deferred tax asset, net	72,180			68,681
Premises and equipment, net	121,250			134,562
Goodwill	529,887			529,887
Other intangible assets, net	6,544			10,270
Cash surrender value of life insurance policies	427,113			418,293
Prepaid FDIC premiums	—			16,323
Accrued interest receivable and other assets	248,379			259,742
Total assets	$	20,609,554		$	20,146,765
Liabilities and shareholders' equity:
Deposits:
Non-interest-bearing	$	2,968,727		$	2,881,131
Interest-bearing	12,030,804			11,649,704
Total deposits	14,999,531			14,530,835
Securities sold under agreements to repurchase and other borrowings	1,372,290			1,076,160
Federal Home Loan Bank advances	1,602,469			1,827,612
Long-term debt	229,146			334,276
Accrued expenses and other liabilities	238,459			284,352
Total liabilities	18,441,895			18,053,235
Shareholders’ equity:
Preferred stock, $.01 par value; Authorized - 3,000,000 shares:
Series A issued and outstanding - 28,939 shares	28,939			28,939
Series E issued and outstanding - 5,060 shares	122,710			122,710
Common stock, $.01 par value; Authorized - 200,000,000 shares:
Issued - 93,360,197 and 90,735,596 shares	933			907
Paid-in capital	1,126,344			1,145,620
Retained earnings	1,054,117			1,000,427
Less: Treasury stock, at cost (3,575,777 and 5,772,006 shares)	(106,443		)	(172,807		)
Accumulated other comprehensive loss	(58,941		)	(32,266		)
Total shareholders' equity	2,167,659			2,093,530
Total liabilities and shareholders' equity	$	20,609,554		$	20,146,765

See accompanying Notes to Condensed Consolidated Financial Statements.

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WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)



	Three months ended September 30,						Nine months ended September 30,
(In thousands, except per share data)	2013			2012			2013			2012
Interest Income:
Interest and fees on loans and leases	$	123,664		$	121,367		$	366,445		$	363,487
Taxable interest and dividends on securities	42,165			43,532			126,619			135,082
Non-taxable interest on securities	5,351			6,662			17,104			20,577
Loans held for sale	573			655			1,761			1,810
Total interest income	171,753			172,216			511,929			520,956
Interest Expense:
Deposits	10,908			14,543			35,782			45,701
Securities sold under agreements to repurchase and other borrowings	5,283			5,594			15,522			15,388
Federal Home Loan Bank advances	3,753			3,943			12,299			12,933
Long-term debt	1,822			3,246			5,482			14,298
Total interest expense	21,766			27,326			69,085			88,320
Net interest income	149,987			144,890			442,844			432,636
Provision for loan and lease losses	8,500			5,000			24,500			14,000
Net interest income after provision for loan and lease losses	141,487			139,890			418,344			418,636
Non-interest Income:
Deposit service fees	25,170			24,728			73,786			71,810
Loan related fees	5,840			4,039			15,930			12,473
Wealth and investment services	8,095			7,186			24,781			21,656
Mortgage banking activities	665			6,515			13,584			14,522
Increase in cash surrender value of life insurance policies	3,516			2,680			10,348			7,758
Net gain on sale of investment securities	269			810			708			3,347
Other income	2,702			2,521			7,649			8,252
Total non-interest income	46,257			48,479			146,786			139,818
Non-interest Expense:
Compensation and benefits	64,862			66,126			196,680			198,332
Occupancy	11,994			12,462			36,710			37,922
Technology and equipment	14,895			15,118			45,743			46,721
Intangible assets amortization	1,242			1,384			3,726			4,178
Marketing	3,649			4,529			12,277			13,723
Professional and outside services	2,254			2,790			5,931			8,869
Deposit insurance	5,300			5,675			15,998			17,107
Other expense	18,085			15,803			54,355			52,027
Total non-interest expense	122,281			123,887			371,420			378,879
Income before income tax expense	65,463			64,482			193,710			179,575
Income tax expense	18,158			19,489			57,915			54,404
Net income	47,305			44,993			135,795			125,171
Preferred stock dividends	(2,639		)	(615		)	(8,164		)	(1,845		)
Net income available to common shareholders	$	44,666		$	44,378		$	127,631		$	123,326



Net income per common share:

Basic	$	0.50	$	0.51	$	1.44	$	1.41

Diluted	0.49		0.48		1.41		1.34

See accompanying Notes to Condensed Consolidated Financial Statements.

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WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)



	Three months ended September 30,				Nine months ended September 30,
(In thousands)	2013		2012		2013			2012
Net income	$	47,305	$	44,993	$	135,795		$	125,171
Other comprehensive income (loss), net of tax	6,198		14,601		(26,675		)	30,927
Comprehensive income	$	53,503	$	59,594	$	109,120		$	156,098

See accompanying Notes to Condensed Consolidated Financial Statements.

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WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited)



	Nine months ended September 30, 2013
(In thousands, except per share data)	Preferred Stock		Common Stock		Paid-In Capital			Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Loss			Total Equity
Balance at December 31, 2012	$	151,649	$	907	$	1,145,620		$	1,000,427		$	(172,807	)	$	(32,266	)	$	2,093,530
Net income	—		—		—			135,795			—			—			135,795
Other comprehensive loss, net of tax	—		—		—			—			—			(26,675		)	(26,675		)
Dividends paid on common stock of $0.40 per share	—		—		—			(35,176		)	—			—			(35,176		)
Dividends paid on Series A preferred stock $63.75 per share	—		—		—			(1,845		)	—			—			(1,845		)
Dividends paid on series E preferred stock $1248.89 per share	—		—		—			(6,319		)	—			—			(6,319		)
Common stock warrants repurchased	—		—		(30		)	—			—			—			(30		)
Exercise of stock options	—		—		(729		)	—			1,713			—			984
Net shares acquired related to employee share-based compensation plans	—		—		—			—			(381		)	—			(381		)
Stock-based compensation, net of tax effects	—		—		2,757			(2,511		)	7,335			—			7,581
Issuance of common stock	—		26		(21,274		)	(36,254		)	57,697			—			195
Balance at September 30, 2013	$	151,649	$	933	$	1,126,344		$	1,054,117		$	(106,443	)	$	(58,941	)	$	2,167,659

	Nine months ended September 30, 2012
(In thousands, except per share data)	Preferred Stock		Common Stock		Paid-In Capital			Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Loss			Total Equity
Balance at December 31, 2011	$	28,939	$	907	$	1,145,346		$	865,427		$	(134,641	)	$	(60,204	)	$	1,845,774
Net income	—		—		—			125,171			—			—			125,171
Other comprehensive income, net of tax	—		—		—			—			—			30,927			30,927
Dividends paid on common stock of $0.25 per share	—		—		—			(21,906		)	—			—			(21,906		)
Dividends paid on Series A preferred stock $63.75 per share	—		—		—			(1,845		)	—			—			(1,845		)
Common stock warrants repurchased	—		—		(385		)	—			—			—			(385		)
Exercise of stock options	—		—		(1,711		)	—			2,567			—			856
Net shares acquired related to employee share-based compensation plans	—		—		—			—			(2,008		)	—			(2,008		)
Stock-based compensation, net of tax effects	—		—		1,735			(4,253		)	9,205			—			6,687
Issuance of common stock	—		—		407			—			—			—			407
Balance at September 30, 2012	$	28,939	$	907	$	1,145,392		$	962,594		$	(124,877	)	$	(29,277	)	$	1,983,678

See accompanying Notes to Condensed Consolidated Financial Statements.

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WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)



	Nine months ended September 30,
(In thousands)	2013			2012
Operating Activities:
Net income	$	135,795		$	125,171
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan and lease losses	24,500			14,000
Deferred tax expense	11,221			14,192
Depreciation and amortization	78,236			81,632
Stock-based compensation	7,757			6,735
Excess tax benefits from stock-based compensation	(255		)	(303		)
Gain on sale, net of write-down, on foreclosed and repossessed assets	(1,072		)	(1,923		)
(Gain) loss on sale net of write-down on premises and equipment	(59		)	603
Loss on fair value adjustment of alternative investments	354			775
Loss on fair value adjustment of derivative instruments	290			12
Net gain on the sale of investment securities	(708		)	(3,347		)
Increase in cash surrender value of life insurance policies	(10,348		)	(7,758		)
Gain from life insurance policies	(1,070		)	—
Gain on sale of loans held for sale	(13,584		)	(14,522		)
Proceeds from sale of loans held for sale	670,226			529,020
Origination of loans held for sale	(592,368		)	(537,348		)
Net decrease (increase) in accrued interest receivable and other assets	83,060			(14,154		)
Net decrease in accrued expenses and other liabilities	(16,743		)	(3,730		)
Net cash provided by operating activities	375,232			189,055
Investing Activities:
Net decrease in interest-bearing deposits	37,243			16,299
Purchases of available for sale securities	(835,364		)	(1,009,181		)
Proceeds from maturities and principal payments of available for sale securities	621,385			627,429
Proceeds from sales of available for sale securities	44,261			148,223
Purchases of held-to-maturity securities	(702,017		)	(752,030		)
Proceeds from maturities and principal payments of held-to-maturity securities	587,998			571,648
Net (purchase) sale of Federal Home Loan Bank and Federal Reserve Board stock	(3,248		)	1,279
Net increase in loans	(503,397		)	(586,375		)
Purchase of life insurance policies	—			(100,000		)
Proceeds from life insurance policies	1,768			—
Proceeds from the sale of foreclosed properties and repossessed assets	5,741			7,453
Proceeds from the sale of premises and equipment	1,304			1,406
Purchases of premises and equipment	(11,247		)	(14,544		)
Net cash used for investing activities	(755,573		)	(1,088,393		)
Financing Activities:
Net increase in deposits	468,696			757,412
Proceeds from Federal Home Loan Bank advances	3,178,120			2,826,265
Repayments of Federal Home Loan Bank advances	(3,403,245		)	(2,625,500		)
Net increase in securities sold under agreements to repurchase and other borrowings	296,130			145,309
Repayment of long-term debt	(102,579		)	(210,971		)
Cash dividends paid to common shareholders	(35,176		)	(21,906		)
Cash dividends paid to preferred shareholders	(8,164		)	(1,845		)
Exercise of stock options	984			856
Excess tax benefits from stock-based compensation	255			303
Issuance of common stock	195			407
Common stock repurchased	(381		)	(2,008		)
Common stock warrants repurchased	(30		)	(385		)
Net cash provided by financing activities	394,805			867,937

Net increase (decrease) in cash and due from banks	14,464			(31,401		)
Cash and due from banks at beginning of period	252,283			195,957
Cash and due from banks at end of period	$	266,747		$	164,556

Supplemental disclosure of cash flow information:
Interest paid	$	66,582		$	92,056
Income taxes paid	42,507			30,398
Noncash investing and financing activities:
Transfer of loans and leases, net to foreclosed properties and repossessed assets	$	9,295		$	5,474
Transfer of loans from portfolio to loans-held-for-sale	44			13,796

See accompanying Notes to Condensed Consolidated Financial Statements.

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NOTE 1: Summary of Significant Accounting Policies

Nature of Operations. Webster Financial Corporation (collectively, with its consolidated subsidiaries, “Webster” or the “Company”), is a bank holding company and financial holding company under the Bank Holding Company Act of 1956, as amended, headquartered in Waterbury, Connecticut and incorporated under the laws of Delaware in 1986. At September 30, 2013, Webster Financial Corporation's principal asset was all of the outstanding capital stock of Webster Bank, National Association (“Webster Bank”).

Webster, through Webster Bank and various non-banking financial services subsidiaries, delivers financial services to individuals, families and businesses throughout southern New England and into Westchester County, New York. Webster provides business and consumer banking, mortgage lending, financial planning, trust and investment services through banking offices, ATMs, telephone banking, mobile banking and its Internet website (www.websterbank.com). Webster Bank offers, through its HSA Bank division, health savings accounts on a nationwide basis. Webster also offers equipment financing, commercial real estate lending, and asset-based lending.

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

The Company determines whether it has a controlling financial interest in an entity by first evaluating whether the entity is a voting interest entity or a variable interest entity (“VIE”) under GAAP. Voting interest entities are entities in which the total equity investment at risk is sufficient to enable the entity to finance itself independently and provides the equity holder with the obligation to absorb losses, the right to receive residual returns and the right to make decisions about the entity’s activities. The Company consolidates voting interest entities in which it has all or at least a majority of, the voting interest. VIEs are entities that lack one or more of the characteristics of a voting interest entity. A controlling financial interest in a VIE is present when the Company has both the power and ability to direct the activities of the VIE that most significantly impact the VIE's economic performance and an obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE.

The Company owns the common stock of a trust which has issued trust preferred securities. The trust is a VIE in which the Company is not the primary beneficiary and, therefore, is not consolidated. The trust's only assets are junior subordinated debentures issued by the Company, which were acquired by the trust using the proceeds from the issuance of the trust preferred securities and common stock. The junior subordinated debentures are included in long-term debt and the Company’s equity interests in the trust is included in other assets in the accompanying Condensed Consolidated Balance Sheets. Interest expense on the junior subordinated debentures is reported in interest expense on long-term debt in the accompanying Condensed Consolidated Statements of Income. See Note 9 - Long-Term Debt.

Certain prior period amounts have been reclassified to conform to the current year's presentation. These reclassifications had no impact on the Company's consolidated financial position, results of operations or net change in cash or cash equivalents.

Use of Estimates. The preparation of the Condensed Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Condensed Consolidated Financial Statements. Actual results could differ from those estimates. The allowance for loan and lease losses, the fair value measurements of financial instruments and valuation of investments for other-than-temporary impairment (“OTTI”), the valuation of goodwill, the deferred tax asset valuation allowance and pension and other postretirement benefits, as well as the status of contingencies are particularly subject to change.

Correction of Immaterial Error Related to Prior Periods. During the three months ended September 30, 2013, the Company identified a $1.7 million error applicable to income taxes in prior periods. The error was determined to be immaterial to the results of the prior periods, and the correction of the error resulted in the recognition of a $1.7 million tax benefit in the three months ended September 30, 2013, which was determined to be immaterial to the results of the current period. For more detailed information see the "Income Taxes" section of Management's Discussion and Analysis of Financial Condition and Results of Operations.

Cash Equivalents and Cash Flows. For the purposes of the Condensed Consolidated Statements of Cash Flows, cash equivalents include cash on hand and due from banks, interest-bearing deposits at the Federal Reserve or other short-term money market investments. Webster classifies financial instruments with maturities of one year or less at the date of purchase as interest-bearing deposits. These deposits are carried at cost, which approximates fair value.

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Cash flows from loans, either originated or acquired, are classified at that time according to management's original intent to either sell or hold the loan for the foreseeable future. When management's intent is to to sell the loan, the cash flows of that loan are presented as operating cash flows. When management's intent is to hold the loan for the foreseeable future, the cash flows of that loan are presented as investing cash flows.

Investment Securities. Investment securities are classified at the time of purchase as “available for sale”, or “held-to-maturity”. Classification is re-evaluated each quarter to ensure appropriate classification and to maintain consistency with corporate objectives. Debt securities held-to-maturity are those which Webster has the ability and intent to hold to maturity. Securities held-to-maturity are recorded at amortized cost. Amortized cost includes the amortization of premiums or accretion of discounts. Such amortization and accretion is included in interest income from securities. Securities classified as available for sale are recorded at fair value. Unrealized gains and losses, net of taxes, are calculated each reporting period and presented as a separate component of other comprehensive income (“OCI”). Securities transferred from available for sale to held-to-maturity are recorded at fair value at the time of transfer. The respective gain or loss is reclassified as a separate component of OCI and amortized as an adjustment to interest income over the remaining life of the security.

Investment securities are reviewed quarterly for OTTI. All securities classified as available for sale or held-to-maturity that are in an unrealized loss position are evaluated for OTTI. The evaluation considers several qualitative factors including the amount of the unrealized loss and the period of time the security has been in a loss position. If the Company intends to sell the security or it is more than likely the Company will be required to sell the security prior to recovery of its amortized cost basis, the security is written down to fair value and the loss is recorded in non-interest income in the accompanying Condensed Consolidated Statements of Income. If the Company does not intend to sell the security and it is more likely than not that the Company will not be required to sell the security prior to recovery of its amortized cost basis, only the credit component of any impairment charge of a debt security would be recognized as a loss in non-interest income in the accompanying Condensed Consolidated Statements of Income. The remaining loss component would be recorded in OCI. A decline in the value of an equity security that is considered OTTI is recorded as a loss in non-interest income in the accompanying Condensed Consolidated Statements of Income.

The specific identification method is used to determine realized gains and losses on sales of securities.

Loans Held for Sale. Loans held for sale are primarily residential real estate mortgage loans. Loans typically are assigned this classification upon origination based on management's intent to sell when the loans are underwritten. Loans held for sale are carried at the lower of cost or fair value. Non-residential mortgage loans held for sale are carried at lower of cost or fair value and are valued on individual asset basis. Any cost amount in excess of fair value is recorded as a valuation allowance and recognized as a reduction of other income. Gains or losses on the sale of loans held for sale are included in non-interest income in the accompanying Condensed Consolidated Statements of Income. Direct loan origination costs and fees are deferred and are recognized at the time of sale.

Loans. Loans are stated at the principal amounts outstanding, net of charged off amounts and unamortized premiums and discounts and net of deferred loan fees and/or costs which are recognized as yield adjustments using the interest method. These yield adjustments are amortized over the contractual life of the related loans adjusted for estimated prepayments when applicable. Interest on loans is credited to interest income as earned based on the interest rate applied to principal amounts outstanding.

Loans are placed on non-accrual status when timely collection of principal and interest in accordance with contractual terms is doubtful. A loan is transferred to a non-accrual basis generally when principal or interest payments become 90 days delinquent, unless the loan is well secured and in process of collection, or sooner if management concludes circumstances indicate that the borrower may be unable to meet contractual principal or interest payments. Residential real estate and consumer loans are placed on non-accrual status at 90 days past due, or at the date when the Company is notified that the borrower is discharged in bankruptcy. A charge-off is recorded at 180 days if the loan balance exceeds the fair value of the collateral less costs to sell. Commercial, commercial real estate and equipment finance loans are subject to a detailed review when 90 days past due to determine accrual status, or when payment is uncertain and a specific consideration is made to put a loan or lease on non-accrual status.

When a loan is placed on non-accrual status, the accrual of interest is discontinued and any unpaid accrued interest is reversed and charged against interest income. If ultimate repayment of a non-accrual loan is expected, any payments received are applied in accordance with contractual terms. If ultimate repayment is not expected on commercial, commercial real estate and equipment finance loans, any payment received on a non-accrual loan is applied to principal until the unpaid balance has been fully recovered. Any excess is then credited to interest income when received. If the Company determines, through a current valuation analysis, that principal can be repaid on residential real estate and consumer loans, interest payments may be taken into income as received or on a cash basis. Loans are removed from non-accrual status when they become current as to principal and interest or demonstrate a period of performance under contractual terms and, in the opinion of management, are fully collectible as to principal and interest.

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

Allowance for Loan and Lease Losses (“ALLL”). The allowance for loan and lease losses is a reserve established through a provision for loan and lease losses charged to expense, and represents management’s best estimate of probable losses that may be incurred within the existing loan and lease portfolio as of the balance sheet date. The level of the allowance reflects management’s view of trends in loss activity, current portfolio quality and present economic, political and regulatory conditions. Portions of the allowance may be allocated for specific loans and leases; however, the entire allowance is available for any loan or lease that is charged off. A charge-off is recorded on a case-by-case basis when all or a portion of the loan or lease is deemed to be uncollectible. Back-testing is performed to compare original estimated losses and actual observed losses, resulting in ongoing refinements. While management utilizes its best judgment based on the information available at the time, the ultimate adequacy of the allowance is dependent upon a variety of factors that are beyond the Company’s control, which include the performance of the Company’s portfolio, economic conditions, interest rate sensitivity and the view of the regulatory authorities regarding loan classifications.

The allowance for loan and lease losses consists of three elements: (i) specific valuation allowances established for probable losses on impaired loans and leases; (ii) quantitative valuation allowances calculated using loss experience for like loans and leases with similar characteristics and trends, adjusted, as necessary, to reflect the impact of current conditions; and (iii) qualitative factors determined based on general economic conditions and other factors that may be internal or external to the Company.

Loans and leases are considered impaired when, based on current information and events, it is probable the Company will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. Impairment is evaluated on a pooled basis for smaller-balance homogeneous residential and consumer loans. Commercial, commercial real estate and equipment financing loans and leases over a specific dollar amount and all troubled debt restructurings ("TDR") are evaluated individually for impairment. A loan identified as a TDR is considered an impaired loan for the entire term of the loan, with few exceptions. If a loan is impaired, a specific valuation allowance may be established, and the loan is reported net, at the present value of estimated future cash flows using the loan’s original interest rate or at the fair value of collateral less cost to sell if repayment is expected from collateral liquidation. Interest payments on non-accruing impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. Impaired loans, or portions thereof, are charged off when deemed uncollectible. Factors considered by management in determining impairment include payment status, collateral value, discharged bankruptcy and the likelihood of collecting scheduled principal and interest payments. Consumer modified loans are analyzed for re-default probability which is considered when determining the impaired reserve for ALLL. The current or weighted-average (for multiple notes within a commercial borrowing arrangement) interest rate of the loan is used as the discount rate when the interest rate floats with a specified index. A change in terms or payments would be included in the impairment calculation.

Reserve for Unfunded Commitments. The reserve for unfunded commitments provides for probable losses inherent with funding the unused portion of legal commitments available to lend. The unfunded reserve calculation includes factors that are consistent with ALLL methodology for funded loans using the loss given default, probability of default and a draw down factor applied to the underlying borrower risk and facility risk grades. The changes in the reserve for unfunded credit commitments is reported as a component of other expense and the reserve is recorded within other liabilities.

Troubled Debt Restructurings. A modified loan is considered a TDR when two conditions are met: (1) the borrower is experiencing financial difficulties and (2) the modification constitutes a concession. The Company considers all aspects of the restructuring in determining whether a concession has been granted, including the debtor's ability to access funds at a market rate. In general, a concession exists when the modified terms of the loan are more attractive to the borrower than standard market terms. Modified terms are dependent upon the financial position and needs of the individual borrower. The Company does not employ modification programs for temporary or trial periods. The most common types of modifications include covenant modifications, forbearance and/or other concessions. If the modification agreement is violated, the loan is reevaluated to determine if it should be handled by the Company’s Restructuring and Recovery group for resolution, which may result in foreclosure. Loans for which the borrower has been discharged under Chapter 7 bankruptcy are considered collateral dependent TDRs, impaired at the date of discharge, and charged down to the fair value of collateral less cost to sell.

The Company’s policy is to place all consumer loan TDRs on non-accrual status for a minimum period of 6 months. Commercial TDRs are evaluated on a case-by-case basis for determination of whether or not to place on non-accrual status. Loans qualify for return to accrual status once they have demonstrated performance with the restructured terms of the loan agreement for a minimum of 6 months. Initially, all TDRs are reported as impaired. Generally, TDRs are classified as impaired loans and reported as TDRs for the remaining life of the loan. Impaired and TDR classification may be removed if the borrower demonstrates compliance with the modified terms for a minimum of 6 months and through a fiscal year-end, and the restructuring agreement specifies a market rate of interest equal to that which would be provided to a borrower with similar credit at the time of restructuring. In the limited circumstances that a loan is removed from TDR classification it is the Company’s policy to continue to base its measure of loan impairment on the contractual terms specified by the loan agreement.

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Transfers and Servicing of Financial Assets. Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is generally considered to have been surrendered when (1) the transferred assets are legally isolated from the Company or its consolidated affiliates, even in bankruptcy or other receivership, (2) the transferee has the right to pledge or exchange the assets with no conditions that constrain the transferee and provide more than a trivial benefit to the Company, and (3) the Company does not maintain the obligation or unilateral ability to reclaim or repurchase the assets.

The Company sells financial assets in the normal course of business, the majority of which are residential mortgage loans sales primarily to government-sponsored enterprises through established programs, commercial loan sales through participation agreements, and other individual or portfolio loan and securities sales. In accordance with accounting guidance for asset transfers, the Company considers any ongoing involvement with transferred assets in determining whether the assets can be derecognized from the balance sheet. With the exception of servicing and certain performance-based guarantees, the Company’s continuing involvement with financial assets sold is minimal and generally limited to market customary representation and warranty clauses.

When the Company sells financial assets, it may retain servicing rights and/or other interests in the financial assets. The gain or loss on sale depends on the previous carrying amount of the transferred financial assets and the consideration received and any liabilities incurred in exchange for the transferred assets. Upon transfer, any servicing assets and other interests held by the Company are carried at the lower of cost or fair value.

Recently Adopted Accounting Standards Updates

ASU No. 2011-11, “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities”. The ASU expands required disclosures of information related to the nature of an entity’s rights of setoff and related arrangements associated with its financial instruments and derivative instruments, in an effort to enhance comparability between financial statements prepared with GAAP and IFRS. The requirements include disclosure of net and gross positions in covered financial instruments and derivative instruments which are either (1) offset in accordance with ASC Sections 210-20-45 or 815-10-45, or (2) subject to an enforceable netting or other similar arrangement. The disclosures required by this amendment were applied retrospectively for all comparative periods presented. The amendments are effective for fiscal years beginning on or after January 1, 2013, and interim periods within those annual periods. The amendments did not have a material impact on the Company's financial statements.

ASU 2013-01- Balance Sheet (Topic 210): "Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities". The ASU amends Update 2011-11 to clarify that the scope applies to derivatives, repurchase and reverse repurchase agreements, and securities borrowing and lending transactions that are either offset in accordance with Section 210-20-45 or Section 815-10-45 or subject to master netting or similar arrangements. Other types of financial assets and liabilities subject to master netting or similar arrangements are not subject to the disclosure requirements in Update 2011-11. The amendments are effective for fiscal years beginning on or after January 1, 2013, and interim periods within those annual periods. The amendments did not have a material impact on the Company's financial statements.

ASU 2013-02- Comprehensive Income (Topic 220): "Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income". The ASU requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. The amendments are effective prospectively for reporting periods beginning after December 15, 2012. The amendments did not have a material impact on the Company's financial statements.

ASU 2013-10- Derivatives and Hedging (Topic 815): "Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes (a consensus of the FASB Emerging Issues Task Force)". The ASU permits an entity to use the Fed Funds Effective Swap Rate as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815, in addition to the United States Treasury and London Interbank Offered Rate swap rates. The amendments also remove the restriction on using different benchmark rates for similar hedges. The amendments are effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. The amendments did not have a material impact on the Company's financial statements.

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NOTE 2: Investment Securities

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



	At September 30, 2013
			Recognized in OCI							Not Recognized in OCI
(In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Carrying Value		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available for sale:
U.S. Treasury Bills	$	200	$	—	$	—		$	200	$	—	$	—		$	200
Agency collateralized mortgage obligations (“CMOs”)	868,288		18,537		(1,349		)	885,476		—		—			885,476
Agency mortgage-backed securities (“MBS”)	1,318,550		9,120		(34,416		)	1,293,254		—		—			1,293,254
Agency commercial mortgage-backed securities (“ACMBS”)	19,988		96		—			20,084		—		—			20,084
Commercial mortgage-backed securities (“CMBS”)	437,616		29,367		(1,032		)	465,951		—		—			465,951
Collateralized loan obligations ("CLOs")	333,023		637		(1,126		)	332,534		—		—			332,534
Pooled trust preferred securities ⁽¹⁾	36,581		—		(6,617		)	29,964		—		—			29,964
Single issuer trust preferred securities	51,311		—		(8,009		)	43,302		—		—			43,302
Corporate debt securities	109,529		4,089		—			113,618		—		—			113,618
Equity securities - financial institutions ⁽²⁾	6,307		3,082		—			9,389		—		—			9,389
Total available for sale	$	3,181,393	$	64,928	$	(52,549	)	$	3,193,772	$	—	$	—		$	3,193,772
Held-to-maturity:
Agency CMOs	368,980		—		—			368,980		11,590		(492		)	380,078
Agency MBS	2,095,513		—		—			2,095,513		48,495		(35,832		)	2,108,176
Municipal bonds and notes	466,084		—		—			466,084		14,135		(743		)	479,476
CMBS	265,727		—		—			265,727		9,272		(4,028		)	270,971
Private Label MBS	9,695		—		—			9,695		224		—			9,919
Total held-to-maturity	$	3,205,999	$	—	$	—		$	3,205,999	$	83,716	$	(41,095	)	$	3,248,620

Total investment securities	$	6,387,392	$	64,928	$	(52,549	)	$	6,399,771	$	83,716	$	(41,095	)	$	6,442,392


(1)	Amortized cost is net of $9.4 million of credit related other-than-temporary impairment at September 30, 2013.


(2)	Amortized cost is net of $21.3 million of other-than-temporary impairment at September 30, 2013.

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	At December 31, 2012
			Recognized in OCI							Not Recognized in OCI
(In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Carrying Value		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available for sale:
U.S. Treasury Bills	$	200	$	—	$	—		$	200	$	—	$	—		$	200
Agency CMOs	1,284,126		25,972		(92		)	1,310,006		—		—			1,310,006
Agency MBS	1,121,941		21,437		(1,098		)	1,142,280		—		—			1,142,280
CMBS	359,438		42,086		(3,493		)	398,031		—		—			398,031
CLOs	88,765		—		(225		)	88,540		—		—			88,540
Pooled trust preferred securities ⁽¹⁾	46,018		—		(19,811		)	26,207		—		—			26,207
Single issuer trust preferred securities	51,181		—		(6,766		)	44,415		—		—			44,415
Corporate debt securities	111,281		6,918		—			118,199		—		—			118,199
Equity securities - financial institutions ⁽²⁾	6,232		2,054		(4		)	8,282		—		—			8,282
Total available for sale	$	3,069,182	$	98,467	$	(31,489	)	$	3,136,160	$	—	$	—		$	3,136,160
Held-to-maturity:
Agency CMOs	500,369		—		—			500,369		16,643		(8		)	517,004
Agency MBS	1,833,677		—		—			1,833,677		88,082		(474		)	1,921,285
Municipal bonds and notes	559,131		—		—			559,131		34,366		(110		)	593,387
CMBS	199,810		—		—			199,810		18,324		—			218,134
Private Label MBS	14,542		—		—			14,542		366		—			14,908
Total held-to-maturity	$	3,107,529	$	—	$	—		$	3,107,529	$	157,781	$	(592	)	$	3,264,718

Total investment securities	$	6,176,711	$	98,467	$	(31,489	)	$	6,243,689	$	157,781	$	(592	)	$	6,400,878


(1)	Amortized cost is net of $10.5 million of credit related other-than-temporary impairment at December 31, 2012.


(2)	Amortized cost is net of $21.3 million of other-than-temporary impairment at December 31, 2012.

The amortized cost and fair value of debt securities at September 30, 2013, by contractual maturity, are set forth below:



	Available for Sale				Held-to-Maturity
(In thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	200	$	200	$	90	$	91
Due after one year through five years	102,717		106,597		66,262		69,780
Due after five through ten years	191,973		192,790		138,276		144,351
Due after ten years	2,880,196		2,884,796		3,001,371		3,034,398
Total debt securities	$	3,175,086	$	3,184,383	$	3,205,999	$	3,248,620

For the maturity schedule above, mortgage-backed securities and collateralized loan obligations, which are not due at a single maturity date, have been categorized based on the maturity date of the underlying collateral. Actual principal cash flows may differ from this maturity date presentation because borrowers have the right to prepay obligations with or without prepayment penalties. At September 30, 2013, the Company had $849.7 million carrying value of callable securities in its CMBS, CLO and municipal bond portfolios. The Company considers these factors in the evaluation of its effective duration and interest rate risk profile.

Securities with a carrying value totaling $2.9 billion at September 30, 2013 and $2.5 billion at December 31, 2012 were pledged to secure public funds, trust deposits, repurchase agreements and for other purposes, as required or permitted by law. At September 30, 2013 and December 31, 2012, the Company had no investments in obligations of individual states, counties, or municipalities which exceed 10% of consolidated shareholders’ equity.

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The following tables provide information on the gross unrealized losses and fair value of the Company’s investment securities with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment security category and length of time that individual investment securities have been in a continuous unrealized loss position:



	At September 30, 2013
	Less Than Twelve Months					Twelve Months or Longer					Total
(Dollars in thousands)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			# of Holdings	Fair Value		Unrealized Losses
Available for sale:
Agency CMOs	$	90,774	$	(1,255	)	$	9,935	$	(94	)	6	$	100,709	$	(1,349	)
Agency MBS	880,443		(29,177		)	106,834		(5,239		)	92	987,277		(34,416		)
CMBS	51,274		(1,032		)	—		—			6	51,274		(1,032		)
CLOs	217,355		(1,126		)	—		—			14	217,355		(1,126		)
Pooled trust preferred securities	—		—			29,964		(6,617		)	6	29,964		(6,617		)
Single issuer trust preferred securities	3,900		(252		)	39,402		(7,757		)	9	43,302		(8,009		)
Total available for sale in an unrealized loss position	$	1,243,746	$	(32,842	)	$	186,135	$	(19,707	)	133	$	1,429,881	$	(52,549	)
Held-to-maturity:
Agency CMOs	29,770		(492		)	—		—			2	29,770		(492		)
Agency MBS	1,008,677		(34,002		)	41,673		(1,830		)	72	1,050,350		(35,832		)
Municipal bonds and notes	33,263		(707		)	2,166		(36		)	38	35,429		(743		)
CMBS	77,145		(4,028		)	—		—			8	77,145		(4,028		)
Total held-to-maturity in an unrealized loss position	$	1,148,855	$	(39,229	)	$	43,839	$	(1,866	)	120	$	1,192,694	$	(41,095	)

Total investment securities in an unrealized loss position	$	2,392,601	$	(72,071	)	$	229,974	$	(21,573	)	253	$	2,622,575	$	(93,644	)



	At December 31, 2012
	Less Than Twelve Months					Twelve Months or Longer					Total
(Dollars in thousands)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			# of Holdings	Fair Value		Unrealized Losses
Available for sale:
Agency CMOs	$	69,936	$	(92	)	$	—	$	—		4	$	69,936	$	(92	)
Agency MBS	275,818		(1,098		)	—		—			28	275,818		(1,098		)
CMBS	14,947		(17		)	20,909		(3,476		)	2	35,856		(3,493		)
CLOs	44,775		(225		)	—		—			2	44,775		(225		)
Pooled trust preferred securities	—		—			26,207		(19,811		)	8	26,207		(19,811		)
Single issuer trust preferred securities	—		—			44,415		(6,766		)	9	44,415		(6,766		)
Equity securities-financial institutions	144		(4		)	—		—			1	144		(4		)
Total available for sale in an unrealized loss position	$	405,620	$	(1,436	)	$	91,531	$	(30,053	)	54	$	497,151	$	(31,489	)
Held-to-maturity:
Agency CMOs	18,741		(8		)	—		—			1	18,741		(8		)
Agency MBS	161,057		(474		)	—		—			12	161,057		(474		)
Municipal bonds and notes	5,990		(51		)	2,858		(59		)	11	8,848		(110		)
Total held-to-maturity in an unrealized loss position	$	185,788	$	(533	)	$	2,858	$	(59	)	24	$	188,646	$	(592	)

Total investment securities in an unrealized loss position	$	591,408	$	(1,969	)	$	94,389	$	(30,112	)	78	$	685,797	$	(32,081	)

There were no additions to credit related OTTI for the three and nine months ended September 30, 2013 or 2012. To the extent that changes in interest rates, credit movements and other factors that influence the fair value of investments occur, the Company may be required to record impairment charges for OTTI in future periods.

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The following discussion summarizes, by investment security type, the basis for evaluating if the applicable investment securities within the Company’s available for sale portfolio were other-than-temporarily impaired at September 30, 2013. Unless otherwise noted for an investment security type, management does not intend to sell these investments and has determined, based upon available evidence, that it is more likely than not that the Company will not be required to sell these securities before the recovery of its amortized cost.

Agency collateralized mortgage obligations (CMOs) – There were $1.3 million in unrealized losses in the Company’s investment in agency CMOs at September 30, 2013 compared to $92 thousand at December 31, 2012. The unrealized loss is attributed to an increase in market rates which resulted in lower prices in CMOs. The contractual cash flows for these investments are performing as expected and there has been no change in the underlying credit quality. As such, the Company does not consider these securities to be other-than-temporarily impaired at September 30, 2013.

Agency mortgage-backed securities (MBS) – There were $34.4 million in unrealized losses in the Company’s investment in residential mortgage-backed securities issued by government agencies at September 30, 2013, compared to $1.1 million at December 31, 2012. The increase in unrealized losses is due to the impact of higher interest rates on mortgage-backed securities which resulted in a decrease in price. The contractual cash flows for these investments are performing as expected. The Company does not consider these securities to be other-than-temporarily impaired at September 30, 2013.

Commercial mortgage-backed securities (CMBS) – The unrealized losses on the Company’s investment in commercial mortgage-backed securities issued by entities other than government agencies decreased to $1.0 million at September 30, 2013, from $3.5 million at December 31, 2012. As of September 30, 2013, the unrealized loss is comprised of six positions with small unrealized losses as a result of widening credit spreads and rising interest rates. Internal and external metrics are considered when evaluating potential OTTI on credit sensitive instruments. Internal stress tests are performed on individual bonds to monitor potential loss in either base or high stress scenarios. In addition, market analytics are performed to validate internal results. Contractual cash flows for the bonds continue to perform as expected. The Company does not consider these securities to be other-than-temporarily impaired at September 30, 2013.

Collateralized loan obligations (CLO) – There were $1.1 million in unrealized losses in the Company’s investment in collateralized loan obligations at September 30, 2013, compared to $225 thousand at December 31, 2012. The increase in unrealized losses is due to wider bid/ask spreads in this market. These securities have been stress tested, and this unrealized loss does not signify any change in perceived credit quality. The Company does not consider these securities to be other-than-temporarily impaired at September 30, 2013.

Pooled trust preferred securities – The pooled trust preferred portfolio consists of collateralized debt obligations (“CDOs”) containing predominantly bank and insurance company collateral that are currently non-investment grade. At September 30, 2013, the fair value of the pooled trust preferred securities was $30.0 million, an increase of $3.8 million from $26.2 million at December 31, 2012. The unrealized losses in the Company's investment in pooled trust preferred securities were $6.6 million at September 30, 2013, a decrease of $13.2 million from $19.8 million at December 31, 2012. The decrease in unrealized losses was attributable to a tightening in credit spreads (6-month average used to discount cash flows), higher projected LIBOR rates and improved collateral performance. For the nine months ended September 30, 2013, the Company recognized no other-than-temporary impairment for these securities. An internal model is used to value the pooled trust preferred securities as similar rated holdings continue to reflect an inactive market. The Company employs an internal CDO model for projection of future cash flows and discounting those cash flows to a net present value. Each underlying issuer in the pools is rated internally using the latest financial data on each institution with future deferrals, defaults and losses estimated on the basis of continued stress in the financial markets. Further, all current and projected deferrals are not assumed to cure, and all current and projected defaults are assumed to have no recovery value. The resulting net cash flows are then discounted at current market levels for similar types of products that are actively trading. To determine potential OTTI due to credit losses, management compares the amortized cost to the present value of expected cash flows adjusted for deferrals and defaults using the discount margin at the time of purchase. Other factors considered include an analysis of excess subordination and temporary interest shortfall coverage. Based on the valuation analysis, the Company does not consider these securities to be other-than-temporarily impaired at September 30, 2013.

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The following table summarizes information that was also considered by management in its overall evaluation of the Pooled Trust Preferred Securities portfolio for OTTI in the current reporting period:



Deal Name	Class	Amortized Cost ⁽¹⁾		Gross Unrealized Losses			Fair Value		Lowest Credit Ratings as of September 30, 2013 ⁽²⁾	Total OTTI through September 30, 2013			% of Performing Bank/ Insurance Issuers		Deferrals/ Defaults (As a % of Current Collateral)
(Dollars in thousands)
Security H	B	$	3,487	$	(533	)	$	2,954	B	$	(352	)	91.7	%	8.0	%
Security I	B	4,468		(716		)	3,752		CCC	(365		)	87.5	%	17.2	%
Security J	B	5,321		(1,067		)	4,254		CCC	(806		)	91.7	%	10.4	%
Security K	A	7,432		(1,107		)	6,325		CCC	(2,040		)	69.1	%	33.5	%
Security L	B	8,728		(1,449		)	7,279		CCC	(867		)	91.3	%	13.2	%
Security M	A	7,145		(1,745		)	5,400		D	(4,926		)	60.7	%	34.6	%
Pooled trust preferred securities		$	36,581	$	(6,617	)	$	29,964		$	(9,356	)

(1)For the securities previously deemed impaired, the amortized cost is reflective of previous OTTI recognized in earnings.

(2)The Company utilized credit ratings provided by Moody’s, S&P and Fitch in its evaluation of issuers.

Single issuer trust preferred securities - At September 30, 2013, the fair value of the single issuer trust preferred portfolio was $43.3 million, a decrease of $1.1 million from the fair value of $44.4 million at December 31, 2012. The unrealized losses in the Company's investment in single issuer trust preferred securities were $8.0 million at September 30, 2013, an increase of $1.2 million from $6.8 million at December 31, 2012. The single issuer portfolio consists of five investments issued by three large capitalized money center financial institutions, which continue to service the debt and have shown improved capital levels in recent years and remain well above current regulatory capital standards. Based on the review of the qualitative and quantitative factors presented above, the Company does not consider these securities to be other-than-temporarily impaired at September 30, 2013.

The following table summarizes the lowest credit rating information that was considered by management in evaluating the Single Issuer Trust Preferred Securities portfolio for OTTI in the current reporting period:



Deal Name	Amortized Cost		Gross Unrealized Losses			Fair Value		Lowest Credit Ratings as of September 30, 2013 ⁽¹⁾
(Dollars in thousands)
Security B	$	6,922	$	(922	)	$	6,000	BB
Security C	8,705		(1,280		)	7,425		BBB
Security D	9,547		(1,847		)	7,700		B
Security E	11,804		(1,387		)	10,417		BBB
Security F	14,333		(2,573		)	11,760		BBB
Single issuer trust preferred securities	$	51,311	$	(8,009	)	$	43,302

(1)The Company utilized credit ratings provided by Moody’s, S&P and Fitch in its evaluation of issuers.

Corporate debt securities – There were no unrealized losses on the Company’s investment in corporate debt securities at September 30, 2013 or December 31, 2012.

Equity securities - financial institutions – There were no unrealized losses on the Company’s investment in equity securities at September 30, 2013, compared to $4 thousand at December 31, 2012. This portfolio consists primarily of investments in the common stock of small capitalization financial institutions based in New England. When estimating the recovery period for equity securities in an unrealized loss position, management utilizes analyst forecasts, earnings assumptions and other company-specific financial performance metrics. In addition, this assessment incorporates general market data, industry and sector cycles and related trends to determine a reasonable recovery period. The Company evaluated the near-term prospects of the issuers in relation to the severity and duration of the impairment. The Company does not consider these securities to be other-than-temporarily impaired at September 30, 2013.

The following discussion summarizes, by investment security type, the basis for the conclusion that the applicable investment securities within the Company’s held-to-maturity portfolio were not other-than-temporarily impaired at September 30, 2013. Unless

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otherwise noted under an investment security type, management does not intend to sell these investments and has determined, based upon available evidence, that it is more likely than not that the Company will not be required to sell these securities before the recovery of its amortized cost. There were no significant credit downgrades on held-to-maturity securities during the nine months ended September 30, 2013.

Agency CMOs – There were unrealized losses of $492 thousand on the Company’s investment in agency CMOs at September 30, 2013, compared to $8 thousand at December 31, 2012. This is due to an increase in market rates which resulted in lower prices. The contractual cash flows for these investments are performing as expected. The Company does not consider these securities to be other-than-temporarily impaired at September 30, 2013.

Agency mortgage-backed securities – There were unrealized losses on the Company’s investment in residential mortgage-backed securities issued by government agencies of $35.8 million at September 30, 2013, compared to $0.5 million at December 31, 2012. The increase was primarily due to the impact of higher interest rates on lower coupon mortgages. The contractual cash flows for these investments are performing as expected. The Company does not consider these securities to be other-than-temporarily impaired at September 30, 2013.

Municipal bonds and notes – There were unrealized losses of $743 thousand on the Company’s investment in municipal bonds and notes at September 30, 2013 compared to $110 thousand at December 31, 2012. This increase is primarily the result of both wider credit spreads as well as higher benchmark interest rates. The municipal portfolio is primarily comprised of bank qualified bonds, over 93.9% with credit ratings of A or better. These ratings do not consider prefunded municipal holdings to be rated AA. If this were the case, the percentage of holdings rated A or better would be 95.8%. In addition, the portfolio is comprised of 85.0% general obligation bonds, 14.5% revenue bonds and 0.5% other bonds. The Company does not consider these securities to be other-than-temporarily impaired at September 30, 2013.

CMBS – There were unrealized losses of $4.0 million on the Company’s investment in commercial mortgage-backed securities issued by entities other than government agencies at September 30, 2013 compared to no unrealized losses at December 31, 2012. As of September 30, 2013, the unrealized loss is comprised of eight positions that have unrealized losses as a result of widening credit spreads and rising interest rates. These securities are currently performing as expected. The Company does not consider these securities to be other-than-temporarily impaired at September 30, 2013.

Private Label MBS - There were no unrealized losses on the Company's investment in residential mortgage-backed securities issued by entities other than government agencies at September 30, 2013 or December 31, 2012. The Company does not consider these securities to be other-than-temporarily impaired at September 30, 2013.

The following table summarizes the proceeds and realized gains recognized from the sale of available for sale securities:



	Three months ended September 30,								Nine months ended September 30,
	2013				2012				2013				2012
(In thousands)	Proceeds		Gains		Proceeds		Gains		Proceeds		Gains		Proceeds		Gains
Available for sale:
Agency CMOs	$	—	$	—	$	16,353	$	4	$	—	$	—	$	44,851	$	897
Agency MBS	—		—		86,015		806		11,771		106		86,015		806
CMBS	—		—		—		—		24,750		333		16,284		1,235
Pooled trust preferred securities	7,740		269		—		—		7,740		269		—		—
Equity securities - financial institutions	—		—		—		—		—		—		1,073		409
Available for sale securities	$	7,740	$	269	$	102,368	$	810	$	44,261	$	708	$	148,223	$	3,347

There were no realized losses or OTTI recognized from the sale of available for sale securities for the periods presented above.

Alternative Investments - In addition to investment securities, the Company has investments in certain non-public funds, which include private equity funds, SBIC equity funds and preferred share ownership in other equity ventures. These alternative investments, which totaled $19.0 million at September 30, 2013 and $19.5 million at December 31, 2012, are included in other assets in the accompanying Condensed Consolidated Balance Sheets. The majority are held at cost, while some are carried at net asset value, which due to the illiquidity of these funds are classified in Level 3 of the fair value hierarchy. See a further discussion of fair value in Note 14 - Fair Value Measurements. The Company recognized losses of $70 thousand and $354 thousand for the three and nine months ended September 30, 2013, respectively, and losses of $518 thousand and $775 thousand for the three and nine months ended September 30, 2012, respectively. These amounts are included in other non-interest income in the accompanying Condensed Consolidated Statements of Income.

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NOTE 3: Loans and Leases

Recorded Investment in Loans and Leases. The following tables summarize the recorded investment by portfolio segment:



	At September 30, 2013
(In thousands)	Residential		Consumer		Commercial		Commercial Real Estate ¹		Equipment Financing		Total ²
Recorded Investment:
Individually evaluated for impairment	$	143,534	$	52,907	$	62,190	$	138,333	$	292	$	397,256
Collectively evaluated for impairment	3,217,268		2,487,122		3,134,197		2,853,099		425,535		12,117,221
Recorded investment in loans and leases	3,360,802		2,540,029		3,196,387		2,991,432		425,827		12,514,477
Less: Accrued interest	10,225		7,730		10,988		7,569		—		36,512
Loans and leases	$	3,350,577	$	2,532,299	$	3,185,399	$	2,983,863	$	425,827	$	12,477,965



	At December 31, 2012
(In thousands)	Residential		Consumer		Commercial		Commercial Real Estate ¹		Equipment Financing		Total ²
Recorded Investment:
Individually evaluated for impairment	$	146,944	$	54,793	$	69,426	$	154,978	$	1,980	$	428,121
Collectively evaluated for impairment	3,155,051		2,584,169		2,843,760		2,635,624		417,331		11,635,935
Recorded investment in loans and leases	3,301,995		2,638,962		2,913,186		2,790,602		419,311		12,064,056
Less: Accrued interest	10,271		8,095		9,453		7,541		—		35,360
Loans and leases	$	3,291,724	$	2,630,867	$	2,903,733	$	2,783,061	$	419,311	$	12,028,696


(1)	Includes certain loans individually evaluated for impairment, under the Company's loan policy, that were deemed not to be impaired at both September 30, 2013 and December 31, 2012.


(2)	Loans and leases include net deferred fees and unamortized premiums of $13.2 million and $12.7 million at September 30, 2013 and December 31, 2012, respectively.

At September 30, 2013, the Company had pledged $4.9 billion of eligible loan collateral to support available borrowing capacity at the Federal Home Loan Bank of Boston ("FHLB") and the Federal Reserve Bank of Boston.

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Loans and Leases Portfolio Aging. The following tables summarize the recorded investment of the Company’s loans and leases portfolio aging by class:



	At September 30, 2013
(In thousands)	30-59 Days Past Due and Accruing		60-89 Days Past Due and Accruing		> 90 Days Past Due and Accruing		Non-accrual		Total Past Due and Non-accrual		Current		Total Loans and Leases
Residential:
1-4 family	$	12,259	$	8,851	$	—	$	85,879	$	106,989	$	3,210,931	$	3,317,920
Construction	—		—		—		390		390		42,492		42,882
Consumer:
Home equity loans	10,407		5,318		—		45,504		61,229		2,312,883		2,374,112
Liquidating portfolio-home equity loans	1,707		1,089		—		6,554		9,350		100,537		109,887
Other consumer	434		81		—		180		695		55,335		56,030
Commercial:
Commercial non-mortgage	2,406		622		4,239		17,453		24,720		2,557,866		2,582,586
Asset-based loans	—		—		—		—		—		613,801		613,801
Commercial real estate:
Commercial real estate	552		—		625		15,883		17,060		2,788,443		2,805,503
Commercial construction	—		—		—		49		49		161,252		161,301
Residential development	—		—		—		4,317		4,317		20,311		24,628
Equipment financing	422		33		—		1,669		2,124		423,703		425,827
Total	$	28,187	$	15,994	$	4,864	$	177,878	$	226,923	$	12,287,554	$	12,514,477



	At December 31, 2012
(In thousands)	30-59 Days Past Due and Accruing		60-89 Days Past Due and Accruing		> 90 Days Past Due and Accruing		Non-accrual		Total Past Due and Non-accrual		Current		Total Loans and Leases
Residential:
1-4 family	$	16,955	$	8,250	$	—	$	94,853	$	120,058	$	3,142,220	$	3,262,278
Construction	—		360		—		823		1,183		38,535		39,718
Consumer:
Home equity loans	17,745		6,993		—		49,516		74,254		2,396,944		2,471,198
Liquidating portfolio-home equity loans	2,063		1,626		—		8,200		11,889		111,760		123,649
Other consumer	338		195		—		135		668		43,446		44,114
Commercial:
Commercial non-mortgage	2,248		552		347		17,547		20,694		2,386,775		2,407,469
Asset-based loans	—		—		—		—		—		505,717		505,717
Commercial real estate:
Commercial real estate	1,081		13,784		910		15,658		31,433		2,617,213		2,648,646
Commercial construction	—		—		—		49		49		114,097		114,146
Residential development	—		—		—		5,044		5,044		22,766		27,810
Equipment financing	1,593		333		—		3,325		5,251		414,060		419,311
Total	$	42,023	$	32,093	$	1,257	$	195,150	$	270,523	$	11,793,533	$	12,064,056

Interest on non-accrual loans and leases that would have been recorded as additional interest income for the three and nine months ended September 30, 2013 and 2012, had the loans and leases been current in accordance with their original terms, totaled $3.5 million and $10.9 million and $4.7 million and $10.6 million, respectively.

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Allowance for Loan and Lease Losses. The following tables summarize the ALLL by portfolio segment:



	Three months ended September 30, 2013
(In thousands)	Residential			Consumer			Commercial			Commercial Real Estate			Equipment Financing			Unallocated		Total
Allowance for loan and lease losses:
Balance, beginning of period	$	26,876		$	49,659		$	43,847		$	28,457		$	3,603		$	11,000	$	163,442
Provision (benefit) charged to expense	1,075			(1,732		)	3,783			6,046			(672		)	—		8,500
Losses charged off	(3,800		)	(5,827		)	(3,245		)	(4,069		)	(10		)	—		(16,951		)
Recoveries	152			1,188			426			105			683			—		2,554
Balance, end of period	$	24,303		$	43,288		$	44,811		$	30,539		$	3,604		$	11,000	$	157,545
Ending balance: individually evaluated for impairment	$	13,003		$	3,281		$	1,630		$	5,397		$	—		$	—	$	23,311
Ending balance: collectively evaluated for impairment	$	11,300		$	40,007		$	43,181		$	25,142		$	3,604		$	11,000	$	134,234



	Three months ended September 30, 2012
(In thousands)	Residential			Consumer			Commercial			Commercial Real Estate			Equipment Financing			Unallocated			Total
Allowance for loan and lease losses:
Balance, beginning of period	$	32,063		$	62,237		$	48,768		$	36,506		$	5,433		$	13,750		$	198,757
Provision (benefit) charged to expense	1,110			9,740			2,944			(4,315		)	(3,479		)	(1,000		)	5,000
Losses charged off	(3,262		)	(9,234		)	(8,642		)	(2,655		)	(187		)	—			(23,980		)
Recoveries	353			1,249			1,297			302			3,111			—			6,312
Balance, end of period	$	30,264		$	63,992		$	44,367		$	29,838		$	4,878		$	12,750		$	186,089
Ending balance: individually evaluated for impairment	$	15,420		$	7,795		$	4,552		$	3,153		$	3		$	—		$	30,923
Ending balance: collectively evaluated for impairment	$	14,844		$	56,197		$	39,815		$	26,685		$	4,875		$	12,750		$	155,166



	Nine months ended September 30, 2013
(In thousands)	Residential			Consumer			Commercial			Commercial Real Estate			Equipment Financing			Unallocated			Total
Allowance for loan and lease losses:
Balance, beginning of period	$	29,474		$	54,254		$	46,566		$	30,834		$	4,001		$	12,000		$	177,129
Provision (benefit) charged to expense	2,835			7,328			8,902			9,146			(2,711		)	(1,000		)	24,500
Losses charged off	(8,848		)	(23,565		)	(13,740		)	(10,339		)	(101		)	—			(56,593		)
Recoveries	842			5,271			3,083			898			2,415			—			12,509
Balance, end of period	$	24,303		$	43,288		$	44,811		$	30,539		$	3,604		$	11,000		$	157,545
Ending balance: individually evaluated for impairment	$	13,003		$	3,281		$	1,630		$	5,397		$	—		$	—		$	23,311
Ending balance: collectively evaluated for impairment	$	11,300		$	40,007		$	43,181		$	25,142		$	3,604		$	11,000		$	134,234



	Nine months ended September 30, 2012
(In thousands)	Residential			Consumer			Commercial			Commercial Real Estate			Equipment Financing			Unallocated			Total
Allowance for loan and lease losses:
Balance, beginning of period	$	34,565		$	67,785		$	60,681		$	45,013		$	8,943		$	16,500		$	233,487
Provision (benefit) charged to expense	5,398			20,836			8,223			(7,054		)	(9,653		)	(3,750		)	14,000
Losses charged off	(10,329		)	(30,634		)	(29,312		)	(9,569		)	(986		)	—			(80,830		)
Recoveries	630			6,005			4,775			1,448			6,574			—			19,432
Balance, end of period	$	30,264		$	63,992		$	44,367		$	29,838		$	4,878		$	12,750		$	186,089
Ending balance: individually evaluated for impairment	$	15,420		$	7,795		$	4,552		$	3,153		$	3		$	—		$	30,923
Ending balance: collectively evaluated for impairment	$	14,844		$	56,197		$	39,815		$	26,685		$	4,875		$	12,750		$	155,166

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Impaired Loans and Leases. The following tables summarize impaired loans and leases by class:



	At September 30, 2013
(In thousands)	Unpaid Principal Balance		Total Recorded Investment		Recorded Investment No Allowance		Recorded Investment With Allowance		Related Valuation Allowance
Residential:
1-4 family	$	159,412	$	143,530	$	23,544	$	119,986	$	13,003
Construction	446		4		1		3		—
Consumer:
Home equity loans	55,398		46,169		23,903		22,266		2,752
Liquidating portfolio-home equity loans	9,092		6,738		3,819		2,919		529
Commercial:
Commercial non-mortgage	67,907		62,190		21,960		40,230		1,630
Commercial real estate:
Commercial real estate	116,349		111,421		54,512		56,909		5,361
Commercial construction	—		—		—		—		—
Residential development	13,717		12,689		12,413		276		36
Equipment financing	331		292		292		—		—
Totals:
Residential	159,858		143,534		23,545		119,989		13,003
Consumer	64,490		52,907		27,722		25,185		3,281
Commercial	67,907		62,190		21,960		40,230		1,630
Commercial real estate	130,066		124,110		66,925		57,185		5,397
Equipment financing	331		292		292		—		—
Total	$	422,652	$	383,033	$	140,444	$	242,589	$	23,311



	At December 31, 2012
(In thousands)	Unpaid Principal Balance		Total Recorded Investment		Recorded Investment No Allowance		Recorded Investment With Allowance		Related Valuation Allowance
Residential:
1-4 family	$	160,490	$	146,683	$	24,267	$	122,416	$	14,726
Construction	446		261		156		105		5
Consumer:
Home equity loans	56,815		47,755		23,967		23,788		2,960
Liquidating portfolio-home equity loans	11,788		7,038		3,663		3,375		651
Commercial:
Commercial non-mortgage	90,627		69,426		21,942		47,484		6,423
Commercial real estate:
Commercial real estate	123,861		121,193		65,212		55,981		2,572
Commercial construction	7,177		7,185		7,185		—		—
Residential development	13,444		12,771		5,029		7,742		111
Equipment financing	2,357		1,980		1,781		199		1
Totals:
Residential	160,936		146,944		24,423		122,521		14,731
Consumer	68,603		54,793		27,630		27,163		3,611
Commercial	90,627		69,426		21,942		47,484		6,423
Commercial real estate	144,482		141,149		77,426		63,723		2,683
Equipment financing	2,357		1,980		1,781		199		1
Total	$	467,005	$	414,292	$	153,202	$	261,090	$	27,449

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The following table summarizes the average recorded investment and interest income recognized by class of impaired loans and leases:



	September 30, 2013		Three months ended September 30, 2013		Nine months ended September 30, 2013		September 30, 2012		Three months ended September 30, 2012		Nine months ended September 30, 2012
(In thousands)	Average Recorded Investment		Total Interest Income		Total Interest Income		Average Recorded Investment		Total Interest Income		Total Interest Income
Residential:
1-4 family	$	145,107	$	1,533	$	4,570	$	141,749	$	1,485	$	4,236
Construction	133		2		4		197		2		4
Consumer:
Home equity loans	46,962		551		1,700		41,724		633		1,336
Liquidating portfolio-home equity loans	6,888		112		349		7,721		132		263
Other consumer	—		—		—		4		—		—
Commercial:
Commercial non-mortgage	65,808		794		2,187		93,090		830		3,035
Asset-based loans	—		—		—		986		—		—
Commercial real estate:
Commercial real estate	116,307		1,109		3,675		170,213		1,479		3,921
Commercial construction	3,593		62		196		7,307		70		216
Residential development	12,730		99		286		14,083		83		254
Equipment financing	1,136		6		19		2,207		13		36
Totals:
Residential	145,240		1,535		4,574		141,946		1,487		4,240
Consumer	53,850		663		2,049		49,449		765		1,599
Commercial	65,808		794		2,187		94,076		830		3,035
Commercial real estate	132,630		1,270		4,157		191,603		1,632		4,391
Equipment financing	1,136		6		19		2,207		13		36
Total	$	398,664	$	4,268	$	12,986	$	479,281	$	4,727	$	13,301

Of the total interest income recognized for the residential and consumer portfolios, $0.9 million and $2.8 million and $0.3 million and $1.0 million of interest income was recognized on a cash basis method of accounting for the three and nine months ended September 30, 2013 and 2012, respectively.

Credit Risk Management. The Company has certain credit policies and procedures in place designed to maximize loan income within an acceptable level of risk. Management reviews and approves these policies and procedures on a regular basis and 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. Most commercial and industrial loans are secured by the assets being financed and may incorporate a personal guarantee; however, some loans may be made on an unsecured basis. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value.

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

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commercial real estate loans based on collateral, geography and risk grade criteria. The Company also utilizes third-party experts to provide insight and guidance about economic conditions and trends affecting its loan portfolio.

Construction loans on commercial properties have unique risk characteristics and are provided to experienced developers/sponsors with strong track records of successful completion and sound financial condition and are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analysis of absorption and lease rates, and financial analysis of the developers and property owners. Construction loans are generally based upon estimates of costs and value associated with the complete project. These estimates may be subject to change as the construction project proceeds. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property, or interim loan commitments from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections by third-party professionals and internal staff.

To monitor and manage consumer loan risk, policies and procedures are developed and modified, as needed, jointly by line and Risk Management personnel. Policies and procedures, coupled with relatively small loan amounts, and predominately collateralized structures spread across many individual borrowers, minimize risk. Trend and outlook reports are reviewed by management on a regular basis. Underwriting factors for mortgage and home equity loans include the borrower’s FICO score, the loan amount relative to property value and the borrower’s debt to income level and are also influenced by regulatory requirements.

Credit Quality Indicators. To measure credit risk for the commercial, commercial real estate and equipment financing portfolios, the Company employs a dual grade credit risk grading system for estimating the probability of borrower default and the loss given default. A credit risk grade system assigns a rating to each borrower and to the facility, which together form a Composite Credit Risk Profile (“CCRP”). The credit risk grading system categorizes borrowers by common financial characteristics that measure the credit strength of borrowers and facilities by common structural characteristics. The CCRP has ten grades, with each grade corresponding to a progressively greater risk of default. Grades 1 through 6 are considered pass ratings, and 7 through 10 are criticized as defined by the regulatory agencies. Rating model assumptions are actively reviewed and tested against industry data and actual experience. Risk ratings are assigned to differentiate risk within the portfolio, are reviewed on an ongoing basis and revised to reflect changes in the borrowers’ current financial positions and outlook, risk profiles, and the related collateral and structural positions. Loan officers review updated financial information on at least an annual basis for all pass rated loans to assess the accuracy of the risk grade. All criticized loans undergo frequent review and enhanced monitoring of the underlying borrowers.

A “Special Mention” (7) credit has the potential weakness that, if left uncorrected, may result in deterioration of the repayment prospects for the asset. “Substandard” (8) assets have a well defined weakness that jeopardizes the full repayment of the debt. An asset rated “Doubtful” (9) has all the same weaknesses as substandard credit with the added characteristic that the weakness makes collection or liquidation in full, given current facts, conditions, and values, improbable. Assets classified as “Loss” (10) in accordance with regulatory guidelines are considered uncollectible and charged off.

The recorded investment in commercial and commercial real estate loans and equipment financing leases segregated by risk rating exposure is as follows:



(In thousands)	Commercial				Commercial Real Estate				Equipment Financing
	At September 30, 2013		At December 31, 2012		At September 30, 2013		At December 31, 2012		At September 30, 2013		At December 31, 2012
(1) - (6) Pass	$	2,990,708	$	2,701,061	$	2,865,921	$	2,588,987	$	403,943	$	381,304
(7) Special Mention	74,439		43,856		9,535		56,023		7,466		12,893
(8) Substandard	130,301		167,485		115,434		143,904		14,418		25,114
(9) Doubtful	939		784		542		1,688		—		—
(10) Loss	—		—		—		—		—		—
Total	$	3,196,387	$	2,913,186	$	2,991,432	$	2,790,602	$	425,827	$	419,311

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

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Troubled Debt Restructurings. The following table summarizes the information for the Company’s TDRs:



(Dollars in thousands)	At September 30, 2013			At December 31, 2012
Recorded investment of TDRs:
Accrual status	$	260,786		$	288,578
Non-accrual status	110,888			115,583
Total recorded investment of TDRs	$	371,674		$	404,161
Accruing TDRs performing under modified terms more than one year	60.1		%	60.2		%
Specific reserves for TDRs included in the balance of allowance for loan and lease losses	$	23,153		$	27,317
Additional funds committed to borrowers in TDR status ⁽¹⁾	8,171			3,263


(1)	This amount may be limited by contractual rights and/or the underlying collateral supporting the loan or lease.

For the three and nine months ended September 30, 2013 and 2012, Webster charged off $3.2 million and $17.3 million and $10.2 million and $33.8 million, respectively, for the portion of TDRs deemed to be uncollectible.

The following tables provide information on loans and leases modified as TDRs in the period:



	Three months ended September 30,
	2013							2012
(Dollars in thousands)	Number of Loans and Leases	Pre- Modification Recorded Investment		Post- Modification Recorded Investment		Post- Modification Coupon Rate		Number of Loans and Leases	Pre- Modification Recorded Investment		Post- Modification Recorded Investment		Post- Modification Coupon Rate
Residential:
1-4 family	24	$	4,872	$	4,872	4.5	%	120	$	17,441	$	17,441	4.7	%
Construction	—	—		—		—		1	159		159		6.4
Consumer:
Home equity loans	31	1,058		1,058		5.2		459	23,277		23,277		5.1
Liquidating portfolio-home equity loans	10	223		223		5.6		108	5,542		5,542		5.5
Commercial:
Commercial non-mortgage	14	4,921		4,921		5.4		8	4,786		4,786		3.1
Commercial real estate:
Commercial real estate	2	340		340		5.6		4	21,507		21,507		2.2
Residential development	—	—		—		—		—	—		—		—
Equipment financing	—	—		—		—		1	248		248		6.1
Total TDRs	81	$	11,414	$	11,414	5.0	%	701	$	72,960	$	72,960	4.1	%



	Nine months ended September 30,
	2013							2012
(Dollars in thousands)	Number of Loans and Leases	Pre- Modification Recorded Investment		Post- Modification Recorded Investment		Post- Modification Coupon Rate		Number of Loans and Leases	Pre- Modification Recorded Investment		Post- Modification Recorded Investment		Post- Modification Coupon Rate
Residential:
1-4 family	96	$	19,130	$	19,130	4.0	%	170	$	26,269	$	26,269	4.4	%
Construction	—	—		—		—		2	263		263		6.6
Consumer:
Home equity loans	96	5,036		5,036		4.4		486	25,549		25,549		5.0
Liquidating portfolio-home equity loans	19	657		657		5.2		112	5,577		5,577		5.6
Commercial:
Commercial non-mortgage	24	13,109		13,109		6.5		33	21,772		21,772		6.3
Commercial real estate:
Commercial real estate	5	12,053		12,053		2.8		7	23,919		23,919		2.5
Residential development	2	189		189		5.0		—	—		—		—
Equipment financing	—	—		—		—		8	590		590		6.7
Total TDRs	242	$	50,174	$	50,174	4.4	%	818	$	103,939	$	103,939	4.6	%

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TDR loans may be modified by means of extended maturity, below market adjusted interest rates, a combination of rate and maturity, or by other means including covenant modifications, or other concessions. The following tables provide information on how loans and leases were modified as TDRs in the period:



	Three months ended September 30,
	2013										2012
(In thousands)	Extended Maturity		Adjusted Interest Rates		Combination of Rate and Maturity		Other ⁽¹⁾		Total		Extended Maturity		Adjusted Interest Rates		Combination of Rate and Maturity		Other ⁽¹⁾		Total
Residential:
1-4 family	$	1,898	$	654	$	1,142	$	1,178	$	4,872	$	604	$	—	$	2,131	$	14,706	$	17,441
Construction	—		—		—		—		—		—		—		—		159		159
Consumer:
Home equity loans	213		—		157		688		1,058		38		117		448		22,674		23,277
Liquidating portfolio-home equity loans	93		—		7		123		223		—		—		—		5,542		5,542
Commercial:
Commercial non-mortgage	—		—		353		4,568		4,921		—		—		737		4,049		4,786
Commercial real estate:
Commercial real estate	—		—		340		—		340		—		—		—		21,507		21,507
Residential development	—		—		—		—		—		—		—		—		—		—
Equipment financing	—		—		—		—		—		—		—		248		—		248
Total TDRs	$	2,204	$	654	$	1,999	$	6,557	$	11,414	$	642	$	117	$	3,564	$	68,637	$	72,960



	Nine months ended September 30,
	2013										2012
(In thousands)	Extended Maturity		Adjusted Interest Rates		Combination of Rate and Maturity		Other ⁽¹⁾		Total		Extended Maturity		Adjusted Interest Rates		Combination of Rate and Maturity		Other ⁽¹⁾		Total
Residential:
1-4 family	$	4,418	$	1,888	$	7,213	$	5,611	$	19,130	$	1,634	$	1,006	$	5,695	$	17,934	$	26,269
Construction	—		—		—		—		—		—		—		104		159		263
Consumer:
Home equity loans	788		154		1,374		2,720		5,036		993		224		1,335		22,997		25,549
Liquidating portfolio-home equity loans	173		—		7		477		657		35		—		—		5,542		5,577
Commercial:
Commercial non-mortgage	7,520		—		982		4,607		13,109		314		—		1,023		20,435		21,772
Commercial real estate:
Commercial real estate	38		—		12,015		—		12,053		2,068		—		245		21,606		23,919
Residential development	189		—		—		—		189		—		—		—		—		—
Equipment financing	—		—		—		—		—		142		—		288		160		590
Total TDRs	$	13,126	$	2,042	$	21,591	$	13,415	$	50,174	$	5,186	$	1,230	$	8,690	$	88,833	$	103,939


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

The Company’s loan and lease portfolio at September 30, 2013 included eleven loans with an A Note/B Note structure, with a combined recorded investment of $37.4 million. The loans were restructured into A Note/B Note structures as a result of evaluating the cash flow of the borrowers to support repayment. Webster immediately charged off the balance of B Notes totaling $17.3 million. TDR classification has been removed from two A Notes with the combined recorded investment of $13.5 million, as the borrowers passed the minimum compliance with the modified terms requirements. The restructuring agreement specifies a market interest rate equal to that which would be provided to a borrower with similar credit at the time of restructuring. The A Notes are paying under the terms of the modified loan agreements. Of the eleven A Notes, eight are on accrual status as the borrowers are paying under the terms of the loan agreements prior to and subsequent to the modification. The remaining A Notes are on non-accrual status due to the continuing financial difficulties of the borrower.

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The following tables provide information on loans and leases modified as TDRs within the previous 12 months and for which there was a payment default during the periods presented:



	Three months ended September 30,
	2013			2012
(Dollars in thousands)	Number of Loans and Leases	Recorded Investment		Number of Loans and Leases	Recorded Investment
Residential:
1-4 family	8	$	1,116	—	$	—
Consumer:
Home equity loans	2	51		—	—
Liquidating portfolio-home equity loans	1	2		3	93
Commercial:
Commercial non-mortgage	1	500		—	—
Commercial real estate:
Commercial real estate	—	—		—	—
Total	12	$	1,669	3	$	93



	Nine months ended September 30,
	2013			2012
(Dollars in thousands)	Number of Loans and Leases	Recorded Investment		Number of Loans and Leases	Recorded Investment
Residential:
1-4 family	12	$	1,814	1	$	406
Consumer:
Home equity loans	6	341		3	554
Liquidating portfolio-home equity loans	1	2		3	93
Commercial:
Commercial non-mortgage	1	500		—	—
Commercial real estate:
Commercial real estate	—	—		—	—
Total	20	$	2,657	7	$	1,053

The recorded investment in commercial, commercial real estate and equipment financing TDRs segregated by risk rating exposure is as follows:



(In thousands)	At September 30, 2013		At December 31, 2012
(1) - (6) Pass	$	56,456	$	56,661
(7) Special Mention	—		—
(8) Substandard	118,353		143,903
(9) Doubtful	423		1,860
(10) Loss	—		—
Total	$	175,232	$	202,424

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NOTE 4: Transfers of Financial Assets and Mortgage Servicing Assets

Transfers of Financial Assets

The Company sells financial assets in the normal course of business, the majority of which are residential mortgage loan sales primarily to government-sponsored enterprises through established programs, commercial loan sales through participation agreements, and other individual or portfolio loan and securities sales. In accordance with the accounting guidance for asset transfers, the Company considers any ongoing involvement with transferred assets in determining whether the assets can be derecognized from the balance sheet. For loans sold under participation agreements, the Company also considers the terms of the loan participation agreement and whether they meet the definition of a participating interest, and thus, qualify for derecognition.

With the exception of servicing rights and certain performance-based guarantees, the Company’s continuing involvement with financial assets sold is minimal and limited to market customary representations and warranties, for which the Company enters into agreements covering certain characteristics of the mortgage loans sold and its origination process. The Company may be required to repurchase a loan in the event of certain breaches of these representations and warranties or in the event of default of the borrower within 90 days of origination. The reserve for loan repurchases provides for estimated losses associated with the repurchase of loans sold in connection with the Company’s mortgage banking operations. The reserve reflects management’s continual evaluation of loss experience and the quality of loan originations. It also reflects management’s expectation of losses from repurchase requests for which management has not yet been notified. Factors considered in the evaluation process for establishing the reserves include the identity of counterparty, the vintage of the loans sold, the amount of open repurchase requests, specific loss estimates for each open request, current level of loan losses in similar vintages held in the residential loan portfolio, and estimated recoveries on the underlying collateral. While management uses its best judgment and information available, the adequacy of this reserve is dependent upon factors outside the Company’s control including the performance of loans sold and the quality of the servicing provided by the acquirer. The provision recorded at the time of loan sale is netted from mortgage banking activities, while any incremental provision, post loan sale, is recorded in other non-interest expense in the accompanying Condensed Consolidated Statements of Income. The gain or loss on sale depends on the previous carrying amount of the transferred financial assets, the consideration received, and any liabilities incurred in exchange for the transferred assets.

The following table provides detail of activity in the Company’s reserve for loan repurchases:



	Three months ended September 30,						Nine months ended September 30,
(In thousands)	2013			2012			2013			2012
Beginning balance	$	2,648		$	2,394		$	2,617		$	2,269
Provision	447			522			1,462			1,103
Loss on repurchased loans and settlements	(586		)	(312		)	(1,570		)	(768		)
Ending balance	$	2,509		$	2,604		$	2,509		$	2,604

The Company sold residential loans totaling $199.2 million and $643.6 million for the three and nine months ended September 30, 2013, respectively, and $211.9 million and $510.8 million for the three and nine months ended September 30, 2012, respectively. Servicing rights were retained on $192.3 million and $622.6 million and on $206.3 million and $497.6 million of the residential loans sold for the three and nine months ended September 30, 2013 and 2012, respectively. In addition, the Company sold commercial loans totaling $13.0 million for the nine months ended September 30, 2013, and $1.0 million and $4.7 million for the three and nine months ended September 30, 2012.

The net gain on the sale of residential loans of $0.7 million and $13.9 million and $6.2 million and $14.2 million for the three and nine months ended September 30, 2013 and 2012, respectively, and commercial loan sale losses of $315 thousand for the nine months ended September 30, 2013, and gains of $275 thousand and $308 thousand for the three and nine months ended September 30, 2012, respectively, are included as mortgage banking activities in the accompanying Condensed Consolidated Statements of Income.

Mortgage Servicing Assets

The Company has retained servicing rights on consumer loans totaling $2.3 billion at September 30, 2013 and $2.1 billion at December 31, 2012, resulting in mortgage servicing assets of $20.6 million at September 30, 2013 and $14.0 million at December 31, 2012, which are carried at the lower of cost or fair value. See Note 14 - Fair Value Measurements for a further discussion on the fair value of mortgage servicing assets.

Loan servicing fees, net of mortgage servicing rights amortization, were $0.4 million and $2.5 million and $0.4 million and $1.6 million for the three and nine months ended September 30, 2013 and 2012, respectively, and are included as a component of loan related fees in the accompanying Condensed Consolidated Statements of Income.

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NOTE 5: Goodwill and Other Intangible Assets

As further discussed in Note 17 - Business Segments, the Company reorganized its management reporting structure during the first quarter 2013 and, accordingly, its segment reporting structure and goodwill reporting units. In connection with the reorganization, management reallocated goodwill to the new reporting unit using a relative fair value approach, resulting in amounts detailed as follows:

The following tables present the carrying value allocated to the business segments for goodwill and other intangible assets, net of accumulated amortization:



	At September 30, 2013
(In thousands)	Goodwill		Core Deposits
Business Segments/reporting units
Consumer Deposits ^a	$	377,605	$	6,544
Small Business Banking ^a	138,955		—
Community Banking	516,560		6,544
Other (HSA Bank)	13,327		—
Total	$	529,887	$	6,544

a) These reporting units are included in the Community Banking segment for financial reporting purposes.



	At December 31, 2012
(In thousands)	Goodwill		Core Deposits
Business Segments
Retail Banking	$	516,560	$	10,270
Other (HSA Bank)	13,327		—
Total	$	529,887	$	10,270

Webster uses a valuation methodology that addresses market concerns, Basel III, and fully allocates capital. Capital allocation for segment reporting is based on regulatory targets aimed at risk-weighted assets, tangible assets and deposits. Actual regulatory targets are applied to each of the asset bases and an implied target is used for deposits. The methodology creates two asset bases, risk-weighted assets and tangible assets, as well as a deposit base, intangibles and management assessment.

Webster tests its goodwill for impairment annually as of August 31 (the “Measurement Date”). In performing Step 1 of the goodwill impairment testing and measurement process, the Company primarily relied on the income approach to arrive at an indicated range of fair value for the reporting units, which was then corroborated with the market approach comparable company method and the market capitalization reconciliation. The income approach consists of discounting projected long-term future cash flows, which are derived from internal forecasts and economic expectations for the respective reporting units. The internal forecasts are developed for each reporting unit by considering several key business drivers such as new business initiatives, market share changes, anticipated loan and deposit growth, forward interest rates, historical performance, and industry and economic trends, among other considerations.

The projected future cash flows are discounted using estimated rates based on the Capital Asset Pricing Model, which considers the risk-free interest rate, market risk premium, beta, and unsystematic risk and size premium adjustments specific to the reporting unit. In this analysis, the discount rates ranged from 10.1% to 13.0%. The long-term growth rate used in determining the terminal value of the reporting units cash flows was estimated at 4.0% and is based on management's assessment of the minimum expected terminal growth rate of each reporting unit as well as broader economic considerations. There was no impairment indicated as a result of the Step 1 test performed at August 31, 2013, as the fair value of the Consumer deposits, Small Business Banking, and Other reporting units exceeded carrying value by 52.5%, 18.1%, and 257.8%, respectively.

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The gross carrying value and accumulated amortization of other intangible assets allocated to the business segments are as follows:



	At September 30, 2013
(In thousands)	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Core deposits:
Community Banking/Consumer Deposits ^a	$	49,420	$	(42,876	)	$	6,544
Core deposits	$	49,420	$	(42,876	)	$	6,544

a) These reporting units are included in the Community Banking segment for financial reporting purposes.



	At December 31, 2012
(In thousands)	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Core deposits:
Retail Banking	$	49,420	$	(39,150	)	$	10,270
Other (HSA Bank)	4,699		(4,699		)	—
Core deposits	$	54,119	$	(43,849	)	$	10,270

Amortization of intangible assets for the three and nine months ended September 30, 2013 and 2012, totaled $1.2 million and $3.7 million and $1.4 million and $4.2 million, respectively. Estimated annual amortization expense is summarized below:



(In thousands)
Remainder of 2013	$	1,193
2014	2,685
2015	1,523
2016	1,143
Total	$	6,544

NOTE 6: Deposits

A summary of deposits by type follows:



(In thousands)	At September 30, 2013		At December 31, 2012
Non-interest-bearing:
Demand	$	2,968,727	$	2,881,131
Interest-bearing:
Checking	1,895,362		1,810,040
Health savings accounts	1,478,758		1,269,727
Money market	2,571,712		2,205,072
Savings	3,827,345		3,819,713
Time deposits	2,257,627		2,545,152
Total interest-bearing	12,030,804		11,649,704
Total deposits	$	14,999,531	$	14,530,835

Demand deposit overdrafts reclassified as loan balances	$	1,745	$	1,654

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At September 30, 2013, the scheduled maturities of time deposits (certificates of deposit and brokered deposits) are as follows:



(In thousands)
Years ending December 31:
2013	$	372,906
2014	1,110,328
2015	393,203
2016	207,395
2017	68,333
Thereafter	105,462
Time deposits	$	2,257,627

The following table presents additional information about the Company’s brokered deposits:



(In thousands)	At September 30, 2013		At December 31, 2012
Interest-bearing checking obtained through brokers	$	56,306	$	43,693
Time deposits obtained through brokers	133,554		126,299
Total brokered deposits	$	189,860	$	169,992

NOTE 7: Securities Sold Under Agreements to Repurchase and Other Borrowings

The following table summarizes securities sold under agreements to repurchase and other borrowings:



(In thousands)	At September 30, 2013		At December 31, 2012
Securities sold under agreements to repurchase:
Original maturity of one year or less	$	337,290	$	326,160
Callable at the option of the counterparty	100,000		300,000
Non-callable	550,000		450,000
	987,290		1,076,160
Other borrowings:
Federal funds purchased	385,000		—
Total securities sold under agreements to repurchase and other borrowings	$	1,372,290	$	1,076,160

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

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NOTE 8: Federal Home Loan Bank Advances

The following table summarizes Federal Home Loan Bank advances:



	At September 30, 2013				At December 31, 2012
(Dollars in thousands)	Total Outstanding		Weighted- Average Contractual Coupon Rate		Total Outstanding		Weighted- Average Contractual Coupon Rate
Stated Maturity:
2013	$	1,100,000	0.19	%	$	1,425,000	0.34	%
2016	145,934		1.80		145,934		1.80
2017	500		5.66		500		5.66
2018-2032	355,968		1.32		256,093		1.29
	1,602,402		0.59	%	1,827,527		0.59	%
Unamortized premiums	67				85
Total Federal Home Loan Bank advances	$	1,602,469			$	1,827,612

At September 30, 2013, Webster Bank had pledged loans with an aggregate carrying value of $4.7 billion as collateral for borrowings and had additional borrowing capacity from the FHLB of approximately $1.2 billion, as well as an unused line of credit of approximately $5.0 million. At December 31, 2012, Webster Bank had pledged loans with an aggregate carrying value of $3.7 billion as collateral for borrowings and had additional borrowing capacity from the FHLB of approximately $0.5 billion, as well as an unused line of credit of approximately $5.0 million. At September 30, 2013 and December 31, 2012, Webster Bank was in compliance with FHLB collateral requirements.

NOTE 9: Long-Term Debt

The following table summarizes long-term debt:



(Dollars in thousands)	Maturity Date	Stated Interest Rate	At September 30, 2013			At December 31, 2012
Senior fixed-rate notes	2014	5.125%	150,000			150,000
Subordinated fixed-rate notes ⁽¹⁾	2013	5.875%	—			102,579
Junior subordinated debt Webster Statutory Trust I floating-rate notes ⁽²⁾	2033	3.204%	77,320			77,320
Total notes and subordinated debt			227,320			329,899
Unamortized discount, net			(39		)	(93		)
Hedge accounting adjustments			1,865			4,470
Total long-term debt			$	229,146		$	334,276


(1)	The Bank used cash on hand to pay off the subordinated fixed-rate notes which matured on January 15, 2013.


(2)	The interest rate on Webster Statutory Trust I floating-rate notes, which varies quarterly based on 3-month LIBOR plus 2.95%, was 3.204% at September 30, 2013 and 3.258% at December 31, 2012.

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NOTE 10: Other Comprehensive Income

The following tables summarize the changes in accumulated other comprehensive (loss) income by component:



	Three months ended September 30, 2013
(In thousands)	Derivative Instruments			Available For Sale and Transferred Securities			Defined Benefit Pension and Postretirement Benefit Plans			Total
Beginning balance	$	(22,872	)	$	2,729		$	(44,996	)	$	(65,139	)
Other comprehensive (loss) income before reclassifications	(1,413		)	5,330			528			4,445
Amounts reclassified from accumulated other comprehensive (loss) income	1,400			(173		)	526			1,753
Net current-period other comprehensive (loss) income, net of tax	(13		)	5,157			1,054			6,198
Ending balance	$	(22,885	)	$	7,886		$	(43,942	)	$	(58,941	)



	Three months ended September 30, 2012
(In thousands)	Derivative Instruments			Available For Sale and Transferred Securities			Defined Benefit Pension and Postretirement Benefit Plans			Total
Beginning balance	$	(28,396	)	$	29,768		$	(45,250	)	$	(43,878	)
Other comprehensive (loss) income before reclassifications	(1,384		)	14,817			360			13,793
Amounts reclassified from accumulated other comprehensive (loss) income	676			(527		)	659			808
Net current-period other comprehensive (loss) income, net of tax	(708		)	14,290			1,019			14,601
Ending balance	$	(29,104	)	$	44,058		$	(44,231	)	$	(29,277	)



	Nine months ended September 30, 2013
(In thousands)	Derivative Instruments			Available For Sale and Transferred Securities			Defined Benefit Pension and Postretirement Benefit Plans			Total
Beginning balance	$	(27,902	)	$	42,741		$	(47,105	)	$	(32,266	)
Other comprehensive income (loss) before reclassifications	467			(34,400		)	1,584			(32,349		)
Amounts reclassified from accumulated other comprehensive (loss) income	4,550			(455		)	1,579			5,674
Net current-period other comprehensive income (loss), net of tax	5,017			(34,855		)	3,163			(26,675		)
Ending balance	$	(22,885	)	$	7,886		$	(43,942	)	$	(58,941	)



	Nine months ended September 30, 2012
(In thousands)	Derivative Instruments			Available For Sale and Transferred Securities			Defined Benefit Pension and Postretirement Benefit Plans			Total
Beginning balance	$	(28,884	)	$	15,967		$	(47,287	)	$	(60,204	)
Other comprehensive (loss) income before reclassifications	(3,065		)	30,267			1,079			28,281
Amounts reclassified from accumulated other comprehensive (loss) income	2,845			(2,176		)	1,977			2,646
Net current-period other comprehensive (loss) income, net of tax	(220		)	28,091			3,056			30,927
Ending balance	$	(29,104	)	$	44,058		$	(44,231	)	$	(29,277	)

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The following tables summarize the reclassifications out of accumulated other comprehensive (loss) income:



	Three months ended September 30,
	2013			2012
Details About Accumulated Other Comprehensive (Loss) Income Components	Amount Reclassified From Accumulated Other Comprehensive (Loss) Income			Amount Reclassified From Accumulated Other Comprehensive (Loss) Income			Affected Line Item in the Condensed Consolidated Statements Of Income
(In thousands)
Derivative instruments:
Cash flow hedges	$	(2,182	)	$	(1,053	)	Total interest expense
Tax benefit	782			377			Income tax expense
Net of tax	$	(1,400	)	$	(676	)
Available for sale and transferred securities:
Unrealized gains (losses) on available for sale securities	$	269		$	810		Net gain on sale of investment securities
Tax expense	(96		)	(283		)	Income tax expense
Net of tax	$	173		$	527
Defined benefit pension and postretirement benefit plans:
Amortization of net loss	$	(803	)	$	(1,009	)	Compensation and benefits
Prior service costs	(18		)	(18		)	Compensation and benefits
Tax benefit	295			368			Income tax expense
Net of tax	$	(526	)	$	(659	)



	Nine months ended September 30,
	2013			2012
Details About Accumulated Other Comprehensive (Loss) Income Components	Amount Reclassified From Accumulated Other Comprehensive (Loss) Income			Amount Reclassified From Accumulated Other Comprehensive (Loss) Income			Affected Line Item in the Condensed Consolidated Statements Of Income
(In thousands)
Derivative instruments:
Cash flow hedges	$	(7,090	)	$	(4,431	)	Total interest expense
Tax benefit	2,540			1,586			Income tax expense
Net of tax	$	(4,550	)	$	(2,845	)
Available for sale and transferred securities:
Unrealized gains (losses) on available for sale securities	$	708		$	3,347		Net gain on sale of investment securities
Tax expense	(253		)	(1,171		)	Income tax expense
Net of tax	$	455		$	2,176
Defined benefit pension and postretirement benefit plans:
Amortization of net loss	$	(2,407	)	$	(3,026	)	Compensation and benefits
Prior service costs	(54		)	(54		)	Compensation and benefits
Tax benefit	882			1,103			Income tax expense
Net of tax	$	(1,579	)	$	(1,977	)

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NOTE 11: Regulatory Matters

Regulatory Capital Requirements. Banks and bank holding companies are subject to various regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. These quantitative measures, to ensure capital adequacy, require minimum amounts and ratios.

As defined in the regulations, the Total risk-based and Tier 1 capital ratios are calculated by dividing the respective capital amounts by risk-weighted assets. Risk-weighted assets are calculated based on regulatory requirements and include total assets, excluding goodwill and other intangible assets, allocated by risk-weight category, and certain off-balance sheet items, primarily loan commitments. As defined in the regulations, the Tier 1 leverage capital to adjusted quarterly average assets is calculated by dividing Tier 1 capital by adjusted quarterly average total assets. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk-weighting and other factors.

The following table provides information on the capital ratios for Webster Financial Corporation and Webster Bank, N.A.:



	Actual				Capital Requirements				Well Capitalized
(Dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
At September 30, 2013
Webster Financial Corporation
Total risk-based capital	$	1,939,194	14.3	%	$	1,088,630	8.0	%	$	1,360,788	10.0	%
Tier 1 capital	1,775,605		13.1		544,315		4.0		816,473		6.0
Tier 1 leverage capital	1,775,605		9.0		792,663		4.0		990,829		5.0
Webster Bank, N.A.
Total risk-based capital	$	1,791,608	13.2	%	$	1,084,672	8.0	%	$	1,355,840	10.0	%
Tier 1 capital	1,629,406		12.0		542,336		4.0		813,504		6.0
Tier 1 leverage capital	1,629,406		8.2		791,132		4.0		988,915		5.0
At December 31, 2012
Webster Financial Corporation
Total risk-based capital	$	1,840,736	13.7	%	$	1,072,749	8.0	%	$	1,340,936	10.0	%
Tier 1 capital	1,672,009		12.5		536,375		4.0		804,562		6.0
Tier 1 leverage capital	1,672,009		8.7		767,289		4.0		959,111		5.0
Webster Bank, N.A.
Total risk-based capital	$	1,718,564	12.9	%	$	1,069,652	8.0	%	$	1,337,064	10.0	%
Tier 1 capital	1,551,238		11.6		534,826		4.0		802,239		6.0
Tier 1 leverage capital	1,551,238		8.1		766,025		4.0		957,532		5.0

Webster is subject to regulatory capital requirements administered by the Federal Reserve, while Webster Bank is subject to regulatory capital requirements administered by the Office of the Comptroller of the Currency ("OCC" ). Regulatory authorities can initiate certain mandatory actions if Webster or Webster Bank fail to meet minimum capital requirements, which could have a direct material effect on the Company’s financial statements.

Dividend Restrictions. In the ordinary course of business, Webster is dependent upon dividends from Webster Bank to provide funds for its cash requirements, including payment of dividends to shareholders. Banking regulations may limit the amount of dividends that may be paid. Approval by regulatory authorities is required if the effect of dividends declared would cause the regulatory capital of Webster Bank to fall below specified minimum levels, or if dividends declared exceed the net profits for that year combined with the retained net profits for the preceding two years. In addition, the OCC has discretion to prohibit any otherwise permitted capital distribution on general safety and soundness grounds. Dividends paid by Webster Bank to Webster during the nine months ended September 30, 2013 and 2012 totaled $70.0 million and $110.0 million, respectively.

Trust Preferred Securities. The Company owns the common stock of a trust which has issued trust preferred securities. The trust is a VIE in which the Company is not the primary beneficiary and, therefore, is not consolidated. At September 30, 2013 and December 31, 2012, $75.0 million in trust preferred securities have been included in the Tier 1 capital of Webster for regulatory reporting purposes pursuant to the Federal Reserve's capital adequacy guidelines. Certain provisions of the Basel III capital framework require the Company to phase out trust preferred securities from Tier 1 capital beginning January 1, 2015. Excluding trust preferred securities from the Tier 1 capital will not affect Webster's ability to meet all capital adequacy requirements to which it is subject.

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NOTE 12: Earnings Per Common Share

The calculation of basic and diluted earnings per common share follows:



	Three months ended September 30,						Nine months ended September 30,
(In thousands, except per share data)	2013			2012			2013			2012
Earnings for basic and diluted earnings per common share:
Net income available to common shareholders	$	44,666		$	44,378		$	127,631		$	123,326
Less: Dividends to participating shares	(48		)	(37		)	(137		)	(102		)
Income allocated to participating shares	(114		)	(149		)	(360		)	(470		)
Net income allocated to common shareholders	$	44,504		$	44,192		$	127,134		$	122,754

Shares:
Weighted-average common shares outstanding - basic	89,759			87,394			88,318			87,301
Effect of dilutive securities:
Stock options and restricted stock	451			260			406			281
Warrants - Series A1 and A2	—			4,114			1,300			4,060
Warrants - other	213			116			169			112
Weighted-average common shares outstanding - diluted	90,423			91,884			90,193			91,754

Earnings per common share:
Basic	$	0.50		$	0.51		$	1.44		$	1.41
Diluted	0.49			0.48			1.41			1.34

Stock Options

Options to purchase 1.1 million shares and 1.2 million shares for the three and nine months ended September 30, 2013, respectively, and 2.0 million shares for both the three and nine months ended September 30, 2012 were excluded from the calculation of diluted earnings per share because the options’ exercise prices were greater than the average market price of Webster's common stock for the respective periods.

Restricted Stock

Non-participating restricted stock awards of 189 thousand shares and 224 thousand shares for the three and nine months ended September 30, 2013, respectively, and 127 thousand shares and 145 thousand shares for three and nine months ended September 30, 2012, respectively, whose issuance is contingent upon the satisfaction of certain performance conditions, were deemed to be anti-dilutive and, therefore, are excluded from the calculation of diluted earnings per share for the respective periods.

Warrants

Series A1 and A2: The Series A1 and A2 warrants issued in connection with the Warburg investment represented an aggregate 8.6 million potential issuable shares of common stock while outstanding. On March 22, 2013, the Company issued 4,564,930 shares of its common stock to Warburg in exchange for all the outstanding Series A1 and A2 warrants in a cashless exercise based on an exercise price of $11.50 per share. The weighted-average dilutive effect of these warrants, prior to the March 22, 2013 exercise, is included in the calculation of diluted earnings per share for the nine months ended September 30, 2013 and the three and nine months ended September 30, 2012 because the exercise price of the warrants was less than the average market price of Webster's common stock for the respective periods.

Other: Warrants initially issued to the U.S. Treasury and sold in a secondary public offering on June 8, 2011 represent 0.7 million potential issuable shares of common stock at both September 30, 2013 and 2012. The weighted-average dilutive effect of these warrants is included in the calculation of diluted earnings per share for the three and nine months ended September 30, 2013 and 2012 because the exercise price of the warrants was less than the average market price of Webster’s common stock for the respective periods.

Series A Preferred Stock

The Series A Preferred Stock represents potential issuable common stock at September 30, 2013 and 2012. The weighted-average effect of 1.1 million shares of common stock associated with the Series A Preferred Stock was deemed to be anti-dilutive and, therefore, is excluded from the calculation of diluted earnings per share for the three and nine months ended September 30, 2013 and 2012.

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NOTE 13: Derivative Financial Instruments

Risk Management Objective of Using Derivatives

Webster is exposed to certain risks arising from both its business operations and economic conditions. Webster principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. Webster manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of its debt funding and the use of derivative financial instruments. Specifically, Webster enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The type of hedge accounting designation used depends on the specific risk being hedged. Webster uses fair value hedges to mitigate changes in fair values due to fixed rates or prices, while changes in cash flows due to variable rates or prices may be reduced or eliminated by a cash flow hedge.

Cash Flow Hedges of Interest Rate Risk

Webster’s primary objective in using interest rate derivatives is to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, Webster uses interest rate swaps and caps as part of its interest rate risk management strategy. Interest rate swaps and caps designated as cash flow hedges are designed to manage the risk associated with a forecasted event or an uncertain variable rate cash flow.

Webster uses forward-settle interest rate swaps to protect the Company against adverse fluctuations in interest rates by reducing its exposure to variability in cash flows relating to interest payments on forecasted debt issuances. Forward-settle swaps are typically cash settled to coincide with a debt issuance. The change in fair value of the forward-settle swaps is recorded in accumulated other comprehensive income ("AOCI") during the swap term. Upon termination, the AOCI gain or loss at the time of debt issuance is amortized into interest expense over the life of the debt.

Webster has four $25 million forward-settle interest rate swap hedges outstanding as of September 30, 2013, which qualify for cash flow hedge accounting. The swaps, entered into in August and September 2013, protect the Company against adverse fluctuations in interest rates by reducing exposure to variability in cash flows related to interest payments on forecasted issuance of five-year debt. Each swap will pay a fixed rate and receive 1-month LIBOR indexed floating rate, effective on June 30, 2014, and maturing on June 30, 2019. Cash settlement is expected to occur on the effective date and the forecasted five-year debt issuances are anticipated to occur between March 31, 2014 and March 31, 2015.

In addition, during September 2013, Webster executed two $25 million forward-settle swaps with dealer counterparties which qualify for hedge accounting. The swaps are intended to reduce interest rate variability of cash flows related to future debt issuance at the holding company. The swaps are structured as an inter-affiliate transaction executed at the Bank on behalf of its holding company. The hedge designations are transferred from the Bank to the holding company through additional intercompany swap transactions at both the Bank and holding company. Each swap will pay a fixed-rate and receive 3-month LIBOR indexed floating rate, effective on December 31, 2013 and maturing on December 31, 2023. Cash settlement is expected to occur on the effective date and the forecasted ten-year debt issuances are anticipated to occur between October 31, 2013 and June 30, 2014.

Previously terminated forward-settle swap losses have been recorded in AOCI and will be amortized into earnings over the respective term of the associated debt instrument. At September 30, 2013, the remaining unamortized loss on the termination of cash flow hedges was $34.5 million. Over the next twelve months, Webster estimates that $8.1 million will be reclassified from AOCI to interest expense. There was no hedge ineffectiveness for the three and nine months ended September 30, 2013 and 2012.

Webster has two $25 million interest rate caps which are designated as cash flow hedge transactions against the risk of changes in cash flows related to the Company's $150 million 3-month LIBOR indexed floating rate FHLB advance maturing December 30, 2021. The caps each have a strike rate of 3.0% indexed to 3-month LIBOR. The change in fair value of the caps is marked through OCI and there is a $1.1 million gain as of September 30, 2013. Webster paid a $2.0 million premium, which will be reclassified from AOCI to interest expense over the life of the cap according to a predetermined cap value schedule. Over the next twelve months, the amount to be reclassified is insignificant based on the cap value schedule.

Amounts reported in AOCI related to current cash flow derivatives will be reclassified to interest expense as interest payments are made on Webster's variable-rate debt. Over the next twelve months, Webster estimates that $1.5 million will be reclassified as an increase to interest expense.

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The table below presents the fair value of Webster’s derivative financial instruments designated as cash flow hedges as well as their classification in the accompanying Condensed Consolidated Balance Sheets:



		At September 30, 2013						At December 31, 2012
(Dollars in thousands)	Balance Sheet Classification	# of Instruments	Notional Amount		Estimated Fair Value			# of Instruments	Notional Amount		Estimated Fair Value
Interest rate derivatives designated as cash flow hedges:
Forward-settle interest rate swap on anticipated debt ⁽¹⁾	Other liabilities	2	$	50,000	$	(901	)	—	$	—	$	—
Forward-settle interest rate swap on anticipated debt	Other liabilities	4	100,000		(1,293		)	4	100,000		(1,130		)
Interest rate cap on FHLB advances	Other assets	2	50,000		3,048			—	—		—
Interest rate swap on FHLB advances	Other liabilities	—	—		—			1	100,000		(497		)

(1) Inter-affiliate swaps between the Bank and holding company total an additional $100 million in aggregate notional value with gains and losses that offset.

The net impact on interest expense related to cash flow hedges is presented below:



	Three months ended September 30,
	2013				2012
(In thousands)	Interest Expense		Amount Reclassified From AOCI		Interest Expense		Amount Reclassified From AOCI
Impact reported as an increase (reduction) in interest expense on borrowings:
Interest rate swaps on FHLB advances	$	—	$	1,353	$	351	$	1,139
Interest rate swaps on subordinated debt	—		—		—		(21		)
Interest rate swaps on repurchase agreements	—		829		—		830
Interest rate swaps on trust preferred securities	—		—		—		(16		)
Net impact on interest expense on borrowings	$	—	$	2,182	$	351	$	1,932



	Nine months ended September 30,
	2013					2012
(In thousands)	Interest Expense		Amount Reclassified From AOCI			Interest Expense		Amount Reclassified From AOCI
Impact reported as an increase (reduction) in interest expense on borrowings:
Interest rate swaps on FHLB advances	$	498	$	4,604		$	1,018	$	3,417
Interest rate swaps on subordinated debt	—		(3		)	—		(70		)
Interest rate swaps on repurchase agreements	—		2,489			—		2,129
Interest rate swaps on trust preferred securities	—		—			—		(105		)
Net impact on interest expense on borrowings	$	498	$	7,090		$	1,018	$	5,371

Fair Value Hedges of Interest Rate Risk

Webster is exposed to changes in the fair value of certain of its fixed-rate obligations due to changes in benchmark interest rates. Webster uses interest rate swaps to manage its exposure to changes in fair value on these obligations attributable to changes in the benchmark interest rate. Interest rate swaps designated as fair value hedges involve the receipt of fixed-rate amounts from a counterparty in exchange for Webster making variable-rate payments over the life of the agreements without the exchange of the underlying notional amount. Webster did not have any derivative financial instruments designated as fair value hedges as of September 30, 2013 and December 31, 2012.

For derivatives designated and that qualify as fair value hedges, the gain or loss on the derivative, as well as the offsetting loss or gain on the hedged item attributable to the hedged risk, is recognized in interest expense. Webster includes the gain or loss from the period end mark-to-market (“MTM”) adjustments on the hedged items in the same line item as the offsetting gain or loss on the related derivatives. The impact of derivative net settlements, hedge ineffectiveness, basis amortization adjustments and amortization of deferred hedge terminations are also recognized in interest expense. At September 30, 2013, the remaining unamortized gain on the termination of fair value hedges was 1.9 million.

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The net impact on interest expense related to fair value hedges is presented below:



	Three months ended September 30,						Nine months ended September 30,
(In thousands)	2013			2012			2013			2012
Impact reported as a reduction in interest expense on borrowings:
Interest rate swaps on senior notes	$	(799	)	$	(799	)	$	(2,398	)	$	(2,398	)
Interest rate swaps on subordinated debt	—			(621		)	(207		)	(2,028		)
Net impact on interest expense on borrowings	$	(799	)	$	(1,420	)	$	(2,605	)	$	(4,426	)

Non-Hedge Accounting Derivatives / Non-designated Hedges

Derivatives that do not meet the hedge accounting requirements of ASC 815, “Derivatives and Hedging” are not speculative and are used to manage the Company’s exposure to interest rate movements and other identified risks. Changes in the fair value of these instruments are recorded as a component of non-interest income in the accompanying Condensed Consolidated Statements of Income.

Webster had the following outstanding interest rate swaps and caps that were not designated for hedge accounting:



		At September 30, 2013
					Estimated Fair Value
(Dollars in thousands)	Balance Sheet Classification	# of Instruments	Notional Amount		Gain		Loss			Net
Webster with customer position:
Commercial loan interest rate derivatives	Other assets	153	$	820,055	$	33,028	$	—		$	33,028
Commercial loan interest rate derivatives	Other liabilities	66	561,956		—		(8,379		)	(8,379		)
Total customer position		219	$	1,382,011	$	33,028	$	(8,379	)	$	24,649

Webster with counterparty position:
Commercial loan interest rate derivatives	Other assets	26	$	266,320	$	3,151	$	(710	)	$	2,441
Commercial loan interest rate derivatives	Other liabilities	186	1,115,631		9,695		(26,130		)	(16,435		)
Total counterparty position		212	$	1,381,951	$	12,846	$	(26,840	)	$	(13,994	)



		At December 31, 2012
					Estimated Fair Value
(Dollars in thousands)	Balance Sheet Classification	# of Instruments	Notional Amount		Gain		Loss			Net
Webster with customer position:
Commercial loan interest rate derivatives	Other assets	178	$	1,009,623	$	50,969	$	—		$	50,969
Commercial loan interest rate derivatives	Other liabilities	23	193,946		—		(124		)	(124		)
Total customer position		201	$	1,203,569	$	50,969	$	(124	)	$	50,845

Webster with counterparty position:
Commercial loan interest rate derivatives	Other liabilities	194	$	1,203,512	$	544	$	(41,965	)	$	(41,421	)
Total counterparty position		194	$	1,203,512	$	544	$	(41,965	)	$	(41,421	)

Webster reported the changes in the fair value of non-hedge accounting derivatives as a component of other non-interest income in the accompanying Condensed Consolidated Statements of Income as follows:



	Three months ended September 30,						Nine months ended September 30,
(In thousands)	2013			2012			2013			2012
Impact reported in other non-interest income:
Visa swap	$	(35	)	$	(60	)	$	(86	)	$	(532	)
Commercial loan interest rate derivatives, net	1,546			1,511			3,230			4,288
Fed funds futures contracts	(450		)	(229		)	(290		)	(12		)
Net impact on other non-interest income	$	1,061		$	1,222		$	2,854		$	3,744

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Offsetting Derivatives

Webster has entered into transactions with counterparties that are subject to an enforceable master netting agreement. In accordance with ASC 815, “Derivatives and Hedging”, as amended by ASU 2013-01 and ASU 2011-11, Webster recognized those financial instruments subject to master netting agreements or similar agreements. Hedge accounting positions are recorded on a gross basis in other assets for a gain position and in other liabilities for a loss position, while non-hedge accounting net positions are recorded in other assets for a net gain or in other liabilities for a net loss position, in the accompanying Condensed Consolidated Balance Sheets.

The tables below present the financial assets and liabilities for derivative positions, summarized by counterparty:



	At September 30, 2013
			Hedge Accounting Positions					Non-Hedge Accounting Positions
(In thousands)	Notional Amount		MTM Gain		MTM Loss			MTM Gain		MTM Loss			Total MTM(Loss) Gain			Cash Collateral Posted (Received)			Net Exposure ⁽¹⁾
Counterparty:
Dealer A	$	383,632	$	—	$	(388	)	$	4,009	$	(10,783	)	$	(7,162	)	$	7,100		$	—
Dealer B	343,467		—		—			3,241		(10,128		)	(6,887		)	7,100			213
Dealer C	14,666		—		—			1		(1,492		)	(1,491		)	—			—
Dealer D	291,320		1,471		—			3,150		(710		)	3,911			(4,100		)	—
Dealer E	283,681		1,576		(513		)	2,373		(2,494		)	942			(1,160		)	—
Dealer F	265,185		—		(1,293		)	72		(1,233		)	(2,454		)	7,225			4,771
Total	$	1,581,951	$	3,047	$	(2,194	)	$	12,846	$	(26,840	)	$	(13,141	)	$	16,165

(1) Net positive exposure represents over-collateralized loss positions which can be the result of OTC clearing house initial margin requirements posted in compliance with the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank").



	At December 31, 2012
			Hedge Accounting Positions					Non-Hedge Accounting Positions
(In thousands)	Notional Amount		MTM Gain		MTM Loss			MTM Gain		MTM Loss			Total MTM Loss			Cash Collateral Posted		Net Exposure
Counterparty:
Dealer A	$	561,716	$	—	$	(985	)	$	199	$	(16,721	)	$	(17,507	)	$	17,900	$	393
Dealer B	403,097		—		(642		)	139		(15,281		)	(15,784		)	16,980		1,196
Dealer C	15,221		—		—			1		(2,038		)	(2,037		)	—		—
Dealer D	184,648		—		—			53		(2,506		)	(2,453		)	2,600		147
Dealer E	238,830		—		—			152		(5,419		)	(5,267		)	5,290		23
Total	$	1,403,512	$	—	$	(1,627	)	$	544	$	(41,965	)	$	(43,048	)	$	42,770

Counterparty Credit Risk. Derivative contracts involve the risk of dealing with both bank customers and institutional derivative counterparties and their ability to meet contractual terms. The Company has master International Swap Derivative Association ("ISDA") agreements with all derivative counterparties for non-cleared trades. Additionally, the Company has executed a Credit Support Annex ("CSA") to the master ISDA agreement with each of its institutional derivative counterparties. The ISDA master agreements provide that on each payment date all amounts otherwise owing the same currency under the same transaction are netted so that only a single amount is owed in that currency. The ISDA master agreements also provide, if the parties so elect, for such netting of amounts in the same currency among all transactions identified as being subject to such election that have common payment dates and booking offices. Under the CSA, daily net exposure in excess of a negotiated threshold is secured by posted cash collateral. The Company has negotiated a zero threshold with the majority of its approved financial institution counterparties. In accordance with Webster policies, institutional counterparties must be analyzed and approved through the Company’s credit approval process.

The Company’s credit exposure on interest rate derivatives is limited to the net favorable value and interest payments of all derivatives by each of the counterparties for the amounts up to the established threshold for collateralization. Credit exposure may be reduced by the amount of collateral pledged by the counterparty. The Company's credit exposure related to derivatives with approved financial institutions is zero unless cash collateral exceeds the unfavorable market value.

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Dodd-Frank derivative clearing rules became effective June 10, 2013 and require that initial margin be posted to the clearing houses for cleared derivative positions. The Company had approximately $4.6 million initial margin posted at September 30, 2013. In addition, in accordance with the CSA, approximately $16.8 million of variation margin collateral was pledged to financial counterparties and approximately $5.3 million was received from financial counterparties at September 30, 2013. Collateral levels for approved financial institution counterparties are monitored on a daily basis and adjusted as necessary. In the event of default, should the collateral not be returned, the exposure would be offset by terminating the transactions.

The Company evaluates the credit risk of its counterparties, taking into account such factors as the likelihood of default, its net exposures, and remaining contractual life, among other things, in determining if any adjustments related to credit risk are required. The Company's net current credit exposure relating to interest rate derivatives with Webster Bank customers was $33.0 million at September 30, 2013. In addition, the Company monitors potential future exposure, representing its best estimate of exposure to remaining contractual maturity. The potential future exposure relating to interest rate derivatives with Webster Bank customers totaled $9.9 million at September 30, 2013. The credit exposure is mitigated as transactions with customers are secured by the collateral securing the underlying transaction being hedged. No losses on derivative instruments have occurred as a result of counterparty nonperformance.

Futures Contracts. In March 2010, Webster entered into a $600 million short-selling of a one-year strip of Fed funds futures contracts with serial maturities between May 2010 and April 2011 to hedge against a rise in short-term rates. Since then, Webster has continued to roll the futures contracts and, beginning with the September 2011 contracts, reduced the notional amount to $400 million, then, beginning with the March 2013 contracts, increased the notional amount to $800 million. This transaction is designed to work in conjunction with floating rate assets with interest rate floors which will not be affected if there is an increase in short-term interest rates. The fair value of these contracts is a loss of $187 thousand and is reflected in other liabilities in the accompanying Condensed Consolidated Balance Sheets. The Company recognized $450 thousand and $290 thousand and $229 thousand and $12 thousand in MTM loss for the three and nine months ended September 30, 2013 and 2012, respectively, which is reflected in non-interest income in the accompanying Condensed Consolidated Statements of Income. Webster had $634 thousand on deposit with its counterparty as of September 30, 2013 to satisfy margin collateral requirements.

Mortgage Banking Derivatives. Certain derivative instruments, primarily forward sales of mortgage loans and MBS, are utilized by Webster in its efforts to manage risk of loss associated with its mortgage loan commitments and mortgage loans held for sale. Prior to closing and funding certain single-family residential mortgage loans, an interest rate lock commitment is generally extended to the borrower. During the period from commitment date to closing date, Webster is subject to the risk that market rates of interest may change. If market rates rise, investors generally will pay less to purchase such loans resulting in a reduction in the gain on sale of the loans or, possibly, a loss. In an effort to mitigate such risk, forward delivery sales commitments, under which Webster agrees to deliver whole mortgage loans to various investors or issue MBS, are established. At September 30, 2013, outstanding rate locks totaled approximately $59.9 million and the outstanding commitments to sell residential mortgage loans totaled approximately $88.3 million. Forward sales, which include mandatory forward commitments of approximately $86.9 million at September 30, 2013, establish the price to be received upon the sale of the related mortgage loan, thereby mitigating certain interest rate risk. There is, however, still certain execution risk specifically related to Webster’s ability to close and deliver to its investors the mortgage loans it has committed to sell. The interest rate locked loan commitments and forward sales commitments are recorded at fair value, with changes in fair value recorded as non-interest income in the accompanying Condensed Consolidated Statements of Income. As of September 30, 2013 and December 31, 2012, the fair value of interest rate locked loan commitments and forward sales commitments was a net unrealized loss of $0.4 million and a net unrealized gain of $2.9 million, respectively, and were recorded as a component of other assets in the accompanying Condensed Consolidated Balance Sheets.

Foreign Currency Derivatives. The Company enters into foreign currency forward contracts that are not designated as hedging instruments, primarily to accommodate the business needs of its customers. Upon the origination of a foreign currency forward contract with a customer, the Company simultaneously enters into an offsetting contract with a third party to negate the exposure to fluctuations in foreign currency exchange rates. The notional amounts and fair values of open foreign currency forward contracts were not material at September 30, 2013 and December 31, 2012.

NOTE 14: Fair Value Measurements

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined using quoted market prices. However, in many instances, quoted market prices are not available. In such instances, fair values are determined using various valuation techniques. Various assumptions and observable inputs must be relied upon in applying these techniques. Accordingly, the fair value estimates may not be realized in an immediate transfer of the respective asset or liability.

Fair Value Hierarchy

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The three levels within the fair value hierarchy are as follows:


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

•

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


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

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

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Securities

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

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

When a market is illiquid or there is a lack of transparency around the inputs to valuation, the securities are classified as Level 3 and reliance is placed upon internally developed models, and management judgment and evaluation for valuation.

Pooled trust preferred securities are currently classified as Level 3. Due to the continued inactive market and illiquid nature of pooled trust preferred securities in the entire capital structure, an internal cash flow model is used to value these securities on a quarterly basis. The Company employs an internal CDO model for projection of future cash flows and discounting those cash flows to a net present value. Each underlying issuer in the pool is rated internally using the latest financial data on each institution, and future deferrals, defaults and losses are then estimated on the basis of continued stress in the financial markets. Further, all current and projected deferrals are not assumed to cure, and all current and projected defaults are assumed to have no recovery value. The resulting net cash flows are then discounted at current market levels for similar types of products that are actively trading.

Alternative Investments

The Company generally accounts for its percentage ownership of alternative investment funds at cost, subject to impairment testing, while certain funds are included at fair value based upon the net asset value of the respective fund. At September 30, 2013, alternative investments consisted of $0.8 million recorded at fair value and $18.2 million recorded at cost. These are non-public investments that cannot be redeemed since the Company’s investment is distributed as the underlying investments are liquidated, which generally takes ten years. There are currently no plans to sell any of these investments prior to their liquidation. The alternative investments included at fair value are classified within Level 3 of the fair value hierarchy. The alternative investments that are carried at cost are considered to be measured at fair value on a non-recurring basis when there is impairment. The Company has $2.0 million in unfunded commitments remaining for its alternative investments as of September 30, 2013.

Investments Held in Rabbi Trust

The investments held in a Rabbi Trust primarily include mutual funds that invest in equity and fixed income securities. Shares of mutual funds are valued based on net asset value, which represents quoted market prices for the underlying shares held in the mutual funds. Therefore, investments held in Rabbi Trust are classified within Level 1 of the fair value hierarchy. The Company has elected to measure the investments held in Rabbi Trust at fair value. The Company consolidates the invested assets of the trust along with the total deferred compensation obligations and includes them in other assets and other liabilities, respectively, in the accompanying Condensed Consolidated Balance Sheets. Earnings in the Rabbi Trust, including appreciation or depreciation, are reflected as other non-interest income and changes in the corresponding liability are reflected as compensation and benefits in the

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accompanying Condensed Consolidated Statements of Income. At September 30, 2013, the cost basis of the investments held in the Rabbi Trust is $5.1 million.

Derivative Instruments

Derivative instruments are valued using third-party valuation software which considers the present value of cash flows discounted using observable forward rate assumptions. The resulting fair values are validated against valuations performed by independent third parties and are classified within Level 2 of the fair value hierarchy. Fed funds futures contracts are valued based on unadjusted quoted prices in active markets and are classified within Level 1 of the fair value hierarchy. In determining if any fair value adjustments related to credit risk are required, the Company evaluates the credit risk of its counterparties by considering factors such as the likelihood of default by the Company and its counterparties, its net exposures, the remaining contractual life, as well as the amount of collateral securing the position. The Company reviews its counterparty exposure on a regular basis, and, when necessary, appropriate business actions are taken to adjust the exposure. When determining fair value, the Company applies the portfolio exception with respect to measuring counterparty credit risk for all of its derivative transactions subject to a master netting arrangement. To date, the Company has not realized any losses due to a counterparty's inability to pay any net uncollateralized position. The change in value of derivative assets and liabilities attributable to credit risk was not significant during the reported periods.

Mortgage Banking Derivatives

Mortgage-backed securities are utilized by Webster in its efforts to manage risk of loss associated with its mortgage loan commitments and mortgage loans held for sale. Prior to closing and funding certain single-family residential mortgage loans, an interest rate lock commitment is generally extended to the borrower. During the period from commitment date to closing date, Webster is subject to the risk that market rates of interest may change. If market rates rise, investors generally will pay less to purchase such loans resulting in a reduction in the gain on sale of the loans or, possibly, a loss. In an effort to mitigate such risk, forward delivery sales commitments, under which Webster agrees to deliver whole mortgage loans to various investors or issue mortgage-backed securities, are established.

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A summary of fair values for assets and liabilities measured at fair value on a recurring basis is as follows:



	At September 30, 2013
(In thousands)	Carrying Balance		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial assets held at fair value:
Available for sale securities:
U.S. Treasury Bills	$	200	$	200	$	—	$	—
Agency CMOs	885,476		—		885,476		—
Agency MBS	1,293,254		—		1,293,254		—
Agency CMBS	20,084		—		20,084		—
CMBS	465,951		—		465,951		—
CLOs	332,534		—		332,534		—
Pooled trust preferred securities	29,964		—		—		29,964
Single issuer trust preferred securities	43,302		—		43,302		—
Corporate debt	113,618		—		113,618		—
Equity securities	9,389		9,114		275		—
Total available for sale securities	3,193,772		9,314		3,154,494		29,964
Derivative instruments:
Interest rate derivatives	38,517		—		38,517		—
Investments held in Rabbi Trust	5,909		5,909		—		—
Alternative investments	804		—		—		804
Total financial assets held at fair value	$	3,239,002	$	15,223	$	3,193,011	$	30,768
Financial liabilities held at fair value:
Derivative instruments:
Interest rate derivatives	$	27,008	$	—	$	27,008	$	—
Fed Fund futures contracts	187		187		—		—
Visa Swap	5		—		5		—
Mortgage banking derivatives	384		—		384		—
Total financial liabilities held at fair value	$	27,584	$	187	$	27,397	$	—

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	At December 31, 2012
(In thousands)	Carrying Balance		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial assets held at fair value:
Available for sale securities:
U.S. Treasury Bills	$	200	$	200	$	—	$	—
Agency CMOs	1,310,006		—		1,310,006		—
Agency MBS	1,142,280		—		1,142,280		—
CMBS	398,031		—		398,031		—
CLOs	88,540		—		—		88,540
Pooled trust preferred securities	26,207		—		—		26,207
Single issuer trust preferred securities	44,415		—		44,415		—
Corporate debt	118,199		—		118,199		—
Equity securities	8,282		8,082		200		—
Total available for sale securities	3,136,160		8,282		3,013,131		114,747
Derivative instruments:
Interest rate derivatives	50,969		—		50,969		—
Mortgage banking derivatives	2,898		—		2,898		—
Investments held in Rabbi Trust	5,741		5,741		—		—
Alternative investments	1,533		—		—		1,533
Total financial assets held at fair value	$	3,197,301	$	14,023	$	3,066,998	$	116,280
Financial liabilities held at fair value:
Derivative instruments:
Interest rate derivatives	$	43,172	$	—	$	43,172	$	—
Fed Fund futures contracts	125		125		—		—
Visa swap	4		—		4		—
Total financial liabilities held at fair value	$	43,301	$	125	$	43,176	$	—

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



	Three months ended September 30,						Nine months ended September 30,
(In thousands)	2013			2012			2013			2012
Level 3, beginning of period	$	31,572		$	30,976		$	116,280		$	32,814
Transfers out of Level 3 ^{(1) (2)}	—			—			(248,844		)	(975		)
Change in unrealized loss included in other comprehensive income	7,194			1,587			14,194			2,279
Unrealized loss included in net income	(70		)	(539		)	(355		)	(1,161		)
Realized gain on sale of available for sale securities	269			—			269			—
Purchases/capital calls	—			—			159,412			126
Sales/proceeds	(7,740		)	—			(7,740		)	—
Accretion/amortization	26			63			214			79
Calls/paydowns	(483		)	(2,219		)	(2,662		)	(3,294		)
Level 3, end of period	$	30,768		$	29,868		$	30,768		$	29,868

(1)

As of April 1, 2013, the CLO portfolio was transferred from Level 3 to Level 2 based on having more observable inputs in determining fair value. In prior quarters, the CLO portfolio was priced using average non-binding broker quotes. During the second quarter, the Company engaged a third-party pricing vendor to provide monthly fair value measurements. The methodology used is a combination of matrix pricing, observed market activity and metrics. Pricing inputs such as credit spreads are observable and market corroborated and, therefore, the CLO portfolio qualifies for Level 2 categorization. The market for these CLOs is active and there is ample price transparency.


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

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The following table presents information about quantitative inputs and assumptions for items categorized in Level 3 of the fair value hierarchy:



	At September 30, 2013
(Dollars in thousands)	Fair Value		Valuation Methodology	Unobservable Inputs	Range of Inputs (Weighted-Average)
Pooled trust preferred securities	$	29,964	Discounted cash flow	Discount rate	6.84 - 7.93% (7.71%)
				Credit spread	318-428 bps (406 bps)

Discount rates are derived for each security depending on the original rating or a notched down rating based on management's judgment. The discount represents a market rate used to discount expected cash flows to determine the fair value of the security. Components of the calculated discount rate are the twelve month rolling average of published industry credit spreads and the 30 year swap rate. When discount rates increase as a result of an increase in rate or credit spread, there is a direct inverse correlation with fair value; as discount rates increase, fair value decreases. An increase in credit spreads correlates to an increase in discount rate and, therefore, a decrease in fair value.

Pooled trust preferred security issuer financials are reviewed on a quarterly basis, and an internal credit rating (“shadow rating”) is updated for individual issuers in the model. The shadow rating is correlated to a Moody’s loss table to determine the loss impact on expected cash flows. There is a direct relationship between shadow rating and fair value; as shadow ratings decline, the loss probability increases, expected cash flows decline and, therefore, fair value decreases. There may be instances when a one notch downgrade in an individual issuer's credit ratings may not significantly impact the fair value of securities.

Assets Measured at Fair Value on a Non-Recurring Basis

Certain assets are measured at fair value on a non-recurring basis; that is, the assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). The following is a description of valuation methodologies used for assets measured on a non-recurring basis.

Impaired Loans and Leases

Impaired loans and leases for which repayment of the loan or lease is expected to be provided solely by the value of the underlying collateral are considered collateral dependent and are valued based on the estimated fair value of such collateral using Level 3 inputs based on customized discounting criteria.

Loans Held for Sale

Loans held for sale are accounted for at the lower of cost or market and are considered to be recognized at fair value when they are recorded at below cost. The fair value of loans held for sale is based on quoted market prices of similar loans sold in conjunction with securitization transactions, adjusted as required for changes in loan characteristics and are classified within Level 3 of the fair value hierarchy.

Other Real Estate Owned (OREO) and Repossessed Assets

The total book value of OREO and repossessed assets is $8.0 million at September 30, 2013. OREO and repossessed assets are accounted for at the lower of cost or market and are considered to be recognized at fair value when they are recorded at below cost. The fair value of OREO is based on independent appraisals or internal valuation methods, less estimated selling costs. The fair value of repossessed assets is based on available pricing guides, auction results and price opinions, less estimated selling costs. Certain assets require assumptions about factors that are not observable in an active market in the determination of fair value and are classified as Level 3.

Mortgage Servicing Assets

The Company accounts for mortgage servicing assets at cost, subject to impairment testing. When the carrying cost exceeds fair value, a valuation allowance is established to reduce the carrying cost to fair value. Fair value is calculated as the present value of estimated future net servicing income and relies on market based assumptions for loan prepayment speeds, servicing costs, discount rates, and other economic factors. As such, mortgage servicing assets are classified within Level 3 of the fair value hierarchy.

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The table below presents the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a non-recurring basis:



	At September 30, 2013
(Dollars in thousands)	Fair Value		Valuation Methodology	Unobservable Inputs	Range of Inputs
Impaired Loans	$	41,177	Real Estate Appraisals	Discount for dated appraisal	0% - 30%
				Discount for costs to sell	3% - 8%
Other Real Estate	$	7,919	Appraisals	Discount for costs to sell	8%
				Discount for appraisal type	25% - 50%
Mortgage Servicing Assets	$	25,496	Discounted cash flow	Constant prepayment rate	6.7% - 26.6%
				Discount Rates	3.1% - 6.0%

Assets and Liabilities Disclosed at Fair Value

The Company is required to disclose the estimated fair value of financial instruments, both assets and liabilities, for which it is practicable to estimate fair value. The following is a description of valuation methodologies used for those assets and liabilities.

Cash, Due from Banks, and Interest-bearing Deposits

The carrying amount of cash, due from banks, and interest-bearing deposits is used to approximate fair value, given the short time frame to maturity and, as such, assets do not present unanticipated credit concerns. Cash, due from banks, and interest-bearing deposits are classified within Level 1 of the fair value hierarchy.

Loan and Lease Receivables

The estimated fair value of loans and leases held for investment is calculated using a discounted cash flow method, using future prepayments and market interest rates inclusive of an illiquidity premium for comparable loans. The associated cash flows are adjusted for credit and other potential losses. Fair value for impaired loans and leases is estimated using the net present value of the expected cash flows. Loan and lease receivables are classified within Level 3 of the fair value hierarchy.

Deposit Liabilities

The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. Deposit liabilities are classified within Level 2 of the fair value hierarchy.

Securities Sold Under Agreements to Repurchase and Other Borrowings

Carrying value is an estimate of fair value for those securities sold under agreements to repurchase and other borrowings that mature within 90 days. The fair values of all other borrowings are estimated using discounted cash flow analysis based on current market rates adjusted, as appropriate, for associated credit risks. Securities sold under agreements to repurchase and other borrowings are classified within Level 2 of the fair value hierarchy.

Federal Home Loan Bank Advances and Long-Term Debt

The fair value of long-term debt is estimated using a discounted cash flow technique. Discount rates are matched with the time period of the expected cash flow and are adjusted, as appropriate, to reflect credit risk. Long-term debt and Federal Home Loan Bank advances are classified within Level 2 of the fair value hierarchy.

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The tables below summarize the estimated fair values of significant financial instruments:



	At September 30, 2013
(In thousands)	Carrying Balance	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Securities available for sale	3,193,772	$	9,314	$	3,154,494	$	29,964
Securities held-to-maturity	3,205,999	—		3,248,620		—
Loans held for sale	40,193	—		—		40,193
Loans and leases, net	12,320,420	—		—		12,410,295
Mortgage servicing assets ^(a)	20,577	—		—		25,496
Alternative investments	19,048	—		—		19,048
Derivative instruments	38,517	—		38,517		—
Investments held in Rabbi Trust	5,909	5,909		—		—
Liabilities
Deposits other than time deposits	12,741,904	—		12,741,904		—
Time deposits	2,257,627	—		2,280,333		—
Securities sold under agreements to repurchase and other borrowings	1,372,290	—		1,404,532		—
Federal Home Loan Bank advances ^(b)	1,602,469	—		1,636,387		—
Long-term debt ^(c)	229,146	—		224,097		—
Derivative instruments	27,584	187		27,397		—



	At December 31, 2012
(In thousands)	Carrying Balance		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Securities available for sale	$	3,136,160	$	8,282	$	3,013,131	$	114,747
Securities held-to-maturity	3,107,529		—		3,264,718		—
Loans held for sale	107,633		—		—		107,633
Loans and leases, net	11,851,567		—		—		12,005,555
Mortgage servicing assets ^(a)	14,027		—		—		15,881
Alternative investments	19,523		—		—		19,523
Derivative instruments	53,867		—		53,867		—
Investments held in Rabbi Trust	5,741		5,741		—		—
Liabilities
Deposits other than time deposits	11,985,683		—		11,985,683		—
Time deposits	2,545,152		—		2,584,921		—
Securities sold under agreements to repurchase and other borrowings	1,076,160		—		1,134,614		—
Federal Home Loan Bank advances ^(b)	1,827,612		—		1,843,615		—
Long-term debt ^(c)	334,276		—		298,807		—
Derivative instruments	43,301		125		43,176		—


(a)	The carrying amount of mortgage servicing assets is net of $0.4 million and $1.8 million reserves at September 30, 2013 and December 31, 2012, respectively. The estimated fair value does not include such adjustments.


(b)	The carrying amount of FHLB advances is net of $67 thousand and $85 thousand in unamortized premiums at September 30, 2013 and December 31, 2012, respectively. The estimated fair value does not include such adjustments.


(c)	The carrying amount of long-term debt is net of $1.8 million and $4.4 million in hedge accounting adjustments and discounts at September 30, 2013 and December 31, 2012, respectively. The estimated fair value does not include such adjustments.

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

NOTE 15: Pension and Other Postretirement Benefits

The following tables summarize the components of net periodic benefit cost:



	Three months ended September 30,
	Webster Pension						Webster SERP				Other Benefits
(In thousands)	2013			2012			2013		2012		2013		2012
Net Periodic Benefit Cost Recognized in Net Income:
Service cost (benefits earned during the period)	$	10		$	7		$	—	$	—	$	—	$	—
Interest cost on benefit obligations	1,841			1,827			72		79		30		44
Expected return on plan assets	(2,779		)	(2,517		)	—		—		—		—
Amortization of prior service cost	—			—			—		—		18		18
Recognized net loss	1,590			1,525			32		18		7		26
Net periodic benefit cost recognized in net income	$	662		$	842		$	104	$	97	$	55	$	88



	Nine months ended September 30,
	Webster Pension						Webster SERP				Other Benefits
(In thousands)	2013			2012			2013		2012		2013		2012
Net Periodic Benefit Cost Recognized in Net Income:
Service cost (benefits earned during the period)	$	30		$	22		$	—	$	—	$	—	$	—
Interest cost on benefit obligations	5,524			5,480			217		237		90		132
Expected return on plan assets	(8,336		)	(7,551		)	—		—		—		—
Amortization of prior service cost	—			—			—		—		54		54
Recognized net loss	4,767			4,576			94		53		21		77
Net periodic benefit cost recognized in net income	$	1,985		$	2,527		$	311	$	290	$	165	$	263

The Webster Bank Pension Plan and the supplemental pension plans were frozen effective December 31, 2007. No additional benefits have been accrued since that time. Additional contributions to the Webster Bank Pension Plan will be made as deemed appropriate by management in conjunction with information provided by the Plan’s actuaries.

The Bank is also a sponsor of a multiple-employer plan, EIN/Pension Plan Number 13-5645888/333 (the "Fund”), administered by Pentegra for the benefit of eligible employees of a bank acquired by Webster. The Fund does not segregate the assets or liabilities of its participating employers in the ongoing administration of this plan. All benefit accruals were frozen as of September 1, 2004.

According to the Fund’s administrators, as of July 1, 2013, the date of the latest actuarial valuation, Webster’s portion of the plan was underfunded by $2.1 million. Webster made $60 thousand and $0.5 million and $0.4 million and $1.2 million in contributions for the three and nine months ended September 30, 2013 and 2012, respectively.

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NOTE 16: Stock-Based Compensation Plans

Webster has established stock-based compensation plans that cover employees and directors (collectively, the “Plans”). Compensation cost related to the Plans, based on the grant-date fair value, net of estimated forfeitures, is included as a component of compensation and benefits reflected in non-interest expense. The cost of an award to retirement eligible employees is recognized immediately, while the award is subject to a one year minimum hold before vesting.

Stock-based compensation expense recognized in the accompanying Condensed Consolidated Statements of Income is summarized in the following table:



	Three months ended September 30,				Nine months ended September 30,
(In thousands)	2013		2012		2013		2012
Stock options	$	886,281	$	737,208	$	2,831,966	$	1,795,501
Restricted stock	1,276,153		1,826,888		4,925,085		4,939,347
Stock-based compensation	$	2,162,434	$	2,564,096	$	7,757,051	$	6,734,848

Stock Options

Stock option awards are granted with an exercise price equal to the market price of Webster's stock at the date of grant and vest over periods ranging from three to four years. Each option grants the holder the right to acquire a share of Webster common stock over a contractual life of up to ten years.

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



	2013		2012
Weighted-average assumptions:
Expected term	6.9 years		6.6 years
Expected dividend yield	1.80	%	1.00	%
Expected forfeiture rate	10.00	%	9.00	%
Expected volatility	58.97	%	61.03	%
Risk-free interest rate	1.36	%	1.30	%
Fair value of option at grant date	$10.96		$11.71

As of September 30, 2013, there was $3.0 million of unrecognized compensation expense related to non-vested options that is expected to be recognized over a remaining weighted-average vesting period of 1.7 years.

The following table summarizes stock option activity under the Plans for the nine month period ending September 30, 2013:



	Nine months ended September 30, 2013
	Number of Shares	Weighted-Average Exercise Price
Outstanding, at January 1, 2013	2,476,645	$	28.99
Granted	436,043	23.00
Exercised	59,521	17.19
Forfeited/Expired	156,312	29.65
Outstanding, at September 30, 2013	2,696,855	$	28.25

Exercisable, at September 30, 2013	2,107,489	$	29.72
Expected to vest, at September 30, 2013	540,314	$	22.95

At September 30, 2013, options outstanding included 2,458,697 non-qualified and 238,158 incentive stock options.

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Restricted Stock

The Company grants time-based restricted stock awards that vest over the applicable service period ranging from one to five years. The Plans limit the number of time-based awards that may be granted to an eligible individual in a calendar year to 100,000 shares. In 2013, the Company granted 222,585 time-based shares. Webster records compensation expense over the vesting period based on the market value on the date of grant.

The following table summarizes time-based restricted stock activity under the Plans for the nine month period ending September 30, 2013:



	Nine months ended September 30, 2013
	Number of Shares	Weighted-average Grant Date Fair Value		Number of Units	Weighted-average Grant Date Fair Value
Outstanding, at January 1, 2013	249,294	$	22.12	33,742	$	22.12
Granted	222,585	22.80		—	—
Vested ⁽¹⁾	154,133	21.78		19,700	22.21
Forfeited/Modified	20,531	22.40		9,778	21.67
Outstanding, at September 30, 2013	297,215	$	22.55	4,264	$	22.75

(1) Vested for purposes of recording compensation expense on a straight-line basis.

The Company grants performance-based restricted stock awards that vest after three years. On February 20, 2013, the Company granted 163,519 performance-based shares, the vesting of which is based 50% upon Webster's ranking for total shareholder return versus Webster's 14 bank compensation peer group companies and 50% upon Webster's return on equity over the three year vesting period. Shares vest in a range from zero to 200% of the target number of shares under the grant depending on performance. The 14 bank compensation peer group companies are utilized because they represent the mix of size and type of financial institutions that best compare with Webster. Webster records compensation expense over the vesting period, based on a fair value calculated using the Monte-Carlo simulation model which allows for the incorporation of the performance condition for the 50% of the performance-based shares tied to total shareholder return versus the bank compensation peer group and based on the market value on the date of grant of the remaining 50% of performance-based shares tied to Webster's return on equity. Compensation expense is subject to adjustment based on management's assessment of Webster's return on equity performance relative to the target number of shares condition.

The following table summarizes performance-based restricted stock activity under the Plans for the nine month period ending September 30, 2013:



	Nine months ended September 30, 2013
	Number of Shares	Weighted-average Grant Date Fair Value
Outstanding, at January 1, 2013	94,407	$	25.44
Granted	163,519	24.04
Vested ⁽¹⁾	64,169	24.77
Forfeited/Modified	34,825	24.55
Outstanding, at September 30, 2013	158,932	$	24.46

(1) Vested for purposes of recording compensation expense on a straight-line basis.

As of September 30, 2013, there was $10.7 million of unrecognized compensation expense related to non-vested restricted stock awards that is expected to be recognized over a remaining weighted-average vesting period of 1.9 years.

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NOTE 17: Business Segments

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

At December 31, 2012, Webster's operations were divided into four reportable segments that represented its core business - Commercial Banking, Retail Banking, Consumer Finance and Other. In the first quarter of 2013, the Company combined the Retail and Consumer Finance segments and realigned the reporting of the management of its small business and consumer related businesses. Beginning in 2013, some business and mass-market consumer business units had been consolidated into a new reportable segment, "Community Banking", which comprises several similar operating segments. Community Banking includes the Personal Bank (Consumer Finance, Consumer Deposits, Webster Investment Services, the Customer Care Center, eBanking, the ATM network) and Business Banking. This strategic decision organizes the business units more effectively around the customer in an effort to deliver banking products and services when and where the customer desires and in a manner that respects customers' clear and growing preference to do their banking remotely. It also enables Webster to meet most of its customers' personal needs from a single business segment. The 2012 business segment results have been adjusted for comparability to the 2013 segment presentation.

Webster’s business segment results are intended to reflect each segment as if it were a stand-alone business. Webster uses an internal profitability reporting system to generate information by operating segment, which is based on a series of management estimates and allocations regarding funds transfer pricing, the provision for loan and lease losses, non-interest expense, income taxes and equity capital. These estimates and allocations, certain of which are subjective in nature, are continually being reviewed and refined. Changes in estimates and allocations that affect the reported results of any operating segment do not affect the consolidated financial position or results of operations of Webster as a whole. The full profitability measurement reports which are prepared for each operating segment reflect non-GAAP reporting methodologies. The differences between the full profitability and GAAP measures are reconciled in the Corporate and Reconciling category.

The Company uses a matched maturity funding concept called funds transfer pricing (“FTP”), to allocate interest income and interest expense to each business while also transferring the primary interest rate risk exposures to the Corporate and Reconciling category. The allocation process considers the specific interest rate risk and liquidity risk of financial instruments and other assets and liabilities in each line of business. The “matched maturity funding concept” considers the origination date and the earlier of the maturity date or the repricing date of a financial instrument to assign an FTP rate for loans and deposits originated each day. Loans are assigned an FTP rate for funds “used” and deposits are assigned an FTP rate for funds “provided.” From a governance perspective, this process is executed by the Company’s Financial Planning and Analysis division, and the process is overseen by the Company’s Asset/Liability Committee (ALCO).

Webster attributes the provision for loan and lease losses to each segment based on management’s estimate of the inherent loss content in each of the specific loan and lease portfolios. Provision expense, for certain elements of risk that are not deemed specifically attributable to a business segment, such as environmental factors, and provision for the consumer liquidating portfolio, are shown as other reconciling. For the three and nine months ended September 30, 2013, 125.0% and 111.6%, respectively, of the provision expense is specifically attributable to business segments and reported accordingly.

Webster allocates a majority of non-interest expense to each business segment using a full-absorption costing process. Costs, including corporate overhead, are analyzed, pooled by process, and assigned to the appropriate business segment. Income tax expense is allocated to each business segment based on the effective income tax rate for the period shown.

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The following tables present the results for Webster’s business segments and incorporate the allocation of the provision for loan and lease losses and income tax expense to each of Webster’s business segments for the periods presented:



	Three months ended September 30, 2013
(In thousands)	Commercial Banking		Community Banking		Other		Total Business Segments		Corporate and Reconciling			Consolidated Total
Net interest income (loss)	$	56,430	$	87,949	$	10,733	$	155,112	$	(5,125	)	$	149,987
Provision (benefit) for loan and lease losses	7,032		3,570		22		10,624		(2,124		)	8,500
Net interest income (loss) after provision for loan and lease losses	49,398		84,379		10,711		144,488		(3,001		)	141,487
Non-interest income	8,818		25,387		8,083		42,288		3,969			46,257
Non-interest expense	24,647		82,748		11,913		119,308		2,973			122,281
Income before income tax expense	33,569		27,018		6,881		67,468		(2,005		)	65,463
Income tax expense (benefit)	9,347		7,504		1,941		18,792		(634		)	18,158
Net income (loss)	$	24,222	$	19,514	$	4,940	$	48,676	$	(1,371	)	$	47,305



	Three months ended September 30, 2012^(a)
(In thousands)	Commercial Banking			Community Banking		Other			Total Business Segments		Corporate and Reconciling		Consolidated Total
Net interest income	$	48,127		$	86,263	$	8,526		$	142,916	$	1,974	$	144,890
(Benefit) provision for loan and lease losses	(5,540		)	9,709		(328		)	3,841		1,159		5,000
Net interest income after provision for loan and lease losses	53,667			76,554		8,854			139,075		815		139,890
Non-interest income	7,191			30,312		7,139			44,642		3,837		48,479
Non-interest expense	24,823			84,408		10,965			120,196		3,691		123,887
Income before income tax expense	36,035			22,458		5,028			63,521		961		64,482
Income tax expense	10,893			6,788		1,520			19,201		288		19,489
Net income	$	25,142		$	15,670	$	3,508		$	44,320	$	673	$	44,993

(a) Reclassified to conform to the 2013 presentation.



	Nine months ended September 30, 2013
(In thousands)	Commercial Banking		Community Banking		Other		Total Business Segments		Corporate and Reconciling			Consolidated Total
Net interest income (loss)	$	161,008	$	259,037	$	30,008	$	450,053	$	(7,209	)	$	442,844
Provision (benefit) for loan and lease losses	11,449		15,816		72		27,337		(2,837		)	24,500
Net interest income (loss) after provision for loan and lease losses	149,559		243,221		29,936		422,716		(4,372		)	418,344
Non-interest income	20,537		87,654		24,579		132,770		14,016			146,786
Non-interest expense	74,068		251,759		37,112		362,939		8,481			371,420
Income before income tax expense	96,028		79,116		17,403		192,547		1,163			193,710
Income tax expense	28,710		23,654		5,203		57,567		348			57,915
Net income	$	67,318	$	55,462	$	12,200	$	134,980	$	815		$	135,795

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	Nine months ended September 30, 2012^(a)
(In thousands)	Commercial Banking			Community Banking		Other			Total Business Segments		Corporate and Reconciling		Consolidated Total
Net interest income	$	137,610		$	255,878	$	24,824		$	418,312	$	14,324	$	432,636
(Benefit) provision for loan and lease losses	(10,979		)	20,847		(668		)	9,200		4,800		14,000
Net interest income after provision for loan and lease losses	148,589			235,031		25,492			409,112		9,524		418,636
Non-interest income	21,365			84,385		21,553			127,303		12,515		139,818
Non-interest expense	74,320			257,292		33,193			364,805		14,074		378,879
Income before income tax expense	95,634			62,124		13,852			171,610		7,965		179,575
Income tax expense	28,973			18,821		4,197			51,991		2,413		54,404
Net income	$	66,661		$	43,303	$	9,655		$	119,619	$	5,552	$	125,171

(a) Reclassified to conform to the 2013 presentation.



	Total Assets
(In thousands)	Commercial Banking		Community Banking		Other		Total Business Segments		Corporate and Reconciling		Consolidated Total
At September 30, 2013	$	5,517,704	$	7,703,557	$	326,049	$	13,547,310	$	7,062,244	$	20,609,554
At December 31, 2012	$	5,113,898	$	7,708,159	$	282,414	$	13,104,471	$	7,042,294	$	20,146,765

NOTE 18: Commitments and Contingencies

Lease Commitments. At September 30, 2013, Webster was obligated under various non-cancelable operating leases for properties used as banking offices and other office facilities. The leases contain renewal options and escalation clauses which provide for increased rental expense, or equipment replaced with new leased equipment, as these leases expire. Rental expense under leases was $5.2 million and $15.3 million and $5.0 million and $15.1 million for the three and nine months ended September 30, 2013 and 2012, respectively, and is recorded as a component of occupancy expense in the accompanying Condensed Consolidated Statements of Income. Rental income from sub-leases on certain of these properties is recorded as a component of occupancy expense in the accompanying Condensed Consolidated Statements of Income, while rental income under various non-cancelable operating leases for properties owned is recorded as a component of other non-interest income in the accompanying Condensed Consolidated Statements of Income. Rental income was $0.2 million and $0.7 million and $0.3 million and $0.8 million for the three and nine months ended September 30, 2013 and 2012, respectively. There has been no significant change in future minimum lease payments payable since December 31, 2012. See Webster's 2012 Form 10-K for additional information regarding these commitments.

Credit-Related Financial Instruments. The Company is a party to credit-related financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and commercial letters of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The Company’s exposure to credit loss is represented by the contractual amount of these commitments as it is for on-balance sheet instruments.

The following table summarizes outstanding financial instruments whose contract amounts represent credit risk:



(In thousands)	At September 30, 2013		At December 31, 2012
Unused commitments to extend credit	$	4,023,250	$	3,801,013
Standby letters of credit	135,601		139,789
Commercial letters of credit	9,252		6,535
Total financial instruments with off-balance sheet risk	$	4,168,103	$	3,947,337

Unused commitments to extend credit. The Company makes commitments under various terms to lend funds to customers. These commitments include revolving credit arrangements, term loan commitments and short-term borrowing agreements. Many of these loans have fixed expiration dates or other termination clauses where a fee may be required. Since commitments are expected to expire without being funded, the total commitment amounts do not necessarily represent future liquidity requirements.

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Standby letters of credit. Standby letters of credit commit the Company to make payments on behalf of customers if certain specified future events occur. The Company has recourse against the customer for any amount required to be paid to a third party under a standby letter of credit. Historically, a large percentage of standby letters of credit expire without being funded. The contractual amount of standby letters of credit represents the maximum potential amount of future payments the Company could be required to make and represents the Company's maximum credit risk.

Commercial letters of credit. Commercial letters of credit are issued to facilitate domestic or foreign trade transactions for customers. As a general rule, drafts will be drawn when the goods underlying the transaction are in transit.

The reserve for unfunded credit commitments is reported as a component of accrued expenses and other liabilities in the accompanying Condensed Consolidated Balance Sheets. The following table provides activity details for the Company’s reserve for unfunded credit commitments:



	Three months ended September 30,					Nine months ended September 30,
(In thousands)	2013		2012			2013			2012
Beginning balance	$	4,593	$	5,463		$	5,662		$	5,449
Provision	64		—			64			259
Reserve release	—		(267		)	(1,069		)	(512		)
Ending balance	$	4,657	$	5,196		$	4,657		$	5,196

Litigation Reserves. Webster is involved in routine legal proceedings occurring in the ordinary course of business and is subject to loss contingencies related to such litigation and claims arising therefrom. Webster evaluates these contingencies based on information currently available, including advice of counsel and assessment of available insurance coverage. Webster establishes accruals for litigation and claims when a loss contingency is considered probable and the related amount is reasonably estimable. These accruals are periodically reviewed and may be adjusted as circumstances change. Webster also estimates certain loss contingencies for possible litigation and claims, whether or not there is an accrued probable loss. Webster believes it has defenses to all the claims asserted against it in existing litigation matters and intends to defend itself in all matters.

Based upon its current knowledge, after consultation with counsel and after taking into consideration its current litigation accruals, Webster believes that as of September 30, 2013 any reasonably possible losses, in addition to amounts accrued, are not material to Webster’s consolidated financial condition. However, in light of the uncertainties involved in such actions and proceedings, there is no assurance that the ultimate resolution of these matters will not significantly exceed the reserves currently accrued by Webster or that the Company’s litigation reserves will not need to be adjusted in future periods. Such an outcome could be material to the Company’s operating results in a particular period, depending on, among other factors, the size of the loss or liability imposed and the level of the Company’s income for that period.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the Company’s Consolidated Financial Statements and Notes thereto, for the year ended December 31, 2012, included in its 2012 Form 10-K, and in conjunction with the Condensed Consolidated Financial Statements and Notes thereto included in Item 1 of this report. Operating results for the three and nine months ended September 30, 2013 are not necessarily indicative of the results for the full year ending December 31, 2013 or any future period.

Forward-Looking Statements and Factors that Could Affect Future Results

Certain statements contained in this Quarterly Report on Form 10-Q that are not statements of historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Act”), notwithstanding that such statements are not specifically identified as such. In addition, certain statements may be contained in the Company’s future filings with the SEC, in press releases, and in oral and written statements made by or with the approval of the Company that are not statements of historical fact and constitute forward-looking statements within the meaning of the Act. Examples of forward-looking statements include, but are not limited to: (i) projections of revenues, expenses, income or loss, earnings or loss per share, the payment or non-payment of dividends, capital structure and other financial items; (ii) statements of plans, objectives and expectations of Webster or its management or Board of Directors, including those relating to products or services or the impact or expected outcome of various legal proceedings; (iii) statements of future economic performance; and (iv) statements of assumptions underlying such statements. Words such as “believes”, “anticipates”, “expects”, “intends”, “targeted”, “continue”, “remain”, “will”, “should”, “may” and other similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.

Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those in such statements. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to:


•	Local, regional, national and international economic conditions and the impact they may have on the Company and its customers and the Company’s assessment of that impact.


•	Volatility and disruption in national and international financial markets.


•	Government intervention in the U.S. financial system.


•	Changes in the level of non-performing assets and charge-offs.


•	Changes in estimates of future reserve requirements based upon the periodic review thereof under relevant regulatory and accounting requirements.


•	Adverse conditions in the securities markets that lead to impairment in the value of securities in the Company’s investment portfolio.


•	Inflation, interest rate, securities market and monetary fluctuations.


•	The timely development and acceptance of new products and services and perceived overall value of these products and services by customers.


•	Changes in consumer spending, borrowings and savings habits.


•	Technological changes.


•	The ability to increase market share and control expenses.


•	Impairment of the Company’s goodwill or other intangible assets.


•	Changes in the competitive environment among banks, financial holding companies and other financial service providers.


•	The effect of changes in laws and regulations (including laws and regulations concerning taxes, banking, securities and insurance) with which the Company and its subsidiaries must comply, including under the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank") and the Basel III update to the Basel Accords.


•	The effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, or the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters.


•	The costs and effects of legal and regulatory developments including the resolution of legal proceedings or regulatory or other governmental inquiries and the results of regulatory examinations or reviews.


•	The Company’s success at managing the risks involved in the foregoing items.

Forward-looking statements speak only as of the date on which such statements are made. The Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made, or to reflect the occurrence of unanticipated events.

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Application of Critical Accounting Policies and Accounting Estimates

The Company’s significant accounting policies are described in Note 1 to the Consolidated Financial Statements included in its 2012 Form 10-K and in Note 1 to the Condensed Consolidated Financial Statements included in Item 1 of this report. The preparation of the Condensed Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States (“GAAP”) and practices generally applicable to the financial services industry requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and to disclose contingent assets and liabilities. Actual results could differ from those estimates.

Management has identified accounting for (i) the allowance for loan and lease losses, (ii) fair value measurements for valuation of financial instruments and valuation of investments for OTTI, (iii) valuation of goodwill, (iv) income taxes and (v) pension and other post retirement benefits as the Company’s most critical accounting policies in that they are important to the portrayal of the Company’s financial condition and results, and they require management’s subjective and complex judgment as a result of the need to make estimates about the effects of matters that are inherently uncertain. These accounting policies and estimates, including the nature of the estimates and types of assumptions used, are described throughout Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Webster's 2012 Form 10-K.

Recent Legislation

The following section should be read in conjunction with the Supervision and Regulation section in Webster's 2012 Form 10-K.

On July 2, 2013, the Federal Reserve Board issued final rules, and on July 9, 2013, the OCC issued final rules that revise the existing regulatory capital requirements to incorporate certain revisions to the Basel capital framework, including Basel III, and to implement certain provisions of Dodd-Frank. The final rules seek to strengthen the components of regulatory capital, increase risk-based capital requirements, and make selected changes to the calculation of risk-weighted assets. The final rules; among other things:


•	revise minimum capital requirements and adjust prompt corrective action thresholds;


•	revise the components of regulatory capital, add a new minimum common equity Tier 1 capital ratio of 4.5% of risk-weighted assets, increase the minimum Tier 1 capital ratio requirement from 4% to 6%;


•	retain the existing risk-based capital treatment for 1-4 family residential mortgage exposures;


•	permit most banking organizations, including the Company, to retain, through a one-time permanent election, the existing capital treatment for accumulated other comprehensive income;


•	implement a new capital conservation buffer of common equity Tier 1 capital equal to 2.5% of risk-weighted assets, which will be in addition to the 4.5% common equity Tier 1 capital ratio and be phased in over a three year period beginning January 1, 2016 which buffer is generally required to make capital distributions and pay executive bonuses;


•	increase capital requirements for past-due loans, high volatility commercial real estate exposures, and certain short-term loan commitments;


•	require the deduction of mortgage servicing assets and deferred tax assets that exceed 10% of common equity Tier 1 capital in each category and 15% of common equity Tier 1 capital in the aggregate; and


•	remove references to credit ratings consistent with Dodd-Frank and establish due diligence requirements for securitization exposures.

Under the final rules, compliance is required beginning January 1, 2015, for most banking organizations including the Company, subject to a transition period for several aspects of the final rules, including the new minimum capital ratio requirements, the capital conservation buffer, and the regulatory capital adjustments and deductions. We are still in the process of assessing the impacts of these complex final and interim final rules; however, we believe we will continue to exceed all estimated well-capitalized regulatory requirements on a fully phased-in basis.

In April 2013, the Securities and Exchange Commission and the Commodity Futures Trading Commission (together, the “Commissions”) jointly issued final rules and guidelines to require certain regulated entities to establish programs to address risks of identity theft. The rules and guidelines implement provisions of Dodd-Frank. These provisions amended Section 615(e) of the Fair Credit Reporting Act and directed the Commissions to adopt rules requiring entities that are subject to the Commissions’ jurisdiction to address identity theft in two ways. First, the rules require financial institutions and creditors to develop and implement a written identity theft prevention program that is designed to detect, prevent, and mitigate identity theft in connection with certain existing accounts or the opening of new accounts. The rules include guidelines to assist entities in the formulation and maintenance of programs that would satisfy the requirements of the rules. Second, the rules establish special requirements for any credit and

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debit card issuers that are subject to the Commissions’ jurisdiction, to assess the validity of notifications of changes of address under certain circumstances. Webster implemented an ID Theft Prevention Program, approved on April 25, 2013 by its Board of Directors, to address these requirements.

RESULTS OF OPERATIONS

Summary of Performance

Webster’s net income available to common shareholders was $44.7 million, or $0.49 per diluted share, for the three months ended September 30, 2013, an increase of $0.3 million compared to $44.4 million, or $0.48 per diluted share, for the three months ended September 30, 2012. The $0.3 million increase is due to a $5.1 million increase in net interest income, a decrease of $1.6 million in non-interest expense, and a $1.3 million decrease in income tax expense, partially offset by an increase of $3.5 million in provision for loan and lease losses, a $2.2 million decrease in non-interest income and a $2.0 million increase in preferred stock dividends.

For the nine months ended September 30, 2013, Webster’s net income available to common shareholders was $127.6 million, or $1.41 per diluted share, an increase of $4.3 million compared to $123.3 million, or $1.34 per diluted share, for the nine months ended September 30, 2012. The $4.3 million increase is due to a $10.2 million increase in net interest income, a $7.0 million increase in non-interest income, and a decrease of $7.5 million in non-interest expense, partially offset by an increase of $10.5 million in provision for loan and lease losses, a $3.5 million increase in income tax expense and an increase of $6.3 million in preferred stock dividends.

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Selected financial highlights are presented in the following table:



	At or for the three months ended September 30,						At or for the nine months ended September 30,
(In thousands, except per share and ratio data)	2013			2012			2013			2012
Earnings:
Net interest income	$	149,987		$	144,890		$	442,844		$	432,636
Provision for loan and lease losses	8,500			5,000			24,500			14,000
Total non-interest income	46,257			48,479			146,786			139,818
Total non-interest expense	122,281			123,887			371,420			378,879
Net income attributable to Webster Financial Corporation	47,305			44,993			135,795			125,171
Net income available to common shareholders	44,666			44,378			127,631			123,326
Per Share Data:
Weighted-average common shares - diluted ^(a)	90,423			91,884			90,193			91,754
Net income available to common shareholders per common share - diluted	$	0.49		$	0.48		$	1.41		$	1.34
Dividends declared per common share	0.15			0.10			0.40			0.25
Dividends declared per Series A preferred share	21.25			21.25			63.75			63.75
Dividends declared per Series E preferred share	400.00			—			1,248.89			—
Book value per common share	22.34			22.24			22.34			22.24
Tangible book value per common share	16.40			16.08			16.40			16.08
Selected Ratios:
Return on average assets ^(b)	0.93		%	0.92		%	0.90		%	0.87		%
Return on average common shareholders' equity	8.93			9.19			8.58			8.71
Return on average tangible common shareholders' equity	12.43			13.03			12.00			12.70
Net interest margin	3.23			3.28			3.24			3.32
Efficiency ratio	60.07			62.25			60.73			63.86
Tangible common equity ratio	7.37			7.37			7.37			7.37
Tier 1 common equity to risk-weighted assets	11.38			11.10			11.38			11.10


(a)	For the three and nine months ended September 30, 2013 and 2012, the effect of the Series A Preferred Stock on the computation of diluted earnings per share was anti-dilutive; therefore, the effect of this security was not included in the determination of diluted average shares.


(b)	Annualized, based on net income before preferred dividend.

The Company evaluates its business based on certain ratios that utilize tangible equity, a non-GAAP financial measure.

The efficiency ratio, which measures the costs expended to generate a dollar of revenue, is calculated excluding foreclosed property expense, amortization of intangibles, gain or loss on securities and other non-recurring items. Accordingly, this is also a non-GAAP financial measure.

The Company believes the use of these non-GAAP financial measures provides additional clarity in assessing the results of the Company. Other companies may define or calculate supplemental financial data differently.

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See the following tables for reconciliations of these non-GAAP financial measures with financial measures defined by GAAP:



(Dollars in thousands)
	Three months ended September 30,						Nine months ended September 30,
	2013			2012			2013			2012
Return on average tangible common shareholders' equity (non-GAAP):
Net income available to common shareholders (GAAP)	$	44,666		$	44,378		$	127,631		$	123,326
Intangible assets amortization, tax-affected at 35% (GAAP)	807			900			2,421			2,716
Net income adjusted for amortization of intangibles (non-GAAP)	$	45,473		$	45,278		$	130,052		$	126,042
Annualized net income used in the return on average tangible common shareholders' equity	$	181,892		$	181,112		$	173,403		$	168,056
Average shareholders' equity (non-GAAP)	$	2,151,667		$	1,960,483		$	2,135,433		$	1,895,549
Less: Average Preferred stock (non-GAAP)	151,649			28,939			151,649			28,939
Average Goodwill and other intangible assets (non-GAAP)	537,038			542,075			538,270			543,461
Average tangible common equity (non-GAAP)	$	1,462,980		$	1,389,469		$	1,445,514		$	1,323,149
Return on average tangible common shareholders' equity (non-GAAP)	12.43		%	13.03		%	12.00		%	12.70		%

	Three months ended September 30,						Nine months ended September 30,
	2013			2012			2013			2012
Efficiency ratio (non-GAAP):
Non-interest expense (GAAP)	$	122,281		$	123,887		$	371,420		$	378,879
Less: Foreclosed property expense (GAAP)	432			118			938			761
Intangible assets amortization (GAAP)	1,242			1,384			3,726			4,178
Other expense (non-GAAP)	950			187			2,989			3,310
Non-interest expense (non-GAAP)	$	119,657		$	122,198		$	363,767		$	370,630
Net interest income (GAAP)	$	149,987		$	144,890		$	442,844		$	432,636
Add back: FTE adjustment (non-GAAP)	3,211			3,740			10,071			11,271
Non-interest income (GAAP)	46,257			48,479			146,786			139,818
Less: Net gain on sale of investment securities (GAAP)	269			810			708			3,347
Income (non-GAAP)	$	199,186		$	196,299		$	598,993		$	580,378
Efficiency ratio (non-GAAP)	60.07		%	62.25		%	60.73		%	63.86		%

							At September 30,
							2013			2012
Tangible common equity ratio (non-GAAP):
Shareholders' equity (GAAP)							$	2,167,659		$	1,983,678
Less: Preferred stock (GAAP)							151,649			28,939
Goodwill and other intangible assets (GAAP)							536,431			541,399
Tangible common shareholders' equity (non-GAAP)							$	1,479,579		$	1,413,340
Total Assets (GAAP)							$	20,609,554		$	19,729,662
Less: Goodwill and other intangible assets (GAAP)							536,431			541,399
Tangible assets (non-GAAP)							$	20,073,123		$	19,188,263
Tangible common equity ratio (non-GAAP)							7.37		%	7.37		%

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(Dollars and shares in thousands, except per share data)
	At September 30,
	2013			2012
Tangible book value per common share (non-GAAP):
Shareholders' equity (GAAP)	$	2,167,659		$	1,983,678
Less: Preferred equity (GAAP)	151,649			28,939
Goodwill and other intangible assets (GAAP)	536,431			541,399
Tangible common equity (non-GAAP)	$	1,479,579		$	1,413,340
Common shares outstanding	90,245			87,899
Tangible book value per common share (non-GAAP)	$	16.40		$	16.08

	At September 30,
	2013			2012
Tier 1 common equity to risk-weighted assets (non-GAAP):
Shareholders' equity (GAAP)	$	2,167,659		$	1,983,678
Less: Preferred equity (GAAP)	151,649			28,939
Goodwill and other intangible assets (GAAP)	536,431			541,399
Disallowed excess servicing assets (regulatory)	—			878
Add back: Accumulated other comprehensive loss (GAAP)	(58,941		)	(29,277		)
DTL (DTA) related to goodwill and other intangibles (regulatory)	10,441			11,694
Tier 1 common equity (regulatory)	$	1,548,961		$	1,453,433
Risk-weighted assets (regulatory)	$	13,607,826		$	13,090,000
Tier 1 common equity to risk-weighted assets (non-GAAP)	11.38		%	11.10		%

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



	Three months ended September 30,
	2013							2012
(Dollars in thousands)	Average Balance		Interest ⁽¹⁾			Average Yields		Average Balance		Interest ⁽¹⁾			Average Yields
Assets
Interest-earning assets:
Loans and leases	$	12,302,467	$	123,664		3.97	%	$	11,608,334	$	121,367		4.14	%
Securities ⁽²⁾	6,293,453		49,854			3.17		6,145,414		53,010			3.48
Federal Home Loan and Federal Reserve Bank stock	158,878		863			2.16		142,595		879			2.45
Interest-bearing deposits	14,039		10			0.28		91,502		45			0.19
Loans held for sale	65,207		573			3.52		82,006		655			3.19
Total interest-earning assets	18,834,044		174,964			3.68		18,069,851		175,956			3.88
Noninterest-earning assets	1,507,532							1,420,460
Total assets	$	20,341,576						$	19,490,311

Liabilities and equity
Interest-bearing liabilities:
Demand deposits	$	2,999,991	$	—		—	%	$	2,726,790	$	—		—	%
Savings, checking & money market deposits	9,690,140		4,580			0.19		8,935,878		5,137			0.23
Time deposits	2,286,380		6,328			1.10		2,677,939		9,406			1.40
Total deposits	14,976,511		10,908			0.29		14,340,607		14,543			0.40

Securities sold under agreements to repurchase and other borrowings	1,293,074		5,283			1.60		1,171,787		5,594			1.87
Federal Home Loan Bank advances	1,506,120		3,753			0.98		1,433,037		3,942			1.08
Long-term debt	229,525		1,822			3.18		361,468		3,247			3.59
Total borrowings	3,028,719		10,858			1.41		2,966,292		12,783			1.70
Total interest-bearing liabilities	18,005,230		21,766			0.48		17,306,899		27,326			0.62
Noninterest-bearing liabilities	184,679							222,929
Total liabilities	18,189,909							17,529,828

Preferred Stock	151,649							28,939
Common shareholders' equity	2,000,018							1,931,544
Webster Financial Corp. shareholders' equity	2,151,667							1,960,483
Total liabilities and equity	$	20,341,576						$	19,490,311
Tax-equivalent net interest income			153,198							148,630
Less: tax equivalent adjustments			(3,211		)					(3,740		)
Net interest income			$	149,987						$	144,890
Net interest margin						3.23	%						3.28	%

(1)On a fully tax-equivalent basis.

(2)Average balances and yields of securities available for sale are based upon the historical amortized cost.

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	Nine months ended September 30,
	2013							2012
(Dollars in thousands)	Average Balance		Interest ⁽¹⁾			Average Yields		Average Balance		Interest ⁽¹⁾			Average Yields
Assets
Interest-earning assets:
Loans and leases	$	12,130,553	$	366,445		4.01	%	$	11,435,430	$	363,487		4.21	%
Securities ⁽²⁾	6,249,115		151,146			3.25		6,076,750		164,187			3.63
Federal Home Loan and Federal Reserve Bank stock	158,016		2,575			2.18		142,912		2,636			2.46
Interest-bearing deposits	24,027		73			0.40		78,852		107			0.18
Loans held for sale	75,066		1,761			3.13		67,411		1,810			3.58
Total interest-earning assets	18,636,777		522,000			3.73		17,801,355		532,227			3.98
Noninterest-earning assets	1,520,026							1,399,566
Total assets	$	20,156,803						$	19,200,921

Liabilities and equity
Interest-bearing liabilities:
Demand deposits	$	2,905,863	$	—		—	%	$	2,572,851	$	—		—	%
Savings, checking & money market deposits	9,475,275		13,708			0.19		8,747,401		16,216			0.25
Time deposits	2,393,999		22,074			1.23		2,739,829		29,485			1.44
Total deposits	14,775,137		35,782			0.32		14,060,081		45,701			0.43

Securities sold under agreements to repurchase and other borrowings	1,196,723		15,522			1.71		1,182,817		15,388			1.71
Federal Home Loan Bank advances	1,624,937		12,299			1.00		1,380,393		12,932			1.23
Long-term debt	235,572		5,482			3.10		447,082		14,299			4.26
Total borrowings	3,057,232		33,303			1.44		3,010,292		42,619			1.87
Total interest-bearing liabilities	17,832,369		69,085			0.51		17,070,373		88,320			0.69
Noninterest-bearing liabilities	189,001							213,196
Total liabilities	18,021,370							17,283,569

Preferred Stock	151,649							28,939
Common shareholders' equity	1,983,784							1,888,413
Webster Financial Corp. shareholders' equity	2,135,433							1,917,352
Total liabilities and equity	$	20,156,803						$	19,200,921
Tax-equivalent net interest income			452,915							443,907
Less: tax equivalent adjustments			(10,071		)					(11,271		)
Net interest income			$	442,844						$	432,636
Net interest margin						3.24	%						3.32	%

(1)On a fully tax-equivalent basis.

(2)Average balances and yields of securities available for sale are based upon the historical amortized cost.

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Net Interest Income

Net interest income is the difference between interest income on earning assets, such as loans and securities, and interest expense on liabilities, such as deposits and borrowings, which are used to fund those assets. Net interest income is the Company's largest source of revenue, representing 75.1% of total revenue for the nine months ended September 30, 2013. Net interest margin is the ratio of taxable-equivalent net interest income to average earning assets for the period. The level of interest rates and the volume and mix of interest-earning assets and interest-bearing liabilities impact net interest income and net interest margin. Since net interest income is affected by changes in interest rates, loan and deposit pricing strategies, competitive conditions, the volume and mix of interest-earning assets and interest-bearing liabilities, as well as the level of non-performing assets, Webster manages the risk of changes in interest rates on its net interest income through an Asset/Liability Management Committee ("ALCO") and through related interest rate risk monitoring and management policies. Four main tools are used for managing interest rate risk: (1) the size and duration of the investment portfolio, (2) the size, duration and credit risk of the wholesale funding portfolio, (3) off-balance sheet interest rate contracts and (4) the pricing and structure of loans and deposits. ALCO meets at least monthly to make decisions on the investment and funding portfolios based on the economic outlook, the Committee’s interest rate expectations, the risk position and other factors. See the “Asset/Liability Management and Market Risk” section for further discussion of Webster’s interest rate risk position.

The following table describes the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have impacted interest income and interest expense during the periods indicated. Information is provided in each category with respect to the impact attributable to changes in volume (change in volume multiplied by prior rate), changes attributable to rates (change in rates multiplied by prior volume) and the total net change. The change attributable to the combined impact of volume and rate has been allocated proportionately to the change due to volume and the change due to rate. The table below is based upon reported net interest income.



	Three months ended September 30,									Nine months ended September 30,
	2013 vs. 2012 Increase (decrease) due to									2013 vs. 2012 Increase (decrease) due to
(In thousands)	Rate			Volume			Total			Rate			Volume		Total
Interest on interest-earning assets:
Loans and leases	$	(4,915	)	$	7,212		$	2,297		$	(17,959	)	$	20,917	$	2,958
Loans held for sale	62			(144		)	(82		)	(242		)	193		(49		)
Investment securities	(3,428		)	751			(2,677		)	(15,228		)	3,293		(11,935		)
Total interest income	$	(8,281	)	$	7,819		$	(462	)	$	(33,429	)	$	24,403	$	(9,026	)
Interest on interest-bearing liabilities:
Deposits	$	(4,225	)	$	590		$	(3,635	)	$	(12,121	)	$	2,202	$	(9,919	)
Borrowings	(2,185		)	261			(1,924		)	(9,956		)	641		(9,315		)
Total interest expense	$	(6,410	)	$	851		$	(5,559	)	$	(22,077	)	$	2,843	$	(19,234	)
Net change in net interest income	$	(1,871	)	$	6,968		$	5,097		$	(11,352	)	$	21,560	$	10,208

Net interest income totaled $150.0 million for the three months ended September 30, 2013 compared to $144.9 million for the three months ended September 30, 2012, an increase of $5.1 million. The increase in net interest income during the three months ended September 30, 2013 was primarily related to an increase in average interest-earning assets, partially offset by declining reinvestment spreads on earning assets. Average interest-earning assets during the three months ended September 30, 2013 increased $764 million compared to the three months ended September 30, 2012. The net interest margin decreased 5 basis points from 3.28% for the three months ended September 30, 2012 to 3.23% for the three months ended September 30, 2013. The decrease in net interest margin is due to a greater decline in the yield of interest-earning assets than the decline in cost on interest-bearing liabilities, primarily due to growth in the average investment portfolio at lower yields and lower yields in the loan and lease portfolio, partially offset by a decline in the cost of deposits and borrowings. The average yield on interest-earning assets decreased 20 basis points from 3.88% for the three months ended September 30, 2012 to 3.68% for the three months ended September 30, 2013. The average yield on interest-earning assets is primarily impacted by changes in market interest rates as well as changes in the volume and relative mix of interest-earning assets. Market interest rates have remained at historically low levels during the reported periods.

Net interest income totaled $442.8 million for the nine months ended September 30, 2013 compared to $432.6 million for the nine months ended September 30, 2012, an increase of $10.2 million. The increase in net interest income during the nine months ended September 30, 2013 was primarily related to an increase in average interest-earning assets, partially offset by declining reinvestment spreads on earning assets. Average interest-earning assets during the nine months ended September 30, 2013 increased

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$835 million compared to the nine months ended September 30, 2012. The net interest margin decreased 8 basis points from 3.32% for the nine months ended September 30, 2012 to 3.24% for the nine months ended September 30, 2013. The decrease in net interest margin is due to a greater decline in the yield of interest-earning assets than the decline in cost on interest-bearing liabilities, primarily due to growth in the average investment portfolio at lower yields and lower yields in the loan and lease portfolio, partially offset by a decline in the cost of deposits and borrowings. The average yield on interest-earning assets decreased 25 basis points from 3.98% for the nine months ended September 30, 2012 to 3.73% for the nine months ended September 30, 2013. The average yield on interest-earning assets is primarily impacted by changes in market interest rates as well as changes in the volume and relative mix of interest-earning assets. Market interest rates have remained at historically low levels during the reported periods.

Average loans and leases increased $695.1 million during the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012. The loan and lease portfolio yield decreased 20 basis points to 4.01% for the nine months ended September 30, 2013 and comprised 65.1% of the average interest-earning assets at September 30, 2013, compared to the loan and lease portfolio yield of 4.2% for the nine months ended September 30, 2012, which comprised 64.2% of the average interest-earning assets at September 30, 2012. The decrease in the yield on the average loan and lease portfolio is due to the repayment of higher yielding loans and leases and the origination of lower yielding loans and leases in a low interest rate environment.

Average securities increased $172.4 million during the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012. The yield on investment securities decreased 38 basis points to 3.25% for the nine months ended September 30, 2013 and comprised 33.5% of average interest-earning assets at September 30, 2013, compared to the yield on investment securities of 3.63% for the nine months ended September 30, 2012, which comprised 34.1% of the average interest-earning assets at September 30, 2012. The decrease in the yield on securities is due to principal repayments and lower reinvestment rates. The growth in the securities portfolio is part of the Company's strategy to protect earnings in a protracted low rate environment.

Average total deposits increased $715.1 million during the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012. The increase is due to a $333 million increase in non-interest-bearing deposits and an increase of $382 million in interest-bearing deposits. The average cost of deposits decreased 11 basis points to 0.32% for the nine months ended September 30, 2013 from 0.43% for the nine months ended September 30, 2012. The decrease in the average cost of deposits is the result of decreased pricing offered on certain deposit products and product mix as the proportion of higher costing certificates of deposit to total interest-bearing deposits decreased to 20.2% for the nine months ended September 30, 2013 from 23.9% for the nine months ended September 30, 2012.

Average total borrowings increased $46.9 million during the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012. The increase is due to growth in loans and securities which exceeded the growth in deposits and equity. Average Federal Home Loan Bank advances increased $244.5 million which is partially offset by decreases of $211.5 million in average long-term debt and $13.9 million in securities sold under agreements to repurchase and other borrowings. The decrease in average long-term debt is due to the repayment of all the $102.6 million outstanding principal amount of Subordinated Notes on January 15, 2013 and the redemption of $136.1 million of Capital Trust Securities on July 18, 2012.

Provision for Loan and Lease Losses

Management performs a quarterly review of the loan and lease portfolio to determine the adequacy of the allowance for loan and lease losses. At September 30, 2013, the allowance for loan and lease losses totaled $157.5 million, or 1.26% of total loans and leases, compared to $177.1 million, or 1.47% of total loans and leases, at December 31, 2012.

Several factors are considered when determining the level of the allowance for loan and lease losses, including loan growth, portfolio composition, portfolio risk profile, credit performance, changes in the levels of non-performing loans and leases and changes in the economic environment. These factors, coupled with net charge-offs during the period, impact the required level of the provision for loan and lease losses. For the three and nine months ended September 30, 2013, total net charge-offs were $14.4 million and $44.1 million, respectively, compared to $17.7 million and $61.4 million for the three and nine months ended September 30, 2012, respectively.

The provision for loan and lease losses of $8.5 million and $24.5 million for the three and nine months ended September 30, 2013, respectively, increased $3.5 million and $10.5 million compared to the three and nine months ended September 30, 2012, respectively.

See the "Loan and Lease Portfolio" through “Allowance for Loan and Lease Losses Methodology” sections for further details.

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Non-Interest Income

Total non-interest income was $46.3 million and $146.8 million for the three and nine months ended September 30, 2013, respectively, a decrease of $2.2 million and an increase of $7.0 million from the comparable periods in 2012. The decrease for the three months ended September 30, 2013 is primarily attributable to a decline in mortgage banking activities and gain on sale of investment securities, while the increase for the nine months ended September 30, 2013 is primarily attributable to growth in loan related fees, wealth and investment services, increase in cash surrender value of life insurance policies, and deposit service fees.



	Three months ended September 30,				Increase (decrease)					Nine months ended September 30,				Increase (decrease)
(In thousands)	2013		2012		Amount			Percent		2013		2012		Amount			Percent
Non-Interest Income:
Deposit service fees	$	25,170	$	24,728	$	442		1.8	%	$	73,786	$	71,810	$	1,976		2.8	%
Loan related fees	5,840		4,039		1,801			44.6		15,930		12,473		3,457			27.7
Wealth and investment services	8,095		7,186		909			12.6		24,781		21,656		3,125			14.4
Mortgage banking activities	665		6,515		(5,850		)	(89.8	)	13,584		14,522		(938		)	(6.5	)
Increase in cash surrender value of life insurance policies	3,516		2,680		836			31.2		10,348		7,758		2,590			33.4
Net gain on sale of investment securities	269		810		(541		)	(66.8	)	708		3,347		(2,639		)	(78.8	)
Other income	2,702		2,521		181			7.2		7,649		8,252		(603		)	(7.3	)
Total non-interest income	$	46,257	$	48,479	$	(2,222	)	(4.6	)%	$	146,786	$	139,818	$	6,968		5.0	%

Deposit Service Fees. Deposit service fees were $25.2 million and $73.8 million for the three and nine months ended September 30, 2013, respectively, an increase of $0.4 million and $2.0 million from the comparable periods in 2012 and is primarily due an increase in cash management fees related to existing customers acquiring additional products. The increase is slightly offset by a decline in overdraft activity.

Loan Related Fees. Loan related fees were $5.8 million and $15.9 million for the three and nine months ended September 30, 2013, respectively, an increase of $1.8 million and $3.5 million from the comparable periods in 2012 due to an increase in loan service fee income, origination fee income and prepayment penalties.

Wealth and Investment Services. Wealth and investment services income was $8.1 million and $24.8 million for the three and nine months ended September 30, 2013, respectively, an increase of $0.9 million and $3.1 million from the comparable periods in 2012 primarily due to an increase in income from Webster Investment Services driven by increased cross-sell to existing customers.

Mortgage Banking Activities. Mortgage banking activities net revenue was $0.7 million and $13.6 million for the three and nine months ended September 30, 2013, respectively, a decrease of $5.9 million and $0.9 million from the comparable periods in 2012. The decrease is primarily related to a rise in interest rates beginning late in the second quarter which contributed to lower volumes of settlements of, and spreads on, loans sold in the three months ended September 30, 2013, as well as a lower pipeline of loan applications to be funded in the next period. Loan originations for sale of $157.1 million and $592.4 million for three and nine months ended September 30, 2013, respectively, compared to $207.7 million and $537.3 million from the comparable periods in 2012, are reflective of the increase in mortgage interest rates in the three months ended September 30, 2013.

Increase in Cash Surrender Value of Life Insurance Policies. Increase in cash surrender value of life insurance polices income was $3.5 million and $10.3 million for the three and nine months ended September 30, 2013, respectively, an increase of $0.8 million and $2.6 million from the comparable periods in 2012 primarily due to $100 million of additional purchases in September 2012.

Other. Other non-interest income was $2.7 million and $7.6 million for the three and nine months ended September 30, 2013, respectively, compared to $2.5 million and $8.3 million for the three and nine months ended September 30, 2012, respectively. The increase of $0.2 million for the three months ended September 30, 2013, compared to 2012, is due to positive mark-to-market adjustments on treasury derivatives as well as positive fair value adjustments to the Company's alternative investments. The decrease of $0.6 million for the nine months ended September 30, 2013, compared to 2012, is due to a write down of $1.5 million, in 2013, on a loan subsequently transferred to held for sale. This decrease was offset by positive fair value adjustments on treasury derivatives related to increased client swap activity as well as positive fair value adjustments to the Company's alternative investments for the nine months ended September 30, 2013 from the comparable period in 2012.

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Non-Interest Expense

Total non-interest expense was $122.3 million and $371.4 million for the three and nine months ended September 30, 2013, respectively, a decrease of $1.6 million and $7.5 million from the comparable periods in 2012. The decrease for the three months ended September 30, 2013 is primarily attributable to lower compensation and benefits, marketing, professional and outside services, and occupancy; while the decrease for the nine months ended September 30, 2013 is primarily attributable to lower professional and outside services, compensation and benefits, marketing, occupancy, and deposit insurance.



	Three months ended September 30,				Increase (decrease)					Nine months ended September 30,				Increase (decrease)
(In thousands)	2013		2012		Amount			Percent		2013		2012		Amount			Percent
Non-Interest Expense:
Compensation and benefits	$	64,862	$	66,126	$	(1,264	)	(1.9	)%	$	196,680	$	198,332	$	(1,652	)	(0.8	)%
Occupancy	11,994		12,462		(468		)	(3.8	)	36,710		37,922		(1,212		)	(3.2	)
Technology and equipment	14,895		15,118		(223		)	(1.5	)	45,743		46,721		(978		)	(2.1	)
Intangible assets amortization	1,242		1,384		(142		)	(10.3	)	3,726		4,178		(452		)	(10.8	)
Marketing	3,649		4,529		(880		)	(19.4	)	12,277		13,723		(1,446		)	(10.5	)
Professional and outside services	2,254		2,790		(536		)	(19.2	)	5,931		8,869		(2,938		)	(33.1	)
Deposit insurance	5,300		5,675		(375		)	(6.6	)	15,998		17,107		(1,109		)	(6.5	)
Other expense	18,085		15,803		2,282			14.4		54,355		52,027		2,328			4.5
Total non-interest expense	$	122,281	$	123,887	$	(1,606	)	(1.3	)%	$	371,420	$	378,879	$	(7,459	)	(2.0	)%

Compensation and Benefits. Compensation and benefits expense was $64.9 million and $196.7 million for the three and nine months ended September 30, 2013, respectively, a decrease of $1.3 million and $1.7 million from the comparable periods in 2012. The decrease is attributable to declines in incentive related expense and pension expense. The decrease was slightly offset by merit increases year over year coupled with increased commissions.

Occupancy. Occupancy expense was $12.0 million and $36.7 million for the three and nine months ended September 30, 2013, respectively, a decrease of $0.5 million and $1.2 million from the comparable periods in 2012, due to lower depreciation and occupancy related maintenance costs.

Technology and Equipment. Technology and equipment expense was $14.9 million and $45.7 million for the three and nine months ended September 30, 2013, respectively, a decrease of $0.2 million and $1.0 million from the comparable periods in 2012. The decrease is primarily due to a reduction in depreciation.

Marketing. Marketing expense was $3.6 million and $12.3 million for the three and nine months ended September 30, 2013, respectively, a decrease of $0.9 million and $1.4 million from the comparable periods in 2012, primarily due to utilizing more cost effective marketing channels.

Professional and outside services. Professional and outside services expense was $2.3 million and $5.9 million for the three and nine months ended September 30, 2013, respectively, a decrease of $0.5 million and $2.9 million from the comparable periods in 2012, primarily due to a decrease in consulting costs.

Deposit Insurance. Deposit insurance was $5.3 million and $16.0 million for the three and nine months ended September 30, 2013, respectively, a decrease of $0.4 million and $1.1 million from the comparable periods in 2012. The reduction of underperforming assets supported by an increase in tier 1 equity during 2013, compared to 2012 levels, resulted in a decrease to the FDIC insurance expense for the three and nine months ended September 30, 2013.

Other. Other non-interest expense was $18.1 million and $54.4 million for the three and nine months ended September 30, 2013, respectively, compared to $15.8 million and $52.0 million for the three and nine months ended September 30, 2012, respectively. The increase of $2.3 million for the three months ended September 30, 2013, compared to 2012, is due to an increase in check card expense and contract costs. The increase of $2.3 million for the nine months ended September 30, 2013, compared to 2012, is due to lower gains on the sale of OREO properties coupled with increased check card expenses and contract costs.

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Income Taxes

Webster recognized income tax expense of $18.2 million and $57.9 million with an effective tax rate of 27.7% and 29.9% for three and nine months ended September 30, 2013, respectively, compared to $19.5 million and $54.4 million with an effective tax rate of 30.2% and 30.3% for three and nine months ended September 30, 2012, respectively. The 27.7% effective tax rate for the three months ended September 30, 2013, compared to 30.2% for the three months ended September 30, 2012, reflects a $2.1 million net tax benefit specific to the quarter, compared to a net tax benefit of $0.3 million for the same period in 2012. The $2.1 million net tax benefit in the current period included a $1.7 million correction of an error applicable to prior periods identified and corrected in the current period. The remaining net tax benefit of $0.4 million included a $0.5 million benefit applicable to a reduction of the Company's estimated annual effective tax rate for 2013 primarily as a result of an increase in tax credits during the year.

As discussed above and disclosed in Note 1 - Summary of Significant Accounting Policies in the Notes to Condensed Consolidated Financial Statements contained elsewhere in this report, in the three months ended September 30, 2013 the Company recognized a $1.7 million benefit to correct an error applicable to income taxes in prior periods. The error related to the November 2008 to December 2010 period when provisions for non-deductible executive compensation associated with the U.S. Treasury's Capital Purchase Program were applicable to Webster and unintentionally overstated. The correction of the error had the effect of reducing the Company's effective tax rate for the three months ended September 30, 2013 by 2.5 percentage points from 30.2% to 27.7% and by 0.9 percentage points from 30.8% to 29.9% for the nine months ended September 30, 2013.

For more information on Webster's income taxes, including its deferred tax assets and uncertain tax positions, see Note 8 - Income Taxes in the Notes to Consolidated Financial Statements included in the Company's 2012 Form 10-K.

Business Segment Results

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

Webster’s business segment results are intended to reflect each segment as if it were a stand-alone business. Webster uses an internal profitability reporting system to generate information by operating segment, which is based on a series of management estimates and allocations regarding funds transfer pricing, the provision for loan and lease losses, non-interest expense, income taxes and equity capital. These estimates and allocations, certain of which are subjective in nature, are continually being reviewed and refined. Changes in estimates and allocations that affect the reported results of any operating segment do not affect the consolidated financial position or results of operations of Webster as a whole. The full profitability measurement reports prepared for each operating segment reflect non-GAAP reporting methodologies. The differences between the full profitability and GAAP measures are reconciled in the Corporate and Reconciling category. The 2012 business segment results have been adjusted for comparability to the 2013 segment presentation.

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The following table presents the results for Webster’s business segments and incorporates the allocation of the provision for loan and lease losses and income tax expense or benefit to each of Webster’s business segments for the periods presented:



	Three months ended September 30,					Nine months ended September 30,
(In thousands)	2013			2012^(a)		2013		2012^(a)
Net income (loss):
Commercial Banking	$	24,222		$	25,142	$	67,318	$	66,661
Community Banking	19,514			15,670		55,462		43,303
Other	4,940			3,508		12,200		9,655
Total Business Segments	48,676			44,320		134,980		119,619
Corporate and Reconciling	(1,371		)	673		815		5,552
Net income	$	47,305		$	44,993	$	135,795	$	125,171

(a) Reclassified to conform to the 2013 presentation.

The Company uses a matched maturity funding concept, also known as coterminous funds transfer pricing (“FTP”), to allocate interest income and interest expense to each business while also transferring the primary interest rate risk exposures to the Corporate and Reconciling category. The allocation process considers the specific interest rate risk and liquidity risk of financial instruments and other assets and liabilities in each line of business. The “matched maturity funding concept” considers the origination date and the earlier of the expected principal repayment date or the repricing date of a financial instrument to assign an FTP rate for loans and deposits originated each day. Loans are assigned an FTP rate for funds “used” and deposits are assigned an FTP rate for funds “provided.” From a governance perspective, this process is executed by the Company’s Financial Planning and Analysis division, and the process is overseen by the Company’s ALCO.

Webster attributes the provision for loan and lease losses to each segment based on management’s estimate of the inherent loss content in each of the specific loan and lease portfolios. Provision expense or benefit, for certain elements of risk that are not deemed specifically attributable to a business segment, such as environmental factors and provision for the consumer liquidating portfolio, is shown as other reconciling. For the three and nine months ended September 30, 2013, 125.0% and 111.6%, respectively, of the provision expense is specifically attributable to business segments.

Webster allocates a majority of non-interest expense to each business segment using a full-absorption costing process. Costs, including corporate overhead, are analyzed, pooled by process, and assigned to the appropriate business segment. Income tax expense or benefit is allocated to each business segment based on the effective income tax rate for the period shown.

Commercial Banking

The Commercial Banking segment includes middle market, asset-based lending, commercial real estate, equipment finance, and treasury and payment services, which includes government and institutional banking. Webster’s Commercial Banking group takes a relationship approach to providing lending, deposit and cash management services to middle market companies in its franchise territory. Additionally, it serves as a referral source to Private Banking and Community Banking.

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Commercial Banking Results:



	Three months ended September 30,					Nine months ended September 30,
(In thousands)	2013		2012^(a)			2013		2012^(a)
Net interest income	$	56,430	$	48,127		$	161,008	$	137,610
Provision (benefit) for loan and lease losses	7,032		(5,540		)	11,449		(10,979		)
Net interest income after provision	49,398		53,667			149,559		148,589
Non-interest income	8,818		7,191			20,537		21,365
Non-interest expense	24,647		24,823			74,068		74,320
Income before income taxes	33,569		36,035			96,028		95,634
Income tax expense	9,347		10,893			28,710		28,973
Net income	$	24,222	$	25,142		$	67,318	$	66,661

(a) Reclassified to conform to the 2013 presentation.



(In thousands)	At September 30, 2013		At December 31, 2012
Total assets	$	5,517,704	$	5,113,898
Total loans	5,455,813		5,037,307
Total deposits	3,258,152		2,633,327

Net interest income increased $8.3 million in the three months ended September 30, 2013 from the comparable period in 2012. The increase is primarily due to greater loan and deposit volumes and lower cost of funds. The provision for loan and lease losses increased $12.6 million in the three months ended September 30, 2013 from the comparable period in 2012. The change in provision is primarily the result of loan growth coupled with losses on two credits, one Commercial Real Estate and one Commercial C&I. Management deems the reserve level adequate to cover inherent losses in the Commercial Banking portfolio. Commercial Banking continues to experience improvement in asset quality with new originations and with lower levels of nonperforming and classified loans. The benefit in 2012 was the result of a greater rate of improvement in credit quality from the comparable period in 2011 as evidenced by improved risk ratings. Non-interest income increased $1.6 million in the three months ended September 30, 2013 from the comparable period in 2012, primarily due to fees generated from agent led business and other loan related fees. Non-interest expense was essentially flat in the three months ended September 30, 2013 from the comparable period in 2012.

Net interest income increased $23.4 million in the nine months ended September 30, 2013 from the comparable period in 2012. The increase is primarily due to greater loan and deposit volumes and lower cost of funds. The provision for loan and lease losses increased $22.4 million in the nine months ended September 30, 2013 from the comparable period in 2012. The change in provision is primarily the result of loan growth coupled with losses on four credits, two Commercial Real Estate and two Commercial C&I, and the sale of a Commercial Real Estate credit. Management deems the reserve level adequate to cover inherent losses in the Commercial Banking portfolio. Commercial Banking continues to experience improvement in asset quality, including lower levels of nonperforming and classified loans. The benefit in 2012 was the result of a greater rate of improvement in credit quality from the comparable period in 2011 as evidenced by the positive migration of risk ratings. Non-interest income decreased $0.8 million in the nine months ended September 30, 2013 from the comparable period in 2012, primarily due to less interest rate management services activity. Non-interest expense was essentially flat in the nine months ended September 30, 2013 from the comparable period in 2012.

Loans increased $418.5 million from December 31, 2012. The volume within the loan pipeline is improving. Loan originations in the three and nine months ended September 30, 2013 were $703.4 million and $1.7 billion, respectively, compared to $467.2 million and $1.4 billion in the three and nine months ended September 30, 2012, respectively. The increase in originations is primarily due to increased deal flow. Total deposits increased $624.8 million for the period ended September 30, 2013 compared to December 31, 2012, consistent with new business development.

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Community Banking

Community Banking serves consumer and small business customers primarily throughout southern New England and into Westchester County, New York. The business segment is comprised of the following reporting units: The Personal Bank, Business Banking, a Distribution network consisting of 169 banking centers and 308 ATMs, a Customer Care Center, and a full range of Internet and mobile banking services.

The Personal Bank includes the following consumer products: deposit and fee-based services, residential mortgages, home equity lines/loans, unsecured consumer loans, and credit cards. In addition, Webster Investment Services (“WIS”) offers investment and securities-related services, including brokerage and investment advice through a strategic partnership with LPL Financial (“LPL”). Webster has employees who are LPL registered representatives located throughout its branch network, offering customers insurance and investment products including stocks and bonds, mutual funds, annuities, and managed accounts. Brokerage and online investing services are available for customers.

At September 30, 2013, Webster had $2.5 billion of assets under administration in its strategic partnership with LPL compared to $2.3 billion at December 31, 2012. These assets are not included in the Condensed Consolidated Balance Sheets. LPL, a provider of investment and insurance programs in financial institutions' branches, is a broker dealer registered with the Securities and Exchange Commission, a registered investment advisor under federal and applicable state laws, a member of the Financial Industry Regulatory Authority (“FINRA”), and a member of the Securities Investor Protection Corporation (“SIPC”).

Business Banking offers credit, deposit and cash flow management products to business and professional service firms with annual revenues up to $10 million. This unit works to build full customer relationships through business bankers and business certified banking center managers supported by a team of customer care center bankers and industry and product specialists.

Community Banking Results:



	Three months ended September 30,				Nine months ended September 30,
(In thousands)	2013		2012^(a)		2013		2012^(a)
Net interest income	$	87,949	$	86,263	$	259,037	$	255,878
Provision for loan and lease losses	3,570		9,709		15,816		20,847
Net interest income after provision	84,379		76,554		243,221		235,031
Non-interest income	25,387		30,312		87,654		84,385
Non-interest expense	82,748		84,408		251,759		257,292
Income before income taxes	27,018		22,458		79,116		62,124
Income tax expense	7,504		6,788		23,654		18,821
Net income	$	19,514	$	15,670	$	55,462	$	43,303

(a) Reclassified to conform to the 2013 presentation.



(In thousands)	At September 30, 2013		At December 31, 2012
Total assets	$	7,703,557	$	7,708,159
Total loans	6,677,903		6,668,712
Total deposits	9,936,007		10,188,750

Net interest income increased $1.7 million in the three months ended September 30, 2013 from the comparable period in 2012. The increase is primarily a result of growth in the Business Banking loan and deposit components of the balance sheet, coupled with increases to both loan and deposit spreads. The provision for loan and lease losses decreased $6.1 million in the three months ended September 30, 2013 from the comparable period in 2012. Management deems the reserve level adequate to cover inherent losses in the Community Banking portfolio. The Business Banking, Residential and Consumer loan portfolios have shown continued improvement in levels of non-performing loans over the past year coupled with improved levels of classified loans. Accruing delinquencies decreased in business banking loans from June 30, 2013. Non-interest income decreased $4.9 million in the three months ended September 30, 2013 from the comparable period in 2012. This decrease is tied to lower mortgage loans sold in the three months ended September 30, 2013 from the comparable period in 2012, coupled with lower spreads on the loans sold in 2013. Also contributing to the decline in gain on loan sales is a lower pipeline of mortgage loans originated for sale compared to the three months ended September 30, 2012. This decreased level of loan sales and pipeline of loans originated for sale, along

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with tighter pricing in the secondary markets resulted in significantly lower gains from loan sales, totaling $0.7 million for the three months ended September 30, 2013 compared to $6.2 million for the comparable period in 2012. Non-interest expense decreased $1.7 million in the three months ended September 30, 2013 from the comparable period in 2012. The decrease is reflective of lower branch staffing costs, reduced loan workout expenses and the Company's continued focus on improving efficiencies through disciplined expense management.

Net interest income increased $3.2 million in the nine months ended September 30, 2013 from the comparable period in 2012. The increase is primarily a result of growth in the Business Banking loans, which has offset the continued decline of consumer loan balances, coupled with increases to both loan and deposit spreads. The provision for loan and lease losses decreased $5.0 million in the nine months ended September 30, 2013 from the comparable period in 2012. Management deems the reserve level adequate to cover inherent losses in the Community Banking portfolio. The Business Banking, Residential and Consumer loan portfolios have shown continued improvement in levels of non-performing loans over the past year coupled with improved levels of classified loans. Accruing delinquencies decreased in business banking loans from June 30, 2013. Non-interest income increased $3.3 million in the nine months ended September 30, 2013 from the comparable period in 2012. The increase in non-interest income is related to investment services fees and credit card fee income, which more than offset a decrease in gains from loan sales and deposit fee income from the comparable nine month period in 2012. Non-interest expense decreased $5.5 million in the nine months ended September 30, 2013 from the comparable period in 2012. The decrease is reflective of lower branch staffing costs, reduced loan workout expenses and the Company's continued focus on improving efficiencies through disciplined expense management.

Total loans increased $9.2 million for the period ended September 30, 2013, compared to December 31, 2012. The net increase in loans is related to strong Business Banking growth which offset declines in the residential mortgage and consumer loan portfolios. The decline in residential and consumer based loans is primarily due to a higher percentage of residential mortgage loans originated for sale into the secondary markets and continued prepayments of consumer loans. Loan originations in the three and nine months ended September 30, 2013 were $553.5 million and $1.8 billion, respectively, compared to $557.0 million and $1.6 billion in the three and nine months ended September 30, 2012, respectively. Total mortgage originations for the three and nine months ended September 30, 2013 decreased by $23.9 million and $73.4 million, respectively from the comparable periods in 2012. Consumer loan originations for the three and nine months ended September 30, 2013 increased by $31.6 million and $94.6 million, respectively from the comparable periods in 2012. Business Banking loan originations for the three and nine months ended September 30, 2013 decreased by $11.1 million and $9.3 million, respectively from the comparable periods in 2012.

Total deposits decreased $252.7 million for the period ended September 30, 2013 compared to December 31, 2012 primarily due to due to runoff of maturing certificates of deposit balances.

Other

Other includes HSA Bank ("HSA") and Private Banking.

HSA Bank is a bank custodian of health savings accounts. These accounts are used in conjunction with high deductible health plans offered by employers or directly to consumers.

Private Banking provides local full relationship banking that serves high net worth clients, not-for-profit organizations and business clients, for asset management, trust, loan and deposit products, and financial planning services.

Other Results:



	Three months ended September 30,					Nine months ended September 30,
(In thousands)	2013		2012^(a)			2013		2012^(a)
Net interest income	$	10,733	$	8,526		$	30,008	$	24,824
Provision (benefit) for loan and lease losses	22		(328		)	72		(668		)
Net interest income after provision	10,711		8,854			29,936		25,492
Non-interest income	8,083		7,139			24,579		21,553
Non-interest expense	11,913		10,965			37,112		33,193
Income before income taxes	6,881		5,028			17,403		13,852
Income tax expense	1,941		1,520			5,203		4,197
Net income	$	4,940	$	3,508		$	12,200	$	9,655

(a) Reclassified to conform to the 2013 presentation.

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(In thousands)	At September 30, 2013		At December 31, 2012
Total assets	$	326,049	$	282,414
Total loans	304,817		259,835
Total deposits	1,669,746		1,454,129

Net interest income increased $2.2 million in the three months ended September 30, 2013 from the comparable period in 2012. Of the $2.2 million increase, $1.9 million was due to HSA deposit growth, account growth and pricing initiatives, and $0.3 million was due to higher loan and deposit balances for Private Banking for the three months ended September 30, 2013. Non-interest income increased $0.9 million in the three months ended September 30, 2013 from the comparable period in 2012. The increase in non-interest income is primarily due to the growth of HSA deposits. Non-interest expense increased $0.9 million in the three months ended September 30, 2013 from the comparable period in 2012, primarily due to an increase in processing costs to support growth in HSA accounts and strategic headcount investments in Private Banking.

Net interest income increased $5.2 million in the nine months ended September 30, 2013 from the comparable period in 2012. Of the $5.2 million increase, $4.4 million was due to HSA deposit growth, account growth and pricing initiatives, and $0.8 million was due to higher loan and deposit balances for Private Banking for the nine months ended September 30, 2013. Non-interest income increased $3.0 million in the nine months ended September 30, 2013 from the comparable period in 2012. The increase in non-interest income is primarily due to the growth of HSA deposits. Non-interest expense increased $3.9 million in the nine months ended September 30, 2013 from the comparable period in 2012, primarily due to an increase in processing costs to support growth in HSA accounts and strategic headcount investments in Private Banking.

At September 30, 2013, HSA achieved $2.2 billion in combined HSA Deposits and Linked Brokerage Accounts. Total deposits increased $215.6 million for the period ended September 30, 2013 compared to December 31, 2012, as a result of continued growth in HSA balances. HSA had $521.1 million in linked brokerage accounts at September 30, 2013 compared to $378.7 million at December 31, 2012.

Private Banking total loans increased $45.0 million due to loan growth. Loan originations in the three and nine months ended September 30, 2013 were $44.4 million and $115.1 million, respectively, compared to $19.2 million and $58.2 million in the three and nine months ended September 30, 2012, respectively. Private Banking had approximately $1.85 billion of client assets under management and administration at September 30, 2013 compared to $1.95 billion at December 31, 2012. Adjusting for the sale of a $184.8 million non-strategic asset portfolio during three months ended September 30, 2013, assets under management and administration increased by $77.2 million from December 31, 2012.

Financial Condition

Webster had total assets of $20.6 billion at September 30, 2013 and $20.1 billion at December 31, 2012. Total loans and leases, net, of $12.3 billion, with allowance for loan and lease losses of $157.5 million at September 30, 2013, increased $468.9 million compared to total loans and leases, net, of $11.9 billion, with allowance for loan and lease losses of $177.1 million at December 31, 2012. Total deposits of $15.0 billion at September 30, 2013 increased $468.7 million compared to total deposits of $14.5 billion at December 31, 2012. Non-interest-bearing deposits increased 3.0%, while interest-bearing deposits increased 3.3% during the period. Webster’s loan-to-deposit ratio was 83.19% at September 30, 2013, compared to 82.78% at December 31, 2012 and 81.37% at September 30, 2012.

At September 30, 2013, total shareholders' equity of $2.2 billion increased $74.1 million compared to total shareholders' equity of $2.1 billion at December 31, 2012. Changes in shareholders' equity for the nine months ended September 30, 2013 consisted of an increase for net income of $135.8 million and decreases for dividends of $35.2 million to common shareholders and $8.2 million to preferred shareholders and $26.7 million of other comprehensive loss primarily related to net unrealized losses on securities available for sale. The quarterly cash dividend to common shareholders increased to $0.15 per common share on April 22, 2013 from $0.10 per common share since April 23, 2012. At September 30, 2013, the tangible common equity ratio was 7.37%, compared to 7.37% at September 30, 2012. See Note 11 - Regulatory Matters in the Notes to Condensed Consolidated Financial Statements contained elsewhere in this report for information on Webster’s regulatory capital levels and ratios.

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Investment Securities Portfolio

Webster Bank's investment securities portfolio is managed within regulatory guidelines and corporate policy, which include limitations on aspects such as concentrations in and type of investments as well as the investment possessing an investment grade rating. While there may be no statutory limit on certain categories of investments, the Office of the Comptroller of the Currency may establish an individual limit on such investments if the concentration in such investments presents a safety and soundness concern.

Webster, either directly or through Webster Bank, maintains through its Corporate Treasury Unit an investment securities portfolio that is primarily structured to provide a source of liquidity for operating needs, to generate interest income and as a means to balance interest-rate sensitivity. The portfolio is classified into two major categories: available for sale and held-to-maturity. At September 30, 2013, Webster Bank’s portfolio consisted primarily of agency MBS, agency CMOs and municipal securities in held-to-maturity and agency CMOs, agency MBS, CMBS and CLOs in available for sale. The Company's combined investment securities portfolio totaled $6.4 billion at September 30, 2013 compared to $6.2 billion at December 31, 2012, an increase of $0.2 billion. Available for sale securities increased by $57.6 million, primarily due to new purchases of agency MBS, CMBS and CLO securities. This included an increase of $244 million in floating-rate CLOs, which were purchased to reduce the duration of the portfolio. Held-to-maturity securities increased by $98.5 million, primarily due to the purchases of agency MBS replacing the cash flows received from agency MBS, agency CMOs and municipal securities. On a tax-equivalent basis, the yield in the securities portfolio for the nine months ended September 30, 2013 and 2012 was 3.25% and 3.63%, respectively.

The Company held $2.6 billion in investment securities that are in an unrealized loss position at September 30, 2013. Approximately $2.4 billion of this total had been in an unrealized loss position for less than twelve months, while the remainder, $230 million, had been in an unrealized loss position for twelve months or longer. The total unrealized loss was $93.6 million at September 30, 2013. These investment securities were evaluated by management and were determined not to be other-than-temporarily impaired. The Company does not have the intent to sell these investment securities, and it is more-likely-than-not that it will not have to sell these securities before the recovery of its cost basis. During the nine months ended September 30, 2013, there were no write-downs for other-than-temporary impairments of its available for sale securities. To the extent that credit movements and other related factors influence the fair value of investments, the Company may be required to record impairment charges for other-than-temporary impairment in future periods. At September 30, 2013, one available for sale investment security valued at $5.4 million remains in non-accruing status. For additional information on the investment securities portfolio, see Note 2 - Investment Securities in the Notes to Condensed Consolidated Financial Statements contained elsewhere in this report.

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



	At September 30, 2013
			Recognized in OCI							Not Recognized in OCI
(In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Carrying Value		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available for sale:
U.S. Treasury Bills	$	200	$	—	$	—		$	200	$	—	$	—		$	200
Agency CMOs	868,288		18,537		(1,349		)	885,476		—		—			885,476
Agency MBS	1,318,550		9,120		(34,416		)	1,293,254		—		—			1,293,254
Agency CMBS	19,988		96		—			20,084		—		—			20,084
CMBS	437,616		29,367		(1,032		)	465,951		—		—			465,951
CLOs	333,023		637		(1,126		)	332,534		—		—			332,534
Pooled trust preferred securities ⁽¹⁾	36,581		—		(6,617		)	29,964		—		—			29,964
Single issuer trust preferred securities	51,311		—		(8,009		)	43,302		—		—			43,302
Corporate debt	109,529		4,089		—			113,618		—		—			113,618
Equity securities-financial institutions ⁽²⁾	6,307		3,082		—			9,389		—		—			9,389
Total available for sale	$	3,181,393	$	64,928	$	(52,549	)	$	3,193,772	$	—	$	—		$	3,193,772
Held-to-maturity:
Agency CMOs	$	368,980	$	—	$	—		$	368,980	$	11,590	$	(492	)	$	380,078
Agency MBS	2,095,513		—		—			2,095,513		48,495		(35,832		)	2,108,176
Municipal bonds and notes	466,084		—		—			466,084		14,135		(743		)	479,476
CMBS	265,727		—		—			265,727		9,272		(4,028		)	270,971
Private Label MBS	9,695		—		—			9,695		224		—			9,919
Total held-to-maturity	$	3,205,999	$	—	$	—		$	3,205,999	$	83,716	$	(41,095	)	$	3,248,620

Total investment securities	$	6,387,392	$	64,928	$	(52,549	)	$	6,399,771	$	83,716	$	(41,095	)	$	6,442,392



	At December 31, 2012
			Recognized in OCI							Not Recognized in OCI
(In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Carrying Value		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available for sale:
U.S. Treasury Bills	$	200	$	—	$	—		$	200	$	—	$	—		$	200
Agency CMOs	1,284,126		25,972		(92		)	1,310,006		—		—			1,310,006
Agency MBS	1,121,941		21,437		(1,098		)	1,142,280		—		—			1,142,280
CMBS	359,438		42,086		(3,493		)	398,031		—		—			398,031
CLOs	88,765		—		(225		)	88,540		—		—			88,540
Pooled trust preferred securities ⁽¹⁾	46,018		—		(19,811		)	26,207		—		—			26,207
Single issuer trust preferred securities	51,181		—		(6,766		)	44,415		—		—			44,415
Corporate Debt	111,281		6,918		—			118,199		—		—			118,199
Equity securities-financial institutions ⁽²⁾	6,232		2,054		(4		)	8,282		—		—			8,282
Total available for sale	$	3,069,182	$	98,467	$	(31,489	)	$	3,136,160	$	—	$	—		$	3,136,160
Held-to-maturity:
Agency CMOs	500,369		—		—			500,369		16,643		(8		)	517,004
Agency MBS	1,833,677		—		—			1,833,677		88,082		(474		)	1,921,285
Municipal bonds and notes	559,131		—		—			559,131		34,366		(110		)	593,387
CMBS	199,810		—		—			199,810		18,324		—			218,134
Private Label MBS	14,542		—		—			14,542		366		—			14,908
Total held-to-maturity	$	3,107,529	$	—	$	—		$	3,107,529	$	157,781	$	(592	)	$	3,264,718

Total investment securities	$	6,176,711	$	98,467	$	(31,489	)	$	6,243,689	$	157,781	$	(592	)	$	6,400,878

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(1)	Amortized cost is net of $9.4 million and $10.5 million of credit related other-than-temporary impairment at September 30, 2013 and December 31, 2012, respectively.


(2)	Amortized cost is net of $21.3 million of other-than-temporary impairment at September 30, 2013 and December 31, 2012.

During the first nine months of 2013, the Federal Reserve maintained the federal funds rate flat, at or below 0.25%, in response to the economic environment. Concerns about slow economic growth and low inflation in the U.S. along with additional monetary policy accommodation by the Federal Reserve with a policy known as Quantitative Easing 3 or ("QE3") kept market yields lower during the nine months ended September 30, 2013. Credit spreads generally tightened as the prospects for a sustained low interest rate environment drove investors to take more credit risk. Market interest rates rose in May and June due to the possible removal of some of the Federal Reserve's QE3 policy earlier than expected with the ten year treasury ending the quarter at 2.62%. This rise in interest rates was generally negative for longer duration investments in the portfolio.

Webster Bank has the ability to use the investment portfolio, as well as interest-rate financial instruments within internal policy guidelines, to hedge and manage interest-rate risk as part of its asset/liability strategy. See Note 13 - Derivative Financial Instruments in the Notes to Condensed Consolidated Financial Statements contained elsewhere in this report for additional information concerning derivative financial instruments.

Loan and Lease Portfolio

The table below provides the Company's loan and lease portfolio composition:



	At September 30, 2013			At December 31, 2012
(Dollars in thousands)	Amount		%	Amount		%
Residential:
1-4 family	$	3,301,083	26.5	$	3,246,586	26.9
Construction	42,340		0.3	39,359		0.3
Total residential	3,343,423		26.8	3,285,945		27.2
Consumer:
Home equity loans	2,352,258		18.9	2,448,207		20.4
Liquidating portfolio	108,470		0.9	121,875		1.0
Other consumer	55,437		0.4	43,672		0.4
Total consumer	2,516,165		20.2	2,613,754		21.8
Commercial:
Commercial non-mortgage	2,583,520		20.7	2,409,816		20.0
Asset-based loans	613,456		4.9	505,425		4.2
Total commercial	3,196,976		25.6	2,915,241		24.2
Commercial real estate:
Commercial real estate	2,800,814		22.4	2,644,229		22.0
Commercial construction	161,605		1.3	114,309		1.0
Residential development	24,593		0.2	27,761		0.2
Total commercial real estate	2,987,012		23.9	2,786,299		23.2
Equipment financing loans and leases	421,207		3.4	414,783		3.4
Net unamortized premiums	5,615		—	6,254		0.1
Net deferred costs	7,567		0.1	6,420		0.1
Total loans and leases	$	12,477,965	100.0	$	12,028,696	100.0
Accrued interest receivable	36,512			35,360
Total recorded investment in loans and leases	$	12,514,477		$	12,064,056

Total residential loans were $3.3 billion at September 30, 2013, an increase of $57.5 million from December 31, 2012. The increase in the residential portfolio reflects originations, primarily jumbo and conventional adjustable rate mortgages, outpacing loan payoffs and payments during the nine months ended September 30, 2013. In line with balance sheet strategies since the second half of 2012, originations of conventional fixed rate products are more frequently sold into the secondary markets.

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Total consumer loans were $2.5 billion at September 30, 2013, a decrease of $97.6 million from December 31, 2012. The decrease is primarily due to high levels of loan prepayments outpacing loan originations and line advances in the continuing portfolio and a reduction of $13.4 million in the liquidating consumer portfolio as a result of payoff and payments coupled with charge-offs taken during the nine months ended September 30, 2013.

Total commercial loans were $3.2 billion at September 30, 2013, an increase of $281.7 million from December 31, 2012. The growth in commercial loans reflects the impact of fundings primarily related to new originations of $1.0 billion in commercial non-mortgage for the nine months ended September 30, 2013. Asset-based loans increased $108.0 million from December 31, 2012, reflective of $149.2 million in originations during the nine months ended September 30, 2013.

Commercial real estate loans were $3.0 billion at September 30, 2013, an increase of $200.7 million from December 31, 2012 as a result of the impact of fundings on existing lines and new originations of $662.9 million during the nine months ended September 30, 2013.

Equipment financing loans and leases were $421.2 million at September 30, 2013, an increase of $6.4 million from December 31, 2012. The increase primarily reflects originations of $161.4 million for the nine months ended September 30, 2013 outpacing payments and payoffs.

Commercial Loans with Interest Reserves

At September 30, 2013 and December 31, 2012, there were 17 and 12, respectively, construction-related loans employing bank-funded interest reserves. Such reserves are established at the time of loan origination. The decision to establish a loan-funded interest reserve is made during the underwriting process and considers the feasibility of the project, the creditworthiness and expertise of the borrower, and the debt coverage provided by the real estate and other pledged collateral. The loans had outstanding balances of $90.6 million and $50.8 million at September 30, 2013 and December 31, 2012, respectively. Contractually committed interest reserves for this loan type totaled $3.1 million and $5.0 million at September 30, 2013 and December 31, 2012, respectively. All of the 17 loans are performing under the original terms as of September 30, 2013.

It is the Company’s policy to recognize income for this interest component as long as the project is progressing as agreed and if there has been no material deterioration in the financial standing of the borrower or the underlying project. A project is subject to on-site inspections, as provided for in the loan agreement, throughout the life of the project. Inspections and reviews are performed upon a request for funding, which typically occurs every four to eight weeks. If there is a monetary loan default, the Company will likely cease any interest accrual. At September 30, 2013 and December 31, 2012, there were no situations where additional interest reserves were advanced to keep a loan from becoming non-performing.

Asset Quality

Management strives to maintain asset quality within established risk tolerance levels through its underwriting standards, servicing and management of loans and leases. Non-performing assets, loan and lease delinquency and credit loss levels are considered to be key measures of asset quality.

The key asset quality ratios that management monitors are as follows:



	At September 30, 2013		At December 31, 2012
Non-performing loans and leases as a percentage of total loans and leases	1.42	%	1.62	%
Non-performing assets as a percentage of:
Total assets	0.90	%	0.98	%
Total loans and leases plus OREO	1.49	%	1.65	%
Net charge-offs as a percentage of average loans and leases ⁽¹⁾	0.48	%	0.68	%
Allowance for loan and lease losses as a percentage of total loans and leases	1.26	%	1.47	%
Allowance for loan and lease losses as a percentage of non-performing loans and leases	88.73	%	90.93	%
Ratio of allowance for loan and lease losses to net charge-offs ⁽¹⁾	2.68x		2.28x

(1) Calculated for the September 30, 2013 period based on year to date net charge-offs, annualized.

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Non-performing Assets

The following table provides additional information regarding Webster's lending-related non-performing assets:



	At September 30, 2013			At December 31, 2012
(Dollars in thousands)	Amount ⁽¹⁾		% ⁽²⁾	Amount ⁽¹⁾		% ⁽²⁾
Loans and leases:
Residential:
1-4 family	$	85,718	2.60	$	94,723	2.90
Construction	381		0.90	817		2.08
Total residential	86,099		2.58	95,540		2.91
Consumer:
Home equity loans	45,408		1.93	49,402		2.02
Liquidating portfolio - home equity loans	6,517		6.01	8,133		6.67
Other consumer	179		0.32	135		0.31
Total consumer	52,104		2.07	57,670		2.21
Commercial:
Commercial non-mortgage	17,471		0.68	17,538		0.73
Commercial real estate:
Commercial real estate	15,850		0.57	15,634		0.59
Commercial construction	49		0.03	49		0.04
Residential development	4,316		17.6	5,043		18.2
Total commercial real estate	20,215		0.68	20,726		0.74
Equipment financing loans and leases	1,669		0.40	3,325		0.80
Total non-performing loans and leases⁽³⁾	$	177,558	1.42	$	194,799	1.62
Deferred costs and unamortized premiums	320			351
Total recorded investment in non-performing loans and leases	$	177,878		$	195,150

Total non-performing loans and leases ⁽³⁾	$	177,558		$	194,799
Foreclosed and repossessed assets:
Residential and consumer	4,087			2,659
Commercial	3,921			723
Total foreclosed and repossessed assets	$	8,008		$	3,382
Total non-performing assets ⁽⁴⁾	$	185,566		$	198,181


(1)	Balances by class exclude the impact of net deferred costs and unamortized premiums.


(2)	Represents the principal balance of non-performing loans and leases as a percentage of the outstanding principal balance within the comparable loan and lease category. The percentage excludes the impact of deferred costs and unamortized premiums.


(3)	Includes non-accrual restructured loans and leases of $110.8 million at September 30, 2013 and $115.5 million at December 31, 2012.


(4)	Excludes one non-accrual available for sale security of $5.4 million at September 30, 2013 and $3.1 million at December 31, 2012.

Webster’s policy is that residential and consumer loans 90 or more days past due are placed on non-accrual status. Residential and consumer loans for which the borrower has been discharged under Chapter 7 bankruptcy are considered collateral dependent TDRs and thus impaired at the date of discharge and placed on non-accrual status. Commercial and commercial real estate loans and equipment financing leases are subject to a detailed review by the Company’s credit risk team when payment is uncertain and a specific determination is made to put a loan or lease on non-accrual status. There are, on occasion, circumstances that cause commercial loans to be placed in the 90 days past due and accruing category, for example, loans that are considered to be well secured and in the process of collection or renewal. See “Delinquent Loans” contained elsewhere within this section for further information concerning loans past due 90 days and still accruing. See Note 1-Summary of Significant Accounting Policies in the Notes to Condensed Consolidated Financial Statements contained elsewhere in this report for information on the Company's non-accrual policy.

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Interest on non-accrual loans at September 30, 2013 and 2012 that would have been recorded as additional interest income for the three and nine months ended September 30, 2013 and 2012 had the loans been current in accordance with their original terms approximated $3.5 million and $10.9 million and $4.7 million and $10.6 million, respectively.

The following table provides detail of non-performing loan and lease activity:



	Nine months ended September 30,
(In thousands)	2013			2012
Non-performing loans and leases, beginning of period	$	194,799		$	188,079
Additions	118,215			160,565
Paydowns/draws on existing non-performing loans and leases, net	(80,973		)	(104,016		)
Charge-offs	(44,496		)	(76,600		)
Other reductions	(9,987		)	(5,416		)
Non-performing loans and leases, end of period ⁽¹⁾	$	177,558		$	162,612

(1)

Included in non-performing loans and leases, end of period, as of September 30, 2013 are $50.5 million of consumer and residential loans where the borrowers' obligations have been discharged in bankruptcy. These loans are reported in accordance with a recent regulatory interpretation of GAAP, which requires a loan discharged under Chapter 7 bankruptcy during the quarter and not reaffirmed by the borrower to be considered a TDR, regardless of delinquency status.

Impaired Loans and Leases

Loans are considered impaired when, based on current information and events, it is probable the Company will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. Impairment is evaluated on a pooled basis for smaller-balance loans of a similar nature, primarily for residential and consumer loans. Consumer and residential loans for which the borrower has been discharged in Chapter 7 bankruptcy are considered collateral dependent impaired loans at the date of discharge. Commercial, commercial real estate and equipment financing loans and leases over a specific dollar amount, risk rated substandard or worse and non-accruing, and all troubled debt restructurings are evaluated individually for impairment. Impairment may be evaluated at the present value of estimated future cash flows using the original interest rate of the loan or at the fair value of collateral less estimated selling costs. To the extent that an impaired loan or lease balance is collateral dependent, the Company determines the fair value of the collateral.

For residential and consumer collateral dependent loans, if the loan value is in excess of $250,000, a third-party appraisal is obtained, and if the loan value is under $250,000, internal valuation methods are performed. Fair value of the collateral for residential and consumer collateral dependent loans is reevaluated every six months. Fair value is reassessed, with any excess amount charged off for all consumer loans that reach 180 days past due for compliance with Federal Financial Institutions Examination Council guidelines. For commercial, commercial real estate and equipment financing collateral dependent loans and leases, Webster's impairment process requires the Company to determine the fair value of the collateral by obtaining a third-party appraisal or asset valuation, an interim valuation analysis, blue book reference, or other internal methods. Fair value of the collateral for commercial loans is reevaluated on a quarterly basis. Whenever the Company has a third-party real estate appraisal performed by independent licensed appraisers, a licensed in-house appraisal officer or qualified reviewer will review these appraisals for compliance with the Financial Institutions Reform Recovery and Enforcement Act and the Uniform Standards of Professional Appraisal Practice.

Any fair value shortfall is recorded as an impairment reserve against the allowance for loan and lease losses. Subsequent to an appraisal or other fair value estimate, should reliable information come to management's attention that the value has declined further, additional impairment may be recorded to reflect the particular situation, thereby increasing the allowance for loan and lease losses. Any impaired loan for which no specific valuation allowance was necessary at September 30, 2013 and December 31, 2012 is the result of either sufficient cash flow or sufficient collateral coverage, or previous charge-off amounts that reduced the book value of the loan to an amount equal to or below the current fair value of the collateral.

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At September 30, 2013, there were 1,850 impaired loans and leases with a recorded investment balance of $383.0 million, which included loans and leases of $242.6 million with an impairment allowance of $23.3 million. There were loans and leases of $248.5 million measured using the present value of expected cash flows and $134.5 million measured using the fair value of associated collateral. Approximately 34.6% of the $134.5 million of the collateral dependent loans and leases at September 30, 2013 relied on current third-party appraisals to assist in measuring impairment. At December 31, 2012, there were 1,932 impaired loans and leases with a recorded investment balance of $414.3 million, which included loans and leases of $261.1 million with an impairment allowance of $27.4 million. There were loans and leases of $293.7 million measured using the present value of expected cash flows and $120.6 million measured using the fair value of associated collateral. Approximately 35.6% of the $120.6 million of the collateral dependent loans and leases at December 31, 2012 relied on current third-party appraisals to assist in measuring impairment.

Troubled Debt Restructurings

A modified loan is considered a TDR when two conditions are met: (1) the borrower is experiencing financial difficulties and (2) the modification constitutes a concession. Modified terms are dependent upon the financial position and needs of the individual borrower. The Company considers all aspects of the restructuring in determining whether a concession has been granted, including the debtor's ability to access market rate funds. In general, a concession exists when the modified terms of the loan are more attractive to the borrower than standard market terms. The Company does not employ modification programs for temporary or trial periods. The most common types of modifications include covenant modifications, forbearance and/or other concessions. If the modification agreement is violated, the loan is reevaluated to determine if it should be handled by the Company’s Restructuring and Recovery group for resolution, which may result in foreclosure. Loans for which the borrower has been discharged under Chapter 7 bankruptcy are considered collateral dependent TDRs and, thus, impaired at the date of discharge and charged down to the fair value of collateral less cost to sell.

The Company’s policy is to place all consumer loan TDRs on non-accrual status for a minimum period of six months. Commercial TDRs are evaluated on a case-by-case basis for determination of whether or not to place on non-accrual status. Loans qualify for return to accrual status once they have demonstrated performance with the restructured terms of the loan agreement for a minimum of six months. Initially, all TDRs are reported as impaired. Generally, TDRs are classified as impaired loans and TDRs for the remaining life of the loan. Impaired and TDR classification may be removed if the borrower demonstrates compliance with the modified terms for a minimum of six months and through one fiscal year-end and the restructuring agreement specifies a market rate of interest equal to that which would be provided to a borrower with similar credit risk at the time of restructuring. In the limited circumstances that a loan is removed from TDR classification, it is the Company’s policy to continue to base its measure of loan impairment on the contractual terms specified by the loan agreement.

The following tables provide detail of TDR balance and activity:



(In thousands)	At September 30, 2013			At December 31, 2012
Recorded investment of TDRs:
Accrual status	$	260,786		$	288,578
Non-accrual status	110,888			115,583
Total recorded investment of TDRs	$	371,674		$	404,161

Accruing TDRs performing under modified terms more than one year	60.1		%	60.2		%
Specific reserves for TDRs included in the balance of allowance for loan and lease losses	$	23,153		$	27,317
Additional funds committed to borrowers in TDR status ⁽¹⁾	8,171			3,263

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	Nine months ended September 30,
(In thousands)	2013			2012
TDRs, beginning of period	$	404,161		$	444,312
Additions ⁽²⁾	39,782			101,481
Paydowns/draws on existing TDRs, net	(53,414		)	(30,245		)
Charge-offs post modification	(17,273		)	(33,756		)
Loan sales	—			(15,105		)
Other reductions⁽³⁾	(1,582		)	(14,224		)
TDRs, end of period	$	371,674		$	452,463


(1)	This amount may be limited by contractual rights and/or the underlying collateral supporting the loan or lease.

(2)

Included in additions for the nine months ended September 30, 2013 and 2012 are $5.8 million and $39.6 million, respectively, of consumer and residential loans where the borrowers' obligations have been discharged in bankruptcy. These loans are reported in accordance with a recent regulatory interpretation of GAAP which requires a loan discharged under Chapter 7 bankruptcy and not reaffirmed by the borrower to be considered a TDR, regardless of delinquency status.


(3)	Other reductions include change in TDR status and transfers to OREO.

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

Delinquent loans and leases

The following table sets forth information regarding over 30-day delinquent loans and leases:



	At September 30, 2013			At December 31, 2012
(Dollars in thousands)	Amount ⁽¹⁾		% ⁽²⁾	Amount ⁽¹⁾		% ⁽²⁾
Residential:
1-4 family	$	20,803	0.63	$	24,826	0.76
Construction	—		—	356		0.91
Consumer:
Home equity loans	15,465		0.66	24,344		0.99
Liquidating portfolio - home equity loans	2,726		2.51	3,588		2.94
Other consumer	501		0.90	516		1.18
Commercial:
Commercial non-mortgage	2,982		0.09	2,769		0.11
Commercial real estate:
Commercial real estate	547		0.02	14,710		0.56
Equipment financing loans and leases	455		0.11	1,926		0.46
Total loans and leases past due 30-89 days	43,479		0.35	73,035		0.61
Past due 90 days or more accruing:
Commercial non-mortgage	4,200		0.13	346		0.01
Commercial real estate	611		0.02	891		0.03
Total loans and leases past due 90 days and accruing	4,811			1,237
Total loans and leases over 30 days delinquent	$	48,290		$	74,272
Deferred costs and unamortized premiums	131			214
Accrued interest	624			887
Total recorded investment over 30 day delinquent loans	$	49,045		$	75,373


(1)	Past due loan and lease balances exclude non-accrual loans and leases.


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

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Past due loans were $48.3 million at September 30, 2013, a decrease of $26.0 million from December 31, 2012. The decrease was primarily driven by enhancements to Webster's consumer collection process along with some seasonality for consumer loans and the payoff of one commercial real estate loan.

Allowance for Loan and Lease Losses Methodology

The allowance for loan and lease losses and the reserve for unfunded credit commitments are maintained at a level estimated by management to provide for probable losses inherent within the loan and lease portfolio. Probable losses are estimated based upon quarterly reviews of the loan and lease portfolios, which include historic default and loss experience, specific problem loans or leases, risk rating profiles, economic conditions and other pertinent factors which, in management’s judgment, warrant current recognition in the loss estimation process. Webster’s Credit Risk Management Committee meets quarterly to review and conclude on the adequacy of the reserves and to present their recommendation to executive management.

Management considers the adequacy of the ALLL a critical accounting policy. The adequacy of the ALLL is subject to considerable assumptions and judgment used in its determination. Therefore, actual losses could differ materially from management’s estimate if actual conditions differ significantly from the assumptions utilized. These conditions include economic factors in Webster’s market and nationally, industry trends and concentrations, real estate values and trends, and the financial condition and performance of individual borrowers. While management believes the ALLL is adequate as of September 30, 2013, actual results may prove different and the differences could be significant.

Webster’s methodology for assessing the appropriateness of the ALLL includes several key elements. Problem loans and leases are analyzed for specific reserves and segregated from the portfolio. The remaining loans and leases are segmented into pools with similar type and risk characteristics. Historic portfolio performance metrics are analyzed to support the segmentation and used in the loss estimation process. Analysis of metrics includes risk ratings, historic delinquency trends, defaults and net loss trend information.

Probable losses in the portfolio are estimated by calculating formula allowances for homogeneous pools of loans and leases and for impaired loans and leases with specific reserves. The formula allowances are calculated by applying loss factors to the loan and lease pools that are based on historic default and loss rates, internal risk ratings, and other risk-based characteristics. Changes in risk ratings, and other risk factors, for both performing and non-performing loans and leases affect the calculation of the allowances. Loss factors are based on Webster’s default and loss experience, and may be adjusted for significant conditions that, in management’s judgment, affect the collectability of the portfolio as of the evaluation date. The following are considered when determining probable losses: historic loss experience, borrower and facility risk ratings, industry and borrower concentrations, collateral values, portfolio trends, accrual status and current market conditions. Back-testing is performed by comparing original estimated losses to actual observed losses, resulting in ongoing refinements.

The ALLL incorporates the range of probable outcomes as part of the loss estimation process, as well as an estimate of risk not captured in quantitative modeling and methodologies. Examples include: imprecision in loss estimate methodologies, asset quality trends, changes in portfolio characteristics and loan mix, volatility in historic loss experience, uncertainty associated with industry trends, the economy and other pertinent external factors.

The table below provides an allocation of the allowance for loan and lease losses by loan type:



	At September 30, 2013			At December 31, 2012			At September 30, 2012
(Dollars in thousands)	Amount		% ⁽¹⁾	Amount		% ⁽¹⁾	Amount		% ⁽¹⁾
Residential	$	24,303	0.73	$	29,474	0.90	$	30,264	0.92
Consumer	43,288		1.71	54,254		2.06	63,992		2.40
Commercial	44,811		1.41	46,566		1.60	44,367		1.62
Commercial real estate	30,539		1.02	30,834		1.11	29,838		1.14
Equipment financing	3,604		0.85	4,001		0.95	4,878		1.21
Unallocated	11,000		—	12,000		—	12,750		—
Total ALLL	$	157,545	1.26	$	177,129	1.47	$	186,089	1.59

(1) Percentage represents allocated allowance for loan and lease losses to total loans and leases within the comparable category. However, the allocation of a portion of the allowance to one category of loans and leases does not preclude its availability to absorb losses in other categories.

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At September 30, 2013, the allowance for loan and lease losses was $157.5 million, or 1.26% of the total loan and lease portfolio, and 88.73% of total non-performing loans and leases. This compares with an allowance of $177.1 million, or 1.47% of the total loan and lease portfolio, and 90.93% of total non-performing loans and leases at December 31, 2012. Net charge-offs for the three and nine months ended September 30, 2013 were $14.4 million and $44.1 million, respectively, consisting of $3.6 million and $8.0 million, respectively, in net charges for residential loans, $4.6 million and $18.3 million, respectively, in net charges for consumer loans, $2.8 million and $10.7 million, respectively, in net charges for commercial loans, $4.0 million and $9.4 million, respectively, in net charges for commercial real estate loans, and net recoveries of $0.7 million and $2.3 million, respectively, for equipment financing loans and leases. Net charge-offs decreased by $3.3 million and $17.3 million during the three and nine months ended September 30, 2013, respectively, compared to the three and nine months ended September 30, 2012. The decrease in net charge-off activity reflects lower levels of losses offset somewhat by lower levels of recoveries, coupled with improved portfolio performance and loan quality metrics for the three and nine months ended September 30, 2013. The decrease in the allowance for loan and lease losses year over year reflects improved portfolio quality and economic conditions across all lines of business, effectively reducing estimated probable losses.

The reserve associated with loans and leases individually evaluated for impairment at September 30, 2013, decreased $4.1 million and $7.6 million compared to December 31, 2012 and September 30, 2012, respectively. The reduction in the reserve is primarily due to the resolution of larger commercial credits through payoff or sale, offset by the addition of new commercial impaired loans.

As of September 30, 2013, the reserve allocated to the residential loan portfolio decreased $5.2 million and $6.0 million compared to December 31, 2012 and September 30, 2012, respectively. The decrease is due to the decrease in delinquent and non-performing loans and leases as well as a decrease in estimated forward-looking losses and reduced impairment levels on modified loans.

The reserve allocated to the consumer portfolio at September 30, 2013, decreased $11.0 million and $20.7 million compared to December 31, 2012 and September 30, 2012, respectively. The decrease is due to a reduction in the consumer loan balances and improved delinquency and non-accrual trends, while the forward-looking loss projection continues to decline. The general reserve excludes loans classified as TDRs.

The reserve allocated to the commercial portfolio at September 30, 2013, decreased $1.8 million and increased $0.4 million compared to December 31, 2012 and September 30, 2012, respectively. The decrease is due to improved risk profile driven primarily by loan growth, and improved classified and non-accrual trends due to payoffs and upgrades.

The reserve allocated to the commercial real estate portfolio at September 30, 2013, decreased $0.3 million and increased $0.7 million compared to December 31, 2012 and September 30, 2012, respectively. The decrease is due to the decline in classified loans due to payoffs, which improved the risk profile as well as the estimated potential loss at September 30, 2013 compared to September 30, 2012.

As of September 30, 2013, the reserve allocated to the equipment financing portfolio decreased $0.4 million and $1.3 million compared to December 31, 2012 and September 30, 2012, respectively. The decrease is based on lower outstanding balances as well as improved credit metrics. There were reductions in delinquency, non-accrual and classified loans and leases during 2013.

The unallocated portion of the ALLL represents general valuation allowances that are not allocated to a specific loan or lease portfolio. The unallocated portion of the ALLL at September 30, 2013, decreased $1.0 million and $1.8 million compared to December 31, 2012 and September 30, 2012, respectively. The reduction is primarily due to improvement in the Company’s monitoring and risk rating process combined with improved commercial and consumer related economic factors during the periods.

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Detail of activity in the Company's allowance for credit losses follows:



	Three months ended September 30,						Nine months ended September 30,
(In thousands)	2013			2012			2013			2012
Beginning balance	$	163,442		$	198,757		$	177,129		$	233,487
Provision	8,500			5,000			24,500			14,000
Charge-offs:
Residential	(3,800		)	(3,262		)	(8,848		)	(10,329		)
Consumer	(5,827		)	(9,234		)	(23,565		)	(30,634		)
Commercial	(3,245		)	(8,642		)	(13,740		)	(29,312		)
Commercial real estate	(4,069		)	(2,655		)	(10,339		)	(9,569		)
Equipment financing	(10		)	(187		)	(101		)	(986		)
Total charge-offs	(16,951		)	(23,980		)	(56,593		)	(80,830		)
Recoveries:
Residential	152			353			842			630
Consumer	1,188			1,249			5,271			6,005
Commercial	426			1,297			3,083			4,775
Commercial real estate	105			302			898			1,448
Equipment financing	683			3,111			2,415			6,574
Total recoveries	2,554			6,312			12,509			19,432
Net charge-offs	(14,397		)	(17,668		)	(44,084		)	(61,398		)
Ending balance	$	157,545		$	186,089		$	157,545		$	186,089

Reserve for unfunded credit commitments:
Beginning balance	$	4,593		$	5,463		$	5,662		$	5,449
Provision	64			—			64			259
Benefit	—			(267		)	(1,069		)	(512		)
Ending balance	$	4,657		$	5,196		$	4,657		$	5,196

A summary of net charge-offs to average outstanding loans and leases by category follows:



	Three months ended September 30,				Nine months ended September 30,
	2013		2012		2013		2012
Net charge-offs ⁽¹⁾
Residential	0.44	%	0.35	%	0.32	%	0.39	%
Consumer	0.73		1.19		0.95		1.21
Commercial	0.36		1.11		0.47		1.29
Commercial real estate	0.55		0.37		0.45		0.44
Equipment financing	(0.65	)	(2.89	)	(0.76	)	(1.73	)
Total net charge-offs to total average loans and leases	0.47	%	0.61	%	0.48	%	0.72	%

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

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Sources of Funds

The primary source of Webster Bank’s cash flows for use in lending and meeting its general operational needs are deposits. Additional sources of funds are from Federal Home Loan Bank of Boston ("FHLB") advances and other borrowings, loan and mortgage-backed securities repayments, securities sales proceeds and maturities, and earnings. While scheduled loan and securities repayments are a relatively stable source of funds, loan and investment security prepayments and deposit inflows are influenced by prevailing interest rates and local economic conditions and are inherently uncertain.

Deposits

Webster Bank offers a wide variety of deposit products for checking and savings (including: ATM and check card use, direct deposit, ACH payments, combined statements, automated mobile banking services, Internet-based banking, bank by mail as well as overdraft protection via line of credit or transfer from another deposit account) designed to meet the transactional, savings and investment needs of our consumer and business customers throughout 169 banking centers within our primary market area.

Webster manages the flow of funds in its deposit accounts and provides an assortment of accounts and rates consistent with FDIC regulations. Webster’s Retail Pricing Committee and its Commercial and Institutional Liability Pricing Committee meet regularly to determine pricing and marketing initiatives. Total deposits were $15.0 billion at September 30, 2013 compared to $14.5 billion at December 31, 2012 and $14.4 billion at September 30, 2012. Deposits have continued to increase, most significantly within the money market and health savings account classifications. See Note 6 - Deposits in the Notes to Condensed Consolidated Financial Statements contained elsewhere in this report for additional information.

Federal Home Loan Bank and Federal Reserve Bank Stock

Webster Bank is a member of the Federal Home Loan Bank System, which consists of twelve district Federal Home Loan Banks, each subject to the supervision and regulation of the Federal Housing Finance Agency. An activity-based FHLB capital stock investment is required in order for Webster Bank to access advances and other extensions of credit for liquidity and funding purposes. The FHLB capital stock investment is restricted in that there is no market for it, and it can only be redeemed by the FHLB. Webster Bank held $108.2 million of FHLB capital stock on September 30, 2013 and $104.9 million on December 31, 2012 for its membership and for outstanding advances and other extensions of credit. The FHLB most recently declared a cash dividend equal to an annual yield of 0.38% on July 25, 2013.

Additionally, Webster Bank is required to hold Federal Reserve Bank of Boston ("FRB") stock equal to 6% of its capital and surplus of which 50% is paid. The remaining 50% is subject to call when deemed necessary by the Board of Governors of the Federal Reserve System. The FRB capital stock investment is restricted in that there is no market for it, and it can only be redeemed by the FRB. At September 30, 2013, Webster Bank held $50.7 million of FRB capital stock. The FRB pays a dividend of 6% annualized.

Borrowings

Total borrowed funds were $3.2 billion at September 30, 2013 and December 31, 2012. Borrowings represented 15.5% and 16.1% of total assets at September 30, 2013 and December 31, 2012, respectively, and 16.5% of total assets at September 30, 2012. See Note 7 - Securities Sold Under Agreements To Repurchase and Other Borrowings, Note 8 - Federal Home Loan Bank Advances and Note 9 - Long-Term Debt in the Notes to Condensed Consolidated Financial Statements contained elsewhere in this report for additional information.

Liquidity

Liquidity management allows Webster to meet cash flow requirements at a reasonable cost under various operating environments. Liquidity at the holding company level and at the Webster Bank level is actively managed and reviewed in order to maintain stable, cost effective funding to promote strength in its balance sheet. Liquidity comes from a variety of cash flow sources such as operating activities including principal and interest payments on loans and investments, or financing activities including unpledged securities which can be utilized to secure funding, or sold and the Company's ability to attract new deposits. Webster has a commitment to maintain a strong, increasing base of core deposits to support growth in its loan and lease portfolio.

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Holding Company Liquidity:

Webster’s primary sources of liquidity at the holding company level are dividends from Webster Bank, investment income and net proceeds from investment sales, borrowings and capital offerings. The main uses of liquidity are the payment of principal and interest to holders of senior notes and capital securities, the payment of dividends to preferred and common shareholders, repurchases of Webster’s common stock and purchases of available for sale securities. There are certain restrictions on the payment of dividends by Webster Bank to the Company, which are described in the section captioned “Supervision and Regulation” in Item 1 as included in Webster’s 2012 Form 10-K. At September 30, 2013, there were $125.6 million of retained earnings available for the payment of dividends by Webster Bank to the holding company. Webster Bank paid the holding company $70.0 million in dividends during the nine months ended September 30, 2013.

During the nine months ended September 30, 2013, a total of 17,032 shares of common stock were repurchased at a cost of approximately $409.3 thousand. All of the repurchased shares were acquired to fund employee compensation plans.

Webster Bank Liquidity:

Webster Bank's primary source of funding is deposits, consisting of demand, checking, savings, health savings accounts, money market accounts and time deposits. The primary use of this funding is for loan portfolio growth. Webster Bank had a gross loan to total deposit ratio of 83.19% at September 30, 2013.

At September 30, 2013 and December 31, 2012, FHLB advances totaled $1.6 billion and $1.8 billion, respectively. Webster Bank had additional borrowing capacity from the FHLB of approximately $1.2 billion and $0.5 billion at September 30, 2013 and December 31, 2012, respectively. Webster Bank also had additional borrowing capacity from unused collateral at the FRB of $0.7 billion and $0.5 billion at September 30, 2013 and December 31, 2012, respectively. In addition, unpledged securities of $3.3 billion could have been used to increase borrowing capacity, either by $2.3 billion at the FHLB or by $2.8 billion at the FRB, or alternatively used to collateralize other borrowings such as repurchase agreements, at September 30, 2013.

Webster Bank is required by regulations adopted by the OCC to maintain liquidity sufficient to ensure safe and sound operations. Adequate liquidity, as assessed by the OCC, may vary from institution to institution depending on such factors as the overall asset/liability structure, market conditions, competition and the nature of the institution’s deposit and loan customers. Webster Bank exceeded all regulatory liquidity requirements at September 30, 2013.

Applicable OCC regulations require Webster Bank to satisfy certain minimum leverage and risk-based capital requirements, as a commercial bank. As an OCC regulated commercial institution, it is also subject to a minimum tangible capital requirement. At September 30, 2013, Webster Bank was in full compliance with all applicable capital requirements and exceeded the FDIC requirements for a “well capitalized” institution. See Note 11 - Regulatory Matters in the Notes to Condensed Consolidated Financial Statements contained elsewhere in this report for a further discussion of regulatory requirements applicable to Webster and Webster Bank.

The liquidity position of the Company is continuously monitored and adjustments are made to the balance between sources and uses of funds as deemed appropriate. Management is not aware of any events that are reasonably likely to have a material adverse effect on the Company’s liquidity, capital resources, or operations. In addition, management is not aware of any regulatory recommendations regarding liquidity, which if implemented would have a material adverse effect on the Company. Webster has a detailed liquidity contingency plan designed to respond to liquidity concerns in a prompt and comprehensive manner. It is designed to provide early detection of potential problems and details specific actions required to address liquidity stress scenarios.

Off-Balance Sheet Arrangements

In the normal course of operations, Webster engages in a variety of financial transactions that, in accordance with GAAP, are not recorded in the financial statements, or are recorded in amounts that differ from the notional amounts. These transactions involve to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used for general corporate purposes or for customer needs. Corporate purpose transactions are used to help manage credit, interest rate and liquidity risk or to optimize capital. Customer transactions are used to manage customers’ requests for funding. For the nine months ended September 30, 2013, Webster did not engage in any off-balance sheet transactions that would have a material effect on its financial condition.

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Asset/Liability Management and Market Risk

An effective asset/liability management process must balance the risks and rewards from both short and long-term interest rate risks in determining management strategy and action. To facilitate and manage this process, Webster has an ALCO Committee. The primary goal of ALCO is to manage interest rate risk to maximize net income and net economic value over time in changing interest rate environments subject to Board of Director approved risk limits. The Board sets limits for earnings at risk for parallel ramps in interest rates over 12 months of plus and minus 100, 200 and 300 basis points. Economic value or “equity at risk” limits are set for parallel shocks in interest rates of plus and minus 100 and 200 basis points. Based on the historic lows in short-term interest rates as of September 30, 2013, the declining interest rate scenarios for both the earnings at risk for parallel ramps and the equity as risk for parallel shocks have been temporarily suspended per ALCO policy. ALCO also regularly reviews earnings at risk scenarios for non-parallel changes in rates, as well as longer-term earnings at risk for up to four years in the future.

Management measures interest rate risk using simulation analysis to calculate earnings and equity at risk. These risk measures are quantified using simulation software from one of the leading firms in the field of asset/liability modeling. Key assumptions relate to the behavior of interest rates and spreads, prepayment speeds and the run-off of deposits. From such simulations, interest rate risk is quantified and appropriate strategies are formulated and implemented.

Earnings at risk is defined as the change in earnings (excluding provision for loan and lease losses and income tax expense) due to changes in interest rates. Interest rates are assumed to change up or down in a parallel fashion and earnings results are compared to a flat rate scenario as a base. The flat rate scenario holds the end of the period yield curve constant over the twelve month forecast horizon. Earnings simulation analysis incorporates assumptions about balance sheet changes such as asset and liability growth, loan and deposit pricing and changes to the mix of assets and liabilities. It is a measure of short-term interest rate risk. Equity at risk is defined as the change in the net economic value of assets and liabilities due to changes in interest rates compared to a base net economic value. Equity at risk analyzes sensitivity in the present value of cash flows over the expected life of existing assets, liabilities and off-balance sheet contracts. It is a measure of the long-term interest rate risk to future earnings streams embedded in the current balance sheet.

Asset sensitivity is defined as earnings or net economic value increasing compared to a base scenario when interest rates rise and decreasing when interest rates fall. In other words, assets are more sensitive to changing interest rates than liabilities and therefore re-price faster. Likewise, liability sensitivity is defined as earnings or net economic value decreasing compared to a base scenario when interest rates rise and increasing when interest rates fall.

Key assumptions underlying the present value of cash flows include the behavior of interest rates and spreads, asset prepayment speeds and attrition rates on deposits. Cash flow projections from the model are compared to market expectations for similar collateral types and adjusted based on experience with Webster Bank's own portfolio. The model's valuation results are compared to observable market prices for similar instruments whenever possible. The behavior of deposit and loan customers is studied using historical time series analysis to model future customer behavior under varying interest rate environments.

The equity at risk simulation process uses multiple interest rate paths generated by an arbitrage-free trinomial lattice term structure model. The Base Case rate scenario, against which all others are compared, uses the month-end LIBOR/Swap yield curve as a starting point to derive forward rates for future months. Using interest rate swap option volatilities as inputs, the model creates multiple rate paths for this scenario with forward rates as the mean. In shock scenarios, the starting yield curve is shocked up or down in a parallel fashion. Future rate paths are then constructed in a similar manner to the Base Case.

Cash flows for all instruments are generated using product specific prepayment models and account specific system data for properties such as maturity date, amortization type, coupon rate, repricing frequency and repricing date. The asset/liability simulation software is enhanced with a mortgage prepayment model and a Collateralized Mortgage Obligation database. Instruments with explicit options such as caps, floors, puts and calls and implicit options such as prepayment and early withdrawal ability, require such a rate and cash flow modeling approach to more accurately quantify value and risk. On the asset side, risk is impacted the most by mortgage loans and mortgage-backed securities, which can typically prepay at any time without penalty and may have embedded caps and floors. On the liability side, there is a large concentration of customers with indeterminate maturity deposits who have options to add or withdraw funds from their accounts at any time. Webster Bank also has the option to change the interest rate paid on these deposits at any time.

Webster's earnings at risk model incorporates net interest income and non-interest income and expense items, some of which vary with interest rates. These items include mortgage banking income, mortgage servicing rights, cash management fees and derivative mark-to-market adjustments.

Four main tools are used for managing interest rate risk: (1) the size and duration of the investment portfolio, (2) the size and duration of the wholesale funding portfolio, (3) off-balance sheet interest rate contracts and (4) the pricing and structure of loans

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and deposits. ALCO meets at least monthly to make decisions on the investment and funding portfolios based on the economic outlook, the Committee's interest rate expectations, the risk position and other factors. ALCO delegates pricing and product design responsibilities to individuals and sub-committees but monitors and influences their actions on a regular basis.

Various interest rate contracts, including futures and options, interest rate swaps and interest rate caps and floors can be used to manage interest rate risk. These interest rate contracts involve, to varying degrees, credit risk and interest rate risk. Credit risk is the possibility that a loss may occur if a counter party to a transaction fails to perform according to the terms of the contract. The notional amount of interest rate contracts is the amount upon which interest and other payments are based. The notional amount is not exchanged; therefore, the notional amounts should not be taken as a measure of credit risk. See Note 1 - Summary of Significant Accounting Policies and Note 13 - Derivative Financial Instruments in the Notes to Condensed Consolidated Financial Statements contained elsewhere in this report for additional information.

Certain derivative instruments, primarily forward sales of mortgage-backed securities, are utilized by Webster Bank in its efforts to manage risk of loss associated with its mortgage banking activities. Prior to closing and funds disbursement, an interest-rate lock commitment is generally extended to the borrower. During such time, Webster Bank is subject to risk that market rates of interest may change impacting pricing on loan sales. In an effort to mitigate this risk, forward delivery sales commitments are established, thereby setting the sales price.

The following table summarizes the estimated impact that gradual parallel changes in income of 100 and 200 basis points, over a twelve month period starting September 30, 2013 and December 31, 2012, might have on Webster’s net interest income ("NII") for the subsequent twelve month period.



NII	-200bp	-100bp	+100bp	+200bp
September 30, 2013	N/A	N/A	0.1%	0.5%
December 31, 2012	N/A	N/A	0.3%	1.1%

The following table summarizes the estimated impact that gradual parallel changes in interest rates of 100 and 200 basis points, over a twelve month period starting September 30, 2013 and December 31, 2012, might have on Webster’s pre-tax, pre-provision earnings ("PPNR") for the subsequent twelve month period, compared to PPNR assuming no change in interest rates.



PPNR	-200bp	-100bp	+100bp	+200bp
September 30, 2013	N/A	N/A	(0.4)%	0.2%
December 31, 2012	N/A	N/A	(0.3)%	0.3%

Interest rates are assumed to change up or down in a parallel fashion and net income results are compared to a flat rate scenario as a base. The flat rate scenario holds the end of period yield curve constant over a twelve month forecast horizon. Webster is within policy limits for all scenarios. The flat rate scenario, as of both September 30, 2013 and December 31, 2012, assumed a federal funds rate of 0.25%. NII results are less positive since year end due to a reduction in forecast prepayment speeds in the residential loan and mortgage backed securities portfolios from higher market interest rates partially offset by replacing fixed with floating rate investments. PPNR was essentially unchanged from year end due to an increase in interest rate futures contracts in 2013 which added asset sensitivity through fee income. As the federal funds rate was at 0.25% on September 30, 2013, the -100 and -200 basis point scenarios have been excluded. The interest rate risk position continues to take advantage of the moderately steep yield curve and extended period of short-term interest rates. Webster is well within policy limits for all scenarios.

Webster can also hold futures and options positions to minimize the price volatility of certain assets held as trading securities. Changes in the market value of these positions are recognized in the Condensed Consolidated Statements of Income.

The following table summarizes the estimated impact that immediate non-parallel changes in income might have on Webster’s NII for the subsequent twelve month period starting September 30, 2013 and December 31, 2012.



NII	Short End of the Yield Curve				Long End of the Yield Curve
	-100bp	-50bp	+50bp	+100bp	-100bp	-50bp	+50bp	+100bp
September 30, 2013	N/A	N/A	(1.2)%	(2.2)%	(2.9)%	(1.4)%	1.4%	2.8%
December 31, 2012	N/A	N/A	(1.2)%	(2.2)%	(4.0)%	(2.0)%	2.0%	3.9%

The following table summarizes the estimated impact that immediate non-parallel changes in interest rates might have on Webster’s PPNR for the subsequent twelve month period starting September 30, 2013 and December 31, 2012.

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PPNR	Short End of the Yield Curve						Long End of the Yield Curve
	-100bp	-50bp	+50bp		+100bp		-100bp		-50bp		+50bp		+100bp
September 30, 2013	N/A	N/A	(2.2	)%	(4.0	)%	(4.8	)%	(2.1	)%	2.1	%	4.6	%
December 31, 2012	N/A	N/A	(2.2	)%	(4.4	)%	(7.4	)%	(3.4	)%	2.7	%	5.4	%

The non-parallel scenarios are modeled with the short end of the yield curve moving up or down 50 and 100 basis points, while the long end of the yield curve remains unchanged and vice versa. The short end of the yield curve is defined as terms less than 18 months and the long end as terms of greater than 18 months. Webster's earnings generally benefit from a fall in short-term interest rates since more new and existing liabilities than assets are tied to short-term rates. The ultimate benefit Webster derives from this mismatch is dependent on the pricing elasticity of its large managed rate core deposit base and the impact of any rate floors on those deposits. An increase in short-term interest rates has the opposite effect on earnings. Webster's earnings generally benefit from a rise in long-term interest rates since more new and existing assets than liabilities are tied to long-term rates. The decrease in earnings from a fall in long-term rates is typically greater than the increase in earnings from a rise in long-term rates due to the acceleration of asset prepayment activity as rates fall. These results reflect the annualized impact to earnings of immediate rate changes. The actual impact can be uneven during the year especially in the short end scenarios where asset yields tied to Prime or LIBOR change immediately while certain deposit rate changes take more time.

The change in NII and PPNR at risk to the long end of the yield curve moving up and down is due primarily to lower forecasted residential mortgage and mortgage-backed securities prepayment speeds from higher market interest rates. Sensitivity to the short end of the yield curve was little changed for both NII and PPNR. Webster is within policy for all scenarios.

The following table summarizes the estimated economic value of assets, liabilities and off-balance sheet contracts at September 30, 2013 and December 31, 2012, and the projected change to economic values if interest rates instantaneously increase or decrease by 100 basis points.



	Book Value		Estimated Economic Value		Estimated Economic Value Change
					Estimated Economic Value Change
(Dollars in thousands)					-100 BP	+100 BP
September 30, 2013
Assets	$	20,609,554	$	20,401,779	N/A	$	(519,155	)
Liabilities	18,441,895		17,919,698		N/A	(361,992		)
Total	$	2,167,659	$	2,482,081	N/A	$	(157,163	)
Net change as % base net economic value						(6.3		)%
December 31, 2012
Assets	$	20,146,765	$	20,154,666	N/A	$	(352,358	)
Liabilities	18,053,235		17,912,452		N/A	(424,867		)
Total	$	2,093,530	$	2,242,214	N/A	$	72,509
Net change as % base net economic value						3.2		%

Changes in economic value can be best described using duration. Duration is a measure of the price sensitivity of financial instruments for small changes in interest rates. For fixed rate instruments it can also be thought of as the weighted-average expected time to receive future cash flows. For floating rate instruments it can be thought of as the weighted-average expected time until the next rate reset. The longer the duration, the greater the price sensitivity for given changes in interest rates. Floating rate instruments may have durations as short as one day and therefore have very little price sensitivity due to changes in interest rates. Increases in interest rates typically reduce the value of fixed rate assets as future discounted cash flows are worth less at higher discount rates. A liability's value decreases for the same reason in a rising rate environment. A reduction in value of a liability is a benefit, however, as this is an obligation of Webster.

Duration gap is the difference between the duration of assets and the duration of liabilities. A duration gap near zero implies that the balance sheet is matched and would exhibit no change in estimated economic value for a small change in interest rates. Webster's duration gap was 0.3 years at September 30, 2013. At December 31, 2012, the duration gap was negative 0.9 years. A negative duration gap implies that liabilities are longer than assets and therefore, they have more price sensitivity than assets and will reset their interest rates slower than assets. Consequently, Webster's net estimated economic value would increase when interest rates rise as the increased value of liabilities would more than offset the decreased value of assets. The opposite would occur when

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interest rates fall. Earnings would also generally be expected to increase when interest rates rise and decrease when rates fall over the longer term absent the effects of new business booked in the future. The change in Webster's duration gap is due to asset duration increasing from 1.6 years to 2.4 years driven primarily by lower forecast residential loan and MBS prepayment speeds and liability duration declining from 2.5 years to 2.1 years driven primarily by deposit mix change and an increase in short term borrowings.

These estimates assume that management does not take any action to mitigate any positive or negative effects from changing interest rates. The earnings and economic values estimates are subject to factors that could cause actual results to differ. Management believes that Webster's interest rate risk position at September 30, 2013 represents a reasonable level of risk given the current interest rate outlook. Management, as always, is prepared to act in the event that interest rates do change rapidly.

Impact of Inflation and Changing Prices

The Condensed Consolidated Financial Statements and related data presented herein have been prepared in accordance with U.S. generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation.

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 4. CONTROLS AND PROCEDURES

As of September 30, 2013, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including its Chief Executive Officer and its Chief Financial Officer, of the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934). Based on this evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of September 30, 2013 for recording, processing, summarizing and reporting the information the Company is required to disclose in the reports it files under the Securities Exchange Act of 1934, within the time periods specified in the SEC's rules and forms. There were no changes made in the Company’s internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

During the nine months ended September 30, 2013, there were no material changes to the risk factors as previously disclosed in Webster's Annual Report on Form 10-K for the year ended December 31, 2012.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table provides information with respect to any purchase of shares of Webster common stock made by or on behalf of Webster or any “affiliated purchaser” during the three months ended September 30, 2013:



Period	Total Number of Shares Purchased (1)	Average Price Paid Per Share		Total Number of Warrants Purchased (2)	Average Price Paid Per Warrant		Total Number of Shares Purchased as a Part of Publicly Announced Plans or Programs	Maximum Dollar Amount Available for Repurchase Under the Plans or Programs (1)
July 1-31, 2013	3,887	$	24.22	—	$	—	—	50,000,000
August 1-31, 2013	4,702	27.00		—	—		—	50,000,000
September 1-30, 2013	826	23.60		—	—		—	50,000,000
Total	9,415	$	25.55	—	$	—	—	50,000,000

(1)

The Company’s current stock repurchase program, which was reconfigured on December 6, 2012, authorized the Company to repurchase $100 million of common stock. The program will remain in effect until fully utilized or until modified, superseded or terminated. All 9,415 shares repurchased during the three months ended September 30, 2013 were repurchased outside of the repurchase program in the open market to fund equity compensation plans.


(2)	Warrants to purchase common stock at an exercise price of $18.28 per share, listed on the NYSE under the symbol “WBS WS”.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable

ITEM 5. OTHER INFORMATION

Not applicable.

ITEM 6. EXHIBITS

Table of Contents



3.1		Third Amended and Restated Certificate of Incorporation (filed as Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, filed with the SEC on May 2, 2012 and incorporated herein by reference).

3.2		Certificate of Designations establishing the rights of the Company’s 8.50% Series A Non-Cumulative Perpetual Convertible Preferred Stock (filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on June 11, 2008 and incorporated herein by reference).

3.3		Certificate of Designations establishing the rights of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series B (filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on November 24, 2008 and incorporated herein by reference).

3.4		Certificate of Designations establishing the rights of the Company’s Perpetual Participating Preferred Stock, Series C (filed as exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on July 31, 2009 and incorporated herein by reference).

3.5		Certificate of Designations establishing the rights of the Company’s Non-Voting Perpetual Participating Preferred Stock, Series D (filed as exhibit 3.2 to the Company’s Current Report on Form 8-K filed with the SEC on July 31, 2009 and incorporated herein by reference).

3.6		Certificate of Designations establishing the rights of the Company's 6.40% Series E Non-Cumulative Perpetual Preferred Stock (filed as Exhibit 3.3 to the Company's Registration Statement on Form 8-A filed with the SEC on December 4, 2012 and incorporated herein by reference).

3.7		Bylaws, as amended effective October 22, 2012 (filed as Exhibit 3.1 to the Company's Current Report on Form 8-K filed with the SEC on October 26, 2012, and incorporated herein by reference).

4.1		Deposit Agreement, dated as December 4, 2012, by and among the Company, Computershare Shareowner Services LLC, as Depository, and the Holders of Depository Receipts (filed as Exhibit 4.1 to the Company's Current Report on Form 8-A filed with the SEC on December 4, 2012 and incorporated herein by reference).

31.1		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, signed by the Company’s Chief Executive Officer.

31.2		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, signed by the Company’s Chief Financial Officer.

32.1 +		Written Statement pursuant to 18 U.S.C. § 1350, as created by section 906 of the Sarbanes-Oxley Act of 2002, signed by the Company’s Chief Executive Officer.

32.2 +		Written Statement pursuant to 18 U.S.C. § 1350, as created by section 906 of the Sarbanes-Oxley Act of 2002, signed by the Company’s Chief Financial Officer.

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definitions Linkbase Document

101.LAB		XBRL Taxonomy Extension Label Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document



+		This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



		WEBSTER FINANCIAL CORPORATION
		Registrant

Date: November 5, 2013	By:	/S/ JAMES C. SMITH
		James C. Smith
		Chairman and Chief Executive Officer

Date: November 5, 2013	By:	/S/ GLENN I. MACINNES
		Glenn I. MacInnes
		Executive Vice President and
		Chief Financial Officer
		(Principal Financial Officer)

Date: November 5, 2013	By:	/S/ GREGORY S. MADAR
		Gregory S. Madar
		Senior Vice President and
		Chief Accounting Officer
		(Principal Accounting Officer)

Table of Contents

WEBSTER FINANCIAL CORPORATION

EXHIBIT INDEX



3.1		Third Amended and Restated Certificate of Incorporation (filed as Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, filed with the SEC on May 2, 2012 and incorporated herein by reference).

3.2		Certificate of Designations establishing the rights of the Company’s 8.50% Series A Non-Cumulative Perpetual Convertible Preferred Stock (filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on June 11, 2008 and incorporated herein by reference).

3.3		Certificate of Designations establishing the rights of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series B (filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on November 24, 2008 and incorporated herein by reference).

3.4		Certificate of Designations establishing the rights of the Company’s Perpetual Participating Preferred Stock, Series C (filed as exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on July 31, 2009 and incorporated herein by reference).

3.5		Certificate of Designations establishing the rights of the Company’s Non-Voting Perpetual Participating Preferred Stock, Series D (filed as exhibit 3.2 to the Company’s Current Report on Form 8-K filed with the SEC on July 31, 2009 and incorporated herein by reference).

3.6		Certificate of Designations establishing the rights of the Company's 6.40% Series E Non-Cumulative Perpetual Preferred Stock (filed as Exhibit 3.3 to the Company's Registration Statement on Form 8-A filed with the SEC on December 4, 2012 and incorporated herein by reference).

3.7		Bylaws, as amended effective October 22, 2012 (filed as Exhibit 3.1 to the Company's Current Report on Form 8-K filed with the SEC on October 26, 2012, and incorporated herein by reference).

4.1		Deposit Agreement, dated as December 4, 2012, by and among the Company, Computershare Shareowner Services LLC, as Depository, and the Holders of Depository Receipts (filed as Exhibit 4.1 to the Company's Current Report on Form 8-A filed with the SEC on December 4, 2012 and incorporated herein by reference).

31.1		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, signed by the Company’s Chief Executive Officer.

31.2		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, signed by the Company’s Chief Financial Officer.

32.1 +		Written Statement pursuant to 18 U.S.C. § 1350, as created by section 906 of the Sarbanes-Oxley Act of 2002, signed by the Company’s Chief Executive Officer.

32.2 +		Written Statement pursuant to 18 U.S.C. § 1350, as created by section 906 of the Sarbanes-Oxley Act of 2002, signed by the Company’s Chief Financial Officer.

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definitions Linkbase Document

101.LAB		XBRL Taxonomy Extension Label Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document



+	This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.

Webster Financial - 10-Q quarterly report FY2013 Q3

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