WEBSTER
FINANCIAL
CORPORATION
2014 Annual Report
Transforming...Expanding...
Growing
MARCH 2015
Dear Shareholders,
Webster made meaningful strides along the
path to high performance in 2014 by investing
capital, resources, and energy in growth
strategies designed to create value for customers
and shareholders alike. In this letter, I’ll discuss
our progress in pursuit of our goal to be a high
performing regional bank as measured by
financial performance, growth in key customer
segments, and customer satisfaction.
Multi-year strategic investments in people
and technology have enabled Webster to
adapt rapidly to the fundamentally changed
banking environment. We’ve transformed our
Community Banking and Private Banking
models, expanded our Commercial Banking
business, and dramatically grown our health
savings account business - HSA Bank. Our
strategic choices, coupled with comprehensive
risk management and relentless expense
control, have led to strong loan growth, higher
revenue, and solid earnings. Our financial
performance as compared to our Proxy Peer
Group across key metrics sustained its steady
improvement.
In delivering our best financial results since the
onset of the Great Recession, Webster achieved
record net income. Webster now has recorded
five consecutive years of revenue growth and
positive operating leverage, the only bank in our
peer group to achieve this dual distinction.
Record total core revenue was propelled by
strong loan growth that produced record net
interest income. Commercial Banking again led
the way with record loan originations and 16%
loan growth. Though core noninterest income
was flat year-over-year due to an industrywide
slowdown in mortgage banking activity, fee
income rose in most other categories as Webster
deepened customer relationships.
Contributing importantly to our progress
has been our intense focus on efficiency. We
achieved a full-year efficiency ratio below 60%,
meeting a goal we laid out three years ago, and
we now rank as the second most efficient bank
in our peer group. Since 2010, core operating
revenue has increased 14% while core operating
expense has increased just over 1%, resulting
in a 7 percentage point improvement in the
efficiency ratio and a 10-plus percentage point
gain relative to the peer group median.
While we’ve been holding expenses relatively
flat in recent years, the underlying components
have shifted meaningfully. Investments
in automated and self-service solutions,
increasingly preferred by customers, have
enabled a rebalancing of staffing patterns. For
example, in Community Banking, the level of
staffing at banking centers is 28% lower than
in 2010, while other customer-facing revenue
producers, including mortgage bankers,
business bankers, and investment specialists,
have increased significantly. Additionally, the
enterprise risk management team has grown
nearly 40% over that period, as we continually
bolster our risk management organization,
invest in new systems, and reinforce the
compliance aspect of our culture.
The combination of revenue growth and
expense control in today’s stubbornly low
interest rate climate and rigorous regulatory
environment has made Webster sustainably
more competitive while bringing us closer to
achieving our overarching financial goal of
earning in excess of our estimated 10% cost of
equity capital (economic profit).
Turning to asset quality, favorable credit trends
drove metrics to levels not seen since 2007.
During 2014, past-due loans dropped 17%,
non-performing loans declined 19%, and net
charge-offs declined by half. Our provision and
allowance for loan losses increased as the loan
portfolio continued to grow, and we reported a
net add to the allowance in every quarter.
Taken together, these favorable factors drove
earnings per diluted share 12% higher to $2.08,
as core return on average shareholders’ equity,
a key metric, held steady at 8.70% amid rising
capital levels. Return on average tangible
common equity was 11.90%.
Investors have taken note that Webster has
consistently delivered on its promises. This
is reflected in the total market value of our
company which recently surpassed $3 billion for
the first time. Total shareholder return ranked
third among the 14 peer group banks in 2014
and ranked first over the past five years. This
outperformance may well reflect the speed with
which Webster is adapting to change.
Our Strategic Perspective
Our management system is organized around
the quest for economic profit. Financial
and strategic goals are hard-wired into our
compensation programs, which are closely
aligned with shareholder interests. Executive
compensation is largely variable, is highly
performance based, and has a sizable equity
component. A significant portion of short-
and long-term incentives are tied to return
on shareholders’ equity and total shareholder
return, including as compared to the peer
group. I encourage you to learn more about our
executive compensation program by reviewing
the Compensation Committee’s report in the
proxy statement that accompanies this letter.
In pursuing our primary goal of maximizing
economic profit over time, we rigorously
evaluate investment opportunities and deploy
capital to those businesses that we believe can
generate sustainable returns above the cost of
capital. To that end, Commercial Banking has
grown pre-provision net revenue (PPNR) at 21%
annually since 2012 and its capital allocation
has increased 24% over that same period. HSA
Bank, the other line of business recording
positive economic profit, has grown PPNR at a
similar rate with its capital allocation up nearly
40%. Because the other two lines of business,
Community Banking and Private Banking,
have not yet achieved positive economic
profit as PPNR has grown at a lower rate, their
cumulative capital allocation has remained
essentially flat.
group continues to focus on privately held,
middle market companies with greater than
$20 million of annual revenue as well as certain
industries where we have deep expertise.
Our primary focus in Community Banking
is on the mass affluent customer segment.
Given our geographic footprint as well as our
reputation for service, a specialized product
set and ever-increasing digital capabilities, we
are well-positioned to grow our mass affluent
penetration level beyond the current level of
about 45%. With HSA Bank, our movement
up-market to serve large employers and
insurance carriers has been validated and
accelerated by our recent acquisition. The
Private Banking team focuses on providing
customized solutions and advice to high net
worth families who oftentimes have an existing
Webster relationship in Commercial or Business
Banking. Across all business units, we value
relationship depth and breadth over simple
account acquisition.
Webster’s strategic choices in recent years
have made us a stronger, more profitable
institution that is poised to grow and thrive in
an increasingly competitive field. Our balance
sheet is well-positioned for a rising interest rate
environment, in part due to shifting loan mix
and deposit mix. As commercial/business loans
have grown from 45% to 56% of our portfolio
since 2010, interest rate risk has also been
mitigated as a greater percentage of our loans
carry floating or periodic interest rates.
On the liability side of the balance sheet, we
have significantly increased transaction account
balances which has extended the duration of
liabilities and reduced the level of anticipated
pricing volatility in a rising rate environment.
Asset sensitivity has increased such that we
will benefit from a rise in short term rates. Our
ample liquidity coverage ratio has benefited
from these changes, and our loan-to-deposit
ratio is below 90%.
Our disciplined approach to allocating capital
and resources by business unit will enable
us to achieve above market growth in key
customer segments. The Commercial Banking
Product and customer profitability analytics are
an increasingly important management tool,
helping us make better pricing and marketing
choices. We’re looking to gain competitive
advantage through an outsized emphasis on
digital and direct response marketing in lieu of
traditional marketing activities.
Sustaining Success in Commercial Banking
Commercial Banking’s importance to Webster
has grown dramatically in recent years. Since
2010, loans have grown at a 12.5% compound
annual rate to $6.6 billion. All five units of
Commercial Banking earned economic profit
again in 2014 through loan growth, validated
pricing discipline, sound risk management, and
expense control – all while earning regional and
national recognition for excellence in client
satisfaction from Greenwich Associates for the
third consecutive year.
We are replicating in contiguous markets
Commercial Banking’s proven model of
geographic expansion. It began with our
successful entry into Boston in 2009 and was
followed by metro New York City. More recently,
we expanded our presence in the greater
Philadelphia market by augmenting commercial
real estate lending with middle market
bankers. We have extended the model further
by establishing a commercial real estate loan
beachhead in greater Washington, D.C. We plan
to gradually bolster our presence in the newer
markets with a broader product set including
middle market, asset-based lending, equipment
finance, cash management, and government
and institutional services.
Our entry into new geographic markets follows a
methodical approach that has been time-tested
and proven effective, due in large measure to
our stable and experienced local leadership
supported by centralized credit decision-
making. We start by identifying and recruiting
top-drawer relationship-driven bankers who
value our intense customer focus, surety of
execution, and industry expertise in certain
market segments. Regional presidents with
demonstrated capabilities in the new markets
provide internal and market-facing leadership.
This approach contributes to deliberate,
responsible loan growth.
Commercial bankers also collaborate closely
with their colleagues in Private Banking,
Business Banking, Personal Banking, and HSA
Bank to leverage the Commercial Bank’s success
and deepen our “share of wallet” by bringing the
totality of Webster to the customer.
Transforming Community Banking
Community Banking has made remarkable
progress in pursuit of its transformative
strategic roadmap. The evolved model
recognizes the fundamental shift in the
economics of this business, responds to
changing customer preferences, harmonizes the
customer experience across multiple channels,
and will ultimately generate economic profit.
The roadmap calls for significant investment in
self-service channels, particularly mobile, that
consumers and businesses increasingly prefer
for their banking. Customer satisfaction is high,
and notably so in the key mass affluent segment.
Last year, a leading national researcher on
customer satisfaction ranked Webster Number
One for Online Banking in New England and
Number One in Overall Satisfaction in New
England for banks with assets greater than $10
billion.
Optimizing delivery channels
Optimization of our Banking Center network
is progressing toward our goal of smaller,
better-located, e-outfitted centers that are
more conducive to high value conversations
with customers. Banking center square footage
declined by 5% last year and by 14% since 2010
due to consolidations and relocations. Our
mobile banking platform now serves 36% of
checking account customers. Deposits in self-
service channels now account for 34% of all
deposits, while Banking Center transactions
declined by 8%, on top of a 13% decline the
prior year.
Driving Banker Productivity
As routine transactions increasingly are
conducted electronically or remotely, our
Universal Banker model provides our bankers
with tools and knowledge needed to help
customers achieve their financial goals,
and in turn to improve sales productivity.
Further improvements flow from the full
implementation of our new Webster Incentive
(WIN) program, which creates incentives for our
bankers to discover and fulfill each customer’s
needs. The Universal Banker model together
with the WIN program increased banking center
sales productivity 12% last year.
Relationship Development at the Fore
Community Banking has sharpened its
focus on key customer segments. Business
Banking, which contributes growth in loans
and deposit balances, expanded its target
market to businesses with up to $20 million in
annual revenues, thus presenting meaningful
opportunities for high-value relationship
development. In Webster Investment Services,
the number of relationships grew 6% to 34,000
households in another high-value segment
characterized by deep, long-lasting relationships,
as evidenced by an average of seven products
and services per household. In Consumer
Finance, the increasing proportion of jumbo
mortgage originations creates relationship
development opportunities, both directly and
through an expanded correspondent network.
HSA Bank: a Strategic Differentiator
You may recall that Webster first entered
the now booming field of consumer-directed
healthcare in its infancy in 2005 with an
acquisition that at the time had about $150
million of deposits. We believed even then that,
by rewarding personal responsibility, health
savings accounts would revolutionize the way
healthcare services are consumed and paid for.
Health savings accounts would not only lead to
lower costs for consumers and plan sponsors
alike, but would also improve quality of care
and broaden access to care.
Since then, HSA Bank has enjoyed a ten-year
compound growth rate in deposits of nearly
30%. Health savings accounts, are also a
valuable source of fee income from interchange
as most accountholders use debit cards to pay
for medical care. The health savings account
business has become a strategic differentiator
for Webster that will grow in importance with
the passage of time.
Multiple strategic investments have positioned
us to better serve accountholders and enhance
our long-term competitiveness. Last year we
broadened our product set to include two other
types of consumer-directed healthcare accounts
– health reimbursement arrangements and
flexible spending accounts – as well as accounts
that reimburse employees for commuter
expenses. We also have deployed an industry-
leading technology platform for healthcare
accounts in order to deliver a best-in-class
experience for our accountholders.
One notable strategic choice made in 2014 was
our agreement to acquire the health savings
account business of JPM Chase, the third largest
provider of such accounts. With the newly
acquired accounts in January 2015, HSA Bank
became the industry leader now with more
than 1.6 million accounts and over $4.5 billion
in assets under administration, including $3.5
billion in deposits. HSA Bank administers the
health savings accounts for two of the top five
health plan providers.
JPM Chase chose to sell its business to Webster
due in part to the reputation that HSA Bank
has earned in the marketplace for excellent
customer service, robust online presence, and a
broad menu of savings and investment options.
HSA Bank enables consumers, in the words of its
brand promise, to ‘own your health’ and provides
consumers, employers, and insurance carriers
an experienced, reliable partner to assist them in
managing healthcare costs. Last year, Kiplinger’s
Personal Finance magazine cited HSA Bank as
offering the best health saving account.
The field of consumer-directed healthcare, of
which health savings accounts are a major
component, is poised to continue its rapid
growth for years to come, as consumers and
employers seek effective ways to bend the
cost curve of healthcare. Being a bank is a
clear competitive advantage as employers and
accountholders consider deposit safety and a
single financial provider solution.
As I write this, HSA Bank comprises about 20%
of our deposit base. These deposits provide us
with a rapidly growing, low cost, long duration
funding for ongoing loan growth as well as
important cross sell opportunities.
Private Bank’s New Model
In 2014, Webster Private Bank completed its
shift to a new business model that implements
custom-tailored, long-term financial solutions
for high net worth customers who value
local, relationship-based service and always-
objective advice. The new model leverages our
longstanding experience in credit, financial
planning, and fiduciary administration
and significantly expands our investment
management capabilities to include global asset
classes and cost-efficient investment vehicles.
Because the credit needs of high net worth
clients can be complex and their service
expectations very high, we created a
streamlined process for handling private
banking loans, complete with a dedicated credit
function and underwriting personnel to ensure
timely loan decisioning on competitive terms.
Talent additions in business development,
credit, portfolio management, and fiduciary
services helped drive business momentum and
pipeline growth in deposits, lending, and assets
under management in the second half of the
year. Webster Private Bank is poised to grow
smartly as the bank of choice for high net worth
clients, including thousands of existing Webster
customers.
Managing Risk and Capital
Risk management is a foundational strength
and, rightfully, a source of pride at Webster. Our
culture demands heightened attention to risk
identification and compliance – every Webster
banker is a risk manager. Business line and
support group managers team with their Risk
group counterparts to calibrate risk appetite,
monitor risk scorecards and concentrations, and
support early identification and mitigation of
current and emerging risks. The Risk group is
a full partner in the strategic planning process,
and new activities are evaluated in the context
of the risk they may pose to the organization.
The Risk Committee of the Board actively
oversees our risk management activities.
We have numerous projects underway designed
to ensure continued satisfaction of rigorous
regulatory expectations, including significant
investments in Bank Secrecy Act systems,
processes and people. We have added expertise
to our information security activities and to the
selection and oversight of outsourced service
providers. Overall, approximately 15% of our
employees perform dedicated risk management
functions, a clear sign of our all-in commitment
to comprehensive risk management.
Our strong capital position, bolstered by solid
earnings, enables us to support asset growth and
provides for return of capital to shareholders
through regular cash dividends, which rose by
36% last year, and selective stock buy-backs.
The Capital Management Committee actively
models the effect of potential risks on the capital
position, including the regulatory stress test
scenarios. We seek to manage risk appetite and
capital levels in a manner that produces stable,
increasing economic profit from a fortified
capital base.
We are completing our annual Dodd-Frank
Act–required stress test submission (DFAST).
We have devoted significant internal and
consultative resources to stress test activities
with particular focus on documentation,
systems, model governance, testing, and
validation. Assumptions are actively debated
and challenged at the management and board
levels. Our primary goal is to confidently
pass the annual regulatory severely adverse
stress DFAST scenario. With an 11.4% Tier 1
common ratio , at year end we believe Webster
comfortably exceeds that target as well as fully
phased-in Basel III well capitalized targets.
Stress testing has become a valuable capital
and risk management tool.
Living Up to Our Customers
Webster is a community-focused, values-guided
organization whose nearly 3,000 bankers believe
each and every day that we make a difference
in the lives of those we serve. Our refreshed
brand promise, Living Up To You, is built on our
values and echoes our unshakable core. It brings
Webster bankers together, and sets us apart in a
competitively differentiating way that enables
us to win in the market.
Living Up To You describes our relationships
with customers, communities, and one another
as we fulfill our mission to help our customers
achieve their financial goals. Customer
satisfaction studies show that businesses and
consumers enthusiastically recommend us
because we live up to what they want their
banking experience to be.
That unwavering commitment to customers
is the asset most responsible for Webster’s
continuing success. As our mission evolves
and our vision expands, our values endure,
providing a constant reminder that our
customers are what matters most. Gone are the
days when my father would take an application
for a construction loan on the trunk of his car,
but the principles that guided him are Webster’s
bedrock today.
Webster is firmly established as a leading
regional bank. Our bankers excel in service to
customers and community. Our management
team is capable, committed, and highly
collaborative in pursuit of our ambitious goals.
Our board of directors is actively engaged in
the strategic process. We’ve made a series of
strategic choices that will add value for our
customers, deliver sustainable growth in key
segments, and maximize economic profit over
time. Our interests are inextricably aligned with
yours.
The board joins me in expressing appreciation
for your support and confidence as we continue
to progress along the path to high performance.
Sincerely,
James C. Smith
Chairman and Chief Executive Officer
2014 Business Lines Review
CORPORATE PROFILE:
Webster Financial Corporation is the holding
company for Webster Bank, National
Association, and other subsidiaries and
is regulated by the Federal Reserve Board
of Governors. Webster serves consumers,
businesses, not-for-profit organizations,
and governmental entities in Connecticut,
Massachusetts, Rhode Island, and metro New
York City with a distribution network of 164
banking centers and 314 ATMs, as well as a
full range of telephone, Internet, and mobile
banking services. In addition, Webster offers
commercial real estate, asset-based lending,
and equipment finance services regionally and
health savings accounts nationally through HSA
Bank. Webster Bank is a member of the FDIC
and is regulated by the Office of the Comptroller
of the Currency and the Bureau of Consumer
Financial Protection. At year end, Webster
Bank’s financial intermediation activities were
organized broadly around four distinct lines
of business: Commercial Banking, Community
Banking, HSA Bank, and Private Banking.
COMMERCIAL BANKING:
Commercial Banking provides lending, deposit,
and treasury and payment solutions with a
focus on building relationships with companies
primarily within our Northeast footprint having
annual revenues greater than $20 million.
Commercial Banking includes Middle Market;
Commercial Real Estate; Webster Business
Credit Corporation, our asset-based lending
subsidiary; Webster Capital Finance, our
equipment financing subsidiary; and Treasury
and Payment Solutions. Commercial Banking
posted record-breaking performance in 2014,
generating pre-provision net revenue of $173
million, a 16% increase from 2013.
Commercial Banking was the largest profit
generator among Webster’s business lines and
together with Business Banking now accounts
for more than half of Webster’s total loan
portfolio. Led by Middle Market and Commercial
Real Estate, Commercial Banking originated $2.9
billion in new loans, a 21% increase from the
previous year. At year end, Commercial Banking
had $6.6 billion in loans and $3.2 billion in
deposits.
Middle Market delivers a full array of financial
services to a diversified group of companies
with revenues greater than $20 million. By
leveraging our industry specialization and
delivering competitive products and services,
loans grew 21% to $3.0 billion while deposits
increased 38% to $1.1 billion.
Commercial Real Estate (CRE) provides
financing for the acquisition, development,
construction, or refinancing of commercial real
estate for which the property is the primary
security for the loan and income generated
from the property is the primary repayment
source. CRE has consistently had strong credit
performance and growth throughout its Boston-
to-Philadelphia marketplace. The CRE portfolio
grew 14% to $2.3 billion.
Webster Business Credit Corporation (WBCC),
headquartered in New York, N.Y., is the regional
asset-based lending subsidiary of Webster Bank
and is one of the top 25 asset-based lenders in
the U.S. WBCC builds relationships with growing
middle market companies by financing core
working capital and import financing needs
primarily with revolving credit facilities with
advance rates against accounts receivable and
inventory. Loans grew 18% to $661 million.
Webster Capital Finance (WCF) is the regional
equipment finance subsidiary of Webster
Bank. WCF offers small to mid-ticket financing
for critical equipment with specialties in
construction, transportation, environmental and
manufacturing equipment. WCF lends
primarily in the eastern half of the U.S. and in
other select markets. In 2014, loans grew 17% to
$538 million.
Treasury and Payment Solutions (TPS)
delivers a broad range of deposit, lending
and treasury services via a dedicated team of
treasury professionals and local commercial
bankers. TPS comprises Government and
loans by 65%, providing low-cost funding across
the Bank.
HSA BANK:
HSA Bank is a leading administrator of health
savings accounts based on assets under
management, with 11% total market share as
of year-end. With a focus on health savings
accounts, HSA Bank delivers HSA, HRA and
FSA administration services to employers and
individuals in all 50 states. At year end, HSA
Bank held more than 691,000 deposit accounts
and $2.6 billion in health savings account
deposits and investments, up 26% and 22%,
respectively. 2014 was HSA Bank’s highest
annual enrollment production year on record. In
the key new enrollment month of January 2015,
HSA Bank opened 220,000 new accounts, partly
reflecting the acquisition of plans formerly
administered by JPM Chase.
PRIVATE BANKING:
Private Banking provides wealth advisory,
investment management, tailored lending,
fiduciary, and banking services to high net
worth individuals and institutional clients.
In 2014, the Private Bank completed its
transformation to a new business model
that provides holistic solutions for its clients.
Loans grew 15% to $396 million, deposits
increased 3% to $211 million, and assets under
management ended the year at $1.5 billion. The
unit continued to attract experienced talent,
adding a new director of business development,
credit executive, portfolio manager and
fiduciary officer, and streamlined its loan
approval process to provide an enhanced client
experience. These developments, and expanded
partnerships within Webster, contributed
significantly to business momentum in the
second half of the year.
Institutional Banking, Cash Management Sales
and Product Management to deliver holistic
solutions to Webster’s increasingly sophisticated
business and institutional clients. We continue
to invest meaningfully in our treasury
capabilities and grew transaction deposit
accounts and cash management services
revenue by 33% and 7%, respectively.
COMMUNITY BANKING:
Community Banking serves nearly 390,000
customers including 46,000 small businesses.
The business is comprised of the following:
Personal Banking, Business Banking, and a
Distribution network consisting of Banking
Centers, ATMs, a Customer Care Center, and
a full range of on-line and mobile banking
services. Pre-provision net revenue increased
7% to $134 million. At year end, Community
Banking had $10.1 billion in deposits and $6.9
billion in loans.
Personal Banking continued to focus on
improving the customer experience by
aligning our delivery channel investments
with our customers’ growing preference to
conduct their banking using electronic and
mobile channels. Transaction deposits grew $85
million and now comprise 27% of total Personal
Bank deposits. Consumer loan balances
increased by over 2% to $5.7 billion. Overall loan
originations were down 23% versus prior year
due to the interest rate environment. Purchase
mortgage originations, an excellent source of
new relationships, increased 12%.
Business Banking loan balances grew 9%
to $1.2 billion at year end. Loan originations
increased 7% to $305 million. Total deposits
grew 7% to $1.9 billion, and transaction balances
grew over 5%. In 2014, Business Banking
leveraged specialty lending programs and
industry expertise to grow its share of affinity
and professional segments. The investment
commercial real estate portfolio grew 24%.
The SBA loan portfolio grew 15%, and Webster
was the top SBA lender in Connecticut for the
seventh consecutive year. Fee income grew
7%, as customers utilized enhanced cash flow
products. Business Banking deposits exceeded
Financial Highlights
At or for the years ended December 31,
(In thousands, except per share and ratio data)
CONSOLIDATED BALANCE SHEETS
Total assets
Loans and leases
Allowance for loan and lease losses
Investment securities
Deposits
Total shareholders’ equity
STATEMENTS OF INCOME
Net interest income
Provision for loan and lease losses
Non-interest income
Net impairment loss recognized in earnings
Non-interest income excluding impairment
Non-interest expense
Income before income tax expense
Income tax expense
Net income
NET INCOME AVAILABLE
TO COMMON SHAREHOLDERS
PER SHARE DATA
Net income per common share - diluted
Dividends declared per common share
Tangible book value per common share
Book value per common share
2014
2013
2012
$ 22,533,010
20,852,999
20,146,765
13,900,025
12,699,776
12,028,696
159,264
6,666,828
152,573
177,129
6,465,652
6,243,689
15,651,605
14,854,420
14,530,835
2,322,681
2,209,188
2,093,530
628,441
37,250
202,108
1,145
203,253
502,138
291,161
91,409
199,752
596,728
33,500
191,050
7,277
198,327
498,059
256,219
76,670
179,549
578,908
21,500
192,758
—
192,758
501,804
248,362
74,665
173,697
$ 189,196
168,746
171,237
$2.08
0.75
18.10
23.99
1.86
0.55
16.85
22.77
1.86
0.35
16.42
22.75
Weighted-average common shares-diluted
90,620
90,261
91,649
KEY PERFORMANCE RATIOS
Return on average assets
Return on average common shareholders’ equity
Net interest margin
Non-interest income as a percentage of total revenue
Tangible common equity ratio
Average shareholders’ equity to average assets
ASSET QUALITY RATIOS
Allowance for loan and lease losses/total loans
Net charge-offs/average loans
Non-performing loans and leases/total loans
Non-performing assets/total loans plus OREO
0.93 %
8.85
3.21
24.33
7.45
10.67
1.15 %
0.23
0.95
1.00
Allowance for loan and lease losses/nonperforming loans
120.73
0.89
8.45
3.26
24.25
7.49
10.61
1.20
0.47
1.28
1.35
93.65
0.90
8.97
3.32
24.98
7.15
10.06
1.47
0.68
1.62
1.65
90.93
Shareholder Information
Reports
Corporate Headquarters
Webster Financial Corporation and
Webster Bank
145 Bank Street
Waterbury, CT 06702
1-800-325-2424
WebsterBank.com
Transfer Agent and Registrar
Regular Mail:
Broadridge Corporate Issuer Solutions, Inc.
PO Box 1342
Brentwood, NY 11717
1-855-222-4926
shareholder@broadridge.com
www.shareholder.broadridge.com/webster
Registered/Overnight Mail:
Broadridge Corporate Issuer Solutions, Inc.
Attn: IWS
1155 Long Island Avenue
Edgewood, NY 11717
Dividend Reinvestment and
Stock Purchase Plan
Shareholders wishing to receive a
prospectus for the Dividend Reinvestment
and Stock Purchase Plan are invited
to write to Broadridge Corporate Issuer
Solutions, Inc. at one of the addresses
listed above.
Stock Listing Information
The common stock of Webster is traded
on the New York Stock Exchange under
the symbol “WBS.”
Investor Relations Contact:
Terrence K. Mangan
Senior Vice President,
Investor Relations
(203) 578-2202
tmangan@websterbank.com
A copy of our Annual Report on Form 10-K for the fiscal
year ended December 31, 2014, as well as our quarterly
reports, news releases, and other information may
be obtained free of charge by accessing our Investor
Relations website (www.wbst.com). For a printed copy
of our Form 10-K, please contact: Terrence K. Mangan,
Senior Vice President, Investor Relations, 145 Bank
Street, Waterbury, CT 06702. The certifications of
Webster’s Chief Executive Officer and Chief Financial
Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 are included as exhibits to our Annual
Report on Form 10-K for the fiscal year ended
December 31, 2014.
Common Stock Dividends and Market Prices
The following table shows dividends declared and the
market price per share by quarter for 2014 and 2013.
COMMON STOCK
(PER SHARE)
CASH DIVIDENDS
MARKET PRICE
DECLARED
HIGH
LOW
END OF
PERIOD
$32.53
29.14
31.54
31.06
$33.32
32.49
31.91
32.67
$26.53
27.77
28.21
28.71
$31.32
28.29
25.92
24.67
$24.64
24.53
22.04
20.81
$31.18
25.53
25.68
24.26
2014
Fourth
Third
Second
First
2013
Fourth
Third
Second
First
$0.20
0.20
0.20
0.15
$0.15
0.15
0.15
0.10
Annual Meeting
The annual meeting of shareholders of Webster
Financial Corporation will be held on April 23, 2015
at 4:00 P.M. at the Webster Bank Resource Center, 436
Slater Road, New Britain, Connecticut.
Webster Information
For more information on Webster products and
services, call 1-800-325-2424, write, or visit us at
WebsterBank.com.
Webster Financial Corporation and
Webster Bank Board of Directors
Executive Management Group
Webster Financial Corporation
James C. Smith
Chairman and Chief Executive Officer
James C. Smith
Chairman and Chief Executive Officer
William L. Atwell
Managing Director, Atwell Partners, LLC
Joseph J. Savage
President
Joel S. Becker
Chairman and Chief Executive Officer
Torrco
Glenn I. MacInnes
Executive Vice President and Chief Financial
Officer
John J. Crawford
President, Strategem, LLC
Robert A. Finkenzeller
President, Eyelet Crafters, Inc.
Elizabeth E. Flynn
Vice Chairman, Marsh, LLC
C. Michael Jacobi, CPA
President, Stable House 1, LLC
Laurence C. Morse
Managing Partner
Fairview Capital Partners, Inc.
Karen R. Osar
Retired Executive Vice President and
Chief Financial Officer
Chemtura Corporation
Mark Pettie
President, Blackthorne Associates, LLC
Joseph J. Savage*
President
Daniel H. Bley
Executive Vice President and Chief Risk Officer
John R. Ciulla
Executive Vice President,
Commercial Banking
Colin D. Eccles
Executive Vice President and
Chief Information Officer
Daniel M. FitzPatrick
Executive Vice President,
Private Banking
Bernard M. Garrigues
Executive Vice President and
Chief Human Resources Officer
Nitin J. Mhatre
Executive Vice President,
Community Banking
Dawn C. Morris
Executive Vice President and
Chief Marketing Officer
Charles W. Shivery
Former Non-Executive Chairman of the Board
Northeast Utilities
Charles L. Wilkins
Executive Vice President,
HSA Bank
*Webster Bank, N.A. Board of Directors
Harriet Munrett Wolfe, Esq.
Executive Vice President,
General Counsel and Secretary
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________________________________________________
_______________________________________________________________________________
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Fiscal
Year Ended December 31, 2014
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, Waterbury, Connecticut 06702
(Address and zip code of principal executive offices)
Registrant's telephone number, including area code: (203) 578-2202
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of exchange on which registered
Common Stock, $.01 par value
Depository Shares, Each Representing 1/1000th Interest in a Share of
6.40% Series E Non-Cumulative Perpetual Preferred Stock
Warrants (Expiring November 21, 2018)
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
______________________________________________________________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of 1933.
Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Yes
No
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.
Yes
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or
for such shorter period that the registrant was required to submit and post such files).
Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
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
Accelerated filer
Non-accelerated filer
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).
Yes
No
The aggregate market value of common stock held by non-affiliates of Webster Financial Corporation was approximately $2.8 billion, based on
the closing sale price of the common stock on the New York Stock Exchange on June 30, 2014, the last trading day of the registrant's most recently
completed second quarter.
The number of shares of common stock, par value $.01 per share, outstanding as of January 30, 2015 was 90,523,288.
Part III: Portions of the Definitive Proxy Statement for the Annual Meeting of Shareholders to be held on April 23, 2015.
Documents Incorporated by Reference
INDEX
Page No.
PART I
Item 1.
Business
Item 1A.
Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4.
Mine Safety Disclosures
PART II
Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
Item 6.
Selected Financial Data
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B. Other Information
PART III
Item 10.
Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accountant Fees and Services
PART IV
Item 15.
Exhibits and Financial Statement Schedules
SIGNATURES
EXHIBIT INDEX
1
13
18
18
18
18
19
22
23
66
67
135
135
138
138
140
141
141
141
141
142
143
i
ITEM 1. BUSINESS
Forward-Looking Statements
PART 1
This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995. For a discussion of forward-looking statements, see the section captioned “Forward-Looking Statements”
in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Company Overview
Webster Financial Corporation (collectively, with its consolidated subsidiaries, “Webster,” the “Company,” our company, we or
us), is a bank holding company and financial holding company under the Bank Holding Company Act of 1956, as amended,
headquartered in Waterbury, Connecticut and incorporated under the laws of Delaware in 1986. At December 31, 2014, Webster
Financial Corporation’s principal asset was all of the outstanding capital stock of Webster Bank, National Association (“Webster
Bank”). Webster had assets of $22.5 billion and shareholders' equity of $2.3 billion at December 31, 2014. Webster’s common
stock is traded on the New York Stock Exchange under the symbol “WBS.”
Webster, through Webster Bank and non-banking financial services subsidiaries, delivers financial services to individuals, families,
and businesses primarily from New York, N.Y. to Boston, Mass. Webster Bank provides commercial, small business, and consumer
banking, mortgage lending, financial planning, and trust and investment services through 164 banking centers, 314 ATMs, telephone
banking, mobile banking, and online banking through www.websterbank.com. Webster Bank also offers equipment financing,
commercial real estate lending, and asset-based lending across the Northeast and offers, through its HSA Bank division, health
savings account trustee and administrative services on a nationwide basis.
The core of our company's value proposition is the service delivery model that comes to life through our brand promise, “Living
Up to You,” which encapsulates how our bankers build meaningful relationships with our customers through a deeper understanding
of their lives beyond the bank. This value proposition is delivered by our bankers who are knowledgeable, are deeply committed
to the communities that we serve, know their markets well, and make decisions at the local level. The Company operates with a
local market orientation as a community-focused, values-guided regional bank. Operating objectives include acquiring and
developing high value customer relationships through sales specialists, universal bankers, marketing, and cross-sale efforts to fuel
organic growth and expand contiguously.
The Commercial Bank, which includes middle market, commercial real estate, equipment financing, asset-based lending, and
treasury and payment solutions generated $2.9 billion in loan originations during the year ended December 31, 2014, an 18.4%
increase from the prior year. For 2014, the Commercial Bank grew loans and transaction account balances by 16.5% and 34.0%
respectively. The solid year-over-year growth reflects a number of strategic initiatives leveraging a relationship-based community
model. Specifically, Webster deploys local decision making through Regional Presidents and capitalizes on the expertise of its
Relationship Managers to offer a compelling value proposition to customers and prospects. Webster has successfully deployed
this model throughout the footprint. The expansion into Metro New York in 2013 has been highly successful, attracting and
developing critical market-facing talent and generating new profitable relationships. The Treasury and Payment Solutions group
complements the relationship-based banking offered by the Commercial Bank by combining the cash management services with
automated capabilities designed to effectively meet customers’ cash management needs.
During 2014, the Company strategically reconfigured its approach to community banking with the goal of focusing primarily on
customer preferences and what matters most to them. This process has brought together our consumer banking and business
banking services and products, including deposits, investments, lending, and cash management services, under the umbrella of
Community Banking. This strategic transformation incorporates comprehensive changes including increased focus on mass affluent
consumers and businesses, banking center network optimization, and a build-out of an integrated omni-channel delivery focused
on improving the customer experience. Strategic investments in the distribution infrastructure in response to meeting customers'
changing preferences have lowered our service delivery costs while improving the customer experience as evidenced by receiving
‘Best Online Banking in New England’ recognition from J.D. Power. The Company upgraded its mobile and online banking
capabilities during 2014 and upgraded functionalities and service standards for our ATM machines. We believe that the shift to
an electronic infrastructure provides customers with more convenience while giving banking center personnel greater opportunity
to build broader, deeper relationships with customers across all lines of business. Driven by the investments in these channels,
deposit taking through electronic, self-service channels increased by 14%, while transactions processed in banking centers
decreased by 7% year over year.
1
In 2014, Business Banking recorded year-over-year loan growth of 8.7% to $1.2 billion. Business transaction deposit balances
also had year-over-year growth of 5.2% to $1.4 billion, or 73.9% of total business banking deposits. Personal Banking transaction
deposit balances grew by 3.9% to $2.24 billion. Investment Assets under administration grew by 8.7% to $2.8 billion. A newly
rolled out incentive plan for the banking center network drove increases in sales productivity by 11%, while increasing service
productivity by 5% year over year. The relationship sales model resulted in increased point-of-sale and 90-day new customer
cross-sale rates, and increased the number of products and services sold and provided across mass affluent households - a critical
element of increasing profitability of the business. A focus on non-deposit related fees, such as cash management, interest rate
derivative products, and credit cards, drove a 7% increase in Business Banking non-interest income year over year. This will
continue to be a key area of ongoing focus.
The Private Bank continued its momentum while completing the strategic transformation of its business model. During 2014,
Private Bank loans grew 15.6% and deposits increased by 2.6%, while assets under management declined by 16.5% as the result
of asset outflows as a result of our model transformation. The Private Bank also completed its recruiting of experienced senior
leadership talent in the areas of investment management, fiduciary services, and relationship management; successfully
implemented a global portfolio management offering tailored to the changing needs of its client base; and launched a new initiative
to streamline the approval and processing of loans to high net worth customers.
HSA Bank experienced a 19% increase in deposit balances and a 26.2% increase in accounts from the prior year. This growth was
primarily driven by increased penetration into larger employer groups and direct relationships with health insurance carriers.
Increased focus of these distribution channels resulted in a 25% increase in large employer groups (500+ employees) for 2014. In
support of this focus, HSA Bank completed a platform upgrade in 2014 and added new products, such as health reimbursement
accounts, flexible spending accounts, and commuter benefits, and capabilities such as mobile banking, bill pay and multi-purse
cards. Branding and positioning were refreshed to reflect new capabilities, and resources were added to focus on the new products
for insurance carriers and large employers. This work was instrumental in the successful bid to acquire the HSA portfolio of
JPMorgan Chase Bank, N.A., which was announced on September 23, 2014 and closed on January 13, 2015. The acquisition adds
approximately 785,000 accounts and $1.3 billion in deposits, further solidifying HSA Bank’s position as a national leader in the
financial health accounts space and significantly grows penetration with health insurance carriers and large employers. In 2015,
HSA Bank will focus on the integration and conversion of the newly acquired portfolio and continued advancement of initiatives
to optimize distribution channels and drive future revenue growth.
Segments
Webster’s operations are managed along three reportable segments that represent its core businesses: Commercial Banking,
Community Banking, and Other. Community Banking consists of the Personal Banking and Business Banking operating segments.
Other consists of HSA Bank and the Private Banking operating segments. 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. A description of
each of the Company’s segments is included in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results
of Operations,” and financial results for each of the Company’s segments are included in Note 20 - Segment Reporting in the
Notes to Consolidated Financial Statements included elsewhere within this report.
Competition
Webster is subject to strong competition from banks and other financial institutions, including savings and loan associations,
finance companies, credit unions, consumer finance companies, and insurance companies. Certain of these competitors are larger
financial institutions with substantially greater resources, lending limits, larger branch systems, and a wider array of commercial
banking services than Webster. Competition could intensify in the future as a result of industry consolidation, the increasing
availability of products and services from non-banks, greater technological developments in the industry, and continued bank
regulatory reforms.
Webster faces substantial competition for deposits and loans throughout its market areas. The primary factors in competing for
deposits are interest rates, personalized services, the quality and range of financial services, convenience of office locations,
automated services, and office hours. Competition for deposits comes primarily from other commercial banks, savings institutions,
credit unions, mutual funds, and other investment alternatives. The primary factors in competing for commercial and business
loans are interest rates, loan origination fees, the quality and range of lending services, and personalized service. Competition for
origination of mortgage loans comes primarily from savings institutions, mortgage banking firms, mortgage brokers, other
commercial banks, and insurance companies. Factors which affect competition include the general and local economic conditions,
current interest rate levels, and volatility in the mortgage markets.
2
Supervision and Regulation
Webster, Webster Bank, and certain of its non-banking subsidiaries are subject to extensive regulation under federal and state laws.
The regulatory framework applicable to bank holding companies and their subsidiary banks is intended to protect depositors,
federal deposit insurance funds, consumers, and the banking system as a whole, and not necessarily investors in bank holding
companies such as Webster.
Set forth below is a description of the significant elements of the laws and regulations applicable to Webster and its subsidiaries.
The description that follows is qualified in its entirety by reference to the full text of the statutes, regulations, and policies that are
described. Also, such statutes, regulations, and policies are continually under review by Congress and state legislatures and federal
and state regulatory agencies. A change in statutes, regulations, or regulatory policies applicable to Webster and its subsidiaries
could have a material effect on the results of the Company.
Regulatory Agencies
Webster is a legal entity separate and distinct from Webster Bank and its other subsidiaries. As a bank holding company and a
financial holding company, Webster is regulated under the Bank Holding Company Act of 1956, as amended (“BHC Act”), and
is subject to inspection, examination, and supervision by the Federal Reserve Board ("FRB"). Webster is also under the jurisdiction
of the United States Securities and Exchange Commission ("SEC") and is subject to the disclosure and regulatory requirements
of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, as administered by the SEC.
Webster's common stock is listed on the New York Stock Exchange (“NYSE”) under the trading symbol “WBS” and is subject
to the rules of the NYSE for listed companies.
Webster Bank is organized as a national banking association under the National Bank Act. It is subject to broad regulation and
examination by the Office of the Comptroller of the Currency (“OCC”) as its primary supervisory agency, as well as by the Federal
Deposit Insurance Corporation (“FDIC”). As noted below, on July 21, 2011, supervision of compliance with federal consumer
financial protection laws for Webster and Webster Bank was transferred to the Bureau of Consumer Financial Protection (“CFPB”).
Webster and Webster Bank may also be subject to increased scrutiny and enforcement efforts by state attorneys general in regard
to state consumer protection laws. Webster Bank's deposits are insured by the FDIC, subject to FDIC guidelines.
The Company's non-bank subsidiary is also subject to regulation by the FRB and other federal and state agencies. Other non-bank
subsidiaries are subject to both federal and state laws and regulations.
Bank Holding Company Regulation
In general, the BHC Act limits the business of bank holding companies to banking, managing or controlling banks, and other
activities that the FRB has determined to be so closely related to banking as to be a proper incident thereto. Bank holding companies
that are financial holding companies may engage in any activity, or acquire and retain the shares of a company engaged in any
activity that is either (i) financial in nature or incidental to such financial activity (as determined by the FRB in consultation with
the Secretary of the Treasury) or (ii) complementary to a financial activity, and that does not pose a substantial risk to the safety
and soundness of depository institutions or the financial system generally (as solely determined by the FRB). Activities that are
financial in nature include securities underwriting and dealing, insurance underwriting, and making merchant banking investments.
If a bank holding company seeks to engage in the broader range of activities that are permitted under the BHC Act for financial
holding companies, (i) all of its depository institution subsidiaries, and the holding company must be “well capitalized” and “well
managed,” as defined in the FRB's Regulation Y, and (ii) it must file a declaration with the FRB that it elects to be a “financial
holding company.”
In order for a financial holding company to commence any activity that is financial in nature, incidental thereto, or complementary
to a financial activity, or to acquire a company engaged in any such activity permitted by the BHC Act, each insured depository
institution subsidiary of the financial holding company must have received a rating of at least “satisfactory” in its most recent
examination under the Community Reinvestment Act ("CRA"). See the section captioned “Community Reinvestment Act and
Fair Lending Laws” included elsewhere in this item.
The BHC Act generally limits acquisitions by bank holding companies that are not qualified as financial holding companies to
commercial banks and companies engaged in activities that the FRB has determined to be so closely related to banking as to be
a proper incident thereto. Financial holding companies like Webster are also permitted to acquire control of non-depository
institution companies engaged in activities that are financial in nature and in activities that are incidental and complementary to
financial activities without prior FRB approval. However, the BHC Act, as amended by the Dodd-Frank Wall Street Reform and
Consumer Protection Act (the “Dodd-Frank Act”), requires prior written approval from the Federal Reserve or prior written notice
to the Federal Reserve before a financial holding company may acquire control of a company with consolidated assets of $10
billion or more.
3
The BHC Act, the Bank Merger Act, and other federal and state statutes regulate acquisitions of commercial banks. The BHC Act
requires the prior approval of the FRB for the direct or indirect acquisition of 5% or more of the voting shares of a commercial
bank or its parent holding company. Under the Bank Merger Act, the prior approval of the OCC is required for a national bank to
merge with another bank or purchase the assets or assume the deposits of another bank. In reviewing applications seeking approval
of merger and acquisition transactions, the federal banking agencies will consider, among other things, the competitive effect and
public benefits of the transactions, the capital position of the combined organization, the applicant's performance record under the
CRA (see the section captioned “Community Reinvestment Act and Fair Lending Laws” included elsewhere in this item), and the
effectiveness of the subject organizations in combating money laundering activities.
Regulatory Reforms
The past four years have resulted in a significant increase in regulation and regulatory oversight for U.S. financial services firms,
primarily resulting from the Dodd-Frank Act. The Dodd-Frank Act is extensive, complicated, and comprehensive legislation that
impacts practically all aspects of a banking organization and represents a significant overhaul of many aspects of the regulation
of the financial services industry. The Dodd-Frank Act implements numerous and far-reaching changes that affect financial
companies, including BHCs and banks such as Webster and Webster Bank, by, among other things:
•
•
•
•
•
applying the same leverage and risk-based capital requirements that apply to insured depository institutions to most BHCs,
savings and loan holding companies, and systemically important nonbank financial companies;
centralizing responsibility for consumer financial protection by creating an independent agency, the CFPB, with responsibility
for implementing, enforcing, and examining compliance with federal consumer financial laws;
requiring any interchange transaction fee charged for a debit transaction be “reasonable” and proportional to the cost incurred
by the issuer for the transaction, with new regulations that establish such fee standards, eliminate exclusivity arrangements
between issuers and networks for debit card transactions, and limit restrictions on merchant discounting for use of certain
payment forms and minimum or maximum amount thresholds as a condition for acceptance of credit cards;
providing for the implementation of certain corporate governance provisions for all public companies concerning executive
compensation;
increasing the FDIC’s deposit insurance limits permanently to $250,000 per depositor, per insured bank, for each account
ownership category and changing the assessment base as well as increasing the reserve ratio for the Deposit Insurance Fund
(“DIF”) to ensure the future strength of the DIF; and
•
reforming regulation of credit rating agencies.
Many of the provisions of the Dodd-Frank Act are subject to further rulemaking, guidance, and interpretation by the applicable
federal banking agencies. Webster will continue to evaluate the impact of any new regulations so promulgated, including changes
in regulatory costs and fees, modifications to consumer products or disclosures required by the CFPB, and the requirements of
the enhanced supervision provisions, among others. Certain provisions of the Dodd-Frank Act applicable to Webster are discussed
herein.
In July 2013, the FRB, the OCC, and the FDIC approved final rules (the “New Capital Rules”) establishing a new comprehensive
capital framework for U.S. banking organizations. The New Capital Rules generally implement the Basel Committee on Banking
Supervision’s (the “Basel Committee”) December 2010 final capital framework referred to as “Basel III” for strengthening
international capital standards. The New Capital Rules substantially revise the risk-based capital requirements applicable to BHCs
and their depository institution subsidiaries, including Webster and the Bank, as compared to the current U.S. general risk-based
capital rules. The New Capital Rules revise the definitions and the components of regulatory capital, as well as address other issues
affecting the numerator in banking institutions’ regulatory capital ratios. The New Capital Rules also address asset risk weights
and other matters affecting the denominator in banking institutions’ regulatory capital ratios and replace the existing general risk-
weighting approach, which was derived from the Basel Committee’s 1988 “Basel I” capital accords, with a more risk-sensitive
approach based, in part, on the “standardized approach” in the Basel Committee’s 2004 “Basel II” capital accords. In addition,
the New Capital Rules implement certain provisions of the Dodd-Frank Act, including the requirements of Section 939A to remove
references to credit ratings from the federal banking agencies’ rules.
In October 2012, the FDIC, the OCC, and the FRB issued separate but similar Dodd-Frank Act-mandated final rules requiring
covered banks and bank holding companies with $10 billion to $50 billion in total consolidated assets to conduct an annual
company-run stress test. The Company and Webster Bank submitted stress test results to the Federal Reserve and OCC in March
of 2014 as required by regulation. The Company and Webster Bank are not required to publicly disclose its results for the March
2014 submission. The Company and Webster Bank will submit their second year of stress test results by March 31, 2015. In
addition, the Company and Webster Bank will publicly release their results of the Severely Adverse Scenario stress test between
June 15, 2015 and June 30, 2015, as required by regulation.
4
In February 2014, the FRB adopted a final rule on enhanced prudential requirements required by the Dodd-Frank Act. Although
most of the enhanced prudential requirements only apply to bank holding companies with more than $50 billion in assets, the final
rule, as directed by the Dodd-Frank Act, contains certain requirements that apply to bank holding companies with more than $10
billion in assets, including an annual company-run stress test requirement and a requirement to use a risk committee of the
Company's board of directors for enterprise-wide risk management practices. Webster meets these requirements.
In June 2011, the FRB approved a final debit card interchange rule pursuant to the Dodd-Frank Act that would cap an issuer's base
fee at 21 cents per transaction and allow an additional amount equal to 5 basis points of the transaction's value. The FRB separately
issued a final rule in July 2012 that also allows a fraud-prevention adjustment of 1 cent per transaction conditioned upon an issuer
developing, implementing, and updating reasonably designed fraud-prevention policies and procedures.
In April 2013, the SEC 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 the Dodd-Frank Act. 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 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.
In December 2013, the federal banking agencies jointly adopted final rules implementing Section 619 of the Dodd-Frank Act,
commonly known as the Volcker Rule. The Volcker Rule restricts the ability of banking entities, such as Webster, to engage in
proprietary trading or to own, sponsor, or have certain relationships with hedge funds or private equity funds, defined as Covered
Funds. The final rule definition of Covered Funds includes certain investments such as collateralized loan obligation (“CLO”)
and collateralized debt obligation (“CDO”) securities. Compliance is generally required by July 21, 2017.
Title VII of the Dodd-Frank Act imposes a new set of requirements related to over-the-counter derivatives. Key provisions of Title
VII of the Dodd-Frank Act are being implemented through Commodity Futures Trading Commission ("CFTC") rulemakings with
respect to previously unregulated derivatives, including interest rate swaps. Among other things, the CFTC’s rules focus on swap
dealers, major swap participants and commercial entities that enter into OTC derivatives transactions to hedge or mitigate risk.
Under these new rules and CFTC guidance, end users are subject to a wide range of requirements including capital, margining,
clearing, documentation, reporting, eligibility and business conduct requirements.
The Company has adopted and complies with all aspects of the Title VII regulation that impact derivative activities including
interest rate risk hedges and its customer loan hedge program.
It is difficult to predict at this time the specific impact certain provisions and yet to be finalized rules and regulations will have on
the Company, including any regulations promulgated by the CFPB. Financial reform legislation and rules could have adverse
implications on the financial industry, the competitive environment, and our ability to conduct business. Management will apply
resources to ensure compliance with all applicable provisions of the regulatory reform, including the Dodd-Frank Act and any
implementing rules, which may increase our costs of operations and adversely impact our earnings.
Dividends
The principal source of Webster's liquidity is dividends from Webster Bank. The prior approval of the OCC is required if the total
of all dividends declared by a national bank in any calendar year would exceed the sum of the bank's net income for that year and
its undistributed net income for the preceding two calendar years, less any required transfers to surplus. Federal law also prohibits
national banks from paying dividends that would be greater than the bank's undivided profits after deducting statutory bad debt
in excess of the bank's allowance for loan and lease losses. At December 31, 2014, there was $270.2 million of undistributed net
income available for the payment of dividends by Webster Bank to the Company. Webster Bank paid the Company $100.0 million
in dividends during the year ended December 31, 2014.
In addition, Webster and Webster Bank are subject to other regulatory policies and requirements relating to the payment of dividends,
including requirements to maintain adequate capital above regulatory minimums. The appropriate federal regulatory authority is
authorized to determine, under certain circumstances relating to the financial condition of a bank holding company or a bank, that
the payment of dividends would be an unsafe or unsound practice and to prohibit payment thereof. The appropriate banking agency
authorities have indicated that paying dividends that deplete a bank's capital base to an inadequate level would be an unsafe and
unsound banking practice and that banking organizations should generally pay dividends only out of current operating earnings.
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Federal Reserve System
FRB regulations require depository institutions to maintain reserves against their transaction accounts, primarily interest-bearing
and regular checking accounts. Webster Bank's required reserves can be in the form of vault cash and, if vault cash does not fully
satisfy the required reserves, in the form of a balance maintained with the Federal Reserve Bank of Boston. FRB regulations
currently require that reserves be maintained against aggregate transaction accounts except for transaction accounts which are
exempt up to $14.5 million. Transaction accounts greater than $14.5 million up to $103.6 million have a reserve requirement of
3%. A 10% reserve ratio will be assessed on transaction accounts in excess of $103.6 million. The FRB generally makes annual
adjustments to the tiered reserves. Webster Bank is in compliance with these requirements.
As a member of the Federal Reserve System, the Bank is required to hold capital stock of the Federal Reserve Bank of Boston.
The required shares may be adjusted up or down based on changes to Webster Bank's common stock and paid-in surplus. Webster
Bank was in compliance with these requirements, with a total investment in Federal Reserve Bank of Boston stock of $50.7 million
at December 31, 2014. The FRB paid an annual dividend of 6% in 2014.
Federal Home Loan Bank System
The Federal Home Loan Bank System provides a central credit facility for member institutions. Webster Bank is a member of the
Federal Home Loan Bank of Boston (“FHLB”). The Bank is required to purchase and hold shares of capital stock in the FHLB
in an amount equal to 0.35% of the aggregate principal amount of its unpaid residential mortgage loans and similar obligations at
the beginning of each year, up to a maximum of $25.0 million. The Bank is also required to hold shares of capital stock in the
FHLB in amounts that vary from 3.0% to 4.5% of its advances, depending on the maturities of those advances. At December 31,
2014, the Bank had approximately $2.9 billion in FHLB advances. Webster Bank was in compliance with these requirements,
with a total investment in FHLB stock of $142.6 million at December 31, 2014. On October 29, 2014, the FHLB declared a
quarterly cash dividend equal to an annual yield of 1.49%.
Source of Strength Doctrine
FRB policy, now codified under the Dodd-Frank Act, requires bank holding companies to act as a source of financial strength to
their subsidiary banks. As a result, Webster is expected to commit resources to support Webster Bank, including at times when
Webster may not be in a financial position to provide such resources. Any capital loans by a bank holding company to any of its
subsidiary banks are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary banks. The
Federal bankruptcy code provides that, in the event of a bank holding company's bankruptcy, any commitment by the bank holding
company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee
and entitled to priority of payment.
In addition, under the National Bank Act, if the capital stock of Webster Bank is impaired by losses or otherwise, the OCC is
authorized to require payment of the deficiency by assessment upon Webster. If the assessment is not paid within three months,
the OCC could order a sale of the Webster Bank stock held by Webster to make good the deficiency.
Capital Adequacy and Prompt Corrective Action
The New Capital Rules: (i) introduce a new capital measure called “Common Equity Tier 1” (“CET1”) and related regulatory
capital ratio of CET1 to risk-weighted assets; (ii) specify that Tier 1 capital consists of CET1 and “Additional Tier 1 capital”
instruments meeting certain revised requirements; (iii) mandate that most deductions/adjustments to regulatory capital measures
be made to CET1 and not to the other components of capital; and (iv) expand the scope of the deductions from and adjustments
to capital as compared to existing regulations. Under the New Capital Rules, for most banking organizations, including Webster,
the most common form of Additional Tier 1 capital is non-cumulative perpetual preferred stock, and the most common forms of
Tier 2 capital are subordinated notes and a portion of the allocation for loan and lease losses, in each case, subject to the New
Capital Rules’ specific requirements.
Pursuant to the New Capital Rules, the minimum capital ratios effective January 1, 2015 are as follows:
•
•
•
•
4.5% CET1 to risk-weighted assets;
6.0% Tier 1 capital (that is, CET1 plus Additional Tier 1 capital) to risk-weighted assets;
8.0% Total capital (that is, Tier 1 capital plus Tier 2 capital) to risk-weighted assets; and
4.0% Tier 1 capital to average consolidated assets as reported on consolidated financial statements (called “leverage ratio”).
The New Capital Rules also introduce a new “capital conservation buffer,” composed entirely of CET1, on top of these minimum
risk-weighted asset ratios. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking
institutions with a ratio of CET1 to risk-weighted assets above the minimum but below the capital conservation buffer will face
constraints on dividends, equity, and other capital instrument repurchases and compensation based on the amount of the shortfall.
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Thus, when fully phased-in on January 1, 2019, the capital standards applicable to Webster will include an additional capital
conservation buffer of 2.5% of CET1, effectively resulting in minimum ratios inclusive of the capital conservation buffer of (i)
CET1 to risk-weighted assets of at least 7%, (ii) Tier 1 capital to risk-weighted assets of at least 8.5%, and (iii) Total capital to
risk-weighted assets of at least 10.5%.
The New Capital Rules provide for a number of deductions from and adjustments to CET1. These include, for example, the
requirement that mortgage servicing assets, deferred tax assets arising from temporary differences that could not be realized through
net operating loss carrybacks, and significant investments in non-consolidated financial entities be deducted from CET1 to the
extent that any one such category exceeds 10% of CET1 or all such items, in the aggregate, exceed 15% of CET1.
In addition, under the current general risk-based capital rules, the effects of accumulated other comprehensive income or loss
items included in shareholders’ equity (for example, mark-to-market of securities held in the available-for-sale portfolio) under
U.S. generally accepted accounting principles are reversed for the purposes of determining regulatory capital ratios. Pursuant to
the New Capital Rules, the effects of certain of these items are not excluded; however, non-advanced approaches banking
organizations, including the Company, may make a one-time permanent election to continue to exclude these items. The Company
will make the one-time permanent election to continue to exclude these items concurrently with the first filing of certain of
Webster’s periodic regulatory reports in 2015. This election will not affect Webster's ability to meet all capital adequacy requirements
to which it is subject.
The New Capital Rules also preclude certain hybrid securities, such as trust preferred securities, from inclusion in bank holding
companies’ Tier 1 capital, subject to phase-out in the case of bank holding companies, such as Webster, that had $15 billion or
more in total consolidated assets as of December 31, 2009. As of December 31, 2014, the Company has $75.0 million of trust
preferred securities included in the Tier 1 capital of Webster for regulatory reporting purposes pursuant to the Federal Reserve’s
capital adequacy guidelines. The New Capital Rules 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.
Implementation of the deductions and other adjustments to CET1 will begin on January 1, 2015 and will be phased in over a 4-
year period (beginning at 40% on January 1, 2015 and an additional 20% per year thereafter). The implementation of the capital
conservation buffer will begin on January 1, 2016 at the 0.625% level and increase by 0.625% on each subsequent January 1, until
it reaches 2.5% on January 1, 2019.
With respect to the Bank, the New Capital Rules revise the “prompt corrective action” (“PCA”) regulations adopted pursuant to
Section 38 of the Federal Deposit Insurance Act (“FDIA”), by: (i) introducing a CET1 ratio requirement at each PCA category
(other than critically under capitalized), with the required CET1 ratio being 6.5% for well-capitalized status; (ii) increasing the
minimum Tier 1 capital ratio requirement for each category, with the minimum Tier 1 capital ratio for well-capitalized status being
8% (as compared to the current 6%); and (iii) eliminating the current provision that provides that a bank with a composite supervisory
rating of 1 may have a 3% leverage ratio and still be adequately capitalized. The New Capital Rules do not change the total risk-
based capital requirement for any PCA category.
The New Capital Rules prescribe a new standardized approach for risk weightings that expand the risk-weighting categories from
the current four Basel I-derived categories (0%, 20%, 50% and 100%) to a larger and more risk-sensitive number of categories,
depending on the nature of the assets, generally ranging from 0% for U.S. government and agency securities, to 600% for certain
equity exposures, and resulting in higher risk weights for a variety of asset classes.
Management believes Webster will be in compliance with the targeted capital ratios upon implementation of the revised
requirements, as finalized.
Transactions with Affiliates & Insiders
Under federal law, transactions between depository institutions and their affiliates are governed by Sections 23A and 23B of the
Federal Reserve Act (“FRA”). In a holding company context, at a minimum, the parent holding company of a bank, and any
companies which are controlled by such parent holding company, are affiliates of the bank. Generally, sections 23A and 23B are
intended to protect insured depository institutions from losses arising from transactions with non-insured affiliates by limiting the
extent to which a bank or its subsidiaries may engage in covered transactions with any one affiliate and with all affiliates of the
bank in the aggregate, and requiring that such transactions be on terms consistent with safe and sound banking practices.
Further, Section 22(h) of the FRA restricts loans to directors, executive officers, and principal stockholders (“insiders”). Under
Section 22(h), loans to insiders and their related interests may not exceed, together with all other outstanding loans to such persons
and affiliated entities, the institution's total capital and surplus. Loans to insiders above specified amounts must receive the prior
approval of the board of directors. Further, under Section 22(h), loans to directors, executive officers, and principal stockholders
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must be made on terms substantially the same as offered in comparable transactions to other persons, except that such insiders
may receive preferential loans made under a benefit or compensation program that is widely available to the bank's employees
and does not give preference to the insider over the employees. Section 22(g) of the FRA places additional limitations on loans
to executive officers.
Consumer Protection and Financial Privacy Laws
The Company is subject to a number of federal and state laws designed to protect borrowers and promote lending to various sectors
of the economy and population. These laws include the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in
Lending Act, the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act, various state law counterparts, and
the Consumer Financial Protection Act of 2010, which constitutes part of the Dodd-Frank Act and establishes the CFPB, as
described above.
On January 10, 2013, the CFPB issued a final rule implementing the ability-to-repay and qualified mortgage (QM) provisions of
the Truth in Lending Act, as amended by the Dodd-Frank Act (the “QM Rule”). The ability-to-repay provision requires creditors
to make reasonable, good faith determinations that borrowers are able to repay their mortgages before extending the credit based
on a number of factors and consideration of financial information about the borrower from reasonably reliable third-party
documents. Under the Dodd-Frank Act and the QM Rule, loans meeting the definition of “qualified mortgage” are entitled to a
presumption that the lender satisfied the ability-to-repay requirements. The presumption is a conclusive presumption/safe harbor
for prime loans meeting the QM requirements and a rebuttable presumption for higher-priced/subprime loans meeting the QM
requirements. The definition of a “qualified mortgage” incorporates the statutory requirements, such as not allowing negative
amortization or terms longer than 30 years. The QM Rule also adds an explicit maximum 43% debt-to-income ratio for borrowers
if the loan is to meet the QM definition, though some mortgages that meet GSE, FHA, and VA underwriting guidelines may, for
a period not to exceed seven years, meet the QM definition without being subject to the 43% debt-to-income limits. The QM Rule
became effective on January 10, 2014.
In addition, federal law and certain state laws currently contain client privacy protection provisions. These provisions limit the
ability of banks and other financial institutions to disclose non-public information about consumers to affiliated companies and
non-affiliated third parties. These rules require disclosure of privacy policies to clients and, in some circumstances, allow consumers
to prevent disclosure of certain personal information to affiliates or non-affiliated third parties by means of "opt out" or "opt in"
authorizations. Pursuant to the Gramm-Leach-Bliley Act ("GLBA") and certain state laws, companies are required to notify clients
of security breaches resulting in unauthorized access to their personal information.
Depositor Preference
The FDIA provides that, in the event of the “liquidation or other resolution” of an insured depository institution, the claims of
depositors of the institution, including the claims of the FDIC as subrogee of insured depositors, and certain claims for administrative
expenses of the FDIC as a receiver, will have priority over other general unsecured claims against the institution. If an insured
depository institution fails, insured and uninsured depositors, along with the FDIC, will have priority in payment ahead of unsecured,
non-deposit creditors, including the parent bank holding company, with respect to any extensions of credit they have made to such
insured depository institution.
Deposit Insurance
Substantially all of the deposits of Webster Bank are insured up to applicable limits by the DIF of the FDIC and are subject to
deposit insurance assessments to maintain the DIF. The FDIC utilizes a risk-based assessment system that imposes insurance
premiums based upon a risk matrix that takes into account a bank's capital level and supervisory rating (“CAMELS rating”). The
risk matrix utilizes four risk categories distinguished by capital levels and supervisory ratings.
In February 2011, the FDIC issued rules to implement changes to the deposit insurance assessment base and risk-based assessments
mandated by the Dodd-Frank Act. The base for insurance assessments changed from domestic deposits to consolidated average
assets less average tangible equity. Assessment rates are calculated using formulas that take into account the risk of the institution
being assessed. The rule was effective April 1, 2011. On September 28, 2011, the FDIC issued notification to insured depository
institutions that the transition guidance for reporting certain leveraged and subprime loans on the Call Report had been extended
from October 1, 2011 to April 1, 2012. On October 9, 2012, the FDIC finalized the definitions of "higher-risk" consumer and C&I
loans and securities used under Large Bank Pricing of deposit insurance assessments adopted February 25, 2011 for banks with
$10 billion or more of assets. The final rule, among other things, renames leveraged loans “higher-risk C&I loans and securities”;
renames subprime consumer loans “higher-risk consumer loans”; clarifies when an asset must be identified as higher risk; and
clarifies the way securitizations are identified as higher risk.
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The Bank's FDIC deposit insurance assessment expense totaled $22.7 million, $21.1 million, and $22.7 million for the years ended
December 31, 2014, 2013, and 2012, respectively. FDIC insurance expense includes deposit insurance assessments and Financing
Corporation (“FICO”) assessments related to outstanding FICO bonds. FICO is a mixed-ownership government corporation
established by the Competitive Equality Banking Act of 1987 whose sole purpose was to function as a financing vehicle for the
now defunct Federal Savings & Loan Insurance Corporation.
Under the FDIA, the FDIC may terminate deposit insurance upon a finding that the institution has engaged in unsafe and unsound
practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order
or condition imposed by the FDIC. Webster's management is not aware of any practice, condition, or violation that might lead to
the termination of its deposit insurance.
Incentive Compensation
The Dodd-Frank Act requires publicly traded companies to give stockholders a non-binding vote on executive compensation at
their first annual meeting taking place six months after the date of enactment and at least every three years thereafter and on so-
called “golden parachute” payments in connection with approvals of mergers and acquisitions. At its 2011 Annual Meeting of
Shareholders, Webster's shareholders voted on a non-binding, advisory basis to hold a non-binding, advisory vote on the
compensation of named executive officers of Webster annually. As a result of the vote, the Board of Directors determined to hold
the vote annually.
Community Reinvestment Act and Fair Lending Laws
Webster Bank has a responsibility under the Community Reinvestment Act of 1977 (“CRA”) to help meet the credit needs of its
communities, including low and moderate-income neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's discretion to develop the types of products and services that it
believes are best suited to its particular community, consistent with the CRA. In connection with its examination, the OCC assesses
Webster Bank's record of compliance with the CRA. In addition, the Equal Credit Opportunity Act and the Fair Housing Act
prohibit discrimination in lending practices on the basis of characteristics specified in those statutes. Webster Bank's failure to
comply with the provisions of the CRA could, at a minimum, result in regulatory restrictions on its activities and the activities of
Webster. Webster Bank's failure to comply with the Equal Credit Opportunity Act and the Fair Housing Act could result in
enforcement actions against it by the OCC, as well as other federal regulatory agencies, including the CFPB and the Department
of Justice. The Bank's latest OCC CRA rating was “satisfactory.”
USA PATRIOT Act
Under Title III of the USA PATRIOT Act, all financial institutions are required to take certain measures to identify their customers,
prevent money laundering, monitor customer transactions, and report suspicious activity to U.S. law enforcement agencies.
Financial institutions also are required to respond to requests for information from federal banking regulatory authorities and law
enforcement agencies. Information sharing among financial institutions for the above purposes is encouraged by an exemption
granted to complying financial institutions from the privacy provisions of the GLBA and other privacy laws. Financial institutions
that hold correspondent accounts for foreign banks or provide private banking services to foreign individuals are required to take
measures to avoid dealing with certain foreign individuals or entities, including foreign banks with profiles that raise money
laundering concerns, and are prohibited from dealing with foreign “shell banks” and persons from jurisdictions of particular
concern. The primary federal banking regulators and the Secretary of the Treasury have adopted regulations to implement several
of these provisions. All financial institutions also are required to establish internal anti-money laundering programs. The
effectiveness of a financial institution in combating money laundering activities is a factor to be considered in any application
submitted by the financial institution under the Bank Merger Act. Webster has in place a Bank Secrecy Act and USA PATRIOT
Act compliance program and engages in very few transactions of any kind with foreign financial institutions or foreign persons.
Office of Foreign Assets Control Regulation
The United States has imposed economic sanctions that affect transactions with designated foreign countries, nationals, and others.
These are typically known as the “OFAC” rules based on their administration by the U.S. Treasury Department Office of Foreign
Assets Control (“OFAC”). The OFAC-administered sanctions targeting countries take many different forms. Generally, they contain
one or more of the following elements: i) restrictions on trade with or investment in a sanctioned country, including prohibitions
against direct or indirect imports from and exports to a sanctioned country and prohibitions on “U.S. persons” engaging in financial
transactions relating to making investments in, or providing investment-related advice or assistance to, a sanctioned country; and
ii) a blocking of assets in which the government or specially designated nationals of the sanctioned country have an interest, by
prohibiting transfers of property subject to U.S. jurisdiction (including property in the possession or control of U.S. persons).
Blocked assets (property and bank deposits) cannot be paid out, withdrawn, set off, or transferred in any manner without a license
from OFAC. Failure to comply with these sanctions could have serious legal and reputational consequences.
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Other Legislative Initiatives
From time to time, various legislative and regulatory initiatives are introduced in Congress and state legislatures, as well as by
regulatory agencies. Such initiatives may include proposals to expand or contract the powers of bank holding companies and/or
depository institutions or proposals to substantially change the financial institution regulatory system. Such legislation could
change banking statutes and the operating environment of the Company in substantial and unpredictable ways. If enacted, such
legislation could increase or decrease the cost of doing business, limit or expand permissible activities, or affect the competitive
balance among banks, savings associations, credit unions, and other financial institutions. The Company cannot predict whether
any such legislation will be enacted, and, if enacted, the effect that it or any implementing regulations would have on the financial
condition or results of operations of the Company. A change in statutes, regulations, or regulatory policies applicable to Webster
or any of its subsidiaries could have a material effect on the business of the Company.
Risk Management Framework
Webster applies an integrated, forward-looking Enterprise Risk Management ("ERM") approach to identifying, assessing and
managing risks across the Company. The ERM framework enables the aggregation of risk across the enterprise and ensures the
Company has the tools, programs and processes in place to support informed decision making, anticipate risks before they
materialize and maintain Webster's risk profile consistent with its risk strategy and appetite. Webster's risk appetite framework
consists of a risk appetite statement supported by board and business-level scorecards for monitoring Webster's risk positions
relative to its established risk appetite.
Key components of the ERM framework include a culture that promotes proactive risk management by all Webster bankers, a
risk appetite framework consisting of a risk appetite statement and board and business-level scorecards for monitoring Webster's
risk positions relative to its established risk appetite, and three lines of defense to manage and oversee risk. Bankers in each line
of business serve as the first line of defense and have responsibility for identifying, managing and owning the risks in their
businesses. Risk and other corporate support functions (e.g., Human Resource and Legal departments) serve as the second line of
defense and are responsible for providing guidance, oversight and appropriate challenge to the first line of defense. Internal Audit
and Credit Risk Review, both of which are independent of management, serve as the third line of defense.
The Risk Committee of the Board of Directors (“Risk Committee”), comprised of independent directors, oversees all Webster's
risk-related matters and provides input and guidance to the Board of Directors and the Executive team, as appropriate. Webster's
Enterprise Risk Management Committee (“ERMC”), which reports directly to the Risk Committee, is chaired by the Chief Risk
Officer ("CRO") and is comprised of members of Webster's Executive Management Committee and Senior Risk Officers.
The CRO is responsible for establishing and maintaining the Company's ERM framework and overseeing credit risk, operational
risk, compliance risk, and loan workout/recovery programs. The Corporate Treasurer, who reports to the Chief Financial Officer
("CFO"), is responsible for overseeing market, liquidity, and capital risk management activities.
Credit Risk
Webster manages and controls credit risk in its loan and investment portfolios through established underwriting practices, adherence
to standards, and utilization of various portfolio and transaction monitoring tools and processes. Credit policies and underwriting
guidelines provide limits on exposure and establish various other standards as deemed necessary and prudent. Additional approval
requirements and reporting are implemented to ensure proper risk identification, decision rationale, risk ratings, and disclosure of
policy exceptions.
Credit Risk Management policies and transaction approvals are managed under the supervision of the Chief Credit Officer (“CCO”)
who reports to the CRO. The CCO and team of credit executives are independent of the loan production and Treasury areas. The
credit risk function oversees the underwriting, approval and portfolio management process, establishes and ensures adherence to
credit policies, and manages the collections and problem asset resolution activities.
As part of Credit Risk Management governance, Webster established a Credit Risk Management Committee ("CRMC") that meets
regularly to review key credit risk topics, issues, and policies. The CRMC reviews Webster's credit risk scorecard, which covers
key risk indicators and limits established as part of the Company's risk appetite framework. The CRMC is chaired by the CCO
and includes senior managers responsible for lending as well as senior managers from the Credit Risk Management function.
Important findings regarding credit quality and trends within the loan and investment portfolios are regularly reported by the CCO
to the ERMC and Risk Committee.
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In addition to the Credit Risk Management team, there is an independent Credit Risk Review function that assesses risk ratings
and credit underwriting process for all areas of the organization that incur credit risk. The head of Credit Risk Review reports
directly to the Risk Committee and administratively to the CRO. Credit Risk Review findings are reported to the CRMC, ERMC
and Risk Committee. Corrective measures are monitored and tested to ensure risk issues are mitigated or resolved.
Market Risk
Market risk refers to the risk of loss arising from adverse changes in interest rates, foreign currency exchange rates, commodity
prices, and other relevant market rates and prices, such as equity prices. The risk of loss is assessed from the perspective of adverse
changes in fair values, cash flows, and future earnings. Due to the nature of its operations, Webster is primarily exposed to interest
rate risk. Webster's interest rate sensitivity is monitored on an ongoing basis by its Asset and Liability Committee (“ALCO”).
ALCO's primary goal is to manage interest rate risk to maximize earnings and net economic value in changing interest rate and
business environments within risk appetite limits approved by the Board of Directors. ALCO is chaired by Webster's Corporate
Treasurer and members include the CEO, CFO and CRO. ALCO activities and findings are regularly reported to the ERMC, Risk
Committee and Board of Directors.
Liquidity Risk
Liquidity risk refers to the ability of Webster Bank to meet a demand for funds by converting assets into cash or cash equivalents
and by increasing liabilities at acceptable costs. Liquidity management involves maintaining the ability to meet day-to-day and
longer-term cash flow requirements of customers, whether they are depositors wishing to withdraw funds or borrowers requiring
funds to meet their credit needs. Liquidity sources include the amount of unencumbered or “free” investment portfolio securities
the Company owns.
The Company requires funds for dividends to shareholders, payment of debt obligations, repurchase of shares, potential acquisitions,
and for general corporate purposes. Its sources of funds include dividends from Webster Bank, income from investment securities,
the issuance of equity, and debt in the capital markets.
Both Webster Bank and the Company maintain a level of liquidity necessary to achieve their business objectives under both normal
and stressed conditions. Liquidity risk is monitored and managed by ALCO and reviewed regularly with the ERMC, Risk Committee
and Board of Directors.
Capital Risk
Webster aims to maintain adequate capital in both normal and stressed environments to support its business objectives and risk
appetite. ALCO monitors regulatory and tangible capital levels according to regulatory requirements and management targets and
recommends capital conservation, generation, and/or deployment strategies. ALCO also has responsibility for the annual capital
plan, target setting, contingency planning and stress testing, which are all reviewed and approved by the Risk Committee and
Board of Directors at least annually.
Operational Risk
Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external
events, such as fraud, cyber-attacks, or natural disasters.
The Operational Risk function is responsible for establishing processes and tools to identify, manage, and aggregate operational
risk across the organization; providing guidance and advice on operational risk matters; and educating the organization on
operational risks. Specific programs and functions have been implemented to manage the risks associated with legal and regulatory
requirements, suppliers and other third-parties, information security, business disruption, fraud, models, and new products and
services.
Webster's Operational Risk Management Committee ("ORMC"), which consists of Senior Risk Officers and senior managers
responsible for operational risk management to periodically review the aforementioned programs, key operational risk trends,
concerns, and mitigation best practices. The ORMC is co-chaired by the CRO and Director of Operating Risk Management, who
is responsible for overseeing Webster's operational risk management framework.
Internal Audit
Internal Audit provides an independent and objective assessment of the design and execution of internal controls for all major
business units and operations throughout Webster, including our management systems, risk governance, and policies and
procedures. Internal Audit activities are designed to provide reasonable assurance that resources are safeguarded; that significant
financial, managerial and operating information is complete, accurate and reliable; and that employee actions comply with our
policies and applicable laws and regulations.
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Results of Internal Audit reviews are reported to management and the Audit Committee of the Board of Directors. Corrective
measures are monitored to ensure risk issues are mitigated or resolved. The General Auditor reports directly to the Audit Committee
and administratively to the Chief Executive Officer. The appointment or replacement of the General Auditor is overseen by the
Audit Committee.
Additional information on risks and uncertainties and additional factors that could affect the Company's results of operations can
be found in Item 1A and elsewhere within this Form 10-K for the year ended December 31, 2014 and in other reports filed by
Webster with the SEC.
Subsidiaries of Webster Financial Corporation
Webster’s direct subsidiaries as of December 31, 2014 included Webster Bank, Webster Wealth Advisors, Inc. (formerly, Fleming,
Perry & Cox, Inc.), and Webster Licensing, LLC. Webster also owns all of the outstanding common stock of Webster Statutory
Trust, an unconsolidated financial vehicle that has issued and may in the future issue trust preferred securities.
Webster Bank's direct subsidiaries include Webster Mortgage Investment Corporation, Webster Business Credit Corporation
(“WBCC”), and Webster Capital Finance, Inc. (“WCF”). Webster Bank is the primary source of community banking activity
within the consolidated group. Webster Bank provides banking services through 164 banking offices, 314 ATMs, telephone banking,
mobile banking, and its Internet website. Residential mortgage origination activity is conducted through Webster Bank. Webster
Mortgage Investment Corporation is a passive investment subsidiary whose primary function is to provide servicing on passive
investments, such as residential real estate and commercial mortgage real estate loans acquired from Webster Bank. Various
commercial lending products are provided through Webster Bank and its subsidiaries to clients within the region from New York,
NY to Boston, MA. WBCC provides asset-based lending services. WCF provides equipment financing for end users of equipment.
Additionally, Webster Bank has various other subsidiaries that are not significant to the consolidated group.
Employees
At December 31, 2014, Webster had 2,764 employees, including 2,693 full-time and 71 part-time and other employees. None of
the employees were represented by a collective bargaining group. Webster maintains a comprehensive employee benefit program
providing, among other benefits, group medical and dental insurance, life insurance, disability insurance, and an employee 401
(k) retirement savings plan. Management considers relations with its employees to be good. See Note 18 - Pension and Other
Postretirement Benefits in the Notes to Consolidated Financial Statements included elsewhere within this report for additional
information on certain benefit programs.
Available Information
Webster makes available free of charge on its websites (www.websterbank.com or www.wbst.com) its Annual Report on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and amendments, if any, to those documents
filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934, as soon as practicable after it electronically
files such material with, or furnishes it to, the SEC. Information on Webster’s website is not incorporated by reference into this
report.
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ITEM 1A. RISK FACTORS
Our financial condition and results of operations are subject to various risks inherent in our business. The material risks and
uncertainties that management believes affect us are described below. If any of the events or circumstances described in the
following risks actually occurs, our business, financial condition or results of operations could suffer. You should consider all of
the following risks together with all of the other information in this Annual Report on Form 10-K.
Changes in interest rates and spreads could have an impact on earnings and results of operations which could have a negative
impact on the value of our stock.
Our consolidated earnings and financial condition are dependent to a large degree upon net interest income, which is the difference
between interest earned from loans and investments and interest paid on deposits and borrowings. The narrowing of interest rate
spreads could adversely affect our earnings and financial condition. We cannot predict with certainty or control changes in interest
rates. Regional and local economic conditions and the policies of regulatory authorities, including monetary policies of the Federal
Reserve Board, affect interest income and interest expense. While we have ongoing policies and procedures designed to manage
the risks associated with changes in market interest rates, changes in interest rates still may have an adverse effect on our profitability.
For example, high interest rates could affect the amount of loans that we can originate because higher rates could cause customers
to apply for fewer mortgages, or cause depositors to shift funds from accounts that have a comparatively lower cost to accounts
with a higher cost, or experience customer attrition due to competitor pricing. If the cost of interest-bearing deposits increases at
a rate greater than the yields on interest-earning assets increase, net interest income will be negatively affected. Changes in the
asset and liability mix may also affect net interest income. Similarly, lower interest rates cause higher yielding assets to prepay
and floating or adjustable rate assets to reset to lower rates. If we are not able to reduce our funding costs sufficiently, due to either
competitive factors or the maturity schedule of existing liabilities, then our net interest margin will decline.
The possibility of the economy’s return to recessionary conditions and the possibility of further turmoil or volatility in the
financial markets would likely have an adverse effect on our business, financial position and results of operations.
We continue to face risks resulting from the aftermath of the severe recession generally and the moderate pace of the current
recovery. A slowing or failure of the economic recovery would likely aggravate the adverse effects of these difficult economic and
market conditions on us and on others in the financial services industry.
In particular, we may face the following risks in connection with the current economic and market environment:
•
•
•
investors may have less confidence in the equity markets in general and in financial services industry stocks in particular,
which could place downward pressure on our stock price and resulting market valuation;
economic and market developments may further affect consumer and business confidence levels and may cause declines in
credit usage and adverse changes in payment patterns, causing increases in delinquencies and default rates;
our ability to assess the creditworthiness of our customers may be impaired if the models and approaches we use to select,
manage, and underwrite our customers become less predictive of future behaviors;
• we could suffer decreases in customer desire to do business with us, whether as a result of a decreased demand for loans or
other financial products and services or decreased deposits or other investments in accounts with us;
•
competition in our industry could intensify as a result of the increasing consolidation of financial services companies in
connection with current market conditions, or otherwise;
• we face increased regulation of our industry, and compliance with such regulation may increase our costs and limit our ability
to pursue business opportunities; and
• we may be required to pay significantly higher FDIC deposit insurance premiums.
We are subject to extensive government regulation and supervision, which may interfere with our ability to conduct our business
and may negatively impact our financial results.
We, primarily through Webster Bank and certain non-bank subsidiaries, are subject to extensive federal and state regulation and
supervision. Banking regulations are primarily intended to protect depositors’ funds, the Federal Deposit Insurance Fund and the
safety and soundness of the banking system as a whole, not shareholders. These regulations affect our lending practices, capital
structure, investment practices, dividend policy and growth, among other things. Congress and federal regulatory agencies
continually review banking laws, regulations and policies for possible changes. Changes to statutes, regulations or regulatory
policies, including changes in interpretation or implementation of statutes, regulations or policies, could affect us in substantial
and unpredictable ways. Such changes could subject us to additional costs, limit the types of financial services and products we
may offer, and/or limit the pricing we may charge on certain banking services, among other things. Additionally, the Dodd-Frank
Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) has and will continue to change the current bank
13
regulatory structure and affect the lending, investment, trading and operating activities of financial institutions and their holding
companies. In addition to the self-implementing provisions of the statute, the Dodd-Frank Act calls for many administrative
rulemakings by various federal agencies to implement various parts of the legislation, some of which have yet to be implemented.
We cannot be certain when final rules affecting us will be issued through such rulemakings and what the specific content of such
rules will be. The financial reform legislation and any implementing rules that are ultimately issued could have adverse implications
on the financial industry, the competitive environment, and our ability to conduct business. We will have to apply resources to
ensure that we are in compliance with all applicable provisions of the Dodd-Frank Act and any implementing rules, which may
increase our costs of operations and adversely impact our earnings. Additionally, revised capital adequacy guidelines and prompt
corrective action rules applicable to us became effective January 1, 2015. Compliance with these rules may impose additional
costs on us.
Failure to comply with laws, regulations or policies could result in sanctions by regulatory agencies, civil money penalties and/
or reputation damage, which could have a material adverse effect on our business, financial condition and results of operations.
While we have policies and procedures designed to prevent any such violations, there can be no assurance that such violations
will not occur. See the section captioned “Supervision and Regulation” in Item 1 of this report for further information.
If all or a significant portion of the unrealized losses in our portfolio of investment securities were determined to be other-
than-temporarily impaired, we would recognize a material charge to our earnings and our capital ratios would be adversely
impacted.
When the fair value of a security declines, management must assess whether that decline is other-than-temporary. When management
reviews whether a decline in fair value is other-than-temporary, it considers numerous factors, many of which involve significant
judgment. No assurance can be provided that the amount of the unrealized losses will not increase.
To the extent that any portion of the unrealized losses in our portfolio of investment securities is determined to be other-than-
temporarily impaired, we will recognize a charge to our earnings in the quarter during which such determination is made and our
capital ratios will be adversely impacted. If any such charge is deemed significant, a rating agency might downgrade our credit
rating or put us on a credit watch. A downgrade or a significant reduction in our capital ratios might adversely impact our ability
to access the capital markets or might increase our cost of capital. Even if we do not determine that the unrealized losses associated
with the investment portfolio require an impairment charge, increases in such unrealized losses adversely impact the tangible
common equity ratio, which may adversely impact credit rating agency and investor sentiment. Any such negative perception also
may adversely impact our ability to access the capital markets or might increase our cost of capital. See Note 2 - Investment
Securities in the Notes to Consolidated Financial Statements included elsewhere within this report for additional information.
Our allowance for loan and lease losses may be insufficient.
Our business is subject to periodic fluctuations based on national and local economic conditions. These fluctuations are not
predictable, cannot be controlled and may have a material adverse impact on our operations and financial condition. For example,
declines in housing activity including declines in building permits, housing starts and home prices, may make it more difficult for
our borrowers to sell their homes or refinance their debt. Sales may also slow, which could strain the resources of real estate
developers and builders. We may suffer higher loan and lease losses as a result of these factors and the resulting impact on our
borrowers. Recent economic uncertainty continues to affect employment levels and impact the ability of our borrowers to service
their debt. Bank regulatory agencies also periodically review our allowance for loan and lease losses and may require an increase
in the provision for loan and lease losses or the recognition of further loan charge-offs, based on judgments different than those
of management. In addition, if charge-offs in future periods exceed the allowance for loan and lease losses, we may need, depending
on an analysis of the adequacy of the allowance for loan and lease losses, additional provisions to increase the allowance for loan
losses. Any increases in the allowance for loan and lease losses will result in a decrease in net income and, possibly, capital, and
may have a material adverse effect on our financial condition and results of operations.
Changes in local economic conditions could adversely affect our business.
A significant percentage of our mortgage loans are secured by real estate in the State of Connecticut. Our success depends in part
upon economic conditions in this and our other geographic markets. Adverse changes in such local markets could reduce our
growth in loans and deposits, impair our ability to collect our loans, increase problem loans and charges-offs, and otherwise
negatively affect our performance and financial condition.
14
Our stock price can be volatile.
Stock price volatility may negatively impact the price at which our common stock may be sold, and may also negatively impact
the timing of any sale. Our stock price can fluctuate widely in response to a variety of factors including, among other things:
•
•
•
•
•
•
•
•
•
•
•
•
actual or anticipated variations in quarterly operating results;
recommendations by securities analysts;
operating and stock price performance of other companies that investors deem comparable to us;
news reports relating to trends, concerns and other issues in the financial services industry;
new technology used, or services offered, by competitors;
perceptions in the marketplace regarding us and/or our competitors;
significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving
us or our competitors;
failure to integrate acquisitions or realize anticipated benefits from acquisitions;
additional investments from third parties;
issuance of additional shares of stock;
changes in government regulations; or
geo-political conditions such as acts or threats of terrorism or military conflicts.
General market fluctuations, industry factors and general economic and political conditions and events, such as economic
slowdowns or recessions, interest rate changes, credit loss trends or currency fluctuations, could also cause our stock price to
decrease regardless of our operating results.
We operate in a highly competitive industry and market area. If we fail to compete effectively, our financial condition and
results of operations may be materially adversely affected.
We face substantial competition in all areas of our operations from a variety of different competitors, many of which are larger
and may have more financial resources than we do. Such competitors primarily include national, regional, and community banks
within the various markets in which we operate. We also face competition from many other types of financial institutions, including,
without limitation, savings and loans, credit unions, finance companies, brokerage firms, insurance companies, factoring companies
and other financial intermediaries. The financial services industry could become even more competitive as a result of legislative,
regulatory and technological changes and continued consolidation. Banks, securities firms and insurance companies can merge
under the umbrella of a financial holding company, which can offer virtually any type of financial service, including banking,
securities, underwriting, insurance (both agency and underwriting) and merchant banking. Regulations also impose restrictions
and/or provide regulatory relief on the basis of asset size providing a potential advantage to smaller banking entities. Technology
has lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks,
such as automatic transfer and automatic payment systems. Additionally, due to their size, many competitors may be able to achieve
economies of scale and, as a result, may offer a broader range of products and services than we do, as well as better pricing for
those products and services.
Our ability to compete successfully depends on a number of factors, including, among other things:
•
•
•
•
•
•
the ability to develop, maintain and build upon long-term customer relationships based on top quality service, high ethical
standards and safe, sound assets;
the ability to expand market position;
the scope, relevance and pricing of products and services offered to meet customer needs and demands;
the rate at which we introduce new products and services relative to our competitors;
customer satisfaction with our level of service; and
industry and general economic trends.
Failure to perform in any of these areas could significantly weaken our competitive position, which could adversely affect our
growth and profitability, which, in turn, could have a material adverse effect on our financial condition and results of operations.
15
The unsoundness of other financial institutions could adversely affect us.
Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other
financial institutions. Financial services companies are interrelated as a result of trading, clearing, counterparty or other
relationships. We have exposure to many different industries and counterparties, and we routinely execute transactions with
counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, mutual and
hedge funds, and other institutional clients. As a result, defaults by, or even rumors or questions about, one or more financial
services companies, or the financial services industry generally, have led to market-wide liquidity problems and could lead to
losses or defaults by us or by other institutions. Many of these transactions expose us to credit risk in the event of default of our
counterparty or client. In addition, our credit risk may be exacerbated if the collateral held by us cannot be realized or is liquidated
at prices not sufficient to recover the full amount of the loan or derivative exposure due us. There is no assurance that any such
losses would not materially and adversely affect our business, financial condition or results of operations.
If the goodwill that we have recorded in connection with our acquisitions becomes impaired, it could have a negative impact
on our profitability.
Applicable accounting standards require that the purchase method of accounting be used for all business combinations. Under
purchase accounting, if the purchase price of an acquired company exceeds the fair value of the acquired company’s net assets,
the excess is carried on the acquirer’s balance sheet as goodwill. A significant decline in our expected future cash flows, a continuing
period of market disruption, market capitalization to book value deterioration, or slower growth rates may require the Company
to record charges in the future related to the impairment of the Company’s goodwill. There can be no assurance that future
evaluations of goodwill will not result in findings of impairment and related write-downs. If we were to conclude that a future
write-down of goodwill is necessary, the Company would record the appropriate charge, which may have a material adverse effect
on our financial condition and results of operations. See Note 1 - Summary of Significant Accounting Policies in the Notes to
Consolidated Financial Statements for further information.
We may not be able to attract and retain skilled people.
Our success depends, in large part, on our ability to attract and retain key people. Competition for the best people in most activities
in which we engage can be intense and we may not be able to hire people or to retain them. Currently, we do not have employment
agreements with any of our executive officers. The unexpected loss of services of one or more of our key personnel could have a
material adverse impact on the business because we would lose the employees’ skills, knowledge of the market, and years of
industry experience and may have difficulty promptly finding qualified replacement personnel.
We continually encounter technological change. The failure to understand and adapt to these changes could negatively impact
our business.
The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-
driven products and services. The effective use of technology can increase efficiency and enable financial institutions to better
serve customers and to reduce costs. However, some new technologies needed to compete effectively result in incremental operating
costs. Our future success depends, in part, upon our ability to address the needs of our customers by using technology to provide
products and services that will satisfy customer demands, as well as to create additional efficiencies in operations. Many of our
competitors, because of their larger size and available capital, have substantially greater resources to invest in technological
improvements. We may not be able to effectively implement new technology-driven products and services or be successful in
marketing these products and services to our customers. Failure to successfully keep pace with technological change affecting the
financial services industry could have a material adverse impact on our business and, in turn, our financial condition and results
of operations.
Our controls and procedures may fail or be circumvented, which may result in a material adverse effect on our business.
Management regularly reviews and updates our internal controls, disclosure controls and procedures, and corporate governance
policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and
can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of
the controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse
effect on our business, results of operations and financial condition.
New lines of business or new products and services may subject us to additional risks. A failure to successfully manage these
risks may have a material adverse effect on our business.
From time to time, we may implement new lines of business, offer new products and services within existing lines of business or
shift our asset mix. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the
markets are not fully developed. In developing and marketing new lines of business and/or new products and services and/or
shifting asset mix, we may invest significant time and resources. Initial timetables for the introduction and development of new
16
lines of business and/or new products or services may not be achieved and price and profitability targets may not prove attainable.
External factors, such as compliance with regulations, competitive alternatives, and shifting market preferences, may also impact
the successful implementation of a new line of business or a new product or service. Furthermore, any new line of business and/
or new product or service could have a significant impact on the effectiveness of our system of internal controls. Failure to
successfully manage these risks in the development and implementation of new lines of business or new products or services could
have a material adverse effect on our business, results of operations and financial condition.
A failure or breach of our systems, or those of our third party vendors and other service providers, including as a result of
cyber attacks, could disrupt our businesses, result in the misuse of confidential or proprietary information, damage our
reputation, increase our costs and cause losses.
As a large financial institution, we depend on our ability to process, record, and monitor a large number of customer transactions,
and customer, public and regulatory expectations regarding operational and information security have increased over time.
Accordingly, our operational systems and infrastructure must continue to be safeguarded and monitored for potential failures,
disruptions and breakdowns. Our business, financial, accounting, data processing systems or other operating systems and facilities
may stop operating properly or become disabled as a result of a number of factors that may be wholly or partially beyond our
control. For example, there could be sudden increases in customer transaction volume; electrical or telecommunications outages;
natural disasters; pandemics; events arising from political or social matters, including terrorist acts; and cyber attacks. Although
we have business continuity plans and believe we have robust information security procedures and controls in place, disruptions
or failures in the physical infrastructure or operating systems that support our businesses and customers, or cyber attacks or security
breaches of the networks, systems or devices on which customers’ personal information is stored and that our customers use to
access our products and services could result in customer attrition, regulatory fines, penalties or intervention, reputational damage,
reimbursement or other compensation costs, and/or additional compliance costs, which could materially adversely affect our results
of operations or financial condition.
Third parties with whom we do business or that facilitate our business activities, including exchanges, clearing houses, financial
intermediaries or vendors that provide services or security solutions for our operations, could also be sources of operational and
information security risk to us, including from breakdowns or failures of their own systems or capacity constraints.
Although to date we have not experienced any material losses relating to cyber attacks or other information security breaches,
there can be no assurance that we will not suffer such losses in the future. Our risk and exposure to these matters remains heightened
and as a result the continued development and enhancement of our controls, processes and practices designed to protect our systems,
computers, software, data and networks from attack, damage or unauthorized access remain a priority for us. As an additional
layer of protection, we have purchased network and privacy liability risk insurance coverage which includes digital asset loss,
business interruption loss, network security liability, privacy liability, network extortion and data breach coverage. As cyber threats
continue to evolve, we may be required to expend significant additional resources to modify our protective measures or to investigate
and remediate any information security vulnerabilities.
We may not pay dividends if we are not able to receive dividends from our subsidiary, Webster Bank.
We are a separate and distinct legal entity from our banking and non-banking subsidiaries and depend on the payment of cash
dividends from Webster Bank and our existing liquid assets as the principal sources of funds for paying cash dividends on our
common stock. Unless we receive dividends from Webster Bank or choose to use our liquid assets, we may not be able to pay
dividends. Webster Bank’s ability to pay dividends is subject to its ability to earn net income and to meet certain regulatory
requirements. See “Supervision and Regulation—Dividends” for a discussion of regulatory and other restrictions on dividend
declarations.
We are exposed to risk of environmental liabilities with respect to properties to which we obtain title.
A large portion of our loan portfolio is secured by real estate. In the course of our business, we may foreclose and take title to real
estate and could be subject to environmental liabilities with respect to these properties. We may be held liable to a government
entity or to third parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection
with environmental contamination, or may be required to clean up hazardous or toxic substances, or chemical releases at a property.
The costs associated with investigation and remediation activities could be substantial. In addition, if we are the owner or former
owner of a contaminated site, we may be subject to common law claims by third parties based on damages and costs resulting
from environmental contamination emanating from the property. These costs and claims could adversely affect our business, results
of operations and prospects.
17
ITEM 1B. UNRESOLVED STAFF COMMENTS
Webster has no unresolved comments from the SEC staff.
ITEM 2. PROPERTIES
The Company's headquarters is located in Waterbury, CT. This facility houses the Company's executive and primary administrative
offices, as well as the principal banking headquarters of Webster Bank.
At December 31, 2014, Webster Bank had 164 banking centers, as follows:
Connecticut
Massachusetts
Rhode Island
New York
Total Banking Centers
Leased
79
8
9
8
104
Owned
43
13
4
—
60
Total
122
21
13
8
164
Lease expiration dates range from 1 to 73 years with renewal options of 1 to 25 years. For additional information regarding leases
and rental payments, see Note 21 - Commitments and Contingencies in the Notes to Consolidated Financial Statements included
elsewhere within this report.
The following subsidiaries and divisions maintain the following offices: Webster Private Banking is headquartered in Stamford,
Connecticut with offices in Hartford, Connecticut; New Haven, Connecticut; Waterbury, Connecticut; Greenwich, Connecticut;
Wilton, Connecticut; White Plains, New York; and Providence, Rhode Island. Webster Capital Finance is headquartered in
Kensington, Connecticut. Webster Business Credit Corporation is headquartered in New York, New York with offices in Boston,
Massachusetts; Radnor, Pennsylvania; New Milford, Connecticut; and Washington D.C. HSA Bank is headquartered in Sheboygan,
Wisconsin with an office in Milwaukee, Wisconsin.
ITEM 3. 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 4. MINE SAFETY DISCLOSURES
None
18
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND
ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Webster's common shares trade on the New York Stock Exchange under the symbol “WBS.”
The following table sets forth, for each quarter of 2014 and 2013, the high and low intra-day sales prices per share of Webster's
common stock and the cash dividends declared per share:
2014
Fourth quarter
Third quarter
Second quarter
First quarter
2013
Fourth quarter
Third quarter
Second quarter
First quarter
$
$
High
33.32 $
32.49
31.91
32.67
High
31.32 $
28.29
25.92
24.67
Cash
Dividends
Declared
0.20
0.20
0.20
0.15
Low
26.53 $
27.77
28.21
28.71
Cash
Dividends
Declared
0.15
0.15
0.15
0.10
Low
24.64 $
24.53
22.04
20.81
On January 27, 2015, Webster’s Board of Directors declared a quarterly dividend of $0.20 per share.
On January 30, 2015, the closing market price of Webster common stock was $30.53; there were 7,007 shareholders of record as
determined by Broadridge, the Company’s transfer agent and registrar; and there were 90,523,288 common shares outstanding.
Dividends
A primary source of liquidity for Webster Financial Corporation is dividend payments from Webster Bank. The Bank paid the
Company $100 million in dividends during the year ended December 31, 2014.
The Bank’s ability to make dividend payments to the Company is subject to certain regulatory and other requirements. Under
OCC regulations, subject to the Bank meeting applicable regulatory capital requirements before and after payment of dividends,
the Bank may declare a dividend, without prior regulatory approval, limited to net income for the current year to date as of the
declaration date, plus undistributed net income from the preceding two years. At December 31, 2014, Webster Bank was in
compliance with all applicable minimum capital requirements, and there was $270.2 million of undistributed net income available
for the payment of dividends by the Bank to the Company.
Under the regulations, the OCC may grant specific approval permitting divergence from the requirements and also has the discretion
to prohibit any otherwise permitted capital distribution on general safety and soundness grounds. In addition, the payment of
dividends is subject to certain other restrictions, none of which is expected to limit any dividend policy that the Board of Directors
may in the future decide to adopt.
If the capital of Webster is diminished by depreciation in the value of its property, by losses, or otherwise, to an amount less than
the aggregate amount of the capital represented by the issued and outstanding stock of all classes having a preference upon the
distribution of assets, no dividends may be paid out of net profits until the deficiency in the amount of capital represented by the
issued and outstanding stock of all classes having a preference upon the distribution of assets has been repaired. See the “Supervision
and Regulation” section contained elsewhere within this report for additional information on dividends.
19
Exchanges of Registered Securities
Registered securities are exchanged as part of employee and director stock compensation plans.
Recent Sale of Unregistered Securities
No unregistered securities were sold by Webster during the year ended December 31, 2014.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The following table provides information with respect to any purchase of equity securities for Webster common stock made by
or on behalf of Webster or any “affiliated purchaser,” as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934,
during the three months ended December 31, 2014:
Period
October 1-31, 2014
November 1-30, 2014
December 1-31, 2014
Total
Total
Number of
Shares
Purchased (1)
Average Price
Paid Per
Share
Maximum
Dollar Amount
Available for
Repurchase
Under the Plans
or Programs (1)
Total
Number of
Warrants
Purchased (2)
Average Price
Paid Per
Warrant
—
1,209
2,166
3,375
$
$
$
$
—
$ 39,258,677
32.08
31.93
31.98
$ 39,258,677
$ 39,258,677
$ 39,258,677
300
—
—
300
$
$
$
$
9.90
—
—
9.90
(1) The Company's current stock repurchase program authorized management to repurchase up to a maximum of $100 million of common
stock and will remain in effect until fully utilized or until modified, superseded, or terminated. All 3,375 shares repurchased during the
three months ended December 31, 2014 were purchased outside of the repurchase program, at market prices, to fund equity compensation
plans.
(2) Warrants to purchase the Company's common stock at an exercise price of $18.28 per share, listed on the New York Stock Exchange under
the symbol "WBS WS."
20
Performance Graph
The performance graph compares Webster’s cumulative shareholder return on its common stock over the last five fiscal years to
the cumulative total return of the Standard & Poor’s 500 Index (“S&P 500 Index”) and the Keefe, Bruyette & Woods Regional
Banking Index (“KRX”). KRX is used as the industry index because Webster believes it provides a representative comparison
and appropriate benchmark against which to measure relative bank stock performance.
Total shareholder return is measured by dividing total dividends (assuming dividend reinvestment) for the measurement period
plus share price change for a period by the share price at the beginning of the measurement period. Webster’s cumulative shareholder
return over a five-year period is based on an initial investment of $100 on December 31, 2009.
Comparison of Five Year Cumulative Total Return Among Webster, S&P 500 Index, KRX
Period Ending
Index
Webster Financial Corporation
S&P 500 Index
KRX
12/31/2009 12/31/2010 12/31/2011 12/31/2012 12/31/2013 12/31/2014
295
$
205
$
195
$
276 $
180 $
190 $
178 $
136 $
129 $
174 $
117 $
114 $
166 $
115 $
120 $
100 $
100 $
100 $
21
ITEM 6. SELECTED FINANCIAL DATA
(Dollars in thousands, except per share data)
BALANCE SHEETS
Total assets
Loans and leases, net
Investment securities
Goodwill and other intangible assets, net
Deposits
Borrowings
Total equity
STATEMENTS OF INCOME
Interest income
Interest expense
Net interest income
Provision for loan and lease losses
Other non-interest income
Net impairment losses on securities recognized in earnings
Net unrealized (loss) gain on securities classified as trading
Net gain on sale of investment securities
Non-interest expense
Income from continuing operations before income tax expense
Income tax expense
Income from continuing operations
Income from discontinued operations, net of tax
Less: Net (loss) income attributable to non controlling interests
Preferred stock dividends
Accretion of preferred stock discount and gain on extinguishment
Net income available to common shareholders
Per Share Data
Weighted-average common shares—diluted
Net income per common share from continuing operations—basic
Net income per common share—basic
Net income per common share from continuing operations—diluted
Net income per common share—diluted
Dividends declared per common share
Book value per common share
Tangible book value per common share
Key Performance Ratios
Return on average assets (1)
Return on average common shareholders’ equity
Return on average tangible common shareholders' equity
Net interest margin
Efficiency ratio
Tangible common equity ratio
Non-interest income as a percentage of total revenue
Average shareholders’ equity to average assets
Dividend payout ratio
Asset Quality Ratios
Allowance for loan and lease losses as a percentage of loans and leases
Net charge-offs as a percentage of average loans and leases
Non-performing loans and leases as a percentage of loans and leases
Non-performing assets as a percentage of loans and leases plus OREO
(1) Calculated based on net income before preferred dividends.
2014
At or for the years ended December 31,
2012
2011
2013
2010
$ 22,533,010
13,740,761
6,666,828
532,553
15,651,605
4,336,424
2,322,681
$ 20,852,999
12,547,203
6,465,652
535,238
14,854,420
3,612,448
2,209,188
$ 20,146,765
11,851,567
6,243,689
540,157
14,530,835
3,238,048
2,093,530
$ 18,714,340
10,991,917
5,848,491
545,577
13,656,025
2,969,904
1,845,774
$ 18,033,881
10,696,532
5,486,229
551,164
13,608,785
2,442,319
1,778,879
$
$
$
718,941
90,500
628,441
37,250
197,754
(1,145)
—
5,499
502,138
291,161
91,409
199,752
—
—
(10,556)
—
189,196
90,620
2.10
2.10
2.08
2.08
0.75
23.99
18.10
0.93%
8.85
11.90
3.21
59.30
7.45
24.33
10.67
35.71
1.15%
0.23
0.95
1.00
$
$
$
687,640
90,912
596,728
33,500
197,615
(7,277)
—
712
498,059
256,219
76,670
179,549
—
—
(10,803)
—
168,746
90,261
1.90
1.90
1.86
1.86
0.55
22.77
16.85
0.89%
8.45
11.77
3.26
60.36
7.49
24.25
10.61
28.95
1.20%
0.47
1.28
1.35
$
$
$
693,502
114,594
578,908
21,500
189,411
—
—
3,347
501,804
248,362
74,665
173,697
—
—
(2,460)
—
171,237
91,649
1.96
1.96
1.86
1.86
0.35
22.75
16.42
0.90%
8.97
12.80
3.32
62.78
7.15
24.98
10.06
17.86
1.47%
0.68
1.62
1.65
$
$
$
699,723
135,955
563,768
22,500
175,018
—
(1,799)
3,823
510,976
207,334
57,951
149,383
1,995
(1)
(3,286)
—
148,093
91,688
1.67
1.69
1.59
1.61
0.16
20.74
14.51
0.84%
8.19
12.04
3.47
65.13
7.00
23.90
10.16
9.47
2.08%
1.00
1.68
1.72
708,647
171,376
537,271
115,000
185,270
(5,838)
12,045
9,748
538,974
84,522
12,358
72,164
94
3
(18,086)
(6,830)
47,339
82,172
0.60
0.60
0.57
0.57
0.04
19.97
13.64
0.40%
3.05
5.11
3.36
66.73
6.80
27.25
10.47
6.67
2.92%
1.23
2.48
2.73
$
$
$
22
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated Financial Statements of Webster Financial
Corporation and the Notes thereto included elsewhere within this report (collectively, the “Consolidated Financial Statements”).
Forward-Looking Statements
This Annual Report on Form 10-K contains “forward-looking statements” within the meaning of the Private Securities Litigation
Reform Act of 1995 (the “Act”). Forward-looking statements can be identified by words such as “believes,” “anticipates,” “expects,”
“intends,” “targeted,” “continue,” “remain,” “will,” “should,” “may,” “plans,” “estimates,” and similar references to future periods;
however, such words are not the exclusive means of identifying such statements. Examples of forward-looking statements include,
but are not limited to: (i) projections of revenues, expenses, income or loss, earnings or loss per share, and other financial items;
(ii) statements of plans, objectives and expectations of Webster or its management or Board of Directors; (iii) statements of future
economic performance; and (iv) statements of assumptions underlying such statements. Forward-looking statements are based on
Webster’s current expectations and assumptions regarding its business, the economy and other future conditions. Because forward-
looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are
difficult to predict. Webster’s actual results may differ materially from those contemplated by the forward-looking statements,
which are neither statements of historical fact nor guarantees or assurances of future performance. Factors that could cause actual
results to differ from those discussed in the forward-looking statements include, but are not limited to: (i) local, regional, national
and international economic conditions and the impact they may have on us and our customers and our assessment of that impact;
(ii) volatility and disruption in national and international financial markets; (iii) government intervention in the U.S. financial
system; (iv) changes in the level of non-performing assets and charge-offs; (v) changes in estimates of future reserve requirements
based upon the periodic review thereof under relevant regulatory and accounting requirements; (vi) adverse conditions in the
securities markets that lead to impairment in the value of securities in our investment portfolio; (vii) inflation, interest rate, securities
market and monetary fluctuations; (viii) the timely development and acceptance of new products and services and perceived overall
value of these products and services by customers; (ix) changes in consumer spending, borrowings and savings habits;
(x) technological changes and cyber-security matters; (xi) the ability to increase market share and control expenses; (xii) changes
in the competitive environment among banks, financial holding companies and other financial services providers; (xiii) the effect
of changes in laws and regulations (including laws and regulations concerning taxes, banking, securities and insurance) with which
we and our subsidiaries must comply, including the Dodd-Frank Wall Street Reform and Consumer Protection Act and the New
Capital Rules; (xiv) the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as
well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard
setters; (xv) 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; and (xvi) our success at managing the risks
involved in the foregoing items. Any forward-looking statement made by the Company in this Annual Report on Form 10-K speaks
only as of the date on which it pursuant to is made. Factors or events that could cause the Company’s actual results to differ may
emerge from time to time, and it is not possible for the Company to predict all of them. The Company undertakes no obligation
to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise,
except as may be required by law.
Critical Accounting Policies and Accounting Estimates
The Company follows accounting and reporting policies and procedures that conform, in all material respects, to U.S. generally
accepted accounting principles and to practices generally applicable to the financial services industry, the most significant of which
are described in Note 1 - Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements included
elsewhere within this report. The preparation of Consolidated Financial Statements in conformity with U.S. generally accepted
accounting principles requires management to make judgments and accounting estimates that affect the amounts reported for
assets, liabilities, revenues and expenses in the Consolidated Financial Statements and accompanying notes, and amounts disclosed
as contingent assets and liabilities. While the Company bases estimates on historical experience, current information and other
factors deemed to be relevant, actual results could differ from those estimates.
Accounting estimates are necessary in the application of certain accounting policies and procedures that are particularly susceptible
to significant change. Critical accounting policies are defined as those that require the most complex or subjective judgment, are
reflective of significant uncertainties, and could potentially result in materially different results under different assumptions and
conditions. Management has identified the Company's most critical accounting policies and accounting estimates, which have
been discussed with the appropriate committees of the Board of Directors, as follows:
23
Allowance for Loan and Lease Losses
The allowance for loan and lease losses is a reserve established through a provision for credit losses charged to expense, which
represents management’s best estimation of probable losses that are inherent within the Company’s portfolio of loans and leases
as of the balance sheet date. The allowance for loan and lease losses is based on guidance provided in SEC Staff Accounting
Bulletin No. 102, “Selected Loan Loss Allowance Methodology and Documentation Issues” and includes amounts calculated in
accordance with Accounting Standards Codification ("ASC") Topic 310, “Receivables” and allowance allocation calculated in
accordance with ASC Topic 450, “Contingencies.”
The level of the allowance for loan and lease losses reflects management’s judgment based on continuing evaluation of industry
concentrations, specific credit risks, loss experience, current portfolio quality, present economic, political, and regulatory conditions
and inherent risks not captured in quantitative modeling and methodologies, as well as trends therein. This allowance balance may
be allocated for specific portfolio credits; however, the entire allowance balance is available for any credit that, in management’s
judgment, should be charged off. While management utilizes its best judgment and information available, the ultimate adequacy
of the allowance for loan and lease losses is dependent upon a variety of factors beyond the Company’s control, including
performance of the Company’s loan portfolio, the economy, changes in interest rates, and regulatory authorities altering their loan
classification guidance.
Fair Value Measurements
The Company records certain assets and liabilities at fair value in the Consolidated Financial Statements. 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, as defined by applicable accounting guidance.
To increase consistency and comparability in fair value measures, management adheres to the three-level hierarchy established to
prioritize the inputs used in valuation techniques, which consists of (i) quoted prices (unadjusted) in active markets for identical
assets or liabilities that the reporting entity can access at the measurement date, (ii) inputs other than quoted prices included in
Level 1 that are observable for the asset or liability, either directly or indirectly, and (iii) unobservable data such as the Company’s
own data or single dealer non-binding pricing quotes. All assets and liabilities recorded at fair value are categorized both on a
recurring and nonrecurring basis into the above three levels. At the end of each quarter, management assesses the valuation hierarchy
for each asset or liability and, as a result, assets or liabilities may be transferred between hierarchy levels due to changes in
availability of observable market inputs used to measure fair value at that measurement date.
When observable market prices are not available, fair value is estimated using modeling techniques such as discounted cash flow
analysis. These modeling techniques utilize assumptions that market participants would use in pricing the asset or liability, including
assumptions about the risk inherent in a particular valuation technique, the effect of a restriction on the sale or use of an asset, and
the risk of nonperformance. Depending on the nature of the asset or liability, the Company uses various valuation techniques and
assumptions when estimating the instrument’s fair value. In addition, changes in legislation or regulatory environment could further
impact these assumptions.
24
The hierarchy level and valuation methodology for financial instruments measured at fair value on a recurring basis is at
December 31, 2014:
Financial Instrument
Hierarchy
Valuation Methodology
Available for sale
securities
Level 1
Consists of U.S. Treasury securities and equity securities which have quoted prices.
Level 2
Consists of Agency CMOs, Agency MBS, Agency CMBS, Non-Agency CMBS, CLOs,
corporate debt, single-issuer trust preferred securities, for which quoted market prices are
not available. Management employs an independent pricing service that utilizes matrix
pricing to calculate fair value. This fair value measurement considers observable data such
as dealer quotes, dealer price indications, market spreads, credit information, and the
respective terms and conditions for debt instruments. Procedures are in place to monitor
assumptions and establish processes to challenge valuations received from pricing services
that appear unusual or unexpected.
Derivative instruments
Level 1
Consists of Fed Funds futures contracts which have quoted prices.
Investments held in
Rabbi Trust
Alternative investments
Level 2
Level 1
Consists of interest rate swaps and mortgage banking derivatives. Management uses readily
observable market parameters to value these contracts. Further, for interest rate swaps,
Bloomberg models and third-party consultants are utilized.
Consists primarily of mutual funds that invest in equity and fixed income securities. Shares
of mutual funds are valued based on net asset value, which represents quoted market prices
for the underlying shares held in the mutual fund.
Level 3 Webster records investments in private equity funds at cost or fair value based on ownership
percentage in the fund. Ownership in investments less than 3% are recorded at cost and are
subject to impairment testing. Equity investments that do not have a readily determinable
fair value are recorded at cost and subject to impairment testing. Investment ownership in
private equity funds greater than 3% are accounted for at fair value using a Net Asset Value
(NAV) as a practical expedient to calculate fair value.
Credit-driven OTTI is monitored for pooled trust preferred securities due to the continued inactive market and illiquid nature in
the entire capital structure of these CDO securities. 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.
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 to determine potential OTTI due to credit losses, which would be charged against
earnings. Other factors that management considers include an analysis of excess subordination and temporary interest shortfall
coverage. Additional interest deferrals, defaults, or ratings changes could result in further OTTI due to credit losses.
On December 10, 2013, Federal banking agencies jointly adopted final regulations to implement Section 619 of the Dodd-Frank
Act, commonly known as the Volcker Rule. The Volcker Rule restricts the ability of banking entities to engage in proprietary
trading or have an ownership interest in Covered Funds. The final rule definition of a Covered Fund includes investments such
as certain CLO and CDO securities, in the available-for-sale portfolio, and alternative investments. The company will divest its
Covered Fund investments in accordance with the conformance period defined in the Final Rule. As a result, OTTI is immediately
triggered since it becomes more likely than not that the company would be required to divest of a security with a current unrealized
loss before achieving full recovery of its cost. Unlike credit-driven OTTI, when only the credit portion of the impairment is charged
against earnings, a required divestiture situation results in a full write-down to market value in the current period. Therefore, the
Company recognized OTTI of $1.1 million related to the CLO securities for the year ended December 31, 2014.
Information regarding the fair value hierarchy levels and Volcker Rule impact are more fully described, along with additional
information regarding fair value measurements, in Note 17 - Fair Value Measurements and Note 2 - Investment Securities in the
Notes to Consolidated Financial Statements included elsewhere within this report.
25
Goodwill Valuation
Goodwill represents the excess purchase price of businesses acquired over the fair value, at acquisition, of the identifiable net
assets acquired and is assigned to specific reporting units. Goodwill is evaluated for impairment, at least annually, in accordance
with ASC Topic 350, "Intangibles - Goodwill and Other." Quarterly, an assessment of potential triggering events is performed and
should events or circumstances be present that, more likely than not, would reduce the fair value of a reporting unit below its
carrying value, the Company would then evaluate: periods of market disruption; market capitalization to book value erosion;
financial services industry-wide factors; geo-economic factors, and internally developed forecasts to determine if its recorded
goodwill may be impaired. Goodwill is evaluated for impairment by either performing a qualitative evaluation or a two-step
quantitative test. The qualitative evaluation is an assessment of factors to determine whether it is more likely than not that the fair
value of a reporting unit is less than its carrying amount, including goodwill. Discounted cash flow estimates, which include
significant management assumptions relating to revenue growth rates, net interest margins, weighted-average cost of capital, and
future economic and market conditions, are used to determine fair value under the two-step quantitative test. In “Step 1,” the fair
value of a reporting unit is compared to its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its
carrying amount, goodwill of the reporting unit is not considered impaired, and it is not necessary to continue to “Step 2” of the
impairment process. Otherwise, Step 2 is performed where the implied fair value of goodwill is compared to the carrying value
of goodwill in the reporting unit. If a reporting unit's carrying value exceeds fair value, the difference is charged to non-interest
expense.
During 2014, Webster performed its annual impairment test under Step 1 as of its elected measurement date of August 31.
Subsequently, Webster elected to change prospectively the measurement date for its annual goodwill impairment test from August
31 to November 30 of each fiscal year beginning in 2015. In conjunction with this change, Webster performed a Step 1 impairment
test at December 31, 2014. This change is not expected to result in the delay, acceleration, or avoidance of an impairment charge.
Webster believes this timing is preferable as it better aligns the goodwill impairment test with the Company's strategic business
planning process, which is a key component of the goodwill impairment test.
The valuation of goodwill involves estimates which require significant management judgment. Determining the fair value of a
reporting unit involves several management estimates, including developing a discounted cash flow valuation model which utilizes
variables such as revenue growth rates, expense trends, discount rates, and terminal values. Based upon an evaluation of key data
and market factors, management selects from a range, the specific variables to be incorporated into the valuation model. 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. The
Company utilizes both an income approach and a market approach to arrive at an indicated fair value range for the reporting
unit. The comparable company method is used to corroborate the income approach, giving an indication of the fair value of equity
of the reporting units, by including small to mid-sized banks based in the Northeast with significant geographic or product line
overlap to Webster and its reporting units.
At December 31, 2014, Webster calculated the following multiples for the selected comparable companies, as appropriate for each
reporting unit: core deposit premium, equity value-to-tangible book value, equity value-to-revenue and price-to-earnings per share.
The selected multiple ranges were based on a range of 90% to 110% of the median multiples, subject to an adjustment factor and
a global factor calculated based on the quantitative and qualitative differences between the comparable companies and the reporting
units. In this income approach used, the discount rate used for each reporting unit ranged from 8.5% to 11.3%. The long-term
growth rate used in determining the terminal value of the reporting unit's cash flows was estimated at 4% and is based on
management’s assessment of the minimum expected growth rate of each reporting unit as well as broader economic and regulatory
considerations.
In estimating the carrying value of each reporting unit, Webster also uses a methodology that is based upon Basel III asset risk
weightings and fully allocates book capital to all assets and liabilities of each reporting unit. Capital is allocated to assets based
on risk weightings and to funding liabilities based on an assessment of operational risk, collateral needs and residual leverage
capital as appropriate.
There was no impairment indicated as a result of the Step 1 test performed as of December 31, 2014. The fair value of the Consumer
Deposits, Business Banking, and Other reporting units where goodwill resides exceeded carrying value by 52.4%, 15.8%, and
910.2%, respectively.
With respect to sensitivity analysis related to the Business Banking unit, by which the fair value exceeded the carrying amount
by approximately 16%, stressing (i) the discount rate up approximately 100 basis points or (ii) the projection of net income
downward by approximately 10%, assuming no changes in any other variable, would result in the Company having to perform
additional analysis under step 2.
26
Calculations around sensitivity are hypothetical and should not be considered to be predictive of future performance. Impacts to
implied fair value based on adverse changes in assumptions should not be extrapolated as the relationship of change in assumption
to the change in fair value may not be linear.
Income Taxes
In accordance with ASC Topic 740, "Income Taxes," certain aspects of accounting for income taxes require significant management
judgment, including assessing the realizability of deferred tax assets and the resolution of uncertain tax positions. Such judgments
are subjective and involve estimates and assumptions about matters that are inherently uncertain. Should actual factors and
conditions differ materially from those used by management, the actual realization of deferred tax assets and resolution of uncertain
tax positions could differ materially from the amounts recorded in the Consolidated Financial Statements.
Deferred tax assets generally represent items that can be used as a tax deduction or credit in future income tax returns and for
which a financial statement tax benefit has been recognized. The realization of deferred tax assets depends upon future sources
of taxable income and the existence of prior years' taxable income to which carry back refund claims could be made. Valuation
allowances are established for those deferred tax assets determined not likely to be realized based on management's judgment.
Tax positions that are uncertain but meet a more likely than not recognition threshold are measured as the largest amount of tax
benefit that has a greater than 50% likelihood of being realized upon settlement with a taxing authority that has full knowledge
of all relevant information. The determination of whether or not a tax position meets the more likely than not recognition threshold
considers the facts, circumstances and information available at the reporting date and is subject to management's judgment.
Income taxes are more fully described in Note 7 - Income Taxes in the Notes to Consolidated Financial Statements included
elsewhere within this report.
Defined Benefit Pension and Postretirement Benefits Plans
The determination of the obligation and expense for the defined benefit pension and postretirement benefits plans is dependent
upon certain key assumptions used in calculating such amounts. Key assumptions used in the actuarial valuations include the
discount rate, expected long-term rate of return on plan assets, and rates of increase in health care costs. Effective December 31,
2014, the mortality assumptions used in the pension liability assessment was updated to the RP-2014 table with the Mercer
MMP-2007 mortality improvement projection scale applied generationally. Market-driven rates may fluctuate unexpectedly, and
actual results would differ from the assumptions utilized for actuarial valuations. Significant differences in actual experience or
significant changes in the key assumptions may materially affect the future defined benefit pension and postretirement benefits
obligations and expense. The Company has a retirement plans committee which evaluates the key assumptions for the benefit
plans annually. The discount rates used in the actuarial valuation of the defined benefit pension and postretirement benefits plans
were calculated using the CitiGroup yield curve as of each measurement date. Trends in the key assumptions used in the actuarial
valuations are more fully described in Note 18 - Pension and Other Postretirement Benefits in the Notes to Consolidated Financial
Statements included elsewhere within this report.
Accounting Standards Updates
See Note 1 - Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements included elsewhere
within this report for details of recently issued accounting pronouncements and their expected impact on the Company's financial
statements.
27
Results of Operations
Financial Performance
The Company achieved a record level of net income available to common shareholders of $189.2 million for the year ended
December 31, 2014. The Company's operating efficiency continued to improve as evidenced by a decrease of 106 basis points in
the efficiency ratio, record high levels of low cost deposits, continued total loan growth, steady improvement in credit quality, and
continued strong capital ratios.
Income before income tax expense was $291.2 million for the year ended December 31, 2014, an increase of $34.9 million from
$256.2 million for the year ended December 31, 2013.
The primary factors positively impacting income before tax expense include:
•
•
•
•
•
•
interest income increased $31.3 million;
impairment losses on securities decreased by $6.1 million;
net gain on sale of investment securities increased $4.8 million;
deposit service fees increased $4.5 million;
loan related fees increased $1.4 million;
interest expense decreased $0.4 million; and
• wealth and investment service fees increased $0.2 million.
The primary factors negatively impacting income from continuing operations include:
•
•
•
income from mortgage banking activities decreased $12.3 million;
non-interest expense increased $4.1 million; and
provision for loan and lease losses increased $3.8 million.
The impact of the items outlined above, and the effect from income taxes of $91.4 million and $76.7 million, and preferred stock
dividends of $10.6 million and $10.8 million for the years ended December 31, 2014 and 2013, respectively, resulted in net income
available to common shareholders of $189.2 million for the year ended December 31, 2014 compared to $168.7 million for the
year ended December 31, 2013. Diluted net income available to common shareholders was $2.08 and $1.86 per share for the
years ended December 31, 2014 and 2013, respectively.
Net interest income increased $31.7 million to $628.4 million for the year ended December 31, 2014. Average total interest-
earning assets increased by $1.2 billion, while the average yield decreased by 7 basis points in 2014 compared to 2013. Average
total interest-bearing liabilities increased $1.1 billion, while the average cost decreased by 3 basis points in 2014 compared to
2013.
Credit quality improved as evidenced by improvement in asset quality ratios. Net charge-offs as a percentage of average loans
and leases decreased to 0.23% for the year ended December 31, 2014 from 0.47% for the year ended December 31, 2013, and
non-performing assets as a percentage of loans, leases and other real estate owned decreased to 1.00% at December 31, 2014
from 1.35% at December 31, 2013. The continued improvement in credit quality in 2014 resulted in a reduction in total past due
and non-accrual loans at December 31, 2014 compared to December 31, 2013.
On April 21, 2014, the Company increased its quarterly cash dividend to common shareholders to $0.20 per common share from
$0.15 per common share.
28
Selected financial highlights are presented in the following table:
$
(In thousands, except per share and ratio data)
Statement of Income:
Net interest income
Provision for loan and lease losses
Total non-interest income
Total non-interest expense
Net income
Net income available to common shareholders
Per Share Data:
Weighted-average common shares - diluted (1)
Net income available to common shareholders per common share - diluted $
Dividends declared per common share
Dividends declared per Series A preferred share
Dividends declared per Series E preferred share
Book value per common share
Tangible book value per common share (3)
Selected Ratios:
Tangible common equity ratio (3)
Tier 1 common equity to risk-weighted assets (3)
Net interest margin
Return on average assets (2)
Return on average common shareholders' equity
Return on average tangible common shareholders' equity (3)
Efficiency ratio (3)
At or for the years ended December 31,
2014
2013
2012
$
$
628,441
37,250
202,108
502,138
199,752
189,196
90,620
2.08
0.75
85.00
1,600.00
23.99
18.10
$
$
596,728
33,500
191,050
498,059
179,549
168,746
90,261
1.86
0.55
85.00
1,648.89
22.77
16.85
7.45%
11.43
3.21
0.93
8.85
11.90
59.30
7.49%
11.43
3.26
0.89
8.45
11.77
60.36
578,908
21,500
192,758
501,804
173,697
171,237
91,649
1.86
0.35
85.00
—
22.75
16.42
7.15%
10.78
3.32
0.90
8.97
12.80
62.78
(1) For the years ended December 31, 2014, 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.
(2) Based on net income before preferred dividend.
(3) 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.
29
The following table reconciles the non-GAAP financial measures with financial measures defined by GAAP:
(Dollars and shares in thousands, except per share data)
Tangible book value per common share (non-GAAP):
Shareholders' equity (GAAP)
Less: Preferred equity (GAAP)
Goodwill and other intangible assets (GAAP)
Tangible common equity (non-GAAP)
Common shares outstanding
Tangible book value per common share (non-GAAP)
Tangible common equity ratio (non-GAAP):
Shareholders' equity (GAAP)
Less: Preferred stock (GAAP)
Goodwill and other intangible assets (GAAP)
Tangible common shareholders' equity (non-GAAP)
Total Assets (GAAP)
Less: Goodwill and other intangible assets (GAAP)
Tangible assets (non-GAAP)
Tangible common equity ratio (non-GAAP)
Tier 1 common equity to risk-weighted assets (non-GAAP):
Shareholders' equity (GAAP)
Less: Preferred equity (GAAP)
Goodwill and other intangible assets (GAAP)
Accumulated other comprehensive loss (GAAP)
Add back: DTL related to goodwill and other intangibles (regulatory)
Tier 1 common equity (regulatory)
Risk-weighted assets (regulatory)
Tier 1 common equity to risk-weighted assets (non-GAAP)
(Dollars in thousands)
Return on average tangible common shareholders' equity (non-GAAP):
Net income available to common shareholders (GAAP)
Intangible assets amortization, tax-affected at 35% (GAAP)
Net income adjusted for amortization of intangibles (non-GAAP)
Average shareholders' equity (non-GAAP)
Less: Average Preferred stock (non-GAAP)
Average Goodwill and other intangible assets (non-GAAP)
Average tangible common equity (non-GAAP)
2014
At December 31,
2013
2012
$ 2,322,681
151,649
532,553
$ 1,638,479
90,512
18.10
$
$ 2,209,188
151,649
535,238
$ 1,522,301
90,367
16.85
$
$ 2,093,530
151,649
540,157
$ 1,401,724
85,341
16.42
$
$ 2,322,681
151,649
532,553
$ 1,638,479
$22,533,010
532,553
$22,000,457
$ 2,209,188
151,649
535,238
$ 1,522,301
$20,852,999
535,238
$20,317,761
$ 2,093,530
151,649
540,157
$ 1,401,724
$ 20,146,765
540,157
$ 19,606,608
7.45%
7.49%
7.15%
$ 2,322,681
151,649
532,553
(56,261)
9,886
$ 1,704,626
$14,908,139
$ 2,209,188
151,649
535,238
(48,549)
10,145
$ 1,580,995
$13,827,535
$ 2,093,530
151,649
540,157
(32,266)
11,380
$ 1,445,370
$ 13,409,363
11.43%
11.43%
10.78%
For the years ended December 31,
2014
2013
2012
$
189,196
1,745
190,941
$
$ 2,289,565
151,649
533,549
$ 1,604,367
$
168,746
3,197
171,943
$
$ 2,149,713
151,649
537,650
$ 1,460,414
$
171,237
3,523
174,760
$
$ 1,946,580
38,335
542,782
$ 1,365,463
Return on average tangible common shareholders' equity (non-GAAP)
11.90%
11.77%
12.80%
Efficiency ratio (non-GAAP):
Non-interest expense (GAAP)
Less: Foreclosed property expense (GAAP)
Intangible assets amortization (GAAP)
Other expense (non-GAAP)
Non-interest expense (non-GAAP)
Net interest income (GAAP)
Add back: FTE adjustment (non-GAAP)
Non-interest income (GAAP)
Less: Net gain on sale of investment securities (GAAP)
Impairment loss recognized in earnings (GAAP)
Income (non-GAAP)
Efficiency ratio (non-GAAP)
30
$
$
$
$
502,138
1,223
2,685
1,732
496,498
628,441
11,124
202,108
5,499
(1,145)
837,319
$
$
$
$
498,059
1,338
4,919
4,354
487,448
596,728
13,221
191,050
712
(7,277)
807,564
$
$
$
$
501,804
1,028
5,420
3,762
491,594
578,908
14,751
192,758
3,347
—
783,070
59.30%
60.36%
62.78%
The following table summarizes the Company's daily average balances, interest, average yields and net interest margin on a fully
tax-equivalent basis:
Years ended December 31,
2014
2013
2012
Average
Balance
Interest
Average
Yields
Average
Balance
Interest
Average
Yields
Average
Balance
Interest
Average
Yields
(Dollars in thousands)
Assets
Interest-earning assets:
Loans and leases
$ 13,275,340 $ 513,705
3.87% $ 12,235,821 $ 490,985
4.01% $ 11,525,233 $ 485,666
4.21%
Securities (1)
Federal Home Loan and Federal
Reserve Bank stock
Interest-bearing deposits
Loans held for sale
6,446,799
210,721
3.28
6,268,889
204,287
3.28
6,100,219
216,513
3.58
168,036
4,719
24,376
22,642
63
857
2.81
0.26
3.78
158,233
3,437
21,800
63,870
84
2,068
2.17
0.39
3.24
143,074
77,265
73,156
3,508
141
2,425
2.45
0.18
3.31
Total interest-earning assets
19,937,193 $ 730,065
3.67%
18,748,613 $ 700,861
3.74% 17,918,947 $ 708,253
3.96%
Non-interest-earning assets
1,523,606
Total assets
$ 21,460,799
1,513,906
$ 20,262,519
1,427,824
$ 19,346,771
Liabilities and equity
Interest-bearing liabilities:
Demand deposits
$ 3,216,777 $
—
—% $ 2,939,324 $
—
—% $ 2,638,025 $
—
—%
Savings, checking, & money market
deposits
Time deposits
Total deposits
9,863,703
17,800
2,280,668
26,362
15,361,148
44,162
Securities sold under agreements to
repurchase and other borrowings
1,353,308
19,388
Federal Home Loan Bank advances
2,038,749
16,909
Long-term debt
Total borrowings
252,368
10,041
3,644,425
46,338
0.18
1.16
0.29
1.43
0.83
3.98
1.27
9,511,386
18,376
2,357,321
28,206
14,808,031
46,582
1,228,002
20,800
1,652,471
16,229
233,850
7,301
3,114,323
44,330
0.19
1.20
0.31
1.69
0.98
3.12
1.42
8,824,581
21,061
2,703,414
38,525
14,166,020
59,586
1,207,623
21,034
1,389,999
16,943
418,896
17,031
3,016,518
55,008
0.24
1.43
0.42
1.74
1.22
4.07
1.82
Total interest-bearing liabilities
19,005,573 $
90,500
0.48%
17,922,354 $
90,912
0.51% 17,182,538 $ 114,594
0.67%
Non-interest-bearing liabilities
Total liabilities
Preferred stock
Common shareholders' equity
Webster Financial Corporation
shareholders' equity
165,661
19,171,234
151,649
2,137,916
2,289,565
190,452
18,112,806
151,649
1,998,064
2,149,713
Total liabilities and equity
$ 21,460,799
$ 20,262,519
217,653
17,400,191
38,335
1,908,245
1,946,580
$ 19,346,771
Tax-equivalent net interest income
Less: tax equivalent adjustments
Net interest income
Net interest margin
639,565
(11,124)
$ 628,441
609,949
(13,221)
$ 596,728
593,659
(14,751)
$ 578,908
3.21%
3.26%
3.32%
(1) Daily average balances and yields of securities available for sale are based upon amortized cost.
31
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 75.7% of total revenue for the year ended December 31, 2014. Net interest margin is the ratio of
tax-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. 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: (i) the size and
duration and credit risk of the investment portfolio, (ii) the size and duration of the wholesale funding portfolio, (iii) off-balance
sheet interest rate contracts, and (iv) 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 table below 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 following rate volume table is based upon reported net interest income:
(In thousands)
Interest on interest-earning assets:
Loans and leases
Loans held for sale
Investments (1)
Total interest income
Interest on interest-bearing liabilities:
Deposits
Borrowings
Total interest expense
Net change in net interest income
Years ended December 31,
2014 vs. 2013
Increase (decrease) due to
Volume
Rate
Total
Rate
Years ended December 31,
2013 vs. 2012
Increase (decrease) due to
Volume
Total
$
$
$
$
$
(17,804) $
300
4,409
(13,095) $
(3,705) $
(4,996)
(8,701) $
(4,394) $
40,044 $
(1,511)
5,863
44,396 $
1,285 $
7,004
8,289 $
36,107 $
22,240
(1,211)
10,272
31,301
$
$
(23,819) $
(55)
(15,118)
(38,992) $
29,138 $
(302)
4,294
33,130 $
5,319
(357)
(10,824)
(5,862)
(2,420) $
2,008
(412) $
$
31,713
(15,601) $
(12,411)
(28,012) $
(10,980) $
2,597 $
1,733
4,330 $
28,800 $
(13,004)
(10,678)
(23,682)
17,820
(1) Investments include; Securities, Federal Home Loan and Federal Reserve Bank stock, and Interest-bearing deposits
Net interest income totaled $628.4 million for the year ended December 31, 2014 compared to $596.7 million for the year ended
December 31, 2013, an increase of $31.7 million. The increase in net interest income during the year was primarily related to an
increase in average interest-earning assets, partially offset by an overall decline in reinvestment spreads on earning assets. Average
interest-earning assets during the year ended December 31, 2014 increased $1.2 billion compared to the year ended December
31, 2013. The average yield on interest-earning assets decreased 7 basis points to 3.67% for the year ended December 31, 2014
from 3.74% for the year ended December 31, 2013. The average yield on interest-earning assets is primarily impacted by changes
in market interest rates as well as changes in the volume and relative mix of interest-earning assets. The net interest margin
decreased 5 basis points to 3.21% during the year ended December 31, 2014 from 3.26% for the year ended December 31, 2013.
The decrease in net interest margin is due primarily to reinvestment of interest-earning assets at reduced spreads, partially offset
by less premium amortization on mortgage-backed securities. Market interest rates remained at historically low levels during the
periods reported.
32
Average loans and leases increased $1.0 billion during the year ended December 31, 2014 as compared to the year ended December
31, 2013. The loan and lease portfolio comprised 66.6% of the average interest-earning assets at December 31, 2014 as compared
to 65.3% of the average interest-earning assets at December 31, 2013. The loan and lease portfolio yield decreased 14 basis points
to 3.87% for the year ended December 31, 2014, compared to the loan and lease portfolio yield of 4.01% for the year ended
December 31, 2013. The decrease in the yield on average loans and leases is due to the repayment of higher yielding loans and
leases and the addition of lower yielding loans and leases in the current low interest rate environment.
Average investments increased $190.3 million during the year ended December 31, 2014 as compared to the year ended December
31, 2013. The investments portfolio comprised 33.3% of the average interest-earning assets at December 31, 2014 as compared
to 34.4% of the average interest-earnings assets at December 31, 2013. The investments portfolio yield increased 7 basis points
to 3.11% for the year ended December 31, 2014 compared to the investments portfolio yield of 3.04% for the year ended December
31, 2013. The yield on average investments increased primarily due to larger Federal Home Loan Bank ("FHLB") holdings, paying
an increased dividend rate.
Average total deposits increased $553.1 million during the year ended December 31, 2014 compared to the year ended December
31, 2013. The increase is due to a $277.4 million increase in non-interest-bearing deposits and an increase of $275.7 million in
interest-bearing deposits. The average cost of deposits decreased 2 basis points to 0.29% for the year ended December 31, 2014
from 0.31% for the year ended December 31, 2013. The decrease in the average cost of deposits is the result of improved pricing
on certain deposit products and product mix, as the proportion of higher costing certificates of deposit to total interest-bearing
deposits decreased to 18.8% for the year ended December 31, 2014 from 19.9% for the year ended December 31, 2013.
Average total borrowings increased $530.1 million during the year ended December 31, 2014 compared to the year ended December
31, 2013. Borrowings increased as growth in loans and securities exceeded the growth in deposits and operating cash flows.
Average securities sold under agreements to repurchase and other borrowings increased $125.3 million, and average FHLB
advances increased $386.3 million. The $18.5 million increase in average long-term debt is due to the issuance of $150 million
aggregate principal amount of senior notes in February 2014, ahead of a prior issuance that matured in April 2014. The average
cost of borrowings decreased 15 basis points to 1.27% for the year ended December 31, 2014 from 1.42% for the year ended
December 31, 2013. The decrease in average cost of borrowings is a result of a larger percentage of total borrowings for securities
sold under agreements to repurchase and FHLB advances at lower rates.
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 December 31, 2014, the allowance for loan and lease losses totaled $159.3 million, or 1.15% of total loans and
leases, compared to $152.6 million, or 1.20% of total loans and leases, at December 31, 2013.
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 year ended December 31, 2014, total net charge-offs were $30.6 million compared
to $58.1 million for the year ended December 31, 2013.
The provision for loan and lease losses was $37.3 million for the year ended December 31, 2014 an increase of $3.8 million
compared to the year ended December 31, 2013. The increase in provision for loan and lease losses was due primarily to the
increase in loan balances, partially offset by improved credit quality.
See the "Loan and Lease Portfolio" through “Allowance for Loan and Lease Losses Methodology” sections for further details.
33
Non-Interest Income
Non-interest income comparison of 2014 to 2013:
(Dollars in thousands)
Non-Interest Income:
Deposit service fees
Loan related fees
Wealth and investment services
Mortgage banking activities
Increase in cash surrender value of life insurance policies
Net gain on sale of investment securities
Impairment loss on securities recognized in earnings
Other income
Total non-interest income
Years ended December 31,
Increase (decrease)
2014
2013
Amount
Percent
$
103,431
$
98,968
$
23,212
34,946
4,070
13,178
5,499
(1,145)
18,917
21,860
34,771
16,359
13,770
712
(7,277)
11,887
4,463
1,352
175
(12,289)
(592)
4,787
6,132
7,030
4.5%
6.2
0.5
(75.1)
(4.3)
672.3
(84.3)
59.1
$
202,108
$
191,050
$ 11,058
5.8%
Total non-interest income was $202.1 million for the year ended December 31, 2014, an increase of $11.1 million from the year
ended December 31, 2013. The increase is primarily attributable to an increase in other income, a lower impairment loss on
securities, an increased gain on sale of securities, and increased deposit service fees due to account growth primarily at the
Company's HSA Bank division, offset by a decrease in mortgage banking activities.
Other income increased $7.0 million, or 59.1%, due to increased commercial customer interest rate derivative activity, a private
equity fund distribution, death benefit proceeds from bank owned life insurance policies, and miscellaneous rebate income.
The decrease in impairment loss on securities recognized in earnings of $6.1 million, or 84.3%, is due to the requirement to
divest certain CLO and CDO securities that were subject to the Volcker Rule. The required divestiture situation resulted in the
full write-down of unrealized market losses of certain CLO and CDO securities to market value in December 2013. The additional
impairment loss recognized in 2014 represents the continued write-down of market losses related to the CLO securities as required
until the conformance date in July 2017.
Net gain on sale of investment securities increased $4.8 million primarily due to the sale of four non Volcker Rule compliant
pooled trust preferred positions during the year.
Deposit service fees increased $4.5 million, or 4.5%, due to volume driven debit card interchange revenue and checking account
services charges from the Company's HSA Bank division, cash management fees, and ATM and other account surcharges, offset
by a reduction in NSF charges.
The decrease in mortgage banking activities of $12.3 million, or 75.1%, is due to increased residential mortgage loan interest rates
resulting in lower refinancing volumes. Originations of loans held for sale were $297 million for the twelve months ended
December 31, 2014 compared to $687 million for the twelve months ended December 31, 2013.
34
Non-Interest Expense
Non-interest expense comparison of 2014 to 2013:
(Dollars in thousands)
Non-Interest Expense:
Compensation and benefits
Occupancy
Technology and equipment
Intangible assets amortization
Marketing
Professional and outside services
Deposit insurance
Other expense
Years ended December 31,
Increase (decrease)
2014
2013
Amount
Percent
$
270,151
$
264,835
$
5,316
2.0%
47,325
61,993
2,685
15,379
8,296
22,670
73,639
48,794
60,326
4,919
15,502
9,532
21,114
73,037
(1,469)
1,667
(2,234)
(123)
(1,236)
1,556
602
(3.0)
2.8
(45.4)
(0.8)
(13.0)
7.4
0.8
0.8%
Total non-interest expense
$
502,138
$
498,059
$
4,079
Total non-interest expense was $502.1 million for the year ended December 31, 2014, an increase of $4.1 million from the year
ended December 31, 2013. The increase for the year ended December 31, 2014 is primarily attributable to higher compensation
and benefits, technology and equipment expense, and deposit insurance, offset by lower intangible asset amortization, occupancy,
and professional and outside services.
Compensation and benefits increased $5.3 million, or 2%, due to additional staffing within the commercial, business banking,
HSA Bank, and compliance areas, an increase in incentive related expense, and annual merit increases, offset by lower expenses
in pension, stock based compensation, and 401(k) match.
Technology and equipment expense increased $1.7 million, or 2.8%, primarily due to infrastructure investments at the Company's
HSA Bank division.
Deposit insurance increased $1.6 million, or 7.4%, due primarily to an increase in overall assets and the addition of high risk
weighted assets.
Intangible assets amortization decreased $2.2 million, or 45.4%, due to the completion of core deposit intangibles amortization
related a 2004 acquisition.
Occupancy costs decreased $1.5 million, or 3%, due to lower depreciation on buildings and leasehold improvements and lower
occupancy related maintenance costs.
Professional and outside services decreased $1.2 million, or 13%, due to lower consulting costs.
Income Taxes
Webster recognized income tax expense of $91.4 million in 2014 and $76.7 million in 2013. The effective tax rates were 31.4%
and 29.9%, respectively. The increase in the effective rate principally reflects the effects of the increased pre-tax income in 2014;
the $1.7 million benefit recognized in 2013 to correct the immaterial errors in prior periods; decreased benefits from tax-exempt
interest income in 2014; and increased state tax expense in 2014, which also included a $2.0 million benefit recognized in the first
quarter.
For additional information on Webster's income taxes, including its deferred tax assets and uncertain tax positions, see Note 7 -
Income Taxes in the Notes to Consolidated Financial Statements included elsewhere within this report.
35
Comparison of 2013 and 2012 Years
Financial Performance
For the year ended December 31, 2013, Webster's income from continuing operations, before income tax expense and preferred
stock dividends, was $256.2 million, an increase of $7.8 million from $248.4 million for the year ended December 31, 2012. The
primary factors which led to this increase are outlined below:
The factors positively impacting income from continuing operations include:
•
interest expense decreased $23.7 million;
• wealth and investment service fees increased $5.3 million;
•
•
•
loan related fees increased $3.8 million;
non-interest expense decreased $3.7 million; and
deposit service fees increased $2.3 million.
The factors negatively impacting income from continuing operations include:
•
•
•
•
provision for loan and lease losses increased $12.0 million;
impairment loss recognized in earnings of $7.3 million in 2013 for investment securities;
income from mortgage banking activities decreased $6.7 million; and
interest income decreased $5.9 million.
A discussion of the significant components of income from continuing operations follows,
Net Interest Income
Net interest income totaled $596.7 million for the year ended December 31, 2013 compared to $578.9 million for the year ended
December 31, 2012, an increase of $17.8 million. The increase in net interest income during the year ended December 31, 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 for the year ended December 31, 2013 increased $829.7 million from the year ended
December 31, 2012. The net interest margin decreased 6 basis points to 3.26% during the year ended December 31, 2013 from
3.32% during the year ended December 31, 2012. The decrease in net interest margin is due to a greater decline in the yield of
interest-earning assets than the decline in cost of interest-bearing liabilities, primarily due to growth in the average investment
portfolio at lower yields and lower yields in the loan portfolio, partially offset by a decline in the cost of deposits and borrowings.
The average yield on interest-earning assets decreased 22 basis points to 3.74% during the year ended December 31, 2013 from
3.96% during the year ended December 31, 2012. The average yield on interest-earning assets is primarily impacted by changes
in market interest rates as well as changes in the volume and relative mix of interest-earning assets. Market interest rates have
remained at historically low levels during the reported periods.
Average loans increased $710.6 million for the year ended December 31, 2013 compared to the year ended December 31, 2012.
The loan portfolio yield decreased 20 basis points to 4.01% for the year ended December 31, 2013 and comprised 65.3% of the
average interest-earning assets at December 31, 2013, compared to the loan portfolio yield of 4.21% for the year ended
December 31, 2012 which comprised 64.3% of the average interest-earning assets at December 31, 2012. The decrease in the
yield on the average loan portfolio is due to the repayment of higher yielding loans and the origination of lower yielding loans in
a low interest rate environment.
Average securities increased $168.7 million for the year ended December 31, 2013 compared to the year ended December 31,
2012. The yield on investment securities decreased 30 basis points to 3.28% for the year ended December 31, 2013 and comprised
33.4% of average interest-earning assets at December 31, 2013, compared to the yield on investment securities of 3.58% for the
year ended December 31, 2012, which comprised 34.0% of the average interest-earning assets at December 31, 2012. The decrease
in the yield on securities is due to principal repayments and lower reinvestment rates. The growth in the securities portfolio is part
of the Company's strategy to protect earnings in a protracted low rate environment.
Average total deposits increased $642.0 million for the year ended December 31, 2013 compared to the year ended December 31,
2012. The increase is due to a $301.3 million increase in non-interest bearing deposits and a $340.7 million increase in interest-
bearing deposits. The average cost of deposits decreased 11 basis points to 0.31% for the year ended December 31, 2013 from
0.42% for the year ended December 31, 2012. The decrease in the average cost of deposits is the result of rate adjustments on
certain deposit products and product mix changes as the proportion of higher costing certificates of deposit to total interest-bearing
deposits decreased from 23.5% for the year ended December 31, 2012 to 19.9% for the year ended December 31, 2013.
36
Average total borrowings increased $97.8 million for the year ended December 31, 2013 compared to the year ended December 31,
2012. This increase is due to a $262.5 million increase in average FHLB advances, a $20.4 million increase in average securities
sold under agreements to repurchase and other borrowings, partially offset by decreases of $185.0 million in average long-term
debt. The increase in FHLB advances is due to the replacement of long-term funding with short-term, lower cost. 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, to a lesser extent, 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 December 31, 2013, the allowance for loan and lease losses totaled $152.6 million, or 1.20% of loans and leases,
compared to $177.1 million, or 1.47% of 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 general 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 year ended December 31, 2013, total net charge-offs were $58.1 million
compared to $77.9 million for the year ended December 31, 2012.
The provision for loan and lease losses was $33.5 million for the year ended December 31, 2013 an increase of $12.0 million
compared to the year ended December 31, 2012. The increase in the provision includes an increased provision for the commercial
real estate portfolio and a reduction in net benefit for the commercial portfolio offset by reduced provisions in the consumer and
residential portfolios.
See the "Loans and Leases" through “Allowance for Loan and Lease Losses Methodology” sections for further details.
Non-Interest Income
Total non-interest income was $191.1 million for the year ended December 31, 2013, a decrease of $1.7 million from the year
ended December 31, 2012. The decrease for the year ended December 31, 2013 is primarily attributable to an impairment loss
recognized in earnings, plus declines in mortgage banking activities and gain on sale of investment securities, partially offset by
increases in wealth and investment services, cash surrender value of life insurance policies, loan related fees, and deposit service
fees.
Non-interest income comparison of 2013 to 2012:
(Dollars in thousands)
Non-Interest Income:
Deposit service fees
Loan related fees
Wealth and investment services
Mortgage banking activities
Increase in cash surrender value of life insurance policies
Net gain on sale of investment securities
Impairment loss recognized in earnings
Other income
Total non-interest income
Years ended December 31,
Increase (decrease)
2013
2012
Amount
Percent
$
$
98,968
21,860
34,771
16,359
13,770
712
(7,277)
11,887
191,050
$
$
96,633
18,043
29,515
23,037
11,254
3,347
—
10,929
192,758
$
$
2,335
3,817
5,256
(6,678)
2,516
(2,635)
(7,277)
958
(1,708)
2.4 %
21.2
17.8
(29.0)
22.4
(78.7)
(100.0)
8.8
(0.9)%
Deposit Service Fees. Deposit service fees were $99.0 million for the year ended December 31, 2013, an increase of $2.3 million
from the comparable period in 2012 due to an increase in check card interchange fees and monthly service charges primarily
related to health savings accounts, and cash management fee growth attributable to the cross sell of new products to existing
customers as well as new sales to core commercial government and business banking. The increase is slightly offset by a decline
in fees from overdraft activities.
Loan Related Fees. Loan related fees were $21.9 million for the year ended December 31, 2013, an increase of $3.8 million from
the comparable period in 2012 primarily due to an increase in loan service fee income, origination fee income, and prepayment
penalties.
37
Wealth and Investment Services. Wealth and investment services income was $34.8 million for the year ended December 31, 2013,
an increase of $5.3 million from the comparable period in 2012 primarily due to an increase in income from the Webster Investment
Services unit as well as an increase in trust fees from private banking activities. Webster Investment Services income has increased
as a result of continued account growth and strong incremental production.
Mortgage Banking Activities. Mortgage banking activities net revenue was $16.4 million for the year ended December 31, 2013,
a decrease of $6.7 million from the comparable period in 2012. The decrease is primarily related to a rise in interest rates beginning
late in the second quarter of 2013 which contributed to lower volumes of settlements of, and spreads on, loans sold, as well as a
lower pipeline of loan applications to be funded. Loans originated for sale were $687.1 million in 2013 compared to $759.1 million
in 2012, due in part to an increase in mortgage interest rates.
Increase in Cash Surrender Value of Life Insurance Policies. The increase in cash surrender value of life insurance policies was
$13.8 million for the year ended December 31, 2013, an increase of $2.5 million from the comparable period in 2012, due primarily
to realizing a full year of earnings on $100 million of additional purchases of life insurance policies in September 2012.
Impairment Loss Recognized in Earnings. The impairment loss recognized in earnings of $7.3 million for the year ended
December 31, 2013 represents an other-than-temporary impairment loss on certain CLO and CDO investment securities that are
subject to the Volcker Rule.
Other. Other non-interest income was $11.9 million and $10.9 million for the years ended December 31, 2013 and 2012, respectively.
The increase of $1.0 million for the year ended December 31, 2013 compared to the year ended December 31, 2012 is primarily
due to mark-to-market adjustments on treasury derivatives related to client swap activity and fair value adjustments to the
Company's alternative investments having a more favorable impact in 2013 compared to 2012.
Non-Interest Expense
Total non-interest expense was $498.1 million for the year ended December 31, 2013, a decrease of $3.7 million from the year
ended December 31, 2012. The decrease for the year ended December 31, 2013 is primarily attributable to reductions in technology
and equipment, professional and outside services, deposit insurance, occupancy, and marketing.
Non-interest expense comparison of 2013 to 2012:
(Dollars in thousands)
Non-Interest Expense:
Compensation and benefits
Occupancy
Technology and equipment
Intangible assets amortization
Marketing
Professional and outside services
Deposit insurance
Other expense
Total non-interest expense
Years ended December 31,
Increase (decrease)
2013
2012
Amount
Percent
$ 264,835
48,794
60,326
4,919
15,502
9,532
21,114
73,037
$ 498,059
$ 264,101
50,131
62,210
5,420
16,827
11,348
22,749
69,018
$ 501,804
$
$
734
(1,337)
(1,884)
(501)
(1,325)
(1,816)
(1,635)
4,019
(3,745)
0.3 %
(2.7)
(3.0)
(9.2)
(7.9)
(16.0)
(7.2)
5.8
(0.7)%
Compensation and Benefits. Compensation and benefits expense was $264.8 million for the year ended December 31, 2013 an
increase of $0.7 million from the comparable period in 2012. The increase is attributable to additional expense from deferred
compensation programs, largely in connection with Webster's share price increase throughout the year, as well as increases in
commission expense driven by higher sales of HSA accounts and an increase in investment services sales. The increase was slightly
offset by declines in other incentive related and pension expense.
Occupancy. Occupancy expense was $48.8 million for the year ended December 31, 2013, a decrease of $1.3 million from the
comparable period in 2012, due to lower depreciation and occupancy related maintenance costs.
Technology and Equipment. Technology and equipment expense was $60.3 million for the year ended December 31, 2013, a
decrease of $1.9 million from the comparable period in 2012. The decrease is primarily due to a reduction in depreciation.
38
Marketing. Marketing expense was $15.5 million for the year ended December 31, 2013, a decrease of $1.3 million from the
comparable period in 2012, primarily due to utilizing more cost effective marketing channels.
Professional and outside services. Professional and outside service expense was $9.5 million for the year ended December 31,
2013, a decrease of $1.8 million from the comparable period in 2012, primarily due to lower consulting fees.
Deposit Insurance. Deposit insurance was $21.1 million for the year ended December 31, 2013, a decrease of $1.6 million from
the comparable period in 2012. The reduction of underperforming assets supported by an increase in Tier 1 capital during 2013,
compared to 2012 levels, resulted in a decrease to the FDIC insurance expense.
Other. Other non-interest expense was $73.0 million for the year ended December 31, 2013, an increase of $4.0 million from the
comparable period in 2012, primarily attributable to an increase in check card expenses, service contract costs, and lower net gains
from the sale of OREO properties. The increase was slightly offset by a decrease in loan workout costs as asset quality improved.
Income Taxes
Webster recognized income tax expense of $76.7 million in 2013 and $74.7 million in 2012. The effective tax rates were 29.9%
and 30.1%, respectively. The decrease in the effective rate principally reflects the benefit recognized in the three months ended
September 30, 2013 related to the correction of an immaterial error applicable to prior periods, partially offset by increased state
tax expense.
As discussed above, 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 by
0.7 percentage points for the twelve months ended December 31, 2013.
39
Segment Results
Webster’s operations are organized into three reportable segments that represent its core businesses – Commercial Banking,
Community Banking, and Other. Community Banking includes the Personal Bank and Business Banking operating segments, and
Other includes HSA Bank and Private Banking. The factors considered in determining whether individual operating segments
could be aggregated include that the operating segments: (i) offer the same products and services, (ii) offer services to the same
types of clients, (iii) provide services in the same manner and (iv) operate in the same regulatory environments. 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. In light of the acquisition
by Webster Bank of JPMorgan Chase Bank, N.A.'s health savings account business on January 13, 2015 (see Note 24 - Subsequent
Event for additional information), the Company intends to evaluate its reportable segment structure as of the end of the first quarter
of 2015 in order to ensure that the segments remain aligned with the way the business is managed. If the evaluation results in a
change in segment reporting, the Company expects that it would conform historical information to the new presentation.
Webster’s 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, 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 Corporate and Reconciling.
The following tables present the performance summary of net income (loss) and balance sheet information:
(In thousands)
Net income (loss):
Commercial Banking
Community Banking
Other
Total Reportable Segments
Corporate and Reconciling
Net income
Years ended December 31,
2013
2012
2014
$
$
110,080
74,130
18,128
202,338
(2,586)
199,752
$
$
91,097
74,147
16,875
182,119
(2,570)
179,549
$
$
88,659
64,462
12,602
165,723
7,974
173,697
40
(In thousands)
Total assets
Total loans and leases
Total deposits
Total assets under management and
administration
Commercial
Banking
Community
Banking
$ 6,550,868 $ 8,198,115 $
6,559,020
3,203,344
6,927,302
10,103,698
At December 31, 2014
Segment
Totals
Corporate and
Reconciling
Consolidated
Total
Other
425,573 $ 15,174,556 $ 7,358,454 $ 22,533,010
13,900,025
395,833
15,651,605
2,036,097
13,882,155
15,343,139
17,870
308,466
— 2,754,775
2,423,944
5,178,719
— 5,178,719
(In thousands)
Total assets
Total loans and leases
Total deposits
Commercial
Banking
Community
Banking
$ 5,682,129 $ 7,809,343 $
5,628,303
2,948,072
6,693,493
10,014,509
At December 31, 2013
Segment
Totals
Corporate and
Reconciling
Consolidated
Total
Other
365,863 $ 13,857,335 $ 6,995,664 $ 20,852,999
12,699,776
343,823
14,854,420
1,739,345
12,665,619
14,701,926
34,157
152,494
Total assets under management and
administration
— 2,534,819
2,552,237
5,087,056
— 5,087,056
(In thousands)
Total assets
Total loans and leases
Total deposits
Commercial
Banking
Community
Banking
$ 5,113,898 $ 7,708,159 $
5,037,307
2,695,911
6,668,712
10,188,750
At December 31, 2012
Segment
Totals
Corporate and
Reconciling
Consolidated
Total
Other
282,414 $13,104,471 $ 7,042,294 $20,146,765
12,028,696
259,835
14,530,835
1,454,129
11,965,854
14,338,790
62,842
192,045
Total assets under management and
administration
— 2,314,052
2,326,660
4,640,712
— 4,640,712
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.” This process is executed by the Company’s Financial Planning and Analysis division and is overseen by the
Company’s Asset/Liability Management Committee.
The provision for loan and lease losses allocated to each segment is 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 the provision for the consumer liquidating
portfolio, is shown as other reconciling. For the years ended December 31, 2014, 2013, and 2012, 103.8%, 115.4%, and 83.7%,
respectively, of the provision expense is specifically attributable to segments.
Webster allocates a majority of non-interest expense to each segment using a full-absorption costing process. Costs, including
corporate overhead, are analyzed, pooled by process, and assigned to the appropriate segment. Income tax expense or benefit is
allocated to each segment based on the effective income tax rate for the period shown.
41
Commercial Banking
The Commercial Banking segment includes middle market, asset-based lending, commercial real estate, equipment finance, and
treasury and payment solutions, 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.
Commercial Banking Results:
(In thousands)
Net interest income
Provision (benefit) for loan and lease losses
Net interest income after provision
Non-interest income
Non-interest expense
Income before income taxes
Income tax expense
Net income
(In thousands)
Total assets
Total loans and leases
Total deposits
Years ended December 31,
2014
238,186
12,629
225,557
37,270
102,374
160,453
50,373
110,080
$
$
2013
217,582
18,581
199,001
30,797
99,801
129,997
38,900
91,097
$
$
2012
188,666
(7,498)
196,164
29,324
98,718
126,770
38,111
88,659
$
$
2014
$ 6,550,868
6,559,020
3,203,344
At December 31,
2013
$ 5,682,129
5,628,303
2,948,072
2012
$ 5,113,898
5,037,307
2,695,911
Net interest income increased $20.6 million in 2014 compared to 2013. The increase is primarily due to greater loan and deposit
volumes and lower cost of funds. The provision for loan and lease losses decreased $6.0 million in 2014 compared to 2013. The
decline is due in part to Commercial Banking realizing continued improvement in asset quality, including declines in charge-offs
and substandard loans, partially offset by loan growth. Management believes the reserve level adequate to cover inherent losses
in the Commercial Banking portfolio as of December 31, 2014. Non-interest income increased $6.5 million in 2014 compared to
2013. The increase is due to fees generated from loan related activities and interest rate derivative products. Non-interest expense
increased $2.6 million in 2014 compared to 2013. The increase is primarily due to compensation and benefit costs related to
strategic new hires.
Net interest income increased $28.9 million in 2013 compared to 2012. The increase is primarily due to greater loan and deposit
volumes, greater deferred loan fees, and the continuing lower cost of funds. The provision for loan and lease losses increased
$26.1 million in 2013 compared to 2012. The change in provision is due to management’s evaluation of the level of inherent losses
in this segment’s existing book of business and management’s belief in the adequacy of the overall reserve levels. Commercial
Banking has realized continued improvement in asset quality, including declines in charge-offs and substandard loans, which
reduced the overall loan loss coverage. Non-interest income increased $1.5 million in 2013 compared to 2012, primarily due to
fees generated from agent led transactions and other loan related fees. Non-interest expense increased $1.1 million in 2013 compared
to 2012. The increase relates to the allocation of corporate expenses.
Total loans were $6.6 billion, $5.6 billion, and $5.0 billion at December 31, 2014 , 2013, and 2012, respectively. Loans increased
$930.7 million for the year ending December 31, 2014 compared to the year ending December 31, 2013, due to continued growth
in new originations. Loans increased $591.0 million for the year ending December 31, 2013 compared to the year ending
December 31, 2012, primarily due to new originations. Loan originations in 2014 were $2.9 billion compared to $2.4 billion and
$2.3 billion in 2013 and 2012, respectively. The increase of $449.6 million in originations for the year ended December 31, 2014
is due to an expansion of our Commercial Banking activities across all business lines within the segment.
Total deposits were $3.2 billion, $2.9 billion, and $2.7 billion at December 31, 2014, 2013, and 2012 , respectively. Deposits
increased $255.3 million for the year ended December 31, 2014 compared to December 31, 2013. Deposits increased $252.2
million for the year ended December 31, 2013 compared to December 31, 2012. The increase in both years is a result of new
business development and operating funds maintained for cash management services.
42
Community Banking
Community Banking serves consumer and business banking customers primarily throughout southern New England and into
Westchester County, New York. This segment is comprised of Personal Banking and Business Banking supported by a distribution
network consisting of 164 banking centers and 314 ATMs, a Customer Care Center, telephone banking, and a full range of web
and mobile-based banking services.
Personal Banking 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 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 December 31, 2014, Webster Investment Services had $2.8 billion of assets under administration in its strategic partnership
with LPL compared to $2.5 billion at December 31, 2013 and $2.3 billion at December 31, 2012. These assets are not included
in the Consolidated Balance Sheets. LPL, a provider of investment and insurance programs for financial institutions, 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 businesses and professional service firms with
annual revenues of up to $20 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:
(In thousands)
Net interest income
Provision for loan and lease losses
Net interest income after provision
Non-interest income
Non-interest expense
Income before income taxes
Income tax expense
Net income
(In thousands)
Total assets
Total loans
Total deposits
Total assets under administration
Years ended December 31,
2014
354,781
25,960
328,821
103,543
324,312
108,052
33,922
74,130
$
$
2013
347,395
19,973
327,422
116,182
337,795
105,809
31,662
74,147
$
$
2012
342,268
26,167
316,101
116,978
340,907
92,172
27,710
64,462
$
$
At December 31,
2014
$ 8,198,115
2013
$ 7,809,343
2012
$ 7,708,159
6,927,302
6,693,493
6,668,712
10,103,698
10,014,509
10,188,750
2,754,775
2,534,819
2,314,052
Net income was flat in 2014 compared to 2013. Net interest income grew by $7.4 million driven by increases in loan and deposit
balances and wider deposit spreads. The provision for loan and lease losses increased by $6.0 million due to loan growth and an
increase in specific reserves on impaired loans, partially offset by improving asset quality and loss rate improvement. Management
believes the reserve level is adequate to cover inherent losses in the Community Banking portfolio. Non-interest income decreased
$12.6 million in 2014 compared to 2013, primarily due to a $12.3 million decline in gains from the sales of mortgage loans resulting
from lower transaction volumes. Other fee revenues were essentially flat, as increases in investment services and debit card
revenue were offset by a reduction in NSF charges. Non-interest expense decreased $13.5 million in 2014 compared to 2013. The
decrease is reflective of the improvement in costs related to debit card processing, loan workout, variable compensation, and
shared services. Compensation was down modestly, as continued reductions in Banking Center staffing were offset by increased
selling staff in the form of Universal Bankers, Business Bankers and WIS financial consultants.
43
Net income increased by $9.7 million in 2013 compared to 2012. Net interest income increased $5.1 million in 2013 compared
to 2012. The increase in net interest income was driven by a lower cost of funds on deposits and a reduction in non-earning assets.
The provision for loan and lease losses decreased $6.2 million in 2013 compared to 2012. The change in provision is primarily
due to management’s evaluation of the level of inherent losses in this segment’s existing book of business and management’s
belief in the adequacy of the overall reserve levels. The consumer loan portfolio charge-offs continue to decline year over year,
while the housing market and unemployment continue to improve gradually in the footprint. Non-interest income decreased $0.8
million in 2013 compared to 2012. The decrease in non-interest income was driven by a reduction in the gains on the sales of
mortgage loans sold into the secondary market and a decline in deposit related fees partially offset by an increase in fee income
from Webster Investment Services. The decreased level of mortgage loan sales was directly linked to a reduction in mortgage
refinance activity in the second half of 2013. The increase in investment fees was driven by higher sales activity and an increase
in asset values. Non-interest expense decreased $3.1 million in 2013 compared to 2012.The decrease is associated with reduced
banking center staff and occupancy expenses that are linked to our strategy to reduce the cost of physical distribution channels
while migrating customer transactions to self-service channels such as ATMs and On-line and Mobile Banking.
Total loans were $6.9 billion at December 31, 2014 and $6.7 billion at December 31, 2013 and 2012. Loans increased $233.8
million for the year ended December 31, 2014 compared to December 31, 2013, due to $92.4 million of growth in the Business
Banking portfolio, with the remainder driven by growth in residential mortgages, home equity lines, and personal loans. Loans
increased $24.8 million for the year ended December 31, 2013 compared to December 31, 2012. The net increase was driven by
growth in the Business Banking portfolio that was partially offset by a decrease in consumer loans. Total originations for the year
ended 2014 were $1.7 billion. For the years ended 2013 and 2012, total originations were $2.2 billion.
Total deposits were $10.1 billion, $10.0 billion, and $10.2 billion, for the years ended December 31, 2014, 2013, and 2012 ,
respectively. Deposits increased $89.2 million for the year ended December 31, 2014 compared to December 31, 2013, due to
continued growth in both business and consumer transaction deposit balances. Deposits decreased $174.2 million for the year
ended December 31, 2013 compared to December 31, 2012 due to a steady reduction in CD balances throughout the year that was
augmented by an elevated level of run-off of high-cost maturing CDs during June and July of 2013.
44
Other:
Other includes HSA Bank and Private Banking.
HSA Bank, a division of Webster Bank, is a bank custodian of health savings accounts. These accounts are used in conjunction
with high deductible health plans and are offered through employers or directly to consumers. Additionally, during the second
quarter of 2014, HSA Bank expanded its product suite to include health reimbursement arrangement accounts and flexible spending
accounts.
On January 13, 2015, Webster Bank completed its acquisition of JPMorgan Chase Bank, N.A.'s health savings account business,
which was announced on September 23, 2014. The acquisition of approximately 785,000 accounts, including approximately $1.3
billion in deposits and $185 million in assets under administration, solidifies the HSA Bank division as a leading administrator
and depository of health savings accounts. In light of the acquisition by Webster Bank of JPMorgan Chase Bank, N.A.'s health
savings account business on January 13, 2015 the Company intends to evaluate its reportable segment structure as of the end of
the first quarter of 2015.
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:
(In thousands)
Net interest income
Provision (benefit) for loan and lease losses
Net interest income after provision
Non-interest income
Non-interest expense
Income before income taxes
Income tax expense
Net income
(In thousands)
Total assets
Total loans
Total deposits
Total assets under management and administration
$
$
$
Years ended December 31,
2014
47,699
81
47,618
38,396
59,591
26,423
8,295
18,128
2013
40,992
93
40,899
32,926
49,745
24,080
7,205
16,875
$
$
2014
425,573
395,833
2,036,097
2,423,944
At December 31,
$
2013
365,863
343,823
1,739,345
2,552,237
$
$
$
2012
33,308
(680)
33,988
28,680
44,649
18,019
5,417
12,602
2012
282,414
259,835
1,454,129
2,326,660
Net interest income of $47.7 million, in 2014, is comprised of $38.8 million related to HSA Bank and $8.9 million related to
Private Banking. Non-interest income of $38.4 million, in 2014, is comprised of $28.6 million related to HSA Bank and $9.8
million related to Private Banking. Non-interest expense of $59.6 million, in 2014, is comprised of $40.9 million related to HSA
Bank and $18.7 million related to Private Banking.
In 2014, HSA Bank's net interest income, non-interest income, and non-interest expense increased $6.0 million, $6.6 million, and
$10.9 million respectively, primarily due to deposit balance and account growth.
Private Banking's net interest income increased $0.7 million in 2014. The increase was due to Private Banking's $52.0 million
growth in loan balances for the year ended December 31, 2014. Private Banking's non-interest income decreased $1.1 million in
2014. The decrease was primarily due to the disposition of non-strategic portfolio assets in the third quarter of 2013 and revenue
reductions tied to the outflow of assets under management related to a strategic shift in the Private Banking investment model in
2014. Private Banking's non-interest expense decreased $1.1 million in 2014 due to the disposition of non-strategic portfolio assets
in the third quarter of 2013 and lower expense associated with staff vacancies in 2014.
45
Net interest income increased $7.7 million in 2013 compared to 2012. Of this amount, deposit growth, account growth and pricing
initiatives at HSA Bank resulted in an increase of $6.6 million, while higher loan and deposit balances in Private Banking resulted
in growth of $1.1 million for the year ended December 31, 2013. Non-interest income increased $4.2 million in 2013. Of this
amount $3.7 million is related to HSA Bank primarily driven by account growth and transaction volume, while $0.5 million is
related to fees generated from Private Banking investment accounts and balances under management. Non-interest expense
increased $5.1 million in 2013. Of this amount, $3.7 million is related to HSA Bank's processing costs due to account growth,
while $1.4 million is related to Private Banking and was primarily driven by higher compensation, tied to the hiring of key fiduciary
services and investment management personnel along with the full year impact of private bankers added during 2012.
HSA Bank had $2.6 billion, $2.1 billion and $1.6 billion in combined deposits and linked brokerage account balances at
December 31, 2014, 2013, and 2012, respectively. Total deposits were $1.8 billion, $1.5 billion and $1.3 billion at December 31,
2014, 2013, and 2012, respectively. Deposits increased $291.5 million for the year ended December 31, 2014 and $263.6 million
for the year ended December 31, 2013. HSA Bank had $747.0 million, $571.8 million, and $378.7 million in linked brokerage
account balances at December 31, 2014, 2013, and 2012, respectively.
Private Banking had total loans of $397.2 million, $343.7 million, and $259.7 million at December 31, 2014 , 2013, and 2012,
respectively. Private Banking loans increased $52.0 million for the year ended December 31, 2014 and $84.0 million for the year
ended December 31, 2013 due to continued loan origination activity coupled with lower loan repayments. Loan originations were
$103.4 million, $156.2 million, and $85.1 million for the years ended December 31, 2014, 2013, and 2012, respectively. Total
deposits were $211.3 million, $206.0 million, and $184.4 million at December 31, 2014 , 2013, and 2012, respectively.
Private Banking had $1.5 billion, $1.8 billion, and $1.7 billion in assets under management at December 31, 2014, 2013, and 2012,
respectively, and $214.7 million, $228.4 million, and $284.1 million in assets under administration at December 31, 2014 , 2013,
and 2012, respectively. The decrease in assets under management in 2014 from December 31, 2013 resulted from outflows related
to personnel departures triggered by a strategic business model shift. December 31, 2012 includes $172.5 million in assets under
management and administration tied to a non-strategic business divested in 2013.
46
Financial Condition
Webster had total assets of $22.5 billion at December 31, 2014 compared to $20.9 billion at December 31, 2013, an increase of
$1.7 billion, or 8.06%, primarily due to the increase in loan balances driven by strong levels of loan originations. In addition, the
Company utilized deposit growth to increase its holdings of held-to-maturity securities.
Total loans and leases, net of allowance for loan and lease losses of $159.3 million, were $13.7 billion at December 31, 2014, an
increase of $1.2 billion compared to $12.5 billion, at December 31, 2013. Total deposits of $15.7 billion at December 31, 2014
increased $797.2 million compared to $14.9 billion at December 31, 2013. Non-interest-bearing deposits increased 15.0%, and
interest-bearing deposits increased 2.8% during the year ended December 31, 2014 due to the Company’s strategic focus to
increase transaction accounts and overall pricing discipline. Webster’s loan-to-deposit ratio was 88.8% at December 31, 2014
compared to 85.5% at December 31, 2013.
At December 31, 2014, total shareholders' equity was $2.3 billion compared to $2.2 billion at December 31, 2013, an increase of
$113.5 million or, 5.14%. Changes in shareholders' equity for the year ended December 31, 2014 consisted of an increase of $199.8
million for net income and a decrease of $7.7 million for other comprehensive loss, primarily related to pension plan and derivative
instrument losses, offset by net unrealized gains on securities available for sale, and $67.7 million of dividends paid to common
shareholders and $10.6 million of dividends paid to preferred shareholders. Quarterly cash dividend to common shareholders
increased to $0.20 per common share on April 21, 2014 from $0.15 per common share. See the section captioned "Selected Financial
Highlights" included elsewhere in this item and Note 14 - Regulatory Matters in the Notes to Consolidated Financial Statements
included elsewhere within this report for information on Webster’s regulatory capital levels and ratios.
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 types of investments as well as minimum risk ratings per type of security. The
Office of the Comptroller of the Currency may establish additional individual limits on a certain type of investment if the
concentration in such investment presents a safety and soundness concern. The holding company also may hold investment
securities directly.
Webster Bank maintains, through the Corporate Treasury Unit of the Company, 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 manage interest rate
risk. The portfolio is classified into two major categories, available-for-sale and held-to-maturity. The available-for-sale portfolio
consists primarily of agency collateralized mortgage obligations ("agency CMOs"), agency mortgage-backed securities ("agency
MBS"), non-agency commercial mortgage-backed securities ("non-agency CMBS") and collateralized loan obligations ("CLOs").
The held-to-maturity portfolio consists primarily of agency CMOs, agency MBS, agency commercial mortgage-backed securities
("agency CMBS"), non-agency CMBS, and municipal bonds. The Company's combined carrying value of investment securities
totaled $6.7 billion and $6.5 billion at December 31, 2014 and December 31, 2013, respectively. Available-for-sale securities
decreased by $313.1 million, primarily due to principal payments and net purchase and sale activity. Held-to-maturity securities
increased by $514.2 million, primarily due to the purchases of agency MBS and agency CMBS exceeding the portfolio paydowns
and calls. On a tax-equivalent basis, the yield in the securities portfolio was 3.28% for each of the years ended December 31, 2014
and 2013.
For the year ended December 31, 2014, the Company recorded OTTI of $1.1 million on its available-for-sale CLOs which qualify
as Covered Fund investments as defined in Section 619 of the Dodd-Frank, commonly known as the Volcker Rule. The final rule
definition of Covered Funds includes certain investments such as CLOs and collateralized debt obligation (“CDO”). Compliance
is generally required by July 21, 2017. All pooled trust preferred securities, including the securities which did not meet the
qualifications for retention under the January 14, 2014 joint regulatory agencies press release, were subsequently sold during the
year ended December 31, 2014.
The Company held $2.1 billion in investment securities that are in an unrealized loss position at December 31, 2014. Approximately
$0.7 billion of this total has been in an unrealized loss position for less than twelve months, while the remainder, $1.4 billion, has
been in an unrealized loss position for twelve months or longer. The total unrealized loss was $33.0 million at December 31, 2014.
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 their cost basis. 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 OTTI in future periods.
47
A summary of the amortized cost, carrying value, and fair value of Webster’s investment securities is presented below:
(In thousands)
Available for sale:
U.S. Treasury Bills
Agency CMO
Agency MBS
Agency CMBS
Non-agency CMBS
CLO (1)
Pooled trust preferred securities
Single issuer trust preferred securities
Corporate debt
Equity securities-financial institutions
At December 31, 2014
Amortized
Cost
Recognized in OCI
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Not Recognized in OCI
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Carrying
Value
Fair Value
$
525 $
— $
— $
525 $
543,417
1,030,724
80,400
534,631
426,269
—
41,981
106,520
3,500
8,636
10,462
—
18,885
482
—
—
3,781
2,403
44,649 $
(1,065)
(12,668)
(134)
(123)
(1,017)
—
(3,736)
—
—
550,988
1,028,518
80,266
553,393
425,734
—
38,245
110,301
5,903
(18,743) $ 2,793,873 $
— $
—
—
—
—
—
—
—
—
—
— $
525
— $
—
550,988
— 1,028,518
80,266
—
553,393
—
425,734
—
—
—
38,245
—
110,301
—
—
5,903
— $ 2,793,873
Total available for sale
$ 2,767,967 $
Held-to-maturity:
Agency CMO
Agency MBS
Agency CMBS
Municipal bonds and notes
Non-agency CMBS
Private Label MBS
$
442,129 $
2,134,319
578,687
373,211
338,723
5,886
Total held-to-maturity
$ 3,872,955 $
— $
—
—
—
—
—
— $
442,129 $
— $
— 2,134,319
578,687
—
373,211
—
338,723
—
—
5,886
— $ 3,872,955 $
6,584 $
57,196
1,597
15,138
9,428
100
90,043 $
(739) $
447,974
2,180,175
579,141
388,294
347,136
5,986
(14,292) $ 3,948,706
(11,340)
(1,143)
(55)
(1,015)
—
(In thousands)
Available for sale:
U.S. Treasury Bills
Agency CMO
Agency MBS
Agency CMBS
Non-agency CMBS
CLO (1)
Pooled trust preferred securities (2)
Single issuer trust preferred securities
Corporate Debt
Equity securities-financial institutions (3)
At December 31, 2013
Amortized
Cost
Recognized in OCI
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Not Recognized in OCI
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Carrying
Value
Fair Value
$
325 $
— $
— $
325 $
794,397
1,265,276
71,759
436,872
357,326
31,900
41,807
108,936
2,314
14,383
9,124
—
28,398
315
—
—
4,155
1,270
57,645 $
(1,868)
(47,698)
(782)
(996)
—
(3,410)
(6,872)
—
—
806,912
1,226,702
70,977
464,274
357,641
28,490
34,935
113,091
3,584
(61,626) $ 3,106,931 $
— $
—
—
—
—
—
—
—
—
—
— $
325
— $
806,912
—
— 1,226,702
70,977
—
464,274
—
357,641
—
28,490
—
34,935
—
113,091
—
—
3,584
— $ 3,106,931
Total available for sale
$ 3,110,912 $
Held-to-maturity:
Agency CMO
Agency MBS
Agency CMBS
Municipal bonds and notes
Non-agency CMBS
Private Label MBS
Total held-to-maturity
$
365,081 $
2,130,685
115,995
448,405
290,057
8,498
$ 3,358,721 $
— $
—
—
—
—
—
— $
365,081 $
— $
— 2,130,685
115,995
—
448,405
—
290,057
—
8,498
—
— $ 3,358,721 $
10,135 $
43,315
44
11,104
8,635
176
73,409 $
(1,009) $
(53,188)
(818)
(1,228)
(4,975)
—
374,207
2,120,812
115,221
458,281
293,717
8,674
(61,218) $ 3,370,912
(1) Amortized cost is net of $3.7 million and $2.6 million of OTTI at December 31, 2014 and December 31, 2013, respectively.
(2) Amortized cost is net of $14.0 million of OTTI at December 31, 2013.
(3) Amortized cost is net of $20.4 million of OTTI at December 31, 2013.
48
For the year ended December 31, 2014, the Federal Reserve maintained the federal funds rate flat, at, or below 0.25% in response
to the economic environment. Credit spreads generally tightened given the prospects for a sustained low interest rate environment.
The benchmark 10-year US Treasury rate declined to 2.17% on December 31, 2014 from 3.03% on December 31, 2013. This
decline in interest rates was generally positive 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 16 - Derivative Financial Instruments in the Notes to Consolidated
Financial Statements contained elsewhere in this report for additional information concerning derivative financial instruments.
A summary of the composition and maturity of Webster's debt securities at December 31, 2014 follows:
Within 1 Year
1 - 5 Years
5 - 10 Years
After 10 Years
Total
(Dollars in thousands)
Amount
Weighted
Average
Yield
Amount
Weighted
Average
Yield
Amount
Weighted
Average
Yield
Amount
Weighted
Average
Yield
Amount
Weighted
Average
Yield
Available for sale:
U.S. Treasury Bills
Agency CMO
Agency MBS
Agency CMBS
Non-agency CMBS
CLO
Pooled trust preferred
securities
Single issuer trust preferred
securities
Corporate debt securities
Total available for sale
Held-to-maturity:
Agency CMO
Agency MBS
Agency CMBS
Municipal bonds and notes
Non-agency CMBS
Private Label MBS
Total held-to-maturity
Total debt securities
$
$
$
$
Alternative Investments
$
525
0.05% $
—
—
—
—
—
—
—
—
—
—
—
—
—
15,008
1.91
20,006
2.00
—
—
—
—
—
—
—
—
—
—
—
—
—
—
110,301
3.11
—% $
—
—% $
—
—% $
525
0.05%
7,777
3.00
543,211
—
—
65,166
225,399
—
—
—
—
—
1.85
2.07
—
—
—
1,028,518
80,266
453,213
200,335
2.76
2.73
2.59
4.22
2.25
550,988
1,028,518
80,266
553,393
425,734
2.76
2.73
2.59
3.78
2.16
—
—
—
—
38,245
1.71
—
—
38,245
110,301
1.71
3.11
15,533
1.85% $ 130,307
2.94% $ 298,342
2.05% $2,343,788
2.95% $2,787,970
2.85%
—
—
—
15
—
—
15
—% $
—
—% $
10,495
2.91% $ 431,634
2.89% $ 442,129
2.89%
—
—
7.25
—
—
40,340
4.24
30,804
4.17
2,063,175
—
—
—
—
17,193
6.16
24,210
6.53
—
—
5,886
4.61
—
—
—
—
578,687
331,793
338,723
—
2.99
2.76
6.51
3.35
—
2,134,319
578,687
373,211
338,723
5,886
3.03
2.76
6.50
3.35
4.61
7.25% $
63,419
4.79% $
65,509
4.84% $3,744,012
3.29% $3,872,955
3.40%
15,548
1.85% $ 193,726
3.58% $ 363,851
2.57% $6,087,800
3.19% $6,660,925
3.17%
Investments in Private Equity Funds - The Company has investments in private equity funds. These investments, which totaled
$10.2 million at December 31, 2014 and $10.4 million at December 31, 2013, are included in other assets in the accompanying
Consolidated Balance Sheets. The majority of these funds are held at cost based on ownership percentage in the fund, while some
are accounted for at fair value using a net asset value. See a further discussion of fair value in Note 17 - Fair Value Measurements.
The Company recognized a net gain of $733 thousand and net losses of $392 thousand and $720 thousand for the years ended
December 31, 2014, 2013, and 2012, respectively. These amounts are included in other non-interest income in the accompanying
Consolidated Statements of Income.
Other Non-Marketable Investments - The Company holds certain non-marketable investments, which include preferred share
ownership in other equity ventures. These investments, which totaled $6.8 million at December 31, 2014 and December 31, 2013,
are included in other assets in the accompanying Consolidated Balance Sheets. These funds are held at cost and subject to impairment
testing. The Company recognized net gains of $110 thousand and $3 thousand for the years ended December 31, 2014 and 2013,
respectively, and a net loss of $263 thousand for the year ended December 31, 2012. These amounts are included in other non-
interest income in the accompanying Consolidated Statements of Income.
Section 619 of the Dodd-Frank Act, commonly known as the Volcker Rule, prohibits investments in private equity funds and non-
public funds that qualify as Covered Funds. Conformance with the final rule is required by July 21, 2017 for certain non-compliant
Covered Funds. The Company does not expect any material impact to the financial statements related to its compliance with the
Volcker Rule on alternative investments.
49
Loan and Lease Portfolio
The following table provides the portfolio composition of Webster's loans and leases:
(Dollars in thousands)
Amount
%
Amount
%
Amount
%
Amount
%
Amount
%
2014
2013
2012
2011
2010
At December 31,
Residential
Consumer:
Home equity
Liquidating - home equity
Other consumer
Total consumer
Commercial:
$ 3,498,675
25.2
$ 3,353,967
26.5
$ 3,285,945 27.2
$ 3,213,814
28.7
$ 3,140,699
28.5
2,367,402
17.0
2,355,257
18.5
2,448,207 20.4
2,554,879
22.8
2,627,233
23.8
92,056
75,307
0.7
0.5
104,902
60,681
0.8
0.5
121,875
43,672
1.0
0.4
147,553
37,506
1.3
0.3
176,576
31,468
1.6
0.3
2,534,765
18.2
2,520,840
19.8
2,613,754 21.8
2,739,938
24.4
2,835,277
25.7
Commercial non-mortgage
3,098,892
22.3
2,734,025
21.5
2,409,816 20.0
1,939,629
17.3
1,653,733
15.0
Asset-based
Total commercial
Commercial real estate:
662,615
4.8
560,666
4.4
505,425
4.2
454,078
4.0
455,290
4.1
3,761,507
27.1
3,294,691
25.9
2,915,241 24.2
2,393,707
21.3
2,109,023
19.1
Commercial real estate
3,326,906
23.9
2,856,110
22.5
2,644,229 22.0
2,274,110
20.3
2,064,603
18.7
Commercial construction
235,449
1.7
205,397
1.6
142,070
1.2
113,534
0.9
134,528
1.2
Total commercial real estate
3,562,355
25.6
3,061,507
24.1
2,786,299 23.2
2,387,644
21.2
2,199,131
19.9
Equipment financing
Net unamortized premiums
Net deferred fees
532,117
2,580
8,026
3.8
—
0.1
455,434
5,466
7,871
3.6
—
0.1
414,783
6,254
6,420
3.4
0.1
0.1
469,679
8,132
12,490
4.2
0.1
0.1
702,233
10,064
21,770
6.4
0.1
0.3
Total loans and leases
13,900,025 100.0
12,699,776 100.0
12,028,696 100.0
11,225,404 100.0
11,018,197 100.0
Accrued interest receivable
38,397
36,433
35,360
33,540
32,801
Total recorded investment in loans and
leases
$ 13,938,422
$ 12,736,209
$ 12,064,056
$ 11,258,944
$ 11,050,998
Total residential loans were $3.5 billion at December 31, 2014, a net increase of $144.7 million from December 31, 2013, primarily
the result of originations of $485.2 million during the year ended December 31, 2014, offset by loan payments.
Total consumer loans were $2.5 billion at December 31, 2014, a net increase of $13.9 million from December 31, 2013.
Total commercial loans were $3.8 billion at December 31, 2014, a net increase of $466.8 million from December 31, 2013. The
growth in commercial loans is primarily related to new originations of $1.4 billion in commercial non-mortgage loans for the year
ended December 31, 2014. Asset-based loans increased $101.9 million from December 31, 2013, reflective of $349.3 million in
originations and line usage during the year ended December 31, 2014.
Total commercial real estate loans were $3.6 billion at December 31, 2014, a net increase of $500.8 million from December 31,
2013 as a result of originations of $1.2 billion during the year ended December 31, 2014, offset by loan payments.
Equipment financing loans and leases were $532.1 million at December 31, 2014, a net increase of $76.7 million from December 31,
2013, primarily the result of $252.3 million in originations during the year ended December 31, 2014, offset by loan payments.
50
The following table provides contractual maturity and interest-rate sensitivity information for Webster's loans and leases at
December 31, 2014:
(In thousands)
Residential
Consumer:
Home equity
Liquidating - home equity
Other consumer
Total consumer
Commercial:
Commercial non-mortgage
Asset-based
Total commercial
Commercial real estate:
Commercial real estate
Commercial construction
Total commercial real estate
Equipment financing loans and leases
Total contractual maturities
Net unamortized premiums
Net deferred fees
Loans and leases
(In thousands)
Fixed rate
Variable rate
Total contractual maturities
Asset Quality
Contractual Maturity
One Year Or Less
More Than One
To Five Years
More Than Five
Years
Total
$
1,176
$
49,763
$ 3,447,736
$ 3,498,675
1,450
—
2,016
3,466
376,930
61,957
438,887
334,183
56,272
390,455
23,159
39,405
1,060
55,595
96,060
2,306,238
597,218
2,903,456
2,326,547
2,367,402
90,996
17,696
92,056
75,307
2,435,239
2,534,765
415,724
3,440
419,164
1,272,846
1,719,877
88,382
1,361,228
435,724
90,795
1,810,672
73,234
3,098,892
662,615
3,761,507
3,326,906
235,449
3,562,355
532,117
$
857,143
$ 4,846,231
$ 8,186,045
$ 13,889,419
2,580
8,026
$ 13,900,025
Interest-Rate Sensitivity
More Than One
To Five Years
760,952
$
More Than Five
Years
3,495,178
$
Total
$
4,425,198
4,085,279
4,690,867
9,464,221
857,143
$
4,846,231
$
8,186,045
$ 13,889,419
One Year Or Less
169,068
688,075
$
$
Management maintains 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 following table provides key asset quality ratios:
At or for the years ended December 31,
2014
2013
2012
2011
2010
Non-performing loans and leases as a percentage of loans and leases
0.95%
1.28%
1.62%
1.68%
2.48%
Non-performing assets as a percentage of total assets
Non-performing assets as a percentage of loans and leases plus OREO
Net charge-offs as a percentage of average loans and leases
Allowance for loan and lease losses as a percentage of loans and leases
Allowance for loan and lease losses as a percentage of non-performing loans
and leases
Ratio of allowance for loan and lease losses to net charge-offs
0.61
1.00
0.23
1.15
0.82
1.35
0.47
1.20
0.98
1.65
0.68
1.47
1.03
1.72
1.00
2.08
1.67
2.73
1.23
2.92
120.73
5.21x
93.65
2.63x
90.93
124.14
117.58
2.28x
2.11x
2.39x
51
Non-performing Assets
The following table provides information regarding Webster's lending-related non-performing assets:
At December 31,
2014
Amount (1) % (2)
2013
Amount (1) % (2)
2012
Amount (1) % (2)
2011
Amount (1) % (2)
2010
Amount (1) % (2)
$
66,061
1.89
$
81,370
2.43
$
95,540
2.91
$
82,052
2.54
$
99,129
3.16
(Dollars in thousands)
Residential (3)
Consumer:
Home equity (3)
Liquidating - home equity
Other consumer
Total consumer
Commercial:
Asset-based loans
Total commercial
Commercial real estate:
Commercial real estate
Commercial construction
Total commercial real estate
Equipment financing
35,490
4,460
280
40,230
1.50
4.84
0.37
1.59
45,434
6,245
139
51,818
1.93
5.95
0.23
2.06
49,402
8,133
135
57,670
2.02
6.67
0.31
2.21
24,943
5,091
116
30,150
27,884
1,880
29,764
0.98
3.45
0.31
1.10
1.44
0.41
1.24
34,456
9,722
119
44,297
34,365
7,832
42,197
1.31
5.51
0.38
1.56
2.08
1.72
2.00
Commercial non-mortgage
6,436
0.21
10,933
0.40
17,538
0.73
—
—
—
—
—
6,436
0.17
10,933
0.33
17,538
0.60
Total non-performing loans and leases (4)
131,920
Deferred costs and unamortized premiums
266
15,016
3,659
18,675
518
0.45
1.55
0.52
0.10
0.95
0.47
2.06
0.58
0.25
1.28
13,428
4,235
17,663
1,141
162,925
303
0.59
3.58
0.74
0.80
1.62
15,634
5,092
20,726
3,325
194,799
351
32,197
1.42
41,134
1.99
6,762
17.01
26,334
19.60
1.63
1.52
1.68
38,959
7,154
188,079
163
3.07
2.92
2.49
67,468
20,482
273,573
1,183
Total recorded investment in non-performing
loans and leases
Total non-performing loans and leases (4)
Foreclosed and repossessed assets:
Residential and consumer (3)
Commercial
Total foreclosed and repossessed assets
Total non-performing assets (5)
$ 132,186
$ 163,228
$ 195,150
$ 188,242
$ 274,756
$ 131,920
$ 162,925
$ 194,799
$ 188,079
$ 273,573
3,517
2,999
6,516
$
4,930
3,752
8,682
$
$ 138,436
$ 171,607
2,659
723
$
3,382
$ 198,181
2,884
2,084
4,968
$
$ 193,047
7,175
21,056
$
28,231
$ 301,804
(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) A total of $17.6 million in residential and consumer loans was reclassified from non-accrual to accrual status in the year ended December
31, 2014 as a result of updated regulatory guidance issued in the first quarter of 2014.
(4) Includes non-accrual restructured loans and leases of $76.9 million at December 31, 2014 and $102.9 million at December 31, 2013.
(5) Excludes one non-accrual available-for-sale security of $5.2 million at December 31, 2013 and $3.1 million at December 31, 2012.
Webster policy requires residential and consumer loans 90 or more days past due to be 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. As a result of updated regulatory guidance
issued in the first quarter of 2014, performing Chapter 7 loans are reclassified to 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 Consolidated Financial Statements contained elsewhere in this report for information on the Company's non-accrual
policy.
52
The following table provides detail of non-performing loan and lease activity:
(In thousands)
Non-performing loans and leases, beginning of period
Additions
Paydowns/draws on existing non-performing loans and leases, net
Reclassification of Chapter 7 Loans to accrual status
Charge-offs
Other reductions
Non-performing loans and leases, end of period
Impaired Loans and Leases
Years ended December 31,
2014
162,925 $
106,525
(81,116)
(17,601)
(34,000)
(4,813)
131,920 $
2013
194,799
158,177
(120,230)
—
(57,204)
(12,617)
162,925
$
$
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. 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, a third-party appraisal is obtained upon loan default. Fair value of the
collateral for residential and consumer collateral dependent loans is reevaluated every six months, by either a new appraisal or
other internal valuation methods. Fair value is also reassessed, with any excess amount charged off, for consumer loans that reach
180 days past due per 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 quarterly. Whenever the Company has
a third-party real estate appraisal performed by independent licensed appraisers, a licensed in-house appraisal officer or qualified
reviewer reviews these appraisals for compliance with the Financial Institutions Reform Recovery and Enforcement Act and the
Uniform Standards of Professional Appraisal Practice.
A 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 December 31, 2014 and December 31,
2013 is the result of either sufficient cash flow or sufficient collateral coverage of the book balance.
At December 31, 2014, there were 1,828 impaired loans and leases with a recorded investment balance of $332.2 million, which
included loans and leases of $218.8 million with an impairment allowance of $25.3 million.
Troubled Debt Restructurings
A modified loan is considered a TDR when two conditions are met: (i) the borrower is experiencing financial difficulties and (ii)
the modification constitutes a concession. 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 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 borrowers have 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.
53
The Company’s policy is to place consumer loan TDRs, except those that were performing prior to TDR status, on non-accrual
status for a minimum period of 6 months. Commercial TDRs are evaluated on a case-by-case basis for determination of whether
or not to place them on non-accrual status. Loans qualify for return to accrual status once they have demonstrated performance
with the restructured terms of the loan agreement for a minimum of 6 months. Initially, all TDRs are reported as impaired. Generally,
TDRs are classified as impaired loans and reported as TDRs for the remaining life of the loan. Impaired and TDR classification
may be removed if the borrower demonstrates compliance with the modified terms for a minimum of 6 months and through one
fiscal year-end, and the restructuring agreement specifies a market rate of interest equal to that which would be provided to a
borrower with similar credit at the time of restructuring. In the limited circumstance that a loan is removed from TDR classification,
it is the Company’s policy to continue to base its measure of loan impairment on the contractual terms specified by the loan
agreement.
The following table provides detail for loans and leases that have been restructured as TDRs:
(In thousands)
Residential
Consumer
Commercial
Total
At December 31,
2014
142,435 $
2013
142,871 $
2012
146,944 $
2011
135,311 $
$
50,374
127,361
52,179
146,848
54,793
202,424
36,629
272,372
2010
122,514
32,157
295,480
$
320,170 $
341,898 $
404,161 $
444,312 $
450,151
The following table provides additional information for TDRs:
(In thousands)
Recorded investment of TDRs:
Accrual status (1)
Non-accrual status (1)
Total recorded investment of TDRs
Accruing TDRs performing under modified terms more than one year
Specific reserves for TDRs included in the balance of allowance for loan and lease losses
Additional funds committed to borrowers in TDR status
At December 31,
2014
2013
$ 243,231
$ 238,926
76,939
102,972
$ 320,170
$ 341,898
67.6%
58.2%
$
23,785
$
20,360
552
1,262
(1) A total of $17.6 million in residential and consumer loans was reclassified from non-accrual to accrual status in the year ended December
31, 2014 as a result of updated regulatory guidance issued in the first quarter of 2014.
The following table provides detail of TDR activity:
(In thousands)
TDRs, beginning of period
Additions
Paydowns/draws on existing TDRs, net
Charge-offs post modification
Transfers to OREO
TDRs, end of period
Years ended December 31,
2014
341,898
37,802
(43,820)
(13,456)
(2,254)
320,170
$
$
2013
404,161
49,744
(84,276)
(24,374)
(3,357)
341,898
$
$
See Note 3 - Loans and Leases in the Notes to 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.
54
Delinquent loans and leases
The following table provides information regarding loans and leases past due 30 days or more and accruing income:
(Dollars in thousands)
Residential
Consumer:
Home equity
At December 31,
2014
Amount (1) % (2)
2013
Amount (1) % (2)
2012
Amount (1) % (2)
2011
Amount (1) % (2)
2010
Amount (1) % (2)
$
17,216
0.49
$
18,285
0.55
$
25,182
0.77
$
24,361
0.76
$
21,513
0.68
14,757
0.62
18,290
0.78
24,344
0.99
20,394
0.80
21,141
0.80
Liquidating - home equity
1,658
1.80
1,806
1.72
3,588
2.94
4,538
3.12
6,128
3.47
Other consumer
Commercial:
Commercial non-mortgage
Asset-based loans
Commercial real estate:
Commercial real estate
Commercial construction
Equipment financing
Total loans and leases past due
30-89 days
Past due 90 days or more
accruing:
Commercial non-mortgage
Commercial real estate
Commercial construction
Total loans and leases past due
90 days and accruing
Total loans and leases over 30
days delinquent
Deferred costs and unamortized
premiums
Accrued interest
Total recorded investment over
30 day delinquent loans
1,110
1.47
636
1.05
516
1.18
453
1.21
398
1.26
2,099
0.07
4,100
0.15
2,769
0.11
4,619
0.24
5,201
0.31
—
—
—
—
—
—
—
—
—
—
2,714
0.08
4,897
0.17
14,710
0.56
1,766
0.08
11,006
0.53
—
—
—
—
—
—
—
—
194
0.32
701
0.13
362
0.08
1,926
0.46
4,800
1.02
7,937
1.13
40,255
0.29
48,376
0.38
73,035
0.61
60,931
0.54
73,518
0.67
48
—
—
48
—
—
—
—
4,269
0.16
232
0.01
—
—
346
891
—
0.01
0.03
—
161
428
135
0.01
0.02
0.34
4,501
0.04
1,237
0.01
724
0.01
91
—
—
91
0.01
—
—
—
40,303
0.29
52,877
0.42
74,272
0.62
61,655
0.55
73,609
0.67
96
498
189
669
214
887
194
720
245
884
$
40,897
$
53,735
$
75,373
$
62,569
$
74,738
(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.
55
Allowance for Loan and Lease Losses Methodology
The allowance for loan and lease losses ("ALLL") 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. Webster Bank’s Credit Risk
Management Committee reviews and advises on the adequacy of these reserves. The ALLL policy is considered a critical accounting
policy.
The determination of the adequacy of the ALLL is subject to considerable assumptions and judgment used in its determination.
The assumptions and judgment could be influenced by conditions such as portfolio size, historical loss trends, nature and
performance, and by economic factors, nationally or specific to Webster Bank’s market, as well as application of policies and
procedures. The quarterly process for determining estimated probable losses is based upon financial loss models, combined with
the review of the loan and lease portfolio and other relevant factors. While actual conditions or factors could differ significantly
from the assumptions utilized, resulting in materially different losses, management believes the ALLL is adequate as of
December 31, 2014.
Webster’s methodology for assessing an appropriate level of the ALLL includes three key elements:
(i) Problem loans and leases are analyzed and assessed for specific reserves based on collateral, cash flow, and probability of re-
default specific to each loan or lease,
(ii) Loans and leases with similar type and risk characteristics are segmented into homogeneous pools and modeled using
quantitative models. The homogeneous commercial portfolio loss estimate is calculated based on internal risk rating, the historic
probability of default and loss given default. Changes in risk ratings and other risk factors, for both performing and non-performing
loans and leases, will affect the calculation of the allowance. The formula for both homogeneous residential and consumer portfolio
allowance is calculated by applying loss factors based on historic delinquency, defaults, and net losses. Webster Bank considers
other quantitative contributing factors for risks associated with the homogeneous loan portfolio not reflected in the quantitative
modeling and adjusts its estimate based on the analysis. Some examples of contributing factors include the potential impact of
policy exceptions, collateral values, unemployment, and changes in economic activity,
(iii) Webster Bank also considers qualitative factors that are not specifically driven by defined metrics but can have an incremental
or regressive impact on losses incurred in the current loan and lease portfolio. Examples include staffing, concentrations, and
macro-economic trends. The quantitative and qualitative contributing factors are consistent with interagency guidance.
The Company has 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. To assist management with their review,
reports related to loan production, loan quality, concentrations of credit, loan delinquencies, and non-performing and potential
problem loans are generated by loan reporting systems.
Commercial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably. Underwriting
standards are designed to promote relationships rather than transactional banking. Once it is determined that the borrower’s
management possesses sound ethics and solid business acumen, the Company’s management examines current and projected cash
flows to determine the ability of the borrower to repay obligations as agreed. Commercial and industrial loans are primarily made
based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The
cash flows of borrowers, however, may not be as expected, and the collateral securing these loans may fluctuate in value. Most
commercial and industrial loans are secured by the assets being financed and may incorporate personal guarantees of the principals.
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 of the property securing the loan. The properties securing the Company’s
commercial real estate portfolio are diverse in terms of type and geographic location, which reduces the Company's exposure to
adverse economic events that may affect a particular market. Management monitors and evaluates commercial real estate loans
based on collateral, geography, and risk grade criteria. Commercial real estate loans may be adversely affected by conditions in
the real estate markets or in the general economy. The Company also utilizes third-party experts to provide insight and guidance
about economic conditions and trends affecting its commercial real estate loan portfolio.
56
Commercial construction loans 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
appraisals, sensitivity analysis of absorption and lease rates, and financial analysis of the developers and property owners.
Commercial 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 an interim loan commitment
from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections by third-party
professionals and the Company's internal staff.
Policies and procedures are in place to manage consumer loan risk and are developed and modified, as needed. 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. Additionally, Webster Bank originates both qualified
mortgage (QM) and non-QM loans as defined by the Consumer Financial Protection Bureau rules that went into effect on January
10, 2014, with appropriate policies, procedures, and underwriting guidelines that include ability-to-repay standards.
The ALLL methodology for groups of loans collectively evaluated for impairment is comprised of both a quantitative and qualitative
analysis. A key assumption in the quantitative component of the reserve is the loss emergence period ("LEP"). The LEP is an
estimate of the average amount of time from an event signaling the potential inability of a borrower to continue to pay as agreed
to the point at which a loss on that loan is confirmed. In general, the LEP is expected to be shorter in an economic slowdown or
recession and longer during times of economic stability or growth as customers are better able to delay loss confirmation after a
potential loss event has occurred. In conjunction with our annual review of ALLL assumptions, we have performed an analysis
of the LEP for both commercial and consumer loans, using charge-off data, servicing data and behavioral data. Our analysis
determined that for all commercial loan segments and for consumer real estate secured segments, the LEP lengthened to 24 months,
and for other consumer loans the LEP lengthened to 18 months. Previously, we assumed an LEP of 12 months for all loan portfolios
based on industry averages and standards. The longer LEP yields an increase in the quantitative component of the ALLL. Since
more of the inherent losses that exist with the loan portfolio are now captured by the quantitative component of the ALLL, there
is an associated decrease in the qualitative component. Another key ALLL assumption is the look back period ("LBP"), which
represents the historical period of time over which data is used to estimate loss rates. Our commercial loss models continue to
use an LBP that goes back to 2006, with more recent years (2010-2014) weighted more heavily than prior years (2006-2009). The
updates to the LEP estimate and the LBP estimate, coupled with the update of the qualitative factors, did not have a material
impact on the overall ALLL.
At December 31, 2014, the allowance for loan and lease losses was $159.3 million, which was 1.15% of the total loan and lease
portfolio and 120.73% of total non-performing loans and leases. This compares with an allowance of $152.6 million at
December 31, 2013, which was 1.20% of the total loan and lease portfolio and 93.65% of total non-performing loans and leases.
The following table provides an allocation of the allowance for loan and lease losses by portfolio segment:
At December 31,
2014
2013
2012
2011
2010
(Dollars in thousands)
Residential
Consumer
Commercial
Commercial real estate
Equipment financing
Unallocated
Total ALLL
Amount
$ 23,596
40,006
48,333
29,240
5,620
12,469
$ 159,264
% (1)
0.67
1.57
1.29
0.82
1.05
—
1.15
Amount
$ 20,580
39,551
47,706
29,883
3,912
10,941
$ 152,573
% (1)
0.61
1.56
1.45
0.98
0.85
—
1.20
Amount
$ 29,474
54,254
46,566
30,834
4,001
12,000
$ 177,129
% (1)
0.90
2.06
1.60
1.11
0.95
—
1.47
Amount
$ 34,565
67,785
60,681
45,013
8,943
16,500
$ 233,487
% (1)
1.07
2.46
2.54
1.89
1.88
—
2.08
Amount
$ 30,792
95,071
74,470
77,695
21,637
22,000
$ 321,665
% (1)
0.98
3.33
3.54
3.54
3.04
—
2.92
(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.
The ALLL reserve associated with loans and leases individually evaluated for impairment at December 31, 2014, increased $4.8
million compared to December 31, 2013. The increase in the reserve is primarily due to the results of collateral and cash flow
evaluations of impaired loans.
57
As of December 31, 2014, the ALLL reserve allocated to the residential loan portfolio increased $3.0 million compared to
December 31, 2013. The increase is due primarily due to the specific reserves calculated related to individually impaired loans
coupled with loan growth.
The ALLL reserve allocated to the consumer portfolio at December 31, 2014 increased $0.5 million compared to December 31,
2013 which is due to an increase in the loan balance, partially offset by reduced levels of delinquent and non-performing loans.
The ALLL reserve allocated to the commercial portfolio at December 31, 2014 increased $0.6 million compared to December 31,
2013, which is due to the increase in the qualitative factors related to loan growth, partially offset by improving asset quality
metrics.
The ALLL reserve allocated to the commercial real estate portfolio at December 31, 2014 decreased $0.6 million compared to
December 31, 2013 due to continued improvement in the asset quality, partially offset by an increase in the qualitative factors
related to loan growth.
As of December 31, 2014, the ALLL reserve allocated to the equipment financing portfolio increased $1.7 million compared to
December 31, 2013. The increase is attributed to loan growth, partially offset by the reductions in non-accruals during 2014.
The portion of the ALLL reserve at December 31, 2014 attributed to environmental factors are qualitative assessments of broader
economic trends and other factors or dynamics specific to Webster. The reserve attributed to environmental factors has increased
$1.5 million compared to December 31, 2013, primarily due to modest loan growth coupled with uncertainty related to maturing
lines of credit.
The following tables provide detail of activity in the allowance for loan and lease losses and the reserve for unfunded credit
commitments:
(In thousands)
ALLL, beginning balance
Provision
Charge-offs:
Residential
Consumer
Commercial
Commercial real estate
Equipment financing
Total charge-offs
Recoveries:
Residential
Consumer
Commercial
Commercial real estate
Equipment financing
Total recoveries
Net charge-offs
ALLL, ending balance
At or for the years ended December 31,
2014
$ 152,573
37,250
2013
$ 177,129
33,500
2012
$ 233,487
21,500
2011
$ 321,665
22,500
2010
$ 341,184
115,000
(6,214)
(20,712)
(13,668)
(3,237)
(595)
(44,426)
(11,592)
(29,037)
(19,126)
(15,425)
(279)
(75,459)
(12,927)
(43,920)
(35,793)
(9,894)
(1,668)
(104,202)
(11,524)
(52,997)
(39,933)
(22,721)
(2,154)
(129,329)
(16,991)
(66,215)
(31,570)
(19,139)
(16,760)
(150,675)
1,324
5,055
4,369
885
2,234
13,867
(30,559)
$ 159,264
1,402
6,185
5,123
1,648
3,045
17,403
(58,056)
$ 152,573
803
7,040
6,817
2,210
9,474
26,344
(77,858)
$ 177,129
933
5,449
5,276
544
6,449
18,651
(110,678)
$ 233,487
1,671
4,637
4,285
996
4,567
16,156
(134,519)
$ 321,665
Reserve for unfunded credit commitments: (1)
Reserve for unfunded credit commitments, beginning balance
Provision (benefit)
Reserve for unfunded credit commitments, ending balance
$
$
4,384
767
5,151
$
$
5,662
(1,278)
4,384
$
$
5,449
213
5,662
$
$
9,378
(3,929)
5,449
$ 10,105
(727)
9,378
$
(1) The reserve for unfunded credit commitments is reported as a component of accrued expenses and other liabilities in the accompanying
Consolidated Balance Sheets.
58
Net charge-offs for the years ended December 31, 2014 and 2013 were $30.6 million and $58.1 million, respectively, consisting
of $4.9 million and $10.2 million, respectively, in net charges for residential loans, $15.7 million and $22.9 million, respectively,
in net charges for consumer loans, $9.3 million and $14.0 million, respectively, in net charges for commercial loans, $2.4 million
and $13.8 million, respectively, in net charges for commercial real estate loans, and net recoveries of $1.6 million and $2.8 million,
respectively, for equipment financing loans and leases. Net charge-offs decreased by $27.5 million during the year ended December
31, 2014 compared to the year ended December 31, 2013. 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 year
ended December 31, 2014.
The following table provides a summary of net charge-offs (recoveries) to average loans and leases by category:
Net charge-offs (recoveries):
Residential
Consumer
Commercial
Commercial real estate
Equipment financing
Total net charge-offs to total average loans and leases
Years ended December 31,
2014
2013
2012
2011
2010
0.14%
0.61
0.26
0.07
(0.34)
0.23%
0.31%
0.74
0.55
0.48
(0.67)
0.47%
0.37%
1.37
1.12
0.30
(1.84)
0.68%
0.34%
1.70
1.53
0.99
(0.73)
1.00%
0.51%
2.10
1.34
0.85
1.52
1.23%
59
Sources of Funds
Deposits are the primary source of Webster Bank’s cash flows for use in lending and meeting its general operational needs.
Additional sources of funds include Federal Home Loan Bank advances and other borrowings, loan and mortgage-backed securities
repayments, securities sale proceeds and maturities, and operating activities. While scheduled loan and security 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 debit card use, direct deposit,
ACH payments, combined statements, 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 164 banking centers within our primary market area.
Daily average balances of deposits by type and weighted-average rates paid thereon for the periods indicated:
(Dollars in thousands)
Non-interest-bearing:
Demand
Interest-bearing:
Checking
Health savings accounts
Money market
Savings
Time deposits
Total interest-bearing
Total average deposits
Years ended December 31,
2014
2013
2012
Average
Balance
Average
Rate
Average
Balance
Average
Rate
Average
Balance
Average
Rate
$
3,216,777
$
2,939,324
$
2,638,025
2,054,318
1,738,368
2,171,469
3,899,548
2,280,668
12,144,371
$ 15,361,148
0.05%
1,873,337
0.30
1,454,558
0.19
2,341,568
0.19
3,841,923
1.16
2,357,321
0.36
11,868,707
0.29% $ 14,808,031
0.05%
1,635,857
0.41
1,201,992
0.20
2,190,266
0.18
3,796,466
1.20
2,703,414
0.39
11,527,995
0.31% $ 14,166,020
0.06%
0.54
0.22
0.23
1.43
0.52
0.42%
Total average deposits increased $553.1 million, or 3.7%, in 2014 compared to 2013 and increased $642.0 million, or 4.5%, in
2013 compared to 2012. There has been steady growth in deposits, most significantly for health savings accounts and non-interest
bearing classifications, partially offset by declining time deposits. As a result, the average cost of deposits has been decreasing.
Webster Bank manages the flow of funds in its deposit accounts and provides a variety of accounts and rates consistent with
Federal Deposit Insurance Corporation ("FDIC") regulations. Webster Bank’s Retail Pricing Committee and its Commercial and
Institutional Liability Pricing Committee meet regularly to determine pricing and marketing initiatives. Total deposits were $15.7
billion at December 31, 2014 compared to $14.9 billion at December 31, 2013. Deposit growth has been steady, led by increased
demand and health savings accounts. See Note 8 - Deposits in the Notes to Consolidated Financial Statements contained elsewhere
in this report for additional information.
On September 23, 2014, Webster Bank signed a definitive agreement to acquire the health savings accounts business from JPMorgan
Chase Bank, N.A. The acquisition closed on January 13, 2015, after previously receiving regulatory approval. The transaction
solidifies the Company as a leading administrator of health savings accounts and will provide Webster with an additional estimated
$1.4 billion in deposits. See Note 24 - Subsequent Event in the Notes to Consolidated Financial Statements contained elsewhere
in this report for additional information.
Time deposits with a denomination of $100 thousand or more amounted to $1.0 billion, $0.9 billion, and $0.9 billion and represented
approximately 6.6%, 5.8%, and 6.4% of total deposits at December 31, 2014, 2013, and 2012, respectively.
60
The following table presents maturity periods for time deposits with a denomination of $100 thousand or more, at December 31,
2014, as indicated:
(In thousands)
Due within 3 months
Due after 3 months and within 6 months
Due after 6 months and within 12 months
Due after 12 months
Time deposits with a denomination of $100 thousand or more
Federal Home Loan Bank and Federal Reserve Bank Stock
$
$
158,785
139,061
173,915
563,761
1,035,522
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 $142.6 million of FHLB capital stock as of December 31, 2014 and $108.2 million as of December 31,
2013 for its membership and for outstanding advances and other extensions of credit. Webster Bank received $1.7 million in
dividends from the FHLB in 2014.
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 both December 31, 2014 and December 31, 2013, Webster Bank held $50.7 million of FRB capital stock. Webster
Bank received $3.0 million in dividends from the FRB in 2014.
Borrowings
Borrowings, utilized as a source of funding for liquidity and interest rate risk management purposes, primarily consist of FHLB
advances and securities sold under agreements to repurchase, whereby the Company delivers securities to counterparties under
an agreement to repurchase the securities at a fixed price in the future. In addition, Webster Bank may utilize term and overnight
Federal funds to meet short-term liquidity needs.
The Company's long-term debt consists of senior fixed-rate notes maturing in 2024 and junior subordinated notes maturing in
2033. On February 11, 2014, Webster completed an underwritten public offering for 4.375% senior fixed-rate notes maturing in
2024, then used cash-on-hand to pay off the 5.125% senior fixed-rate notes which matured on April 15, 2014.
Daily average balances of borrowings by type and weighted-average rates paid thereon for the periods indicated:
(Dollars in thousands)
FHLB advances
Securities sold under agreements to repurchase
Federal funds
Long-term debt
Total average borrowings
Years ended December 31,
2014
Average
Balance
2,038,749
966,304
387,004
252,368
3,644,425
$
$
Average
Rate
0.83% $
1.93
0.20
3.98
1.27% $
2013
Average
Balance
1,652,471
972,313
255,689
233,850
3,114,323
Average
Rate
0.98% $
2.09
0.18
3.12
1.42% $
2012
Average
Balance
1,389,999
1,033,933
173,690
418,896
3,016,518
Average
Rate
1.22%
2.01
0.17
4.07
1.82%
Total average borrowings increased $530.1 million, or 17.0%, in 2014 compared to 2013 and increased $97.8 million, or 3.2%,
in 2013 compared to 2012. The increase in 2014 compared to 2013 was primarily due to greater utilization of FHLB advances at
lower interest rates. The increase in 2013 compared to 2012 was due to greater FHLB advances utilization, somewhat offset by
prepayments of long-term debt with higher interest rates. As a result, the average cost of borrowings has been decreasing. Average
borrowings represented 17.0%, 15.4%, and 15.6% of average total assets for December 31, 2014, 2013, and 2012, respectively.
Total borrowed funds were $4.3 billion at December 31, 2014 as compared to $3.6 billion at December 31, 2013. Borrowings
represented 19.2% and 17.3% of total assets at December 31, 2014 and December 31, 2013, respectively. For additional information,
see Note 9 - Securities Sold Under Agreements To Repurchase and Other Borrowings, Note 10 - Federal Home Loan Bank
Advances, and Note 11 - Long-Term Debt in the Notes to Consolidated Financial Statements contained elsewhere in this report.
61
The following table summarizes the Company’s contractual obligations to make future payments as of December 31, 2014:
(In thousands)
Contractual Obligations:
Senior notes
Junior subordinated debt
FHLB advances
Securities sold under agreements to repurchase
Deposits with stated maturity dates
Operating leases
Purchase obligations
Payments Due by Period (1)
Total
Less than
one year
1-3 years
3-5 years
After 5
years
$
150,000 $
77,320
2,859,394
959,756
2,271,587
152,438
184,387
— $
—
2,275,000
459,756
1,260,472
21,347
41,525
— $
—
146,434
200,000
486,958
38,308
70,910
— $
—
278,026
300,000
523,431
28,025
52,364
150,000
77,320
159,934
—
726
64,758
19,588
472,326
Total contractual obligations
$
6,654,882 $ 4,058,100 $ 942,610 $ 1,181,846 $
(1) Payments for borrowings do not include interest. Payments related to leases are reflected as specified in the underlying contracts.
As of December 31, 2014, the Company has unrecognized tax benefits that, if recognized, would impact the effective tax rate in
future periods. Due to the uncertainty of the amounts to be ultimately paid, as well as the timing of such payments, all uncertain
tax liabilities that have not been paid have been excluded from the table above. Further detail on the impact of income taxes is
located in Note 7 - Income Taxes in the Notes to Consolidated Financial Statements included elsewhere within this report.
The Company has investments in private equity funds which are included in other assets in the accompanying Consolidated Balance
Sheets. The Company has $6.5 million in unfunded commitments remaining for these investments as of December 31, 2014.
Loan commitments and standby letters of credit are presented at contractual amounts; however, since many of these commitments
are expected to expire unused or only partially used, the total amounts of these commitments do not necessarily reflect future cash
requirements. The Company has $4.5 billion in other commitments, including unused commitments to extend credit, standby
letters of credit, and commercial letters of credit as of December 31, 2014.
Liquidity
Webster meets its cash flow requirements at an efficient cost under various operating environments through proactive liquidity
management at both the Company and Webster Bank. 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 new deposits. Webster is committed to maintaining a strong, increasing base
of core deposits to support growth in its loan and lease portfolio. Liquidity is reviewed and managed in order to maintain stable,
cost effective funding to promote overall balance sheet strength.
Holding Company Liquidity
Webster’s primary source of liquidity at the holding company level is dividends from Webster Bank. On occasion, investment
income, net proceeds from investment sales, borrowings, and public offerings may provide additional liquidity. 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 holding company, which are described in Item 1
“Supervision and Regulation.” At December 31, 2014, there were $270.2 million of retained earnings available for the payment
of dividends by Webster Bank to the holding company. Webster Bank paid $100.0 million in dividends to the holding company
during the year ended December 31, 2014.
Webster periodically repurchases common shares to fund employee compensation plans. In addition, the Company has a common
stock repurchase program authorized by the Board of Directors. The Company records the repurchase of shares of common stock
at cost based on the settlement date for these transactions. During the year ended December 31, 2014, a total of 427,185 shares
of common stock were repurchased at a cost of approximately $13.1 million, of which 77,185 shares were purchased to fund
employee compensation plans at a cost of approximately $2.3 million, and 350,000 shares were purchased under the common
stock repurchase program at a cost of approximately $10.7 million. At December 31, 2014, $39.3 million of repurchase authority
remained under the common stock repurchase program.
62
Webster Bank Liquidity
Webster Bank's primary source of funding is core deposits, consisting of demand, checking, savings, health savings accounts,
money market, and time deposits. The primary use of this funding is for loan portfolio growth. Webster Bank had a loan to total
deposit ratio of 88.8% and 85.5% at December 31, 2014 and December 31, 2013, respectively.
At December 31, 2014 and December 31, 2013, FHLB advances totaled $2.9 billion and $2.1 billion, respectively. Webster Bank
had additional borrowing capacity from the FHLB of approximately $0.7 billion and $1.0 billion at December 31, 2014 and
December 31, 2013, respectively. Webster Bank also had additional borrowing capacity at the FRB of $0.8 billion at both
December 31, 2014 and December 31, 2013. In addition, unpledged securities of $3.6 billion could have been used to increase
borrowing capacity, by $3.3 billion at either the FHLB or the FRB, or alternatively used to collateralize other borrowings such as
repurchase agreements, at December 31, 2014.
Webster Bank is required by regulations adopted by the Office of the Comptroller of the Currency ("OCC") to maintain liquidity
sufficient to ensure safe and sound operations. Adequate liquidity, as assessed by the OCC, considers 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 as of December 31, 2014. 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.
Applicable OCC regulations require Webster Bank, as a commercial bank, to satisfy certain minimum leverage and risk-based
capital requirements. As an OCC regulated commercial institution, it is also subject to a minimum tangible capital requirement.
As of December 31, 2014, Webster Bank was in compliance with all applicable capital requirements and exceeded the FDIC
requirements for a “well capitalized” institution. See Note 14 - Regulatory Matters in the Notes to 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.
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 risks. 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 risks, or to optimize
capital. Customer transactions are used to manage customers' funding requests. For the year ended December 31, 2014, Webster
did not engage in any off-balance sheet transactions that would have a material effect on its financial condition.
Asset/Liability Management and Market Risk
An effective asset/liability management process must balance the risks and rewards from both short and long-term interest rate
risks in determining management strategy and action. To facilitate and manage this process, Webster has an ALCO Committee.
The primary goal of ALCO is to manage interest rate risk to maximize net income and net economic value over time in changing
interest rate environments subject to Board approved risk limits. The Board sets limits for earnings at risk for parallel ramps in
interest rates over twelve months of plus and minus 100 and 200 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 December 31, 2014 and 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.
63
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. In the loan portfolio, floors are a benefit to interest income in this low rate environment.
Floating rate loans at floors pay a higher interest rate than a loan at a fully indexed rate without a floor, as with a floor there is a
limit on how low the interest rate can fall. As market rates rise, however, the interest rate paid on these loans does not rise until
the fully indexed rate rises through the contractual floor. 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, servicing rights, cash management fees, and derivative mark-
to-market adjustments.
Four main tools are used for managing interest rate risk: (i) the size and duration of the investment portfolio, (ii) the size and
duration of the wholesale funding portfolio, (iii) off-balance sheet interest rate contracts, and (iv) the pricing and structure of loans
and deposits. ALCO meets at least monthly to make decisions on the investment and funding portfolios based on the economic
outlook, the Committee's interest rate expectations, the risk position, and other factors. ALCO delegates pricing and product design
responsibilities to individuals and sub-committees but monitors and influences their actions on a regular basis.
Various interest rate contracts, including futures and options, interest rate swaps, and interest rate caps and floors can be used to
manage interest rate risk. These interest rate contracts involve, to varying degrees, credit risk and interest rate risk. Credit risk is
the possibility that a loss may occur if a counterparty 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 16 - Derivative Financial Instruments in the Notes to 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.
64
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 December 31, 2014 and December 31, 2013, might have on Webster’s net interest income ("NII")
for the subsequent twelve month period compared to NII assuming no change in interest rates:
NII
December 31, 2014
December 31, 2013
-200bp
N/A
N/A
-100bp
N/A
N/A
+100bp
1.8%
0.1%
+200bp
3.7%
0.6%
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 December 31, 2014 and December 31, 2013, 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
December 31, 2014
December 31, 2013
-200bp
N/A
N/A
-100bp
N/A
N/A
+100bp
2.7%
0.7%
+200bp
5.7%
2.0%
Interest rates are assumed to change up or down in a parallel fashion, and NII and PPNR results in each scenario 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 December 31, 2014 and December 31, 2013
assumed a federal funds rate of 0.25%. NII and PPNR results as of December 31, 2014 are more asset sensitive since December 31,
2013 due primarily to forecast increases in health savings account balances, as well as increases in the amount of floating-rate
investments in the securities portfolio. Additionally, loans at floors on December 31, 2014 totaled $1.7 billion and were, on average,
60 bps above their fully indexed rate or "in the money". This is $200 million and 8 bps less than on December 31, 2013, contributing
to the improved performance in a rising rate scenario. As loans at floors continue to roll off the balance sheet, earnings in scenarios
that include rising short term rates will continue to improve. As the federal funds rate was at 0.25% on December 31, 2014, the
-100 and -200 basis point scenarios have been excluded.
Webster can also hold futures, options, and forward foreign currency contracts to minimize the price volatility of certain assets
and liabilities. Changes in the market value of these positions are recognized in earnings.
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 December 31, 2014 and December 31, 2013:
NII
Short End of the Yield Curve
Long End of the Yield Curve
December 31, 2014
December 31, 2013
-100bp
N/A
N/A
-50bp
N/A
N/A
+50bp
(0.1)%
(1.1)%
+100bp
0.2%
(2.0)%
-100bp
(5.5)%
(2.8)%
-50bp
(2.4)%
(1.4)%
+50bp
2.0%
1.3%
+100bp
3.8%
2.6%
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 December 31, 2014 and December 31, 2013:
PPNR
Short End of the Yield Curve
Long End of the Yield Curve
December 31, 2014
December 31, 2013
-100bp
N/A
N/A
-50bp
N/A
N/A
+50bp
(0.3)%
(1.4)%
+100bp
(0.1)%
(2.6)%
-100bp
(9.8)%
(4.5)%
-50bp
(4.1)%
(2.1)%
+50bp
3.6%
2.1%
+100bp
6.8%
4.3%
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
eighteen months, and the long end as terms of greater than eighteen months. The results above reflect the annualized impact 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.
Sensitivity to the short end of the yield curve at December 31, 2014 is more asset sensitive than at December 31, 2013 due to
increases in health savings account balances along with increases in the amount of floating-rate investments in the securities
portfolio for both NII and PPNR. As mentioned above, the $200 million decrease in loans at floors on December 31, 2014 as
compared to December 31, 2013 also contributed to the improved performance due to a rise in short end rates.
Sensitivity to both increases and decreases in the long end of the yield curve were more pronounced than at December 31, 2013
in both NII and PPNR due to faster forecast prepayment speeds in the MBS portfolio.
65
The following table summarizes the estimated economic value of assets, liabilities, and off-balance sheet contracts at December 31,
2014 and December 31, 2013 and the projected change to economic values if interest rates instantaneously increase or decrease
by 100 basis points:
(Dollars in thousands)
December 31, 2014
Assets
Liabilities
Total
Net change as % base net economic value
December 31, 2013
Assets
Liabilities
Total
Net change as % base net economic value
Book
Value
Estimated
Economic
Value
Estimated Economic Value Change
-100 bp
+100 bp
$
$
$
$
22,533,010 $
20,210,329
2,322,681 $
22,388,119
19,799,495
2,588,624
20,852,999 $
18,643,811
2,209,188 $
20,589,480
18,108,291
2,481,189
N/A
N/A
N/A
N/A
N/A
N/A
$
$
$
$
(423,429)
(455,452)
32,023
1.2 %
(571,146)
(374,071)
(197,075)
(7.9)%
Changes in economic value can be best described using duration. Duration is a measure of the price sensitivity of financial
instruments for small changes in interest rates. For fixed rate instruments, it can also be thought of as the weighted-average expected
time to receive future cash flows. For floating rate instruments, it can be thought of as the weighted-average expected time until
the next rate reset. The longer the duration, the greater the price sensitivity for given changes in interest rates. Floating rate
instruments may have durations as short as one day and, therefore, have very little price sensitivity due to changes in interest rates.
Increases in interest rates typically reduce the value of fixed-rate assets as future discounted cash flows are worth less at higher
discount rates. A liability's value decreases for the same reason in a rising rate environment. A reduction in value of a liability is
a benefit, however, as this is an obligation of Webster.
Duration gap is the difference between the duration of assets and the duration of liabilities. A duration gap near zero implies that
the balance sheet is matched and would exhibit no change in estimated economic value for a small change in interest rates. Webster's
duration gap was negative 0.8 years at December 31, 2014. At December 31, 2013, the duration gap was a positive 0.5 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 generally be expected
to increase when interest rates rise, as the increased value of liabilities would more than offset the decreased value of assets. The
opposite would generally be expected to occur when interest rates fall. Earnings would also generally be expected to increase
when interest rates rise and decrease when rates fall over the longer term absent the effects of new business booked in the future.
The change in Webster's duration gap is due to decreased asset duration at December 31, 2014 driven primarily by the decreased
duration of the securities portfolio and increased liability duration at December 31, 2014 driven primarily by the issuance of $150
million aggregate principal amount of senior fixed-rate notes on February 11, 2014.
These estimates assume that management does not take any action to mitigate any positive or negative effects from changing
interest rates. Estimated earnings and economic values are subject to factors that could cause actual results to differ. Management
believes that Webster's interest rate risk position at December 31, 2014 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 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information regarding quantitative and qualitative disclosures about market risk appears under Item 7, “Management’s Discussion
and Analysis of Financial Condition and Results of Operations,” under the caption “Asset/Liability Management and Market
Risk.”
66
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Reports of Independent Registered Public Accounting Firms
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Statements of Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Page No.
68
70
71
72
73
74
76
67
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Webster Financial Corporation and subsidiaries:
We have audited the accompanying consolidated balance sheets of Webster Financial Corporation and subsidiaries (the Company)
as of December 31, 2014 and 2013, and the related consolidated statements of income, comprehensive income, shareholders’
equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position
of Webster Financial Corporation and subsidiaries as of December 31, 2014 and 2013, and the results of their operations and their
cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
Webster Financial Corporation’s internal control over financial reporting as of December 31, 2014, based on criteria established
in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), and our report dated February 27, 2015 expressed an unqualified opinion on the effectiveness of the
Company’s internal control over financial reporting.
Hartford, Connecticut
February 27, 2015
68
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of
Webster Financial Corporation and subsidiaries:
We have audited the accompanying consolidated statements of income, comprehensive income, shareholders’ equity and cash
flows of Webster Financial Corporation and subsidiaries (the “Company”) for the year ended December 31, 2012. These financial
statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, with respect to Webster Financial
Corporation and subsidiaries, the consolidated results of their operations and their cash flows for the year ended December 31,
2012, in conformity with U.S. generally accepted accounting principles.
Boston, Massachusetts
February 28, 2013
69
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
2014
2013
$
261,544
132,695
2,793,873
3,872,955
193,290
67,952
13,900,025
(159,264)
13,740,761
74,077
121,933
529,887
2,666
440,073
301,304
$ 22,533,010
$
223,616
23,674
3,106,931
3,358,721
158,878
20,802
12,699,776
(152,573)
12,547,203
65,109
121,605
529,887
5,351
430,535
260,687
$ 20,852,999
$
3,598,872
12,052,733
15,651,605
1,250,756
2,859,431
226,237
222,300
20,210,329
$
3,128,152
11,726,268
14,854,420
1,331,662
2,052,421
228,365
176,943
18,643,811
28,939
122,710
28,939
122,710
936
1,127,534
1,202,117
(103,294)
(56,261)
2,322,681
$ 22,533,010
934
1,125,584
1,080,488
(100,918)
(48,549)
2,209,188
$ 20,852,999
(In thousands, except share data)
Assets:
Cash and due from banks
Interest-bearing deposits
Securities available-for-sale, at fair value
Securities held-to-maturity (fair value of $3,948,706 and $3,370,912)
Federal Home Loan Bank and Federal Reserve Bank stock
Loans held for sale
Loans and leases
Allowance for loan and lease losses
Loans and leases, net
Deferred tax asset, net
Premises and equipment, net
Goodwill
Other intangible assets, net
Cash surrender value of life insurance policies
Accrued interest receivable and other assets
Total assets
Liabilities and shareholders' equity:
Deposits:
Non-interest-bearing
Interest-bearing
Total deposits
Securities sold under agreements to repurchase and other borrowings
Federal Home Loan Bank advances
Long-term debt
Accrued expenses and other liabilities
Total liabilities
Shareholders’ equity:
Preferred stock, $.01 par value; Authorized - 3,000,000 shares:
Series A issued and outstanding - 28,939 shares
Series E issued and outstanding - 5,060 shares
Common stock, $.01 par value; Authorized - 200,000,000 shares:
Issued - 93,623,090 and 93,366,673 shares
Paid-in capital
Retained earnings
Treasury stock, at cost (3,241,555 and 3,407,256 shares)
Accumulated other comprehensive loss
Total shareholders' equity
Total liabilities and shareholders' equity
See accompanying Notes to Consolidated Financial Statements.
70
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Interest Income:
Interest and fees on loans and leases
Taxable interest and dividends on securities
Non-taxable interest on securities
Loans held for sale
Total interest income
Interest Expense:
Deposits
Securities sold under agreements to repurchase and other borrowings
Federal Home Loan Bank advances
Long-term debt
Total interest expense
Net interest income
Provision for loan and lease losses
Net interest income after provision for loan and lease losses
Non-interest Income:
Deposit service fees
Loan related fees
Wealth and investment services
Mortgage banking activities
Increase in cash surrender value of life insurance policies
Net gain on sale of investment securities
Impairment loss on securities recognized in earnings
Other income
Total non-interest income
Non-interest Expense:
Compensation and benefits
Occupancy
Technology and equipment
Intangible assets amortization
Marketing
Professional and outside services
Deposit insurance
Other expense
Total non-interest expense
Income before income tax expense
Income tax expense
Net income
Preferred stock dividends
Net income available to common shareholders
Net income per common share:
Basic
Diluted
See accompanying Notes to Consolidated Financial Statements.
71
Years ended December 31,
2014
2013
2012
$
$
$
511,612
189,408
17,064
857
718,941
44,162
19,388
16,909
10,041
90,500
628,441
37,250
591,191
103,431
23,212
34,946
4,070
13,178
5,499
(1,145)
18,917
202,108
270,151
47,325
61,993
2,685
15,379
8,296
22,670
73,639
502,138
291,161
91,409
199,752
(10,556)
189,196
2.10
2.08
$
$
$
489,372
174,579
21,621
2,068
687,640
46,582
20,800
16,229
7,301
90,912
596,728
33,500
563,228
98,968
21,860
34,771
16,359
13,770
712
(7,277)
11,887
191,050
264,835
48,794
60,326
4,919
15,502
9,532
21,114
73,037
498,059
256,219
76,670
179,549
(10,803)
168,746
1.90
1.86
484,957
179,664
26,456
2,425
693,502
59,586
21,034
16,943
17,031
114,594
578,908
21,500
557,408
96,633
18,043
29,515
23,037
11,254
3,347
—
10,929
192,758
264,101
50,131
62,210
5,420
16,827
11,348
22,749
69,018
501,804
248,362
74,665
173,697
(2,460)
171,237
1.96
1.86
$
$
$
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Net income
Other comprehensive income, net of taxes:
Total available-for-sale and transferred securities
Total derivative instruments
Total defined benefit pension and postretirement benefit plans
Other comprehensive (loss) income
Comprehensive income
See accompanying Notes to Consolidated Financial Statements.
Years ended December 31,
2014
199,752
$
2013
179,549
$
2012
173,697
$
19,038
(7,324)
(19,426)
(7,712)
192,040
$
(45,358)
9,696
19,379
(16,283)
163,266
$
26,774
982
182
27,938
$
201,635
72
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands, except per share data)
Balance at December 31, 2011
Net income
Other comprehensive income, net of taxes
Dividends on common stock and dividend equivalents
declared $0.35 per share
Dividends on Series A preferred stock $85.00 per share
Common stock issued
Stock-based compensation, net of tax impact
Exercise of stock options
Shares acquired related to employee share-based
compensation plans
Common stock repurchased
Common stock warrants repurchased
Series E preferred stock issued
Balance at December 31, 2012
Net income
Other comprehensive loss, net of taxes
Dividends on common stock and dividend equivalents
declared $0.55 per share
Dividends on Series A preferred stock $85.00 per share
Dividends on Series E preferred stock $1,648.89 per share
Common stock issued
Stock-based compensation, net of tax impact
Exercise of stock options
Shares acquired related to employee share-based
compensation plans
Common stock warrants repurchased
Preferred
Stock
Common
Stock
Paid-In
Capital
Retained
Earnings
Treasury
Stock
Accumulated
Other
Comprehensive
Loss
Total
Shareholders'
Equity
$ 28,939 $
907 $ 1,145,346 $ 865,427 $ (134,641) $
(60,204) $ 1,845,774
—
—
—
—
—
—
—
—
—
—
122,710
151,649
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
560
2,090
(1,988)
—
—
(388)
—
173,697
—
(30,685)
(2,460)
—
—
—
—
—
—
(5,552)
12,093
—
—
2,984
(3,243)
— (50,000)
—
—
—
—
—
27,938
—
—
—
—
—
—
—
—
—
173,697
27,938
(30,685)
(2,460)
560
8,631
996
(3,243)
(50,000)
(388)
122,710
907
1,145,620
1,000,427
(172,807)
(32,266)
2,093,530
—
—
—
—
—
27
—
—
—
—
—
—
19
—
—
179,549
—
(49,164)
(2,460)
(8,343)
—
—
—
—
—
(20,737)
(36,256)
2,813
(2,101)
—
(30)
(3,265)
—
—
—
57,697
10,027
4,837
(672)
—
—
179,549
(16,283)
(16,283)
—
—
—
—
—
—
—
—
(49,145)
(2,460)
(8,343)
731
9,575
2,736
(672)
(30)
Balance at December 31, 2013
151,649
934
1,125,584
1,080,488
(100,918)
(48,549)
2,209,188
Net income
Other comprehensive loss, net of taxes
Dividends on common stock and dividend equivalents
declared $0.75 per share
Dividends on Series A preferred stock $85.00 per share
Dividends on Series E preferred stock $1,600.00 per share
Common stock issued
Stock-based compensation, net of tax impact
Exercise of stock options
Shares acquired related to employee share-based
compensation plans
Common stock repurchased
Common stock warrants repurchased
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
2
—
—
—
—
—
—
—
57
—
—
433
3,223
(1,760)
—
—
(3)
199,752
—
(67,747)
(2,460)
(8,096)
—
180
—
—
—
—
—
—
—
6,710
3,981
—
(2,326)
— (10,741)
—
—
—
199,752
(7,712)
(7,712)
—
—
—
—
—
—
—
—
—
(67,690)
(2,460)
(8,096)
435
10,113
2,221
(2,326)
(10,741)
(3)
Balance at December 31, 2014
$ 151,649 $
936 $ 1,127,534 $ 1,202,117 $ (103,294) $
(56,261) $ 2,322,681
See accompanying Notes to Consolidated Financial Statements.
73
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Operating Activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Years ended December 31,
2014
2013
2012
$
199,752
$
179,549
$
173,697
Provision for loan and lease losses
Deferred tax (benefit) expense
Depreciation and amortization
Amortization of earning assets and funding premium/discount, net
Stock-based compensation
Gain on sale, net of write-down, on foreclosed and repossessed assets
(Gain) loss on sale, net of write-down, on premises and equipment
Impairment loss on securities recognized in earnings
(Gain) loss on alternative investments
Loss on fair value adjustment of futures contracts derivatives
Net gain on the sale of investment securities
Increase in cash surrender value of life insurance policies
Gain from life insurance policies
Gain, net on sale of loans held for sale
Proceeds from sale of loans held for sale
Originations of loans held for sale
Net (increase) decrease in accrued interest receivable and other assets
Net increase (decrease) in accrued expenses and other liabilities
Net cash provided by operating activities
Investing Activities:
Net (increase) decrease in interest-bearing deposits
Purchases of available-for-sale securities
Proceeds from maturities and principal payments of available-for-sale securities
Proceeds from sales of available-for-sale securities
Purchases of held-to-maturity securities
Proceeds from maturities and principal payments of held-to-maturity securities
Net purchase of Federal Home Loan Bank stock
Net increase in loans
Purchase of life insurance policies
Proceeds from life insurance policies
Proceeds from the sale of foreclosed properties and repossessed assets
Proceeds from the sale of premises and equipment
Purchases of premises and equipment
Net cash used for investing activities
See accompanying Notes to Consolidated Financial Statements.
37,250
(5,150)
30,585
50,758
10,223
(1,297)
(292)
1,145
(784)
595
(5,499)
(13,178)
(2,229)
(4,070)
287,132
(296,996)
(23,932)
8,802
272,815
(109,021)
(217,920)
416,821
98,402
(1,113,958)
575,009
(34,412)
(1,269,264)
—
2,178
8,995
3,565
(30,039)
(1,669,644)
33,500
11,427
36,019
61,395
10,664
(1,295)
1,287
7,277
389
438
(712)
(13,770)
(1,070)
(16,359)
786,658
(687,090)
83,152
(14,735)
476,724
31,761
(952,995)
741,467
57,804
(989,397)
717,601
(3,248)
(741,856)
—
1,768
7,745
1,304
(21,886)
(1,149,932)
21,500
20,992
39,504
69,035
8,955
(2,344)
745
—
720
48
(3,347)
(11,254)
—
(23,037)
750,470
(759,355)
(8,659)
(20,588)
257,082
(2,143)
(1,204,079)
854,747
148,222
(946,996)
796,481
(11,756)
(915,572)
(100,000)
—
11,469
1,381
(21,983)
(1,390,229)
74
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
(In thousands)
Financing Activities:
Net increase in deposits
Proceeds from Federal Home Loan Bank advances
Repayments of Federal Home Loan Bank advances
Net (decrease) increase in securities sold under agreements to repurchase and
other borrowings
Issuance of long-term debt
Repayment of long-term debt
Debt issuance costs
Issuance of preferred stock
Dividends paid to common shareholders
Dividends paid to preferred shareholders
Exercise of stock options
Excess tax benefits from stock-based compensation
Common stock issued
Common stock repurchased
Shares acquired related to employee share-based compensation plans
Common stock warrants repurchased
Net cash provided by financing activities
Net increase (decrease) in cash and due from banks
Cash and due from banks at beginning of period
Cash and due from banks at end of period
Supplemental disclosure of cash flow information:
Interest paid
Income taxes paid
Noncash investing and financing activities:
Transfer of loans and leases to foreclosed properties and repossessed assets
Transfer of loans from portfolio to loans held for sale
See accompanying Notes to Consolidated Financial Statements.
Years ended December 31,
2014
2013
2012
797,218
10,372,226
(9,565,192)
323,386
4,928,120
(4,703,287)
874,947
6,919,849
(6,344,126)
(80,906)
150,000
(150,000)
(1,349)
—
(67,431)
(10,556)
2,221
1,161
435
(10,741)
(2,326)
(3)
1,434,757
37,928
223,616
261,544
89,942
102,973
5,532
—
$
$
$
$
$
$
255,502
—
(102,579)
—
—
(48,952)
(10,803)
2,736
389
731
—
(672)
(30)
644,541
(28,667)
252,283
223,616
88,388
62,926
11,750
106
(88,546)
—
(210,971)
—
122,710
(30,667)
(2,460)
996
812
560
(50,000)
(3,243)
(388)
1,189,473
56,326
195,957
252,283
116,412
56,491
7,539
22,670
$
$
$
75
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,
incorporated under the laws of Delaware in 1986 and headquartered in Waterbury, Connecticut. At December 31, 2014, Webster
Financial Corporation's principal asset is all of the outstanding capital stock of Webster Bank, National Association ("Webster
Bank").
Webster, through Webster Bank and various non-banking financial services subsidiaries, delivers financial services to individuals,
families, and businesses throughout southern New England and into Westchester County, New York. Webster provides business
and consumer banking, mortgage lending, financial planning, trust and investment services through banking offices, ATMs,
telephone banking, mobile banking and its Internet website (www.websterbank.com). Webster also offers equipment financing,
commercial real estate lending, and asset-based lending across the Northeast. Webster Bank offers, through its HSA Bank division,
health savings accounts on a nationwide basis.
Basis of Presentation. The consolidated financial statements include the accounts of Webster Financial Corporation and all other
entities in which it has a controlling financial interest. All significant intercompany balances and transactions have been eliminated
in consolidation. Webster's accounting and financial reporting policies conform, in all material respects, to U.S. Generally Accepted
Accounting Principles (“GAAP”) and to general practices within the financial services industry.
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 equivalents.
Variable Interest Entities: 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 VIEs in which it has at least a majority of the voting interest. VIEs are entities that lack one
or more of the characteristics of a voting interest entity. A controlling financial interest in a VIE is present when the Company has
both the power and ability to direct the activities of the VIE that most significantly impact the VIE's economic performance and
an obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE.
The Company owns the common stock of a trust which has issued trust preferred securities. The trust is a VIE in which the
Company is not the primary beneficiary and, therefore, is not consolidated. The trust's only assets are junior subordinated debentures
issued by the Company, which were acquired by the trust using the proceeds from the issuance of the trust preferred securities
and common stock. The junior subordinated debentures are included in long-term debt and the Company’s equity interest in the
trust is included in other assets in the accompanying Consolidated Balance Sheets. Interest expense on the junior subordinated
debentures is reported in interest expense on long-term debt in the accompanying Consolidated Statements of Income.
Investment Services: Assets that the Company holds in a fiduciary or agency capacity for customers, typically referred to as assets
under administration, are not included in the accompanying Consolidated Balance Sheets since those assets are not Webster's, and
the Company is not the primary beneficiary.
Use of Estimates. The preparation of consolidated financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of these consolidated financial statements. Actual results could differ from those estimates. The allowance for loan and
lease losses, the fair value measurements of financial instruments, the valuation of investments for other-than-temporary
impairment, the goodwill valuation, income taxes, the pension and other postretirement benefits, as well as the status of
contingencies, are particularly subject to change.
Cash Equivalents. Cash equivalents have a maturity of three months or less.
Cash and due from banks: Cash equivalents, including cash on hand, certain cash due from banks, and deposits at the Federal
Reserve Banks, are referenced as cash and due from banks in the accompanying Consolidated Balance Sheets and Consolidated
Statements of Cash Flows.
Interest-bearing deposits: Cash equivalents, primarily representing deposits at the Federal Reserve Banks in excess of reserve
requirements, and federal funds sold, which essentially represent uncollateralized loans to other financial institutions, are referenced
as interest-bearing deposits in the accompanying Consolidated Balance Sheets and Consolidated Statements of Cash Flows. The
Company regularly evaluates the credit risk associated with those financial institutions to assess that Webster is not exposed to
any significant credit risk on cash equivalents.
76
Investment Securities. Investment securities are classified as available-for-sale ("AFS") or held-to-maturity ("HTM") at the time
of purchase. Any subsequent change to classification is reviewed for compliance with corporate objectives and accounting policy.
Debt securities classified as HTM are those which Webster has the ability and intent to hold to maturity. Securities classified as
HTM are recorded at amortized cost net of unamortized premiums and discounts. Discount accretion income and premium
amortization expense are recognized as interest income according to a constant yield methodology, with consideration given to
prepayment assumptions on mortgage backed securities. Securities classified as AFS are recorded at fair value with unrealized
gains and losses recorded as a component of other comprehensive income (“OCI”). Securities transferred from AFS to HTM are
recorded at fair value at the time of transfer, and the respective gain or loss is recorded as a separate component of OCI and
amortized as an adjustment to interest income over the remaining life of the security.
All securities classified as AFS or HTM that are in an unrealized loss position are evaluated for other-than-temporary impairment
("OTTI") on a quarterly basis. The evaluation considers several qualitative factors, including the period of time the security has
been in a loss position, in addition to the amount of the unrealized loss. If the Company intends to sell the security or it is more
than likely the Company will be required to sell the security prior to recovery of its amortized cost basis, the security is written
down to fair value, and the loss is recognized in non-interest income in the accompanying 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 to a debt security would
be recognized as a loss. The remaining loss component would be recorded to accumulated other comprehensive income in the
accompanying Consolidated Balance Sheets. 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 Consolidated Statements of Income.
The specific identification method is used to determine realized gains and losses on sales of securities.
Federal Home Loan Bank and Federal Reserve Bank Stock. Webster Bank is a member of the Federal Home Loan Bank (“FHLB”)
of Boston and the Federal Reserve Bank ("FRB") system and is required to maintain an investment in capital stock of the FHLB
and FRB. Based on redemption provisions, the stock of both the FHLB and the FRB has no quoted market value and is carried at
cost. Management evaluates the ultimate recoverability of the cost basis of these investments for impairment on a quarterly basis.
Loans Held for Sale. A majority of loans held for sale are residential mortgage loans. Residential mortgage loans typically are
classified as held for sale upon origination based on management's intent to sell such loans. For loans not previously held for sale,
once a decision has been made to sell loans, such loans shall be transferred into the loans held for sale classification. Loans held
for sale are carried at the lower of cost or fair value and are valued on an individual asset basis. Any cost amount in excess of fair
value is recorded as a valuation allowance and recognized as a reduction of other income in the Consolidated Statements of Income.
Gains or losses on the sale of loans held for sale are recorded as non-interest income. Direct loan origination costs and fees are
deferred and recognized as part of the gain or loss at the time of sale. Cash flows from sale of loans made by the Company that
were acquired specifically for resale are presented as operating cash flows. All other cash flows from sale of loans are presented
as investing cash flows.
Loans and Leases. Loans and leases are stated at the principal amount outstanding, net of amounts charged off, unamortized
premiums and discounts, and deferred loan and lease fees/costs which are recognized as yield adjustments using the interest
method. These yield adjustments are amortized over the contractual life of the related loans and leases adjusted for estimated
prepayments when applicable. Interest on loans and leases is credited to interest income as earned based on the interest rate applied
to principal amounts outstanding. Cash flows from loans and leases are presented as investing cash flows.
Loans and leases are placed on non-accrual status when collection of principal and interest in accordance with contractual terms
is doubtful, generally when principal or interest payments become 90 days delinquent, unless the loan or lease 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 loans,
and equipment finance loans or leases 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 loans and leases are 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 or lease 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 and leases, any payment received on a non-accrual loan or lease 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 on a cash basis. Except for loans discharged under Chapter 7 of the Bankruptcy
Code, loans are removed from non-accrual status when they become current as to principal and interest or demonstrate a period
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of performance under contractual terms and, in the opinion of management, are fully collectible as to principal and interest. Pursuant
to regulatory guidance, a Chapter 7 discharged bankruptcy loan is removed from non-accrual status when the bank expects full
repayment of the remaining pre-discharged contractual principal and interest, the loan is a closed-end amortizing loan, it is fully
collateralized, and post-discharge the loan had at least six consecutive months of current payments.
Allowance for Loan and Lease Losses. The allowance for loan and lease losses ("ALLL") is a reserve established through a
provision for loan and lease losses charged to expense and represents management’s best estimate of probable losses that may be
incurred within the existing loan and lease portfolio as of the balance sheet date. The level of the allowance reflects management’s
view of trends in losses, current portfolio quality, and present economic, political, and regulatory conditions. Portions of the
allowance may be allocated for specific loans and leases; however, the entire allowance is available for any loan or lease that is
charged off. A charge-off is recorded on a case-by-case basis when all or a portion of the loan or lease is deemed to be uncollectible.
Back-testing is performed to compare original estimated losses and actual observed losses, resulting in ongoing refinements. While
management utilizes its best judgment based on the information available at the time, the ultimate adequacy of the allowance is
dependent upon a variety of factors that are beyond the Company’s control, which include the performance of the Company’s
portfolio, economic conditions, interest rate sensitivity, and the view of the regulatory authorities regarding loan classifications.
The ALLL consists of the following three elements: (i) specific valuation allowances established for probable losses on impaired
loans and leases; (ii) quantitative valuation allowances calculated using loss experience for like loans and leases with similar
characteristics and trends, adjusted, as necessary, to reflect the impact of current conditions; and (iii) qualitative factors determined
based on general economic conditions and other factors that may be internal or external to the Company.
Loans and leases are considered impaired when, based on current information and events, it is probable the Company will be
unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled
principal and interest payments. Impairment is evaluated on a pooled basis for smaller-balance homogeneous residential and
consumer loans. Commercial, commercial real estate, and equipment financing loans and leases over a specific dollar amount and
all troubled debt restructurings ("TDR") are evaluated individually for impairment. A loan identified as a TDR is considered an
impaired loan for the entire term of the loan, with few exceptions. If a loan is impaired, a specific valuation allowance may be
established, and the loan is reported net, at the present value of estimated future cash flows using the loan’s original interest rate
or at the fair value of collateral less cost to sell if repayment is expected from collateral liquidation. Interest payments on non-
accruing impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in
which case interest is recognized on a cash basis. Impaired loans, or portions thereof, are charged off when deemed uncollectible.
Factors considered by management in determining impairment include payment status, collateral value, discharged bankruptcy,
and the likelihood of collecting scheduled principal and interest payments. Consumer modified loans are analyzed for re-default
probability, which is considered when determining the impaired reserve for ALLL. The current or weighted-average (for multiple
notes within a commercial borrowing arrangement) interest rate of the loan is used as the discount rate when the interest rate floats
with a specified index. A change in terms or payments would be included in the impairment calculation.
Reserve for Unfunded Commitments. The reserve for unfunded commitments provides for probable losses inherent with funding
the unused portion of legal commitments available to lend. The unfunded reserve calculation includes factors that are consistent
with ALLL methodology for funded loans using the loss given default, probability of default, and a draw down factor applied to
the underlying borrower risk and facility grades. Changes in the reserve for unfunded credit commitments, included within other
liabilities, are reported as a component of other expense in the accompanying Consolidated Statements of Income.
Troubled Debt Restructurings. A modified loan is considered a TDR when the following two conditions are met: (i) the borrower
is experiencing financial difficulties and (ii) the modification constitutes a concession. The Company considers all aspects of the
restructuring in determining whether a concession has been granted, including the debtor's ability to access funds at a market rate.
In general, a concession exists when the modified terms of the loan are more attractive to the borrower than standard market terms.
Modified terms are dependent upon the financial position and needs of the individual borrower. The most common types of
modifications include covenant modifications and forbearance. 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, if management considers that loss potential likely exists.
The Company’s policy is to place consumer loan TDRs, except those that were performing prior to TDR status, on non-accrual
status for a minimum period of six months. Commercial TDRs are evaluated on a case-by-case basis for determination of whether
or not to place them on non-accrual status. Loans qualify for return to accrual status once they have demonstrated performance
with the restructured terms of the loan agreement for a minimum of six months. Initially, all TDRs are reported as impaired.
Generally, TDRs are classified as impaired loans and reported as TDRs for the remaining life of the loan. Impaired and TDR
classification may be removed if the borrower demonstrates compliance with the modified terms for a minimum of six months
and through one fiscal year-end and the restructuring agreement specifies a market rate of interest equal to that which would be
provided to a borrower with similar credit at the time of restructuring. In the limited circumstance that a loan is removed from
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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.
Foreclosed and Repossessed Assets. Real estate acquired through foreclosure (“OREO”) or other assets acquired through
repossession are carried at the lower of cost or market value less estimated selling costs and are included within other assets in
the accompanying Consolidated Balance Sheets. Independent appraisals generally are obtained to substantiate fair value and may
be subject to adjustment based upon historical experience or specific geographic trends impacting the property. Within 90 days
of a loan being foreclosed upon, the excess of loan balance over fair value less cost to sell is charged off against the allowance for
loan and lease losses. Subsequent write-downs in value, maintenance costs as incurred, and gains or losses upon sale are charged
to non-interest expense in the accompanying Consolidated Statements of Income.
Transfers and Servicing of Financial Assets. Transfers of financial assets are accounted for as sales when control over the assets
has been surrendered. Control over transferred assets is generally considered to have been surrendered when (i) the transferred
assets are legally isolated from the Company or its consolidated affiliates, even in bankruptcy or other receivership, (ii) the transferee
has the right to pledge or exchange the assets with no conditions that constrain the transferee and provide more than a trivial benefit
to the Company, and (iii) the Company does not maintain the obligation or unilateral ability to reclaim or repurchase the assets.
The Company sells financial assets in the normal course of business, the majority of which are residential mortgage loan sales
primarily to government-sponsored enterprises through established programs, commercial loan sales through participation
agreements, and other individual or portfolio loan and securities sales. In accordance with accounting guidance for asset transfers,
the Company considers any ongoing involvement with transferred assets in determining whether the assets can be derecognized
from the balance sheet. With the exception of servicing and certain performance-based guarantees, the Company’s continuing
involvement with financial assets sold is minimal and generally limited to market customary representation and warranty clauses.
When the Company sells financial assets, it may retain servicing rights and/or other interests in the financial assets. The gain or
loss on sale depends on the previous carrying amount of the transferred financial assets and the consideration received and any
liabilities incurred in exchange for the transferred assets. Upon transfer, any servicing assets and other interests held by the Company
are carried at the lower of cost or fair value.
Cash Surrender Value of Life Insurance. The investment in life insurance represents the cash surrender value of life insurance
policies on certain current and former officers of Webster. Increases in the cash surrender value are recorded as non-interest income.
Decreases are the result of collection on the policies due to the death of an insured. Death benefit proceeds in excess of cash
surrender value are recorded in other non-interest income when realized.
Premises and Equipment. Premises and equipment are carried at cost, less accumulated depreciation. Depreciation of premises
and equipment is computed on a straight-line basis over the estimated useful lives of the assets, as follows:
Building and Improvements
Leasehold improvements
Fixtures and equipment
Data processing and software
5-40 years
5-20 years (or term or lease, if shorter)
5-10 years
3-5 years
Repairs and maintenance costs are charged to non-interest expense as incurred. Premises and equipment being actively marketed
for sale are reclassified as assets held for disposition. The cost and accumulated depreciation relating to premises and equipment
retired or otherwise disposed of are eliminated, and any resulting losses are charged to non-interest expense.
Goodwill. During 2014, Webster performed its annual impairment test under Step 1 as of its elected measurement date of August
31. Subsequently, Webster elected to change prospectively the measurement date for its annual goodwill impairment test from
August 31 to November 30 of each fiscal year beginning in 2015. In conjunction with this change, Webster performed a Step 1
impairment test at December 31, 2014. This change is not expected to result in the delay, acceleration, or avoidance of an impairment
charge. Webster believes this timing is preferable as it better aligns the goodwill impairment test with the Company's strategic
business planning process, which is a key component of the goodwill impairment test.
Goodwill represents the excess purchase price of businesses acquired over the fair value of the identifiable net assets acquired and
is assigned to specific reporting units. Goodwill is not subject to amortization but rather is evaluated for impairment annually, or
more frequently in interim periods if events occur or circumstances change indicating it would more likely than not result in a
reduction of the fair value of a reporting unit below its carrying value.
Goodwill is evaluated for impairment by either performing a qualitative evaluation or a two-step quantitative test. The qualitative
evaluation is an assessment of factors to determine whether it is more likely than not that the fair value of a reporting unit is less
than its carrying amount, including goodwill. Discounted cash flow estimates, which include significant management assumptions
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relating to revenue growth rates, net interest margins, weighted-average cost of capital, and future economic and market conditions,
are used to determine fair value under the two-step quantitative test. In “Step 1,” the fair value of a reporting unit is compared to
its carrying amount, including goodwill, to ascertain if a goodwill impairment exists. If the fair value of the reporting unit exceeds
its carrying amount, goodwill of the reporting unit is not considered impaired, and it is not necessary to continue to “Step 2” of
the impairment process. Otherwise, Step 2 is performed where the implied fair value of goodwill is compared to the carrying value
of goodwill in the reporting unit. If a reporting unit's carrying value exceeds fair value, the difference is charged to non-interest
expense.
Other Intangible Assets. Other intangible assets represent purchased assets that lack physical substance but can be distinguished
from goodwill because of contractual or other legal rights, or because the asset is capable of being sold or exchanged either
separately or in combination with a related contract, asset, or liability. Other intangible assets with finite useful lives are amortized
to non-interest expense over their estimated useful lives and are evaluated for impairment whenever events occur or circumstances
change indicating the carrying amount of the asset may not be recoverable. The Company's core deposit intangible assets are
amortized on a straight line basis over a period of ten years.
Securities Sold Under Agreements to Repurchase. These agreements are accounted for as secured financing transactions since
Webster maintains effective control over the transferred securities and the transfer meets the other criteria for such accounting.
Obligations to repurchase securities sold are reflected as a liability in the accompanying Consolidated Balance Sheets. The securities
underlying the agreements are delivered to a custodial account for the benefit of the dealer or bank with whom each transaction
is executed. The dealers or banks, who may sell, loan, or otherwise dispose of such securities to other parties in the normal course
of their operations, agree to resell to Webster the same securities at the maturities of the agreements. The securities underlying the
agreements with Bank customers are pledged; however, the customer does not have ability to re-hypothecate the underlying
securities.
Stock-based Compensation. Webster maintains several equity incentive plans under which non-qualified stock options, incentive
stock options, restricted stock, restricted stock units, or stock appreciation rights may be granted to employees and directors. Share
awards are issued from available treasury shares. Stock-based compensation cost is recognized over the requisite service period
for the awards, based on the grant-date fair value, net of estimated forfeitures, and is included as a component of compensation
and benefits expense. Awards to retirement eligible employees are subject to a one-year service vesting period. For stock option
awards the Black-Scholes Option-Pricing Model is used to measure fair value at the date of grant. For time-based restricted stock
and restricted stock unit awards, fair value is measured using the Company's common stock closing price at the date of grant.
The Company grants performance-based restricted stock awards that vest after three years. Awards granted in 2014 vest in a range
from zero to 150% while previous awards vest in a range from zero to 200% of the target number of shares under the grant. The
Company records compensation expense over the vesting period, based on a fair value. 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. Dividends are accrued on the performance-based shares and paid when the performance target is met. See Note 19 -
Stock-Based Compensation Plans for further information regarding stock based compensation.
Excess tax benefits result when tax return deductions exceed recognized compensation cost determined using the grant-date fair
value approach for financial statement purposes. Excess tax benefits are presented as a cash inflow from financing activities and
a cash outflow from operating activities.
Income Taxes. Income tax expense, or benefit, is comprised of two components: current and deferred. Current income taxes reflect
taxes to be paid or refundable for the current period by applying the provisions of enacted tax laws to the Company's income or
loss. Deferred income taxes are determined using the liability (or balance sheet) method. Under this method, the net deferred tax
asset or liability reflects the tax effects of the differences between the book and tax bases of assets and liabilities, and the effects
of enacted changes in tax rates and laws are recognized in the period in which they occur. Deferred income tax expense or benefit
results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are recognized if it is more likely
than not that the assets will be realized, and they are reduced by a valuation allowance if, based on the weight of evidence available,
it is more likely than not that all or some portion will not be realized.
Tax positions that are uncertain but meet a more likely than not recognition threshold are initially and subsequently measured as
the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon settlement with a taxing authority
that has full knowledge of all relevant information. The determination of whether or not a tax position meets the more likely than
not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to
management's judgment. Webster recognizes interest expense and penalties on uncertain tax positions as a component of income
tax expense and recognizes interest income on refundable income taxes as a component of other non-interest income.
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Earnings Per Common Share. Earnings per common share is computed under the two-class method. Basic earnings per common
share is computed by dividing net earnings allocated to common shareholders by the weighted-average number of common shares
outstanding during the applicable period, excluding outstanding participating securities. Non-vested restricted stock awards are
participating securities as they have non-forfeitable rights to dividends or dividend equivalents. Diluted earnings per common
share is computed using the weighted-average number of shares determined for the basic earnings per common share computation
plus the dilutive effect of stock compensation and warrants for common stock using the treasury stock method. A reconciliation
of the weighted-average shares used in calculating basic earnings per common share and the weighted-average common shares
used in calculating diluted earnings per common share is provided in Note 15 - Earnings Per Common Share.
Comprehensive Income. Comprehensive income includes all changes in shareholders’ equity during a period, except those resulting
from transactions with shareholders. In addition to net income, Webster's components of other comprehensive income consists of
the after-tax effect of changes in net unrealized gain/loss on securities available for sale, changes in net unrealized gain/loss on
derivative instruments, and changes in net actuarial gain/loss and prior service cost for defined benefit pension and other
postretirement benefit plans. Comprehensive income is reported in the accompanying Consolidated Statements of Shareholders'
Equity and Consolidated Statements of Comprehensive Income.
Derivative Instruments and Hedging Activities. Derivatives are recognized as assets and liabilities in the accompanying
Consolidated Balance Sheets and measured at fair value. For exchange-traded contracts, fair value is based on quoted market
prices. For non-exchange traded contracts, fair value is based on dealer quotes, pricing models, discounted cash flow methodologies,
or similar techniques for which the determination of fair value may require management judgment or estimation, relating to future
rates and credit activities.
Interest Rate Swap Agreements. For asset/liability management purposes, the Company uses interest rate swap agreements to
hedge various exposures or to modify interest rate characteristics of various balance sheet accounts. Interest rate swaps are contracts
in which a series of interest rate flows are exchanged over a prescribed period. The notional amount on which the interest payments
are based is not exchanged. These swap agreements are derivative instruments and generally convert a portion of the Company’s
variable-rate debt to a fixed-rate (cash flow hedge), and convert a portion of its fixed-rate debt to a variable-rate (fair value hedge).
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 typically
have a future effective date that coincides with the expected debt issuance date. The forward-settle swaps are typically terminated
and cash settled upon hedge debt issuance date.
The gain or loss on a derivative designated and qualifying as a fair value hedging instrument, as well as the offsetting gain or loss
on the hedged item attributable to the risk being hedged, is recognized currently in earnings in the same accounting period. The
effective portion of the gain or loss on a derivative designated and qualifying as a cash flow hedging instrument is initially reported
as a component of other comprehensive income and subsequently reclassified into earnings in the same period or periods during
which the hedged transaction affects earnings. The ineffective portion of the gain or loss on the derivative instrument, if any, is
recognized in non-interest income.
Interest rate derivative financial instruments receive hedge accounting treatment only if they are qualified and properly designated
as hedges and are expected to be, and are, effective in substantially reducing interest rate risk arising from specifically identified
assets and liabilities. A hedging instrument is expected at inception to be highly effective at offsetting changes in the hedged
transactions attributable to the changes in the hedged risk. The Company expects that the hedging relationship will be highly
effective however it does not assume there is no ineffectiveness. The Company performs quarterly prospective and retrospective
assessments of the hedge effectiveness to ensure the hedging relationship continues to be highly effective and that hedge accounting
can continue to be applied. Those derivative financial instruments that do not meet specified hedging criteria are recorded at fair
value with changes in fair value recorded in income.
Cash flows from derivative financial instruments designated for hedge accounting are classified in the cash flow statement in the
same category as the cash flows of the asset or liability being hedged.
Derivative Loan Commitments. Mortgage loan commitments related to the origination of mortgages that will be held for sale upon
funding are considered derivative instruments. Loan commitments that are derivatives are recognized at fair value on the
Consolidated Balance Sheets in other assets and other liabilities with changes in their fair values recorded in non-interest income.
Counterparty Credit Risk. The Company's exposures with the majority of its approved financial institution counterparties are fully
cash collateralized. In accordance with Webster policies, institutional counterparties must be fully underwritten and approved
through the Company’s credit approval process. The Company’s credit exposure on interest rate swaps is limited to the net favorable
value and interest payments of all swaps by each of the counterparties for the amounts up to the established threshold for
collateralization. Credit exposure may be reduced by the amount of collateral pledged by the counterparty. The Company 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.
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Fair Value Measurements. The Company measures many of its assets and liabilities on a fair value basis, in accordance with
ASC Topic 820, "Fair Value Measurement." Fair value is used on a recurring basis for certain assets and liabilities in which fair
value is the primary basis of accounting. Examples of these include derivative instruments and available-for-sale securities.
Additionally, fair value is used on a non-recurring basis to evaluate assets or liabilities for impairment. Examples of these include
impaired loans, long-lived assets, goodwill, and loans held for sale, which are accounted for at the lower of cost or fair value.
Further information regarding the Company's policies and methodology used to measure fair value is presented in Note 17 - Fair
Value Measurements.
Employee Retirement Benefit Plan. Webster Bank maintains a noncontributory defined benefit pension plan covering all employees
that were participants on or before December 31, 2007. Costs related to this qualified plan, based upon actuarial computations of
current and future benefits for eligible employees, are charged to non-interest expense and are funded in accordance with the
requirements of the Employee Retirement Income Security Act. A supplemental retirement plan is also maintained for select
executive level employees that were participants on or before December 31, 2007. Webster also provides postretirement healthcare
benefits to certain retired employees.
Fee Revenue. Generally, fee revenue from deposit service charges and loans is recognized when earned, except where ultimate
collection is uncertain, in which case revenue is recognized when received. Trust revenue is recognized as earned on individual
accounts based upon a percentage of asset value. Fee income on managed institutional accounts is accrued as earned and collected
quarterly based on the value of assets managed at quarter end.
Marketing Costs. Marketing costs are expensed as incurred.
Recently Adopted Accounting Standards Updates
ASU No. 2013-11 - Income Taxes (Topic 740) - "Presentation of an Unrecognized Tax Benefit When a Net Operating Loss
Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (a consensus of the FASB Emerging Issues Task Force)."
The ASU requires an entity to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, in the financial
statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward,
as applicable. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the
reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the dis-
allowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not
intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit shall be presented in the financial statements
as a liability and shall not be combined with deferred tax assets. This update was adopted effective January 1, 2014 and will be
applied prospectively; however, its netting provisions are consistent with the Company’s previous presentation, as applicable, and
as a result do not require additional disclosures.
Recently Issued Accounting Standards Updates
ASU No. 2014-01 - Investments - Equity Method and Joint Ventures (Topic 323) - "Accounting for Investments in Qualified
Affordable Housing Projects (a consensus of the FASB Emerging Issues Task Force)." The ASU permits an entity to make an
accounting policy election to account for its investment in qualified affordable housing projects using the proportional amortization
method if certain conditions are met. Under the proportionate amortization method, an entity amortizes the initial cost of the
investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the
income statement as a component of income tax expense or benefit. The decision to apply the proportionate amortization method
of accounting should be applied consistently to all qualifying affordable housing project investments. A reporting entity that uses
the effective yield or other method to account for its investments in qualified affordable housing projects before the date of adoption
may continue to apply such method to those preexisting investments. The amendments are effective for annual and interim periods,
beginning after December 15, 2014. The Company intends to adopt the accounting standard during the first quarter of 2015, with
no material impact on its financial statements anticipated.
ASU No. 2014-04, Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-40) - "Reclassification of Residential
Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure (a consensus of the FASB Emerging Issues Task Force)."
The ASU clarifies that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical
possession of residential real estate property collateralizing a consumer mortgage loan, upon either (i) the creditor obtaining legal
title to the residential real estate property upon completion of a foreclosure or (ii) the borrower conveying all interest in the
residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a
similar agreement. In addition, the amendments require disclosure of both the amount of foreclosed residential real estate property
held by the creditor and the recorded investment in consumer mortgage loans collateralized by residential real estate property that
are in the process of foreclosure in accordance with local requirements of the applicable jurisdiction. An entity can elect to adopt
the amendments using either a modified retrospective method or a prospective transition method. The amendments are effective
for annual and interim periods beginning after December 15, 2014. The Company intends to adopt the accounting standard during
the first quarter of 2015, with no material impact on its financial statements anticipated.
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ASU No. 2014-09 - Revenue from Contracts with Customers (Topic 606). The ASU establishes a single comprehensive model for
an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration
to which the entity expects to be entitled, and will supersede nearly all existing revenue recognition guidance, to clarify and
converge revenue recognition principles under US GAAP and IFRS. The update outlines five steps to recognizing revenue: (i)
identify the contracts with the customer; (ii) identify the separate performance obligations in the contract; (iii) determine the
transaction price; (iv) allocate the transaction price to the separate performance obligations; (v) recognize revenue when each
performance obligation is satisfied. The update requires more comprehensive disclosures, relating to quantitative and qualitative
information for amounts, timing, the nature and uncertainty of revenue, and cash flows arising from contracts with customers,
which will mainly impact construction and high-tech industries. The most significant potential impact to banking entities relates
to less prescriptive derecognition requirements on the sale of OREO property. An entity may elect either a full retrospective or a
modified retrospective application. The amendments are effective for annual and interim periods beginning after December 15,
2016. The Company intends to adopt the accounting standard during the first quarter of 2017, with no material impact on its
financial statements anticipated.
ASU No. 2014-11 - Transfers and Servicing (Topic 860) - “Repurchase-to-Maturity Transactions, Repurchase Financings, and
Disclosures.” The ASU requires two accounting changes: (i) the accounting for repurchase-to-maturity transactions are to be
accounted for as secured borrowings; (ii) repurchase financing arrangements, separate accounting is required for a transfer of a
financial asset executed contemporaneously with a repurchase agreement with the same counterparty, which will result in secured
borrowing accounting for the repurchase agreement. Additionally, disclosure requirements have been expanded to include a
disaggregation of collateral used for secured borrowings, and contractual maturity disclosure has been expanded to interim periods.
The amendments are effective for annual and interim periods beginning after December 15, 2014. The Company intends to adopt
the accounting standard during the first quarter of 2015, with no material impact on its financial statements anticipated.
ASU No. 2014-12, Compensation-Stock Compensation (Topic 718) - “Accounting for Share-Based Payments When the Terms of
an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (a consensus of the FASB
Emerging Issues Task Force).” The ASU provides explicit guidance to account for a performance target that could be achieved
after the requisite service period as a performance condition. For awards within the scope of this Update, the Task Force decided
that an entity should apply existing guidance in Topic 718 as it relates to share-based payments with performance conditions that
affect vesting. Consistent with that guidance, performance conditions that affect vesting should not be reflected in estimating the
fair value of an award at the grant date. Compensation cost should be recognized when it is probable that the performance target
will be achieved and should represent the compensation cost attributable to the period for which the requisite service has already
been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the
remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The
total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards
that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The amendments are effective for
annual and interim periods beginning after December 15, 2015. The Company intends to adopt the accounting standard during
the first quarter of 2016, with no material impact on its financial statements anticipated.
ASU No. 2014-14, Receivables-Troubled Debt Restructurings by Creditors (Subtopic 310-40) - "Classification of Certain
Government-Guaranteed Residential Mortgage Loans upon Foreclosure (a consensus of the FASB Emerging Issues Task Force)."
The ASU has been issued to reduce diversity in practice in the classification of foreclosed residential mortgage loans held by
creditors that are fully guaranteed under certain government programs, including the Federal Housing Administration guarantees.
A residential mortgage loan would be derecognized, and a separate other receivable would be recognized upon foreclosure if the
loan has both of the following characteristics: (i) the loan has a government guarantee that is not separable from the loan before
foreclosure entitling the creditor to the full unpaid principal balance of the loan; and (ii) at the time of foreclosure, the creditor
has the intent to make a claim on the guarantee and the ability to recover the full unpaid principal balance of the loan through the
guarantee. Notably, upon foreclosure, the separate other receivable would be measured based on the current amount of the loan
balance expected to be recovered under the guarantee. The amendments are effective for annual and interim periods beginning
after December, 15 2014. The Company intends to adopt the accounting standard during the first quarter of 2015, with no material
impact on its financial statements anticipated.
ASU No. 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40) - "Disclosure of Uncertainties About
an Entity's Ability to Continue as a Going Concern." The ASU has been issued to require an entity to evaluate going concern
uncertainties by assessing information about conditions and events that exist at the date the financial statements are issued and
provide footnote disclosures when it is either (i) more likely than not that the entity will be unable to meet its obligations within
twelve months after the financial statement date without taking actions outside the ordinary course of business, or (ii) known or
probable that the entity will be unable to meet its obligations within twenty-four months after the financial statement date without
taking actions outside the ordinary course of business. The amendments are effective for annual periods ending after December
15, 2016 and also for interim periods thereafter. The Company does not expect the application of this guidance to have a material
impact on its financial statements.
83
NOTE 2: Investment Securities
Summaries of the amortized cost, carrying value, and fair value of Webster’s investment securities are presented below:
(In thousands)
Available-for-sale:
U.S. Treasury Bills
At December 31, 2014
Recognized in OCI
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Carrying
Value
Not Recognized in OCI
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Amortized
Cost
Fair Value
$
525 $
— $
— $
525 $
— $
— $
525
Agency collateralized mortgage obligations
(“agency CMO”)
Agency mortgage-backed securities
(“agency MBS”)
Agency commercial mortgage-backed
securities (“agency CMBS”)
Non-agency commercial mortgage-backed
securities ("non-agency CMBS")
Collateralized loan obligations ("CLO") (1)
Pooled trust preferred securities
Single issuer trust preferred securities
Corporate debt securities
Equity securities - financial institutions
543,417
8,636
(1,065)
550,988
1,030,724
10,462
(12,668)
1,028,518
80,400
—
(134)
80,266
534,631
426,269
—
41,981
106,520
3,500
18,885
(123)
553,393
482
—
—
3,781
2,403
(1,017)
425,734
—
—
(3,736)
38,245
—
—
110,301
5,903
—
—
—
—
—
—
—
—
—
—
550,988
— 1,028,518
—
—
—
—
—
—
—
80,266
553,393
425,734
—
38,245
110,301
5,903
Total available-for-sale
$ 2,767,967 $
44,649 $ (18,743) $ 2,793,873 $
— $
— $ 2,793,873
Held-to-maturity:
Agency CMO
Agency MBS
Agency CMBS
Municipal bonds and notes
Non-agency CMBS
Private Label MBS
$
442,129 $
— $
— $
442,129 $
6,584 $
(739) $
447,974
2,134,319
578,687
373,211
338,723
5,886
—
—
—
—
—
— 2,134,319
57,196
(11,340)
2,180,175
—
—
—
—
578,687
373,211
338,723
5,886
1,597
15,138
9,428
100
(1,143)
579,141
(55)
388,294
(1,015)
347,136
—
5,986
Total held-to-maturity
$ 3,872,955 $
— $
— $ 3,872,955 $
90,043 $ (14,292) $ 3,948,706
(1) Amortized cost is net of $3.7 million of other-than-temporary impairments at December 31, 2014.
84
(In thousands)
Available-for-sale:
U.S. Treasury Bills
Agency CMO
Agency MBS
Agency CMBS
Non-agency CMBS
CLO (1)
Pooled trust preferred securities (2)
Single issuer trust preferred securities
Corporate debt securities
Equity securities - financial institutions (3)
Total available-for-sale
Held-to-maturity:
Agency CMO
Agency MBS
Agency CMBS
Municipal bonds and notes
Non-agency CMBS
Private Label MBS
Total held-to-maturity
At December 31, 2013
Recognized in OCI
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Carrying
Value
Not Recognized in OCI
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Amortized
Cost
Fair Value
$
325 $
— $
— $
325 $
— $
— $
325
794,397
14,383
(1,868)
806,912
1,265,276
9,124
(47,698)
1,226,702
71,759
436,872
357,326
31,900
41,807
108,936
2,314
—
28,398
315
—
—
4,155
1,270
(782)
(996)
—
(3,410)
(6,872)
—
—
70,977
464,274
357,641
28,490
34,935
113,091
3,584
—
—
—
—
—
—
—
—
—
—
806,912
— 1,226,702
—
—
—
—
—
—
—
70,977
464,274
357,641
28,490
34,935
113,091
3,584
$ 3,110,912 $
57,645 $ (61,626) $ 3,106,931 $
— $
— $ 3,106,931
$
365,081 $
— $
— $
365,081 $
10,135 $
(1,009) $
374,207
2,130,685
115,995
448,405
290,057
8,498
—
—
—
—
—
— 2,130,685
43,315
(53,188)
2,120,812
—
—
—
—
115,995
448,405
290,057
8,498
44
(818)
115,221
11,104
8,635
176
(1,228)
(4,975)
—
458,281
293,717
8,674
$ 3,358,721 $
— $
— $ 3,358,721 $
73,409 $ (61,218) $ 3,370,912
(1) Amortized cost is net of $2.6 million of other-than-temporary impairments at December 31, 2013.
(2) Amortized cost is net of $14.0 million of other-than-temporary impairments at December 31, 2013.
(3) Amortized cost is net of $20.4 million of other-than-temporary impairments at December 31, 2013.
Contractual Maturities
The amortized cost and fair value of debt securities at December 31, 2014, by contractual maturity, are set forth below:
(In thousands)
Due in one year or less
Due after one year through five years
Due after five through ten years
Due after ten years
Total debt securities
Available-for-Sale
Held-to-Maturity
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
$
15,522 $
15,533
$
15 $
126,521
297,718
130,307
298,342
63,419
65,509
15
65,863
68,037
2,324,706
2,343,788
3,744,012
3,814,791
$
2,764,467 $ 2,787,970
$ 3,872,955 $ 3,948,706
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 December 31, 2014, the Company had a carrying value of $882.1 million in callable securities in its CMBS, CLO, and municipal
bond portfolios. The Company considers these factors in the evaluation of its interest rate risk profile and effective duration. These
maturities do not reflect actual duration which is impacted by prepayment assumptions.
Securities with a carrying value totaling $2.9 billion at December 31, 2014 and $2.7 billion at December 31, 2013 were pledged
to secure public funds, trust deposits, repurchase agreements, and for other purposes, as required or permitted by law. At
December 31, 2014 and December 31, 2013, the Company had no investments in obligations of individual states, counties, or
municipalities which exceeded 10% of consolidated shareholders’ equity.
85
Gross Unrealized Losses and Fair Value
The following tables provide information on the gross unrealized losses and fair value of the Company’s investment securities
with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment security type and
length of time that individual investment securities have been in a continuous unrealized loss position:
(Dollars in thousands)
Available-for-sale:
Agency CMO
Agency MBS
Agency CMBS
Non-agency CMBS
CLO
Pooled trust preferred securities
Single issuer trust preferred securities
Total available-for-sale in an unrealized
loss position
Held-to-maturity:
Agency CMO
Agency MBS
Agency CMBS
Municipal bonds and notes
Non-agency CMBS
At December 31, 2014
Less Than Twelve Months
Twelve Months or Longer
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
# of
Holdings
Total
Fair
Value
Unrealized
Losses
$
47,217 $
(240) $
35,968 $
(825)
3,691
80,266
24,932
99,221
—
4,150
(18)
(134)
(117)
(1,017)
—
(36)
641,355
(12,650)
—
9,396
—
—
—
(6)
—
—
34,095
(3,700)
259,477 $
(1,562) $ 720,814 $
(17,181)
52,172 $
(187) $
24,942 $
(552)
20,791
324,394
5,341
13,003
(86)
608,568
(11,254)
(1,143)
(23)
(30)
—
3,074
65,913
—
(32)
(985)
$
$
8
64
4
4
6
—
8
94
6
44
17
15
7
89
$
83,185 $
(1,065)
645,046
(12,668)
80,266
34,328
99,221
—
(134)
(123)
(1,017)
—
38,245
(3,736)
980,291 $
(18,743)
77,114 $
(739)
629,359
324,394
8,415
78,916
(11,340)
(1,143)
(55)
(1,015)
$
$
$ 1,118,198 $
(14,292)
Total held-to-maturity in an unrealized
loss position
$
415,701 $
(1,469) $ 702,497 $
(12,823)
(Dollars in thousands)
Available-for-sale:
Agency CMO
Agency MBS
Agency CMBS
Non-agency CMBS
CLO
Pooled trust preferred securities
Single issuer trust preferred securities
Total available-for-sale in an unrealized
loss position
Held-to-maturity:
Agency CMO
Agency MBS
Agency CMBS
Municipal bonds and notes
Non-agency CMBS
Total held-to-maturity in an unrealized
loss position
At December 31, 2013
Less Than Twelve Months
Twelve Months or Longer
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
# of
Holdings
Total
Fair
Value
Unrealized
Losses
$
149,894 $
(1,713) $
9,011 $
(155)
616,286
(29,537)
279,680
(18,161)
70,977
52,340
—
—
3,777
(782)
(996)
—
—
(381)
—
—
—
11,141
31,158
—
—
—
(3,410)
(6,491)
15
88
3
7
—
2
8
$
158,905 $
(1,868)
895,966
(47,698)
70,977
52,340
—
11,141
34,935
(782)
(996)
—
(3,410)
(6,872)
$
$
893,274 $
(33,409) $
330,990 $
(28,217)
123
$ 1,224,264 $
(61,626)
53,789 $
(1,009) $
— $
—
1,045,693
(42,181)
170,780
(11,007)
90,218
46,587
106,527
(818)
(1,193)
(4,059)
—
2,166
14,832
—
(35)
(916)
4
94
4
51
11
$
53,789 $
(1,009)
1,216,473
(53,188)
90,218
48,753
121,359
(818)
(1,228)
(4,975)
$ 1,342,814 $
(49,260) $
187,778 $
(11,958)
164
$ 1,530,592 $
(61,218)
86
Available-for-Sale Impairment Analysis
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 December 31, 2014. Unless otherwise
noted for an investment security type, management does not intend to sell these investments and has determined, based upon
available evidence, that it is more likely than not the Company will not be required to sell these securities before the recovery of
its amortized cost.
Agency collateralized mortgage obligations ("agency CMO") – There were unrealized losses of $1.1 million on the Company’s
investment in agency CMO at December 31, 2014, compared to $1.9 million at December 31, 2013. Unrealized losses decreased
due to lower market rates which resulted in higher security prices since December 31, 2013. The contractual cash flows for these
investments are performing as expected, 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 December 31, 2014.
Agency mortgage-backed securities ("agency MBS") – There were unrealized losses of $12.7 million on the Company’s investment
in residential mortgage-backed securities issued by government agencies at December 31, 2014, compared to $47.7 million at
December 31, 2013. Unrealized losses decreased due to lower market rates which resulted in higher security prices since
December 31, 2013. These investments are issued by a government or a government sponsored agency and, therefore, are backed
by certain government guarantees, either direct or indirect. There has been no change in the credit quality, and the contractual
cash flows are performing as expected. The Company does not consider these securities to be other-than-temporarily impaired at
December 31, 2014.
Agency commercial mortgage-backed securities ("agency CMBS") - There were unrealized losses of $134 thousand on the
Company's investment in commercial mortgage-backed securities issued by government agencies at December 31, 2014, compared
to $0.8 million at December 31, 2013. Unrealized losses decreased due to lower market rates which resulted in higher security
prices since December 31, 2013. The Company does not consider these securities to be other-than-temporarily impaired at
December 31, 2014.
Non-agency commercial mortgage-backed securities ("non-agency CMBS") – There were unrealized losses of $123 thousand on
the Company’s investment in non-agency commercial mortgage-backed securities at December 31, 2014, compared to $1.0 million
at December 31, 2013. Unrealized losses decreased due to lower market rates which resulted in higher security prices since
December 31, 2013. Internal and external metrics are considered when evaluating potential OTTI. Internal stress tests are performed
on individual bonds to monitor potential losses under stress scenarios. In addition, market analytics are performed to validate
internal results. Contractual cash flows for the bonds continue to perform as expected. The Company does not consider these
securities to be other-than-temporarily impaired at December 31, 2014.
Collateralized loan obligations ("CLO") – There were unrealized losses of $1.0 million on the Company’s investment in Volcker
compliant collateralized loan obligations at December 31, 2014 compared to no unrealized losses at December 31, 2013. The
unrealized loss is due to increased CLO spreads on Volcker compliant holdings during the period. The Company does not consider
these securities to be other-than-temporarily impaired at December 31, 2014. The Company continues to recognize the full write-
down of CLO positions to market value if they meet the definition of a Covered Fund under the Volcker Rule effective December
10, 2013.
Pooled trust preferred securities – There were no unrealized losses on the Company's investment in pooled trust preferred securities
at December 31, 2014, compared to $3.4 million at December 31, 2013. The decrease in unrealized loss is due to the sale of the
remaining two non-investment grade pooled trust preferred securities during the third quarter of 2014. The Company does not
hold investments in pooled trust preferred securities at December 31, 2014.
Single issuer trust preferred securities - There were unrealized losses of $3.7 million on the Company's investment in single issuer
trust preferred securities at December 31, 2014, compared to $6.9 million at December 31, 2013. Unrealized losses decreased
due to lower market spreads which resulted in higher security prices since December 31, 2013. The single issuer portfolio consists
of four investments issued by three large capitalization money center financial institutions, which continue to service the debt.
The Company performs periodic credit reviews of the issuer and as a result does not consider these securities to be other-than-
temporarily impaired at December 31, 2014.
Corporate debt securities – There were no unrealized losses on the Company’s investment in corporate debt securities at
December 31, 2014 and December 31, 2013. These securities are currently performing as expected at December 31, 2014.
Equity securities - financial institutions – There were no unrealized losses on the Company’s investment in equity securities at
December 31, 2014 and December 31, 2013.
87
Held-to-Maturity Impairment Analysis
The following discussion summarizes, by investment 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 December 31, 2014. Unless otherwise
noted under an investment security type, management does not intend to sell these investments and has determined, based upon
available evidence, that it is more likely than not that the Company will not be required to sell these securities before the recovery
of its amortized cost.
Agency CMO – There were unrealized losses of $0.7 million on the Company’s investment in agency CMO at December 31, 2014,
compared to $1.0 million at December 31, 2013. Unrealized losses decreased due to lower market rates which resulted in higher
security prices since December 31, 2013. The contractual cash flows for these investments are performing as expected, and there
has been no change in the underlying credit quality. The Company does not consider these securities to be other-than-temporarily
impaired at December 31, 2014.
Agency MBS – There were unrealized losses of $11.3 million on the Company’s investment in residential mortgage-backed securities
issued by government agencies at December 31, 2014, compared to $53.2 million at December 31, 2013. Unrealized losses
decreased due to lower market rates which resulted in higher security prices since December 31, 2013. These investments are
issued by a government or a government sponsored agency and, therefore, are backed by certain government guarantees, either
direct or indirect. There has been no change in the credit quality, and the contractual cash flows are performing as expected. The
Company does not consider these securities to be other-than-temporarily impaired at December 31, 2014.
Agency CMBS - There were unrealized losses of $1.1 million on the Company’s investment in commercial mortgage-backed
securities issued by government agencies at December 31, 2014, compared to $0.8 million at December 31, 2013. Unrealized
losses increased due to wider spreads on certain securities which resulted in lower security prices since December 31, 2013. The
Company does not consider these securities to be other-than-temporarily impaired at December 31, 2014.
Municipal bonds and notes – There were unrealized losses of $55 thousand on the Company’s investment in municipal bonds and
notes at December 31, 2014, compared to $1.2 million at December 31, 2013. Unrealized losses decreased due to lower market
rates which resulted in higher security prices since December 31, 2013. The municipal portfolio is primarily comprised of bank
qualified bonds, over 99.3% with credit ratings of A or better. In addition, the portfolio is comprised of 88.3% general obligation
bonds, 11.1% revenue bonds, and 0.6% other bonds. The Company does not consider these securities to be other-than-temporarily
impaired at December 31, 2014.
Non-agency CMBS – There were unrealized losses of $1.0 million on the Company’s investment in non-agency commercial
mortgage-backed securities at December 31, 2014, compared to $5.0 million unrealized losses at December 31, 2013. Unrealized
losses decreased due to lower market rates which resulted in higher security prices since December 31, 2013. Internal and external
metrics are considered when evaluating potential OTTI. Internal stress tests are performed on individual bonds to monitor potential
losses under stress scenarios. In addition, market analytics are performed to validate internal results. 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 December 31, 2014.
Private Label MBS - There were no unrealized losses on the Company's investment in private label residential mortgage-backed
securities issued by entities other than government agencies at December 31, 2014 and December 31, 2013. These securities are
currently performing as expected at December 31, 2014.
Other-Than-Temporary Impairment
There were additions to OTTI of $1.1 million and $7.3 million for the years ended December 31, 2014 and 2013, respectively.
The cumulative OTTI related to previously impaired securities was reduced due to the sale of four trust preferred securities during
the first quarter of 2014, the sale of two trust preferred securities, and two CLOs were called during the third quarter of 2014.
CLO positions carried at an unrealized loss are Volcker compliant and the losses are considered to be temporary. 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.
88
The following is a roll forward of the amount of OTTI related to debt securities:
(In thousands)
Balance of OTTI, beginning of period
Reduction for securities sold, called
Additions for OTTI not previously recognized
Balance of OTTI, end of period
Realized Gains and Losses
Years ended December 31,
2014
2013
2012
16,633
$
10,460
$
10,460
(14,082)
1,145
(1,104)
7,277
—
—
3,696
$
16,633
$
10,460
$
$
The following table summarizes proceeds from available-for-sale securities, the gross realized gains and losses from those sales,
and the impact of the recognition of other-than-temporary impairments for the periods presented:
(In thousands)
Proceeds from sales (1)
Gross realized gains
Gross realized losses
OTTI write-down
Net realized gains (losses) from investment securities
Years ended December 31,
2014
98,402
7,268
(1,769)
(1,145)
4,354
$
$
$
$
$
$
2013
57,804
2012
$ 148,222
$
2,847
(2,135)
(7,277)
(6,565) $
3,347
—
—
3,347
(1) Proceeds from sales, for the year ended December 31, 2014, do not include $28.2 million of unsettled sales transactions at December 31,
2014. The gross realized gains and gross realized losses for the year ended December 31, 2014 reflect the unsettled sales transactions.
NOTE 3: Loans and Leases
Recorded Investment in Loans and Leases. The following tables summarize the recorded investment in loans and leases by
portfolio segment:
(In thousands)
Recorded Investment:
Individually evaluated for impairment
Collectively evaluated for impairment
Recorded investment in loans and leases
Less: Accrued interest
Loans and leases
(In thousands)
Recorded Investment:
Individually evaluated for impairment
Collectively evaluated for impairment
Recorded investment in loans and leases
Less: Accrued interest
Loans and leases
Residential
Consumer
Commercial
Commercial
Real Estate (1)
Equipment
Financing
Total (2)
At December 31, 2014
$
36,454 $
50,374 $
142,435 $
332,940
13,605,482
13,938,422
38,397
$ 3,509,175 $ 2,549,401 $ 3,749,270 $ 3,554,428 $ 537,751 $ 13,900,025
3,460,116
3,563,161
8,733
3,377,196
3,519,631
10,456
3,723,991
3,760,445
11,175
2,507,060
2,557,434
8,033
537,119
537,751
—
103,045 $
632 $
Residential
Consumer
Commercial
Commercial
Real Estate (1)
Equipment
Financing
Total (2)
At December 31, 2013
$
52,199 $
52,179 $
142,871 $
352,505
12,383,704
12,736,209
36,433
$ 3,361,425 $ 2,536,688 $ 3,282,851 $ 3,058,362 $ 460,450 $ 12,699,776
2,492,353
2,544,532
7,844
3,241,045
3,293,244
10,393
3,228,688
3,371,559
10,134
2,961,378
3,066,424
8,062
460,240
460,450
—
105,046 $
210 $
(1) Includes certain loans individually evaluated for impairment under the Company's loan policy that were deemed not to be impaired at
both December 31, 2014 and December 31, 2013.
(2) Loans and leases include net deferred fees and unamortized premiums of $10.6 million and $13.3 million at December 31, 2014 and
December 31, 2013, respectively.
89
At December 31, 2014, the Company had pledged $5.7 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.
Loans and Leases Portfolio Aging. The following tables summarize the aging of the recorded investment in loans and leases by
portfolio class:
(In thousands)
Residential (1)
Consumer:
Home equity (1)
Other consumer
Commercial:
Commercial non-mortgage
Asset-based
Commercial real estate:
Commercial real estate
Commercial construction
Equipment financing
Total
30-59 Days
Past Due and
Accruing
60-89 Days
Past Due and
Accruing
At December 31, 2014
> 90 Days
Past Due
and Accruing
Non-
accrual
Total Past
Due and
Non-accrual
Current
Total Loans
and Leases
$
11,521 $
5,931 $
— $
66,156 $
83,608 $ 3,436,023 $ 3,519,631
11,516
720
1,971
—
2,348
—
551
5,161
425
156
—
397
—
150
—
—
50
—
—
—
—
40,025
281
6,449
—
15,038
3,659
578
56,702
1,426
2,424,584
2,481,286
74,722
76,148
8,626
3,088,656
3,097,282
—
663,163
663,163
17,783
3,310,765
3,328,548
3,659
1,279
230,954
536,472
234,613
537,751
$
28,627 $
12,220 $
50 $
132,186 $
173,083 $ 13,765,339 $ 13,938,422
(1) A total of $17.6 million residential and consumer loans was reclassified from non-accrual to accrual status as a result of updated
regulatory guidance issued in the first quarter of 2014.
(In thousands)
Residential
Consumer:
Home equity
Other consumer
Commercial:
Commercial non-mortgage
Asset-based
Commercial real estate:
Commercial real estate
Commercial construction
Equipment financing
Total
At December 31, 2013
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
$
11,721 $
6,839 $
— $
81,520 $
100,080 $ 3,271,479 $ 3,371,559
15,332
462
3,208
—
4,387
—
299
5,120
193
984
—
587
—
63
—
—
4,305
—
235
—
—
51,788 $
72,240
2,410,953 $ 2,483,193
140
795
60,543
61,338
10,946
—
13,456
4,237
1,141
19,443
2,712,870
2,732,313
—
560,931
560,931
18,665
2,842,637
2,861,302
4,237
1,503
200,886
458,947
205,123
460,450
$
35,409 $
13,786 $
4,540 $
163,228 $
216,963 $ 12,519,246 $ 12,736,209
Interest on non-accrual loans and leases that would have been recorded as additional interest income for the years ended December
31, 2014, 2013, and 2012, had the loans and leases been current in accordance with their original terms, totaled $9.3 million, $11.4
million, and $12.2 million, respectively.
90
Allowance for Loan and Lease Losses. The following tables summarize the ALLL by portfolio segment:
At or for the twelve months ended December 31, 2014
Residential Consumer Commercial
Commercial
Real Estate
Equipment
Financing Unallocated
Total
(In thousands)
Allowance for loan and lease losses:
Balance, beginning of period
Provision charged to expense
Losses charged off
Recoveries
$ 20,580 $ 39,551 $
7,906
(6,214)
1,324
16,112
(20,712)
5,055
Balance, end of period
Individually evaluated for impairment
Collectively evaluated for impairment
$ 23,596 $ 40,006 $
$ 12,094 $
4,237 $
$ 11,502 $ 35,769 $
47,706 $
9,926
(13,668)
4,369
48,333 $
2,710 $
45,623 $
29,883 $
1,709
(3,237)
885
29,240 $
6,232 $
23,008 $
3,912 $
69
(595)
2,234
5,620 $
28 $
5,592 $
1,528
—
—
10,941 $ 152,573
37,250
(44,426)
13,867
12,469 $ 159,264
25,301
12,469 $ 133,963
— $
At or for the twelve months ended December 31, 2013
Residential Consumer Commercial
Commercial
Real Estate
Equipment
Financing Unallocated
Total
(In thousands)
Allowance for loan and lease losses:
Balance, beginning of period
$ 29,474 $ 54,254 $
Provision (benefit) charged to expense
Losses charged off
Recoveries
1,296
(11,592)
1,402
8,149
(29,037)
6,185
Balance, end of period
Individually evaluated for impairment
Collectively evaluated for impairment
$ 20,580 $ 39,551 $
$ 10,535 $
4,595 $
$ 10,045 $ 34,956 $
46,566 $
15,143
(19,126)
5,123
47,706 $
1,878 $
45,828 $
30,834 $
12,826
(15,425)
1,648
29,883 $
3,445 $
26,438 $
4,001 $
(2,855)
(279)
3,045
3,912 $
— $
3,912 $
12,000 $ 177,129
33,500
(1,059)
(75,459)
—
17,403
—
10,941 $ 152,573
20,453
10,941 $ 132,120
— $
At or for the year ended December 31, 2012
Residential Consumer Commercial
Commercial
Real Estate
Equipment
Financing Unallocated
Total
60,681 $
14,861
(35,793)
6,817
46,566 $
6,423 $
40,143 $
45,013 $
(6,495)
(9,894)
2,210
30,834 $
2,683 $
28,151 $
8,943 $
(12,748)
(1,668)
9,474
4,001 $
1 $
4,000 $
16,500 $ 233,487
21,500
(4,500)
— (104,202)
26,344
—
12,000 $ 177,129
27,449
12,000 $ 149,680
— $
(In thousands)
Allowance for loan and lease losses:
Balance, beginning of period
$ 34,565 $ 67,785 $
Provision (benefit) charged to expense
Losses charged off
Recoveries
7,033
(12,927)
803
23,349
(43,920)
7,040
Balance, end of period
Individually evaluated for impairment
Collectively evaluated for impairment
$ 29,474 $ 54,254 $
$ 14,731 $
3,611 $
$ 14,743 $ 50,643 $
91
Impaired Loans and Leases. The following tables summarize impaired loans and leases by portfolio class:
(In thousands)
Residential:
1-4 family
Consumer:
Home equity
Commercial:
Commercial non-mortgage
Commercial real estate:
Commercial real estate
Commercial construction
Equipment financing
Totals:
Residential
Consumer
Commercial
Commercial real estate
Equipment financing
Total
(In thousands)
Residential:
1-4 family
Consumer:
Home equity
Commercial:
Commercial non-mortgage
Commercial real estate:
Commercial real estate
Commercial construction
Equipment financing
Totals:
Residential
Consumer
Commercial
Commercial real estate
Equipment financing
Total
At December 31, 2014
Unpaid
Principal
Balance
Total
Recorded
Investment
Recorded
Investment
No Allowance
Recorded
Investment
With Allowance
Related
Valuation
Allowance
$
157,152 $
142,435 $
24,388 $
118,047 $
12,094
60,424
50,374
26,464
23,910
41,019
36,454
16,064
20,390
99,687
7,218
629
96,160
6,177
632
157,152
60,424
41,019
106,905
629
366,129 $
142,435
50,374
36,454
102,337
632
332,232 $
$
40,575
5,956
—
24,388
26,464
16,064
46,531
—
113,447 $
55,585
221
632
118,047
23,910
20,390
55,806
632
218,785 $
4,237
2,710
6,222
10
28
12,094
4,237
2,710
6,232
28
25,301
Unpaid
Principal
Balance
Total
Recorded
Investment
At December 31, 2013
Recorded
Investment
No Allowance
Recorded
Investment
With Allowance
Related
Valuation
Allowance
$
158,361 $
142,871 $
23,988 $
118,883 $
10,534
63,886
52,179
27,323
24,856
59,279
52,199
23,138
29,061
95,013
11,725
249
90,976
10,625
210
42,774
10,625
210
158,361
63,886
59,279
106,738
249
388,513 $
142,871
52,179
52,199
101,601
210
349,060 $
23,988
27,323
23,138
53,399
210
128,058 $
$
48,202
—
—
118,883
24,856
29,061
48,202
—
221,002 $
4,595
1,878
3,444
—
—
10,534
4,595
1,878
3,444
—
20,451
92
The following table summarizes the average recorded investment and interest income recognized for impaired loans and leases
by portfolio class:
(In thousands)
Residential:
1-4 family
Consumer:
Home equity
Other consumer
Commercial:
Commercial non-mortgage
Asset-based
Commercial real estate:
Commercial real estate
Commercial construction
Equipment financing
Totals:
Residential
Consumer
Commercial
Commercial real estate
Equipment financing
Years ended December 31,
Average
Recorded
Investment
2014
Accrued
Interest
Income
Cash Basis
Interest
Income
Average
Recorded
Investment
2013
Accrued
Interest
Income
Cash Basis
Interest
Income
Average
Recorded
Investment
2012
Accrued
Interest
Income
Cash Basis
Interest
Income
$ 142,653 $
4,644 $
1,221
$ 144,908 $
4,119 $
1,954
$ 141,128 $
4,494 $
1,150
51,277
—
44,327
—
93,568
8,401
421
142,653
51,277
44,327
101,969
421
1,484
—
2,326
—
3,429
269
28
1,203
—
—
—
—
—
—
53,486
—
60,813
—
106,085
15,291
1,095
1,003
—
2,889
—
4,476
620
22
1,724
—
—
—
—
—
—
45,707
4
87,393
929
155,384
21,615
2,624
1,621
—
3,852
—
4,847
630
45
547
—
—
—
—
—
—
4,644
1,484
2,326
3,698
28
12,180 $
1,221
1,203
—
—
—
2,424
144,908
53,486
60,813
121,376
1,095
$ 381,678 $
4,119
1,003
2,889
5,096
22
13,129 $
1,954
1,724
—
—
—
3,678
141,128
45,711
88,322
176,999
2,624
$ 454,784 $
4,494
1,621
3,852
5,477
45
15,489 $
1,150
547
—
—
—
1,697
Total
$ 340,647 $
Credit Quality Indicators. To measure credit risk for the commercial, commercial real estate, and equipment financing portfolios,
the Company employs a dual grade credit risk grading system for estimating the probability of borrower default and the loss given
default. The credit risk grade system assigns a rating to each borrower and to the facility, which together form a Composite Credit
Risk Profile (“CCRP”). The credit risk grade system categorizes borrowers by common financial characteristics that measure the
credit strength of borrowers and facilities by common structural characteristics. The CCRP has 10 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. Risk ratings, 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 outlooks, 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. Criticized loans undergo more frequent reviews and enhanced monitoring.
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 of the same weaknesses as a 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.
93
The recorded investment in commercial and commercial real estate loans and equipment financing leases segregated by risk rating
exposure is as follows:
Commercial
Commercial Real Estate
Equipment Financing
(In thousands)
(1) - (6) Pass
(7) Special Mention
(8) Substandard
(9) Doubtful
(10) Loss
Total
$
At December 31,
2014
3,555,559
89,064
115,653
169
—
3,760,445
$
$
At December 31,
2013
3,091,154
87,451
114,199
440
—
3,293,244
$
$
At December 31,
2014
3,416,214
33,580
112,874
493
—
3,563,161
$
$
At December 31,
2013
2,947,116
20,901
97,822
585
—
3,066,424
$
At December 31,
2014
$
$
516,115
4,364
17,272
—
—
537,751
$
At December 31,
2013
437,033
7,979
15,438
—
—
460,450
$
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.
Troubled Debt Restructurings. The following table summarizes information for TDRs:
(Dollars in thousands)
Recorded investment of TDRs:
Accrual status (1)
Non-accrual status (1)
Total recorded investment of TDRs
Accruing TDRs performing under modified terms more than one year
Specific reserves for TDRs included in the balance of allowance for loan and lease losses
Additional funds committed to borrowers in TDR status
At December 31,
2014
2013
$
$
$
243,231
76,939
320,170
67.6%
23,785
552
$
$
$
238,926
102,972
341,898
58.2%
20,360
1,262
(1) A total of $17.6 million in residential and consumer loans was reclassified from non-accrual to accrual status in the twelve months ended
December 31, 2014 as a result of updated regulatory guidance issued in the first quarter of 2014.
For years ended December 31, 2014, 2013, and 2012, Webster charged off $13.5 million, $24.4 million, and $45.2 million,
respectively, for the portion of TDRs deemed to be uncollectible.
TDRs may be modified by means of extended maturity, below market adjusted interest rates, a combination of rate and maturity,
or other means, including covenant modifications, forbearance, loans discharged under Chapter 7 bankruptcy, or other concessions.
94
The following table provides information on the type of concession for loans and leases modified as TDRs:
(Dollars in thousands)
Residential:
Extended Maturity
Adjusted Interest rates
Combination Rate and Maturity
Other (2)
Consumer:
Extended Maturity
Adjusted Interest rates
Combination Rate and Maturity
Other (2)
Commercial:
Extended Maturity
Adjusted Interest rates
Combination Rate and Maturity
Other (2)
Commercial real estate:
Extended Maturity
Combination Rate and Maturity
Other (2)
Equipment Financing
Extended Maturity
Combination Rate and Maturity
Other (2)
TOTAL TDRs
Years ended December 31,
2014
2013
2012
Number of
Loans and
Leases
Post-
Modification
Recorded
Investment(1)
Number of
Loans and
Leases
Post-
Modification
Recorded
Investment(1)
Number of
Loans and
Leases
Post-
Modification
Recorded
Investment(1)
27 $
3
22
55
19
1
6
90
7
1
22
6
—
2
—
1
—
—
262 $
3,547
448
4,239
11,792
944
51
412
4,934
423
25
1,217
7,457
—
11,146
—
492
—
—
47,127
27 $
8
45
44
24
4
14
100
3
—
22
4
3
6
1
—
—
—
305 $
5,238
2,776
8,302
9,517
1,163
154
1,507
4,249
7,527
—
1,122
4,616
227
15,588
68
—
—
—
62,054
12 $
7
42
138
15
2
21
611
4
—
5
28
5
5
6
2,067
2,707
7,913
20,550
1,113
224
1,380
29,545
816
—
1,162
20,721
2,431
2,369
21,951
4
2
2
909 $
142
288
160
115,539
(1) Post-modification balances approximate pre-modification balances. The aggregate amount of charge-offs as a result of the restructurings
was not significant.
(2) Other includes covenant modifications, forbearance, loans discharged under Chapter 7 bankruptcy, and/or other concessions.
loan and
The Company’s
included loans with A-Note/B-Note structures.
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 balances of the B-Notes. The restructuring agreements specify a market interest
rate equal to that which would be provided to a borrower with similar credit at the time of restructuring.
lease portfolio at December 31, 2014
The following table provides 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:
(Dollars in thousands)
Residential:
1-4 family
Consumer:
Home equity
Commercial:
Commercial non-mortgage
Total
Years ended December 31,
2014
2013
2012
Number of
Loans and
Leases
Recorded
Investment
Number of
Loans and
Leases
Recorded
Investment
Number of
Loans and
Leases
Recorded
Investment
7
2
—
9
$
1,497
24
—
1,521
$
9
4
1
14
$
1,202
2
$
847
339
47
1,588
$
—
—
2
$
—
—
847
95
The recorded investment in commercial, commercial real estate, and equipment financing TDRs segregated by risk rating exposure
is as follows:
(In thousands)
(1) - (6) Pass
(7) Special Mention
(8) Substandard
(9) Doubtful
(10) Loss
Total
At December 31,
2014
2013
$
$
40,943
8,304
77,771
343
—
127,361
$
$
55,973
—
90,461
414
—
146,848
96
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 loans primarily
to government-sponsored enterprises through established programs, commercial loans through participation agreements, and other
individual or portfolio loans and securities. 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. The gain or loss on loans sold
depends on the previous carrying amounts of the transferred financial assets, the consideration received, and any liabilities incurred
in exchange for the transferred assets, and is included as mortgage banking activities in the accompanying Consolidated Statements
of Income.
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 customary market representations and warranties covering certain characteristics
of the mortgage loans sold and the Company's origination process, which the Company makes in the sale agreements. 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 sale.
A reserve provides for estimated losses associated with the repurchase of loans sold in connection with the Company’s mortgage
banking operations. The reserve for loan repurchases reflects management’s monthly evaluation 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. This reserve also
reflects management’s expectation of losses from repurchase requests for which the Company has not yet been notified. While
management uses its best judgment and information available, the adequacy of the 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 the gain or loss recorded in mortgage banking activities, while any incremental
provision, post loan sale, is recorded in other non-interest expense in the accompanying Consolidated Statements of Income.
The following table provides a summary of activity in the reserve for loan repurchases:
(In thousands)
Beginning balance
(Benefit) provision
Loss on repurchased loans and settlements
Ending balance
The following table provides detail of activity related to loan sales:
(In thousands)
Residential mortgage loans:
Proceeds from the sale of loans held for sale
Net gain on sale included as mortgage banking activities
Loans sold with servicing rights retained
Commercial loans:
Proceeds from the sale of loans held for sale
Net loss (gain) on sale included as mortgage banking activities
Mortgage Servicing Assets
Years ended December 31,
2013
2012
2014
$
$
2,254
(493)
(702)
1,059
$
$
2,617
1,209
(1,572)
2,254
$
$
2,269
1,621
(1,273)
2,617
Years ended December 31,
2013
2012
2014
$ 287,132
4,070
264,292
$ 773,887
16,588
690,300
$ 746,243
22,530
618,500
—
—
12,771
(229)
4,227
507
The Company has retained servicing rights on consumer loans totaling $2.4 billion at December 31, 2014 and December 31, 2013,
resulting in mortgage servicing assets of $19.4 million and $21.0 million at December 31, 2014 and 2013, respectively, which
are carried at the lower of cost or fair value. See Note 17 - 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 $1.5 million, $3.0 million, and $1.9 million, for the years
ended December 31, 2014, 2013, and 2012, respectively, and are included as a component of loan related fees in the accompanying
Consolidated Statements of Income.
97
NOTE 5: Premises and Equipment
A summary of premises and equipment follows:
(In thousands)
Land
Buildings and improvements
Leasehold improvements
Fixtures and equipment
Data processing and software
Total premises and equipment
Less: Accumulated depreciation and amortization
Premises and equipment, net
At December 31,
$
2014
12,987
95,843
78,029
73,180
175,887
435,926
(313,993)
$ 121,933
$
2013
13,777
97,586
74,127
70,819
162,693
419,002
(297,397)
$ 121,605
Depreciation and amortization of premises and equipment was $27.9 million, $31.1 million, and $34.1 million for the years ended
December 31, 2014, 2013, and 2012, respectively.
The following table provides a summary of activity for assets held for disposition:
(In thousands)
Assets held for disposition, beginning of period
Assets added
Asset write-downs
Assets sold
Assets held for disposition, end of period
Years ended December 31,
2014
1,567
1,061
(432)
(1,437)
759
$
$
2013
415
3,231
(1,002)
(1,077)
1,567
$
$
98
NOTE 6: Goodwill and Other Intangible Assets
The following table presents the carrying value for goodwill allocated to the reportable segments:
(In thousands)
Reporting Units/ Reportable Segments
Consumer Deposits
Business Banking
Community Banking
Other (HSA Bank)
Total
At December 31,
2014
2013
Goodwill
Core Deposit
Intangibles
Goodwill
Core Deposit
Intangibles
$ 377,605 $
138,955
516,560
13,327
$ 529,887 $
2,666
—
2,666
—
2,666
$ 377,605 $
138,955
516,560
13,327
$ 529,887 $
5,351
—
5,351
—
5,351
The gross carrying amount and accumulated amortization of other intangible assets (core deposits) allocated to the business
segments are as follows:
(In thousands)
Community Banking
At December 31, 2014
At December 31, 2013
Gross Carrying
Amount
49,420
$
Accumulated
Amortization
$ (46,754)
Net Carrying
Amount
2,666
$
Gross Carrying
Amount
49,420
$
Accumulated
Amortization
$ (44,069)
Net Carrying
Amount
5,351
$
Amortization of intangible assets for the years ended December 31, 2014, 2013, and 2012 totaled $2.7 million, $4.9 million, and
$5.4 million, respectively.
Future estimated annual amortization expense is summarized below:
(In thousands)
Years ended December 31,
2015
2016
$
1,523
1,143
99
NOTE 7: Income Taxes
Income tax expense is comprised of the following:
(In thousands)
Current:
Federal
State and local
Deferred:
Federal
State and local
Total:
Federal
State and local
Years ended December 31,
2014
2013
2012
$
89,977 $
6,582
96,559
61,666 $
3,577
65,243
52,391
1,282
53,673
(3,780)
(1,370)
(5,150)
10,693
734
11,427
20,012
980
20,992
86,197
5,212
91,409 $
72,359
4,311
76,670 $
72,403
2,262
74,665
$
The following is a reconciliation of Webster’s reported income tax expense to the amount that would result from applying the
federal statutory rate of 35.0%:
(Dollars in thousands)
Income tax expense at federal statutory rate
Reconciliation to reported income tax expense:
State and local taxes, net of federal benefit
Tax-exempt interest income, net
Increase in cash surrender value of life insurance
Other, net
Reported income tax expense
Effective tax rate
Years ended December 31,
2014
2013
2012
Amount
$ 101,906
Percent
35.0% $ 89,677
Amount
Percent
35.0% $ 86,927
Amount
Percent
35.0%
3,388
(7,335)
(4,612)
(1,938)
$ 91,409
1.2
(2.5)
(1.6)
(0.7)
2,802
(8,517)
(4,819)
(2,473)
$ 76,670
1.1
(3.3)
(1.9)
(1.0)
1,470
(9,577)
(3,939)
(216)
$ 74,665
0.6
(3.8)
(1.6)
(0.1)
31.4%
29.9%
30.1%
Refundable income taxes totaling $56.7 million and $56.0 million at December 31, 2014 and 2013, respectively, are reported as
a component of accrued interest receivable and other assets in the accompanying Consolidated Balance Sheets. The refunds are
largely attributable to Federal carryback claims applicable to 2008 and 2009 losses, and the timing of their receipt is subject to
the completion of an ongoing examination by the Internal Revenue Service and subsequent review and approval by the U.S.
Congressional Joint Committee on Taxation. Refundable income taxes include $1.0 million and $0.8 million attributable to
estimated non-contingent accrued interest income on those refunds at December 31, 2014 and 2013, respectively.
100
The significant components of the Company’s deferred tax asset, net (“DTA”) are reflected below:
(In thousands)
Deferred tax assets:
Allowance for loan and lease losses
Net operating loss and credit carry forwards
Compensation and employee benefit plans
Net losses on derivative instruments
Net unrealized loss on securities available for sale
Other
Gross deferred tax assets
Valuation allowance
Total deferred tax assets, net of valuation allowance
Deferred tax liabilities:
Net unrealized gain on securities available for sale
Equipment-financing leases
Deferred income on repurchase of debt
Intangible assets
Mortgage servicing assets
Other
Gross deferred tax liabilities
Deferred tax asset, net
At December 31,
2014
2013
$
65,288 $
64,561
47,748
12,637
—
27,300
217,534
(80,722)
62,080
66,709
34,562
12,804
1,532
20,993
198,680
(82,747)
$ 136,812 $ 115,933
$
$
10,288 $
21,930
8,502
9,242
7,230
5,543
62,735
74,077 $
—
13,751
10,627
8,239
7,765
10,442
50,824
65,109
The Company's DTA increased by $9.0 million during 2014, reflecting primarily a $5.2 million deferred tax benefit and a $4.1
million benefit recognized as an increase in shareholders equity.
Webster’s $80.7 million valuation allowance at December 31, 2014 consists of $74.4 million attributable to net state DTAs and
$6.4 million attributable to capital losses deductible only to the extent of capital gains for U.S. tax purposes. During 2014, the
valuation allowance decreased by $2.0 million and was attributable to a $0.9 million decrease applicable to capital losses and a
$1.1 million decrease applicable to changes in net state DTAs, for which a full valuation allowance had been established at both
the beginning and end of the year.
Management believes it is “more likely than not” that Webster will realize its DTAs net of the valuation allowance. Significant
“positive evidence” exists in support of management’s conclusion regarding the realization of Webster's DTAs, including: book-
taxable income levels in recent years and projected future years; recoverable taxes paid in 2014 and 2013; and future reversals of
existing taxable temporary differences. There can, however, be no assurance that any specific level of future income will be
generated or that the Company’s DTAs will ultimately be realized.
Connecticut net operating losses approximating $1.3 billion at December 31, 2014 are scheduled to expire in varying amounts
during tax years 2020 through 2032. Connecticut income tax credits, totaling $3.2 million at December 31, 2014, have a five-year
carryover period with excess credits expiring annually. A full valuation allowance of $64.6 million, net, has been established for
these Connecticut tax net operating losses and credits, and is included in Webster’s $74.4 million valuation allowance attributable
to net state DTAs noted above.
A deferred tax liability of $21.1 million has not been recognized for certain “thrift bad-debt” reserves, established before 1988,
that would become taxable upon the occurrence of certain events: distributions by Webster Bank in excess of certain earnings and
profits; the redemption of Webster Bank’s stock; or liquidation. Webster does not expect any of those events to occur. At
December 31, 2014 and 2013 the cumulative taxable temporary differences applicable to those reserves amounted to approximately
$58.0 million.
101
The following is a reconciliation of the beginning and ending balances of Webster’s unrecognized tax benefits (“UTBs”):
(In thousands)
Balance at beginning of year
Additions as a result of tax positions taken during the current year
Additions as a result of tax positions taken during prior years
Reductions as a result of tax positions taken during prior years
Reductions relating to settlements with taxing authorities
Reductions as a result of lapse of statute of limitations
Balance at end of year
Years ended December 31,
2014
2013
2012
$
3,109 $
3,119 $
4,436
956
1,031
—
—
(503)
4,593 $
528
442
(460)
—
(520)
3,109 $
858
283
(575)
(1,342)
(541)
3,119
$
If recognized, $3.0 million of the $4.6 million of UTBs at December 31, 2014 would affect the effective tax rate, compared to
$2.0 million of the $3.1 million at December 31, 2013.
Webster recognizes accrued interest and penalties related to UTBs, where applicable, in income tax expense. During the years
ended December 31, 2014, 2013, and 2012, Webster recognized interest and penalties of $0.5 million, $0.3 million, and $0.3
million, respectively. At December 31, 2014 and 2013, the Company had accrued interest and penalties related to UTBs of $1.6
million and $1.2 million, respectively.
Webster has determined it is reasonably possible that its total UTBs could decrease by an amount in the range of $1.0 million to
$3.0 million by the end of 2015 as a result of potential settlements with state and local taxing authorities concerning tax-base and
apportionment determinations and/or lapses in statute-of-limitations periods.
Webster is currently under, or subject to, examination by various taxing authorities. Federal tax returns for all years subsequent
to 2007 are either under or remain open to examination. For Webster’s principal state tax jurisdictions, Connecticut and
Massachusetts tax returns for years subsequent to 2010 remain open to examination while New York and Rhode Island tax returns
for years subsequent to 2006 or 2007 are either under or remain open to examination.
102
NOTE 8: Deposits
A summary of deposits by type follows:
(In thousands)
Non-interest-bearing:
Demand
Interest-bearing:
Checking
Health savings accounts
Money market
Savings
Time deposits
Total interest-bearing
Total deposits
At December 31,
2014
2013
$
3,598,872
$
3,128,152
2,155,047
1,824,799
1,908,522
3,892,778
2,271,587
12,052,733
$ 15,651,605
1,934,291
1,533,310
2,167,593
3,863,930
2,227,144
11,726,268
$ 14,854,420
Time deposits and interest-bearing checking obtained through brokers included in above balances $
Time deposits with a denomination of $100 thousand or more
Demand deposit overdrafts reclassified as loan balances
357,629
1,035,522
1,488
$
205,934
867,867
1,455
At December 31, 2014, the scheduled maturities of time deposits are as follows:
(In thousands)
2015
2016
2017
2018
2019
Thereafter
Time deposits
Years ending
December 31,
$ 1,260,472
349,674
137,284
148,777
374,654
726
$ 2,271,587
103
NOTE 9: Securities Sold Under Agreements to Repurchase and Other Borrowings
The following table summarizes securities sold under agreements to repurchase and other borrowings:
(In thousands)
Securities sold under agreements to repurchase:
Original maturity of one year or less
Original maturity of greater than one year, non-callable
Callable at the option of the counterparty (1)
Other borrowings:
Federal funds purchased
Securities sold under agreements to repurchase and other borrowings
At December 31,
2014
2013
$
$
$
409,756
550,000
—
959,756
359,662
550,000
100,000
1,009,662
291,000
1,250,756
$
322,000
1,331,662
(1) There were $100 million of securities sold under agreements to repurchase that had callable options for June 23, 2014 and were classified
as callable at the option of the counterparty at December 31, 2013. The callable options were not exercised as of the call date and were
reclassified as original maturity of greater than one year, non-callable during the quarter ended September 30, 2014.
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 counterparties are limited to primary dealers
in government securities or commercial and municipal customers through Webster’s Treasury Sales desk. Dealer counterparties
have the right to pledge, transfer, or hypothecate purchased securities during the term of the transaction. The Company has right
of offset with respect to repurchase agreement assets and liabilities where there are netting agreements in place. At December 31,
2014, the Company has a gross repurchase agreement liability of $1.0 billion.
Information concerning repurchase agreements outstanding at December 31, 2014 is presented below:
(Dollars in thousands)
Maturity:
Up to 30 days
31 to 90 days
Over 90 days
Totals
Balance
Fair Value of
Collateral
Weighted-Average
Rate
Weighted-Average
Remaining Maturity
$
$
409,556
200
550,000
959,756
$
$
418,504
208
592,659
1,011,371
0.15%
0.15
2.73
1.63%
2.76 days
2.63 months
2.82 years
1.71 years
The following table sets forth additional information for short-term borrowings:
(Dollars in thousands)
Securities sold under agreements to repurchase:
At end of year
Average during year
Highest month-end balance during year
Federal funds purchased:
At end of year
Average during year
Highest month-end balance during year
At or for the years ended December 31,
2014
2013
2012
Amount
Rate
Amount
Rate
Amount
Rate
$ 409,756
0.15% $ 359,662
0.16% $ 326,160
0.15%
374,935
459,259
291,000
387,004
457,000
0.16
—
0.17
0.20
—
316,560
372,922
322,000
255,689
398,000
0.15
—
0.20
0.18
—
306,294
357,396
—
173,690
255,200
0.18
—
—
0.17
—
104
NOTE 10: Federal Home Loan Bank Advances
The following table summarizes Federal Home Loan Bank advances:
(Dollars in thousands)
FHLB advances maturing:
Within 1 year
After 1 but within 2 years
After 2 but within 3 years
After 3 but within 4 years
After 4 but within 5 years
After 5 years
Unamortized premiums
Federal Home Loan Bank advances
At December 31,
2014
2013
Total
Outstanding
Weighted-
Average Contractual
Coupon Rate
Total
Outstanding
Weighted-
Average Contractual
Coupon Rate
$
$
2,275,000
145,934
500
200,000
78,026
159,934
2,859,394
37
2,859,431
0.23%
1.80
5.66
1.36
1.95
1.27
0.50%
$
$
1,550,000
—
145,934
500
200,000
155,926
2,052,360
61
2,052,421
0.25%
—
1.80
5.66
1.36
1.25
0.54%
At December 31, 2014, Webster Bank had pledged loans with an aggregate carrying value of $5.2 billion as collateral for borrowings
and had additional borrowing capacity from the FHLB of approximately $0.7 billion, as well as an unused line of credit of
approximately $5.0 million. At December 31, 2013, Webster Bank had pledged loans with an aggregate carrying value of $4.8
billion as collateral for borrowings and had additional borrowing capacity from the FHLB of approximately $1.0 billion, as well
as an unused line of credit of approximately $5.0 million. At December 31, 2014 and December 31, 2013, Webster Bank was in
compliance with FHLB collateral requirements.
NOTE 11: Long-Term Debt
The following table summarizes long-term debt:
(Dollars in thousands)
4.375% Senior fixed-rate notes due February 15, 2024
5.125% Senior fixed-rate notes due April 15, 2014
Junior subordinated debt Webster Statutory Trust I floating-rate notes due September 17, 2033 (1)
Total notes and subordinated debt
Unamortized discount, net (2)
Hedge accounting adjustments (2)
Long-term debt
At December 31,
2014
150,000
—
77,320
227,320
(1,083)
—
226,237
$
$
2013
—
150,000
77,320
227,320
(21)
1,066
228,365
$
$
(1) The interest rate on Webster Statutory Trust I floating-rate notes, which varies quarterly based on 3-month LIBOR plus 2.95%, was
3.193% at December 31, 2014 and 3.194% at December 31, 2013
(2) Related to senior fixed-rate notes due 2024 at December 31, 2014 and senior fixed-rate notes due 2014 at December 31, 2013
NOTE 12: Shareholders’ Equity
Common Stock
On June 8, 2011, the U.S. Treasury closed an underwritten public offering of 3,282,276 warrants issued in connection with the
Company’s participation in the Capital Purchase Program, each representing the right to purchase one share of Webster common
stock, $0.01 par value per share. The warrants have an exercise price of $18.28, expire on November 21, 2018, and are listed on
the New York Stock Exchange under the symbol “WBS WS.” The Company did not receive any of the proceeds of the warrant
offering; however, the Company paid $14.4 million to purchase 2,282,276 warrants at auction, which were subsequently canceled.
In addition, the Company has purchased 320,379 warrants from the open market have been exercised since the warrant offering.
In the fourth quarter of 2014, 556,702 warrants were exercised, resulting in the issuance of 241,821 shares of common stock. At
December 31, 2014, there are 122,919 warrants outstanding and exercisable.
105
On December 7, 2012, Warburg Pincus Private Equity and one of its affiliates ("Warburg Pincus") offered for sale in an underwritten
secondary offering 10,000,000 shares of Webster's common stock at a price to the public of $20.10 per share. Warburg Pincus
received all of the net proceeds from this offering. No shares of common stock were sold by Webster. Immediately following the
completion of the offering, Warburg Pincus continued to own 4,179,920 shares of common stock and had the right to acquire,
pursuant to the exercise of warrants, 8,625,000 shares of Webster common stock. In connection with the common stock repurchase
program, Webster purchased 2,518,891 shares of its common stock in the Warburg Pincus offering at a price per share equal to
that being paid by the underwriter to Warburg Pincus in the offering, or $19.85 per share. On March 22, 2013, the Company
exchanged 4,564,930 shares of its common stock with Warburg Pincus for all their outstanding Series A1 and A2 warrants in a
cashless exercise based on an exercise price of $11.50 per share. On May 13, 2013, Warburg Pincus completed a public offering
of 8,744,850 shares of Webster common stock, which constituted all of its holdings of Webster common stock at such time.
On December 6, 2012, Webster announced that its Board of Directors had authorized a $100 million common stock repurchase
program under which shares may be repurchased from time to time in open market or privately negotiated transactions, subject
to market conditions and other factors. A total of 427,185 and 26,819 shares of common stock were repurchased during 2014 and
2013, respectively, at an average cost of $30.59 and $25.03 per common share, respectively. Of the shares repurchased during
2014 and 2013, 77,185 and 26,819, respectively, were for employee compensation plans. Webster's common stock repurchase
program has $39.3 million of remaining repurchase authority at December 31, 2014.
Preferred Stock
On December 4, 2012, Webster closed on a public offering of 5,060,000 depository shares, each representing 1/1000th ownership
interest in a share of Webster's 6.40% Series E Non-Cumulative Perpetual Preferred Stock, par value $0.01 per share, with a
liquidation preference of $25,000 per share (equivalent to $25 per depository share) (the "Series E Preferred Stock"). Webster
will pay dividends as declared by the Board of Directors or a duly authorized committee of the Board. Dividends are payable at
a rate of 6.40% per annum, quarterly in arrears, on the fifteenth day of each March, June, September, and December. Dividends
on the Series E Preferred Stock will not be cumulative and will not be mandatory. If for any reason the Board of Directors or a
duly authorized committee of the Board does not declare a dividend on the Series E Preferred Stock for any dividend period, such
dividend will not accrue or be payable, and Webster will have no obligation to pay dividends for such dividend period, whether
or not dividends are declared for any future dividend periods.
The Company may redeem the Series E Preferred Stock at its option, in whole or in part, on December 15, 2017, or any dividend
payment date thereafter, at a redemption price equal to $25,000 per share (equivalent to $25 per depositary share), plus any declared
and unpaid dividends, without accumulation of any undeclared dividends. The Series E Preferred Stock also may be redeemed at
the Company's option, in whole or in part, upon the occurrence of a regulatory capital treatment event at a redemption price equal
to $25,000 per share (equivalent to $25 per depositary share), plus any declared and unpaid dividends, without accumulation of
any undeclared dividends. The Series E Preferred Stock does not have any voting rights except with respect to authorizing or
increasing the authorized amount of senior stock, certain changes to the terms of the Series E Preferred Stock, or in the case of
certain dividend nonpayments.
As of December 31, 2014, Webster has 28,939 shares of 8.50% Series A Non-Cumulative Perpetual Convertible Preferred Stock,
par value $0.01 per share (Series A Preferred Stock) outstanding. Dividends on the Series A Preferred Stock are non-cumulative
and payable quarterly in arrears, on the fifteenth day of each March, June, September, and December, when, as, and if authorized
and declared by Webster’s board of directors, at an annual rate of 8.50% on the liquidation preference of $1,000 per share.
The shares of Series A Preferred Stock are not subject to the operation of a sinking fund and have no participation rights. The
holders of this series have no general voting rights. If any quarterly dividend payable on this series is in arrears for six or more
dividend periods (whether consecutive or not), the holders of this series, voting together as a single class with holders of any and
all other series of voting preferred stock then outstanding ranking equally as for payment of dividends and upon which equivalent
voting rights have been conferred and are exercisable, will be entitled to vote for the election of two additional members of
Webster’s board of directors subject to certain limitations. These voting rights and the terms of any preferred stock directors
terminate when Webster has paid in full dividends on this series for at least four consecutive dividend periods following the
dividend arrearage.
Each share of Series A Preferred Stock may be converted at any time, at the option of the holder, into 36.8046 shares of Webster’s
common stock plus cash in lieu of fractional shares, subject to adjustment under certain circumstances. Since June 15, 2013, if
the closing price of Webster’s common stock exceeds 130% of the then-applicable conversion price for 20 trading days during
any 30 consecutive trading day period, including the last trading day of such period, ending on the trading day preceding the date
Webster gives notice of conversion, Webster may at its option cause some or all of the Series A Preferred Stock to be automatically
converted into Webster common stock at the then prevailing conversion rate.
106
NOTE 13: Accumulated Other Comprehensive Loss
The following table summarizes the changes in accumulated other comprehensive loss by component:
Available For
Sale and
Transferred
Securities
Derivative
Instruments
Defined
Benefit
Pension and
Postretirement
Benefit Plans
$
15,967 $
(28,884) $
(In thousands)
Balance at December 31, 2011
Other comprehensive income (loss) before reclassifications
Amounts reclassified from accumulated other comprehensive income (loss)
Net current-period other comprehensive income, net of tax
Balance at December 31, 2012
Other comprehensive (loss) income before reclassifications
Amounts reclassified from accumulated other comprehensive income (loss)
Net current-period other comprehensive (loss) income, net of tax
Balance at December 31, 2013
Other comprehensive income (loss) before reclassifications
Amounts reclassified from accumulated other comprehensive income (loss)
Net current-period other comprehensive income (loss), net of tax
28,950
(2,176)
26,774
42,741
(49,572)
4,214
(45,358)
(2,617)
21,811
(2,773)
19,038
(3,243)
4,225
982
(47,287) $
(2,462)
2,644
182
(27,902)
(47,105)
3,744
5,952
9,696
(18,206)
(12,506)
5,182
(7,324)
17,298
2,081
19,379
(27,726)
(19,496)
70
(19,426)
Total
(60,204)
23,245
4,693
27,938
(32,266)
(28,530)
12,247
(16,283)
(48,549)
(10,191)
2,479
(7,712)
Balance at December 31, 2014
$
16,421 $
(25,530) $
(47,152) $
(56,261)
The following table summarizes the reclassifications out of accumulated other comprehensive loss:
(In thousands)
Accumulated Other Comprehensive Loss
Components
Years ended December 31,
2014
2013
2012
Amount
Reclassified
From
Accumulated
Other
Comprehensive
Loss
Amount
Reclassified
From
Accumulated
Other
Comprehensive
Loss
Amount
Reclassified
From
Accumulated
Other
Comprehensive
Loss
Associated Line Item in the Consolidated
Statements Of Income
Available-for-sale and transferred
securities:
Unrealized gains (losses) on investments
$
5,499
Unrealized gains (losses) on investments
Tax (expense) benefit
Net of tax
Derivative instruments:
Cash flow hedges
Tax benefit
Net of tax
Defined benefit pension and postretirement
benefit plans:
Amortization of net loss
Prior service costs
Tax benefit
Net of tax
(1,145)
(1,581)
2,773
(8,100)
2,918
(5,182)
(37)
(73)
40
(70)
$
$
$
$
$
$
$
$
$
712
$
3,347
Net gain on sale of investment securities
(7,277)
2,351
(4,214)
(9,272)
3,320
(5,952)
$
$
$
—
Impairment loss recognized in earnings
(1,171)
Income tax expense
2,176
(6,575)
Total interest expense
2,350
(4,225)
Income tax expense
$
(3,169)
$
(4,042)
Compensation and benefits
(73)
1,161
(73)
Compensation and benefits
1,471
Income tax expense
$
(2,081)
$
(2,644)
107
The following tables summarize the tax effects for each component of other comprehensive income (loss):
(In thousands)
Available-for-sale and transferred securities:
Net unrealized loss during the period
Reclassification for net gain included in net income
Net non-credit other than temporary impairment
Amortization of unrealized loss on securities transferred to held-to-maturity
Total available-for-sale and transferred securities
Derivative instruments:
Net unrealized gain during the period
Reclassification adjustment for items included in net income
Total derivative instruments
Defined benefit pension and postretirement benefit plans:
Current year actuarial gain
Reclassification adjustment for amortization of net loss included in net income
Reclassification adjustment for prior service cost included in net income
Total defined benefit pension and postretirement benefit plans
Other comprehensive income (loss)
(In thousands)
Available-for-sale and transferred securities:
Net unrealized loss during the period
Reclassification for net gain included in net income
Net non-credit other than temporary impairment
Amortization of unrealized loss on securities transferred to held-to-maturity
Total available-for-sale and transferred securities
Derivative instruments:
Net unrealized gain during the period
Reclassification adjustment for items included in net income
Total derivative instruments
Defined benefit pension and postretirement benefit plans:
Current year actuarial gain
Reclassification adjustment for amortization of net loss included in net income
Reclassification adjustment for prior service cost included in net income
Total defined benefit pension and postretirement benefit plans
Other comprehensive income (loss)
(In thousands)
Available-for-sale and transferred securities:
Net unrealized loss during the period
Reclassification for net gain included in net income
Net non-credit other than temporary impairment
Amortization of unrealized loss on securities transferred to held-to-maturity
Total available-for-sale and transferred securities
Derivative instruments:
Net unrealized gain during the period
Reclassification adjustment for items included in net income
Total derivative instruments
Defined benefit pension and postretirement benefit plans:
Current year actuarial gain
Reclassification adjustment for amortization of net loss included in net income
Reclassification adjustment for prior service cost included in net income
Total defined benefit pension and postretirement benefit plans
Other comprehensive income (loss)
108
Year ended December 31, 2014
Pre-Tax
Amount
Tax Benefit
(Expense)
Net of Tax
Amount
34,242 $
(5,499)
1,145
60
29,948
(19,589)
8,100
(11,489)
(30,683)
37
73
(30,573)
(12,114) $
(12,469) $
1,999
(418)
(22)
(10,910)
7,083
(2,918)
4,165
11,187
(14)
(26)
11,147
4,402 $
21,773
(3,500)
727
38
19,038
(12,506)
5,182
(7,324)
(19,496)
23
47
(19,426)
(7,712)
Year ended December 31, 2013
Pre-Tax
Amount
Tax Benefit
(Expense)
Net of Tax
Amount
(77,524) $
(712)
7,277
296
(70,663)
5,826
9,272
15,098
26,949
3,169
73
30,191
(25,374) $
27,762 $
255
(2,606)
(106)
25,305
(2,082)
(3,320)
(5,402)
(9,651)
(1,135)
(26)
(10,812)
9,091 $
(49,762)
(457)
4,671
190
(45,358)
3,744
5,952
9,696
17,298
2,034
47
19,379
(16,283)
Year ended December 31, 2012
Pre-Tax
Amount
Tax Benefit
(Expense)
Net of Tax
Amount
45,024 $
(3,347)
—
35
41,712
(5,047)
6,575
1,528
(3,832)
4,042
73
283
43,523 $
(16,096) $
1,171
—
(13)
(14,938)
1,804
(2,350)
(546)
1,370
(1,445)
(26)
(101)
(15,585) $
28,928
(2,176)
—
22
26,774
(3,243)
4,225
982
(2,462)
2,597
47
182
27,938
$
$
$
$
$
$
NOTE 14: 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 ratio 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 capital and capital ratios of Webster Financial Corporation and Webster Bank, N.A.:
(Dollars in thousands)
At December 31, 2014
Webster Financial Corporation
Total risk-based capital
Tier 1 capital
Tier 1 leverage capital
Webster Bank, N.A.
Total risk-based capital
Tier 1 capital
Tier 1 leverage capital
At December 31, 2013
Webster Financial Corporation
Total risk-based capital
Tier 1 capital
Tier 1 leverage capital
Webster Bank, N.A.
Total risk-based capital
Tier 1 capital
Tier 1 leverage capital
Capital
Minimum
Well Capitalized
Amount
Ratio
Amount
Ratio
Amount
Ratio
Capital Requirements
$ 2,096,772
1,931,276
1,931,276
14.1% $ 1,192,651
596,326
13.0
859,241
9.0
8.0% $ 1,490,706
894,423
4.0
1,074,051
4.0
$ 1,939,229
1,774,814
1,774,814
13.0% $ 1,190,242
595,121
11.9
858,197
8.3
8.0% $ 1,487,803
892,682
4.0
1,072,746
4.0
$ 1,965,171
1,807,642
1,807,642
14.2% $ 1,106,203
553,101
13.1
801,535
9.0
8.0% $ 1,382,754
829,652
4.0
1,001,919
4.0
$ 1,815,423
1,658,466
1,658,466
13.2% $ 1,104,200
552,100
12.0
800,063
8.3
8.0% $ 1,380,250
828,150
4.0
1,000,079
4.0
10.0%
6.0
5.0
10.0%
6.0
5.0
10.0%
6.0
5.0
10.0%
6.0
5.0
Webster is subject to regulatory capital requirements administered by the Federal Reserve Bank ("FRB"), 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 payments 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 income for
that year combined with the undistributed net income 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
totaled $100.0 million and $90.0 million during the years ended December 31, 2014 and 2013, respectively.
Cash Restrictions. Webster Bank is required by FRB regulations to hold cash reserve balances on hand or with the Federal Reserve
Banks. Pursuant to this requirement, the Bank held $38.3 million and $41.8 million at December 31, 2014 and 2013, respectively.
Trust Preferred Securities. The Company holds an unconsolidated VIE trust that has issued trust preferred securities totaling $75.0
million at December 31, 2014 and 2013, which 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.
109
NOTE 15: Earnings Per Common Share
The calculation of basic and diluted earnings per common share follows:
(In thousands, except per share data)
Earnings for basic and diluted earnings per common share:
Net income available to common shareholders
Less: Earnings allocated to participating securities
Net income allocated to common shareholders
Shares:
Weighted-average common shares outstanding - basic
Effect of dilutive securities:
Stock options and restricted stock
Warrants - Series A1 and A2
Warrants - other
Weighted-average common shares outstanding - diluted
Earnings per common share:
Basic
Diluted
Stock Options
Years ended December 31,
2014
2013
2012
$ 189,196
674
$ 188,522
$ 168,746
617
$ 168,129
$ 171,237
748
$ 170,489
89,899
88,713
87,211
466
—
255
90,620
436
922
190
90,261
281
4,048
109
91,649
$
$
2.10
2.08
$
1.90
1.86
1.96
1.86
Options to purchase 0.6 million, 0.8 million, and 1.7 million common shares for the years ended December 31, 2014, 2013, and
2012, respectively, were excluded from the calculation of diluted earnings per share because the options’ exercise prices were
greater than the average market price of Webster's common stock for the respective periods presented.
Restricted Stock
Non-participating restricted stock awards of 170,647, 201,366, and 138,332 shares for the years ended December 31, 2014, 2013,
and 2012, respectively, whose issuance is contingent upon the satisfaction of certain performance conditions, were deemed to be
anti-dilutive and, therefore, are excluded from the calculation of diluted earnings per share for the respective periods presented.
Warrants
Series A1 and A2 warrants issued in connection with the Warburg investment were exchanged in a cashless exercise on March
22, 2013. The weighted-average dilutive effect of these warrants prior to the exchange is included in the calculation of diluted
earnings per share for the years ended December 31, 2013 and 2012 because the exercise price of the warrants was less than the
average market price of Webster's common stock for those periods.
Other warrants initially issued to the U.S. Treasury and sold in a secondary public offering on June 8, 2011 represent 0.1 million
potential issuable shares of common stock at December 31, 2014, and 0.7 million at December 31, 2013 and 2012. The weighted-
average dilutive effect of these warrants is included in the calculation of diluted earnings per share for the years ended December
31, 2014, 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 presented.
Series A Preferred Stock
Series A Preferred Stock represents potential issuable common stock at December 31, 2014, 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 years ended December 31, 2014, 2013, and 2012.
110
NOTE 16: Derivative Financial Instruments
Risk Management Objective of Using Derivatives
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 exposure that arises from business activities, that result in the receipt or payment of future known and
uncertain cash amounts, the values of which are determined by interest rates. Cash flow or fair value hedge designation, for
accounting, depends on the specific risk being hedged. Webster uses cash flow hedges to reduce or eliminate changes in cash flows
due to variable rates and may use fair value hedges to mitigate changes in fair value due to fixed rates or prices.
Cash Flow Hedges of Interest Rate Risk
Webster’s primary objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure
to interest rate movements. To accomplish these objectives, 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. The change in fair value of interest rate swaps and caps is recorded
in Accumulated Other Comprehensive Income ("AOCI") during the term of the cash flow hedge.
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. The current forward-settle
interest rate swaps are structured as pay fixed-receive 1-month LIBOR. Forward-settle swaps are typically terminated and cash
settled to coincide with a debt issuance. Upon the swap termination and debt issuance, the gain or loss that has been recorded in
AOCI is amortized into interest expense over the life of the debt.
The table below presents information for Webster's forward-settle interest rate swaps outstanding at December 31, 2014:
(Dollars in thousands)
Number of
Instruments
Total Notional
Amount
Trade Date
Effective Date
Maturity Date
Debt Issuance Expected
2
2
2
$
$
$
50,000 October and
50,000
November 2013
January 2014
November 2014
November 2019
At or before May 2015
January 2015
January 2020
October 2014 - July 2015
50,000 April and May 2014
June 2015
June 2020
March 2015 - December 2015
Webster uses interest rate swaps and caps to protect the Company from exposure to variability in cash flows relating to interest
payments on floating-rate funding instruments. The swaps and caps are structured to offset fluctuations in interest rates on floating-
rate debt during the life of the funding instrument.
The table below presents information for Webster's interest rate swaps and caps outstanding at December 31, 2014:
(Dollars in thousands)
Number of
Instruments
Total Notional
Amount
Instrument
Type
Index Rate
Hedged Debt
Maturity Date
6
4
$ 150,000
Cap
3.0% strike $150 million 3-month LIBOR indexed
December 2021
floating-rate FHLB advance
$ 100,000
Swap
1 Month
Libor
$100 million 28 day rolling FHLB advance
for a 5-year term
July 2019, August 2019,
September 2019
The table below presents the notional amounts and fair values for Webster’s interest rate derivatives designated as cash flow hedges
as well as their classification in the accompanying Consolidated Balance Sheets:
(Dollars in thousands)
Interest rate swap
Interest rate swap
Interest rate cap
At December 31, 2014
At December 31, 2013
Balance Sheet
Classification
# of
Instruments
Notional
Amount
Fair
Value
# of
Instruments
Notional
Amount
Fair
Value
Other assets
Other liabilities
Other assets
—
10
6
$
— $
—
250,000
(4,598)
150,000
4,481
8
5
2
$ 200,000 $
3,027
125,000
(622)
50,000
3,554
111
AOCI related to cash flow hedges
The changes in fair value of derivatives designated as cash flow hedges are recorded in AOCI. These amounts are reclassified to
interest expense as interest payments are made on the Company's variable-rate debt. The remaining unamortized interest rate cap
premium balance of $8.0 million will be reclassified to interest expense over the term of the cap transactions according to a
predetermined cap value schedule. Over the next twelve months, the Company estimates that $2.3 million will be reclassified
from AOCI as an increase to interest expense.
Webster records gains and losses related to forward-settle swap terminations in AOCI and amortizes the balance into earnings
over the respective term of the hedged debt instruments. A loss of $143 thousand was recognized in non-interest expense for
hedge ineffectiveness due to the timing of swap terminations for the year ended December 31, 2014, and there was no hedge
ineffectiveness for the year ended December 31, 2013. At December 31, 2014, the remaining unamortized loss on the termination
of cash flow hedges is $31.6 million. Over the next twelve months, the Company estimates that $8.0 million will be reclassified
from AOCI as an increase to interest expense.
The increase/(reduction) to interest expense on borrowings related to cash flow hedges is presented below:
(In thousands)
2014
Years ended December 31,
2013
2012
Interest
Expense
Amount
Reclassified
From AOCI
Interest
Expense
Amount
Reclassified
From AOCI
Interest
Expense
Amount
Reclassified
From AOCI
Interest rate swaps on FHLB advances
$
585 $
5,458
$
498 $
5,956
$
1,393 $
4,754
Interest rate swaps on senior fixed-rate notes
Interest rate swaps on junior subordinated debt
Interest rate swaps on repurchase agreements
Interest rate swaps on trust preferred securities
—
—
—
—
267
—
2,224
151
—
—
—
—
—
(3)
3,319
—
—
—
—
—
Net increase to interest expense on borrowings
$
585 $
8,100
$
498 $
9,272
$
1,393 $
—
(92)
2,959
(105)
7,516
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, on occasion, uses interest rate swaps to manage its exposure to changes in fair value on these obligations attributable to
changes in the benchmark interest rates. 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 December 31, 2014 and December 31, 2013.
For a qualifying derivative designated as a fair value hedge, the gain or loss on the derivative, as well as the offsetting gain or loss
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.
The reduction to interest expense on borrowings related to fair value hedges is presented below:
(In thousands)
Interest rate swaps on senior fixed-rate notes
Interest rate swaps on junior subordinated debt
Net reduction to interest expense on borrowings
Years ended December 31,
2014
(1,066)
—
(1,066)
$
$
2013
(3,197)
(207)
(3,404)
$
$
2012
(3,197)
(2,648)
(5,845)
$
$
112
Non-Hedge Accounting Derivatives / Non-designated Hedges
Webster has derivatives that do not meet hedge accounting requirements and are accounted for as free-standing derivatives with
changes in fair value recorded in non-interest income. The Company’s risk management strategy includes the use of derivatives
to modify the repricing risk of assets and liabilities. As part of this strategy, the Company uses futures contracts to hedge certain
loans. Other derivative instruments include interest rate swap and cap contracts sold to commercial and other customers who wish
to modify interest rate sensitivity. These contracts are offset with dealer counterparty transactions structured with matching terms.
As a result, there is minimal impact on earnings.
Webster had the following derivative positions that were not designated for hedge accounting:
(Dollars in thousands)
Webster with customer position:
Balance Sheet
Classification
# of
Instruments
Notional
Amount
Gain
Loss
Net
At December 31, 2014
Fair Value
Commercial loan interest rate derivatives
Commercial loan interest rate derivatives
Other assets
Other liabilities
Total customer position
Webster with counterparty position:
Commercial loan interest rate derivatives
Commercial loan interest rate derivatives
Futures contracts
Other assets
Other liabilities
Other liabilities
Total counterparty position
224
61
285
—
276
7
283
$ 1,537,395 $
581,299
$ 2,118,694 $
48,209 $
—
48,209 $
— $
(2,539)
(2,539) $
48,209
(2,539)
45,670
$
— $
2,118,631
5,600,000
$ 7,718,631 $
— $
5,408
—
5,408 $
— $
(34,491)
(293)
(34,784) $
—
(29,083)
(293)
(29,376)
(Dollars in thousands)
Webster with customer position:
Balance Sheet
Classification
# of
Instruments
Notional
Amount
Gain
Loss
Net
At December 31, 2013
Fair Value
Commercial loan interest rate derivatives
Commercial loan interest rate derivatives
Other assets
Other liabilities
Total customer position
Webster with counterparty position:
Commercial loan interest rate derivatives
Commercial loan interest rate derivatives
Futures contracts
Other assets
Other liabilities
Other liabilities
Total counterparty position
159
76
235
111
118
14
243
$
915,272 $
648,456
$ 1,563,728 $
29,004 $
—
29,004 $
— $
(11,175)
(11,175) $
29,004
(11,175)
17,829
$
914,044 $
649,623
11,200,000
$12,763,667 $
8,944 $
8,118
32
17,094 $
(2,766) $
(20,094)
(259)
(23,119) $
6,178
(11,976)
(227)
(6,025)
Webster reported the changes in the fair value of non-hedge accounting derivatives as a component of other non-interest income
in the accompanying Consolidated Statements of Income as follows:
(In thousands)
Non-hedge derivatives, net
Futures contracts
Net increase to other non-interest income
Offsetting Derivatives
Years ended December 31,
2014
2013
2012
$
$
8,001
(595)
7,406
$
$
5,770
(438)
5,332
$
$
5,572
48
5,620
Webster has entered into transactions with counterparties that are subject to a master netting agreement. 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 Consolidated
Balance Sheets.
113
The tables below present the financial assets and liabilities for non-customer derivative positions, including futures contracts,
summarized by dealer counterparty or Derivative Clearing Organization ("DCO"):
Hedge Accounting
Positions
At December 31, 2014
Non-Hedge Accounting
Positions
MTM Gain MTM Loss
MTM Gain MTM Loss
Notional
Amount
Total MTM
(Loss) Gain
Cash Collateral
Posted
(Received)
$
427,430
$
— $
(739) $
1,861 $
(6,576) $
(5,454) $
319,663
11,538
303,663
424,401
6,631,936
1,494
—
747
2,240
—
—
—
—
—
(3,858)
978
—
1,147
867
555
(6,420)
(834)
(1,627)
(1,698)
(3,948)
(834)
267
1,409
(17,629)
(20,932)
$ 8,118,631
$
4,481 $
(4,597) $
5,408 $
(34,784) $
(29,492) $
5,300
3,610
—
(400)
(1,420)
39,037
46,127
Net
Exposure (1)
$
—
—
—
—
—
18,105
Hedge Accounting
Positions
At December 31, 2013
Non-Hedge Accounting
Positions
MTM Gain MTM Loss
MTM Gain MTM Loss
Notional
Amount
Total MTM
(Loss) Gain
Cash Collateral
Posted
(Received)
$
387,258
$
730 $
— $
4,643 $
(9,647) $
(4,274) $
322,888
14,477
291,627
372,771
11,749,646
615
—
1,734
2,290
1,212
—
—
—
(15)
(607)
3,475
—
4,108
3,017
1,819
(9,100)
(1,348)
(592)
(1,743)
(657)
(5,010)
(1,348)
5,250
3,549
1,767
$ 13,138,667
$
6,581 $
(622) $
17,062 $
(23,087) $
(66) $
4,300
4,940
—
(5,300)
(3,310)
7,485
8,115
Net
Exposure (1)
$
26
—
—
—
—
9,252
(In thousands)
Dealer A
Dealer B
Dealer C
Dealer D
Dealer E
Dealer F (2)
Total
(In thousands)
Dealer A
Dealer B
Dealer C
Dealer D
Dealer E
Dealer F (2)
Total
(1) Net positive exposure represents over-collateralized loss positions which can be the result of DCO initial margin requirements posted in
compliance with the Dodd-Frank Wall Street Reform and Consumer Protection Act.
(2) Dealer F represents Chicago Mercantile Exchange, our designated DCO.
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 International Swap Derivative Association ("ISDA")
Master agreements, including a Credit Support Annex ("CSA"), with all derivative counterparties for non-cleared trades. 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 provides, 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 with non-dealer counterparties is limited to the net favorable value,
including accrued interest, reduced by the amount of collateral pledged by the counterparty. The Company's credit exposure related
to derivatives with dealer counterparties is zero unless cash collateral exceeds the unfavorable market value.
In accordance with counterparty credit agreements and derivative clearing rules, the Company had approximately $46.1 million
in net margin collateral posted with financial counterparties at December 31, 2014 which was comprised of approximately $47.9
million of margin collateral posted to financial counterparties or DCO and approximately $1.8 million received from financial
counterparties. Collateral levels for approved financial institution counterparties are monitored daily and adjusted as necessary. In
the event of default, should the collateral not be returned, the exposure would be offset by terminating the transaction.
The Company regularly evaluates the credit risk of its counterparties, taking into account likelihood of default, net exposures, and
remaining contractual life, among other related factors. The Company's net current credit exposure relating to interest rate
derivatives with Webster Bank customers was $48.2 million at December 31, 2014. 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 $16.5 million at December 31, 2014. The credit exposure is
mitigated as transactions with customers are generally secured by the same collateral of the underlying transactions being hedged.
114
Futures Contracts Derivatives. Webster holds a notional $800 million short-sale of a one year strip of Fed funds futures contracts
and continues to roll the maturities of these contracts. This transaction is designed to work in conjunction with floating rate assets
with interest rate floors, which would not generate a benefit from an increase in short-term interest rates. Therefore, as the probability
for rising short-term rates increases, the notional amount would be increased, and as the probability for rising short-term rates
decreases, the notional amount would be reduced. The fair value of these contracts is a net loss of $293 thousand and is reflected
in other liabilities in the accompanying Consolidated Balance Sheets.
Mortgage Banking Derivatives. 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, interest rate lock commitments are generally extended to the borrowers. 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 causing a reduction in the anticipated gain on sale of the loans
and possibly resulting in a loss. In an effort to mitigate such risk, forward delivery sales commitments are established, under which
Webster agrees to deliver whole mortgage loans to various investors or issue MBS. At December 31, 2014, outstanding rate locks
totaled approximately $36.8 million and the outstanding commitments to sell residential mortgage loans totaled approximately
$58.4 million. Forward sales, which include mandatory forward commitments of approximately $57.4 million at December 31,
2014, 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 Consolidated Statements of Income.
At December 31, 2014 and December 31, 2013, the fair value of interest rate locked loan commitments and forward sales
commitments totaled gains of $18 thousand and $540 thousand, respectively, and were recorded as a component of other assets
in the accompanying Consolidated Balance Sheets.
Foreign Currency Derivatives. The Company enters into foreign currency forward contracts that are not designated for hedge
accounting to minimize fluctuations of currency exchange rates on certain lending arrangements. The carrying amount and fair
value of foreign currency forward contracts is immaterial at December 31, 2014 and December 31, 2013.
Risk Participation Agreements. The Company enters into financial guarantees of performance on interest rate swap derivatives.
The purchased (asset) or sold (liability) guarantee allows the Company to participate-in (for a fee received) or participate-out (for
a fee paid), the risk associated with certain derivative positions executed with the borrower by a lead bank. The risk participation
agreement guarantee is recorded on the balance sheet at fair value, with changes in fair value recognized in earnings each period.
The notional amount and fair value of risk participation agreements is immaterial at December 31, 2014 and December 31, 2013.
NOTE 17: Fair Value Measurements
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. Fair value is best determined using quoted market prices. However, in many instances, quoted
market prices are not available. In such instances, fair values are determined using appropriate valuation techniques. Various
assumptions and observable inputs must be relied upon in applying these techniques. Accordingly, the fair value estimates may
not be realized in an immediate transfer of the respective asset or liability.
Fair Value Hierarchy
The three levels within the fair value hierarchy are as follows:
•
•
•
Level 1: Valuation is based upon unadjusted quoted prices in active markets for identical assets or liabilities that the reporting
entity has the ability to access at the measurement date.
Level 2: Fair value is calculated using inputs other than quoted market prices that are directly or indirectly observable for
the asset or liability. The valuation may rely on quoted prices for similar assets or liabilities in active markets, quoted prices
for identical or similar assets or liabilities in inactive markets, inputs other than quoted prices that are observable for the
asset or liability (such as interest rates, volatilities, prepayment speeds, credit ratings, etc.), or inputs that are derived
principally or corroborated by market data, by correlation, or other means.
Level 3: Inputs for determining the fair value of the respective assets or liabilities are not observable. Level 3 valuations
are reliant upon pricing models and techniques that require significant management judgment or estimation.
Categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
115
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Available-for-Sale Investment 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, U.S. Treasury Bills, and interest rate futures contracts.
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. Management maintains 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 CMO, agency MBS, agency CMBS, CLO, corporate debt, single-issuer trust preferred securities, and non-agency CMBS.
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 for valuation.
Derivative Instruments
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. The Company's other derivative instruments are valued using third-party valuation software, which
considers the present value of cash flows discounted using observable forward rate assumptions. Resulting fair values are validated
against valuations performed by independent third parties and are classified within Level 2 of the fair value hierarchy. In determining
if any fair value adjustments related to credit risk are required, Webster evaluates the credit risk of its counterparties by considering
factors such as the likelihood of default by the counterparties, its net exposures, the remaining contractual life, as well as the
amount of collateral securing the position. Webster reviews its counterparty exposure on a regular basis, and, when necessary,
appropriate business actions are taken to adjust the exposure. When determining fair value, Webster applies the portfolio exception
with respect to measuring counterparty credit risk for all of its derivative transactions subject to a master netting arrangement.
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 the Company 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, the
Company 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 are established, under which the Company agrees to deliver whole mortgage loans to various
investors or issue mortgage-backed securities. The fair value of mortgage banking derivatives is determined based on current
market prices for similar assets in the secondary market and, therefore, classified within Level 2 of the fair value hierarchy.
Investments Held in Rabbi Trust
Investments held in 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 the Rabbi Trust are classified within Level 1 of the fair value hierarchy. Webster has elected
to measure the investments held in the Rabbi Trust at fair value. The Company consolidates the invested assets of the trust along
with the total deferred compensation obligations and includes them in other assets and other liabilities, respectively, in the
accompanying Consolidated Balance Sheets. Earnings in the Rabbi Trust, including appreciation or depreciation, are reflected as
other non-interest income, and changes in the corresponding liability are reflected as compensation and benefits in the accompanying
Consolidated Statements of Income. The cost basis of the investments held in Rabbi Trust is $4.5 million at December 31, 2014.
Alternative Investments
The Company generally records alternative investments at cost, subject to impairment testing. Certain funds, for which the
ownership percentage is greater than 3%, are recorded at fair value on a recurring basis based upon the net asset value of the
respective fund. At December 31, 2014, alternative investments consisted of $475 thousand recorded at fair value and $16.5 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. 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 $6.5 million in unfunded commitments remaining for its alternative investments
as of December 31, 2014. See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations,
Investment Securities Portfolio section for additional discussion of the Company's alternative investments.
116
Summaries of the fair values of assets and liabilities measured at fair value on a recurring basis are as follows:
(In thousands)
Financial assets held at fair value:
Available-for-sale investment securities:
U.S. Treasury Bills
Agency CMO
Agency MBS
Agency CMBS
Non-agency CMBS
CLO
Pooled trust preferred securities
Single issuer trust preferred securities
Corporate debt
Equity securities
Total available-for-sale investment securities
Derivative instruments
Mortgage banking derivatives
Investments held in Rabbi Trust
Alternative investments
Total financial assets held at fair value
Financial liabilities held at fair value:
Derivative instruments
Total financial liabilities held at fair value
(In thousands)
Financial assets held at fair value:
Available-for-sale investment securities:
U.S. Treasury Bills
Agency CMO
Agency MBS
Agency CMBS
Non-agency CMBS
CLO
Pooled trust preferred securities
Single issuer trust preferred securities
Corporate debt
Equity securities
Total available-for-sale investment securities
Derivative instruments
Mortgage banking derivatives
Investments held in Rabbi Trust
Alternative investments
Total financial assets held at fair value
Financial liabilities held at fair value:
Derivative instruments
Total financial liabilities held at fair value
At December 31, 2014
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
$
525
550,988
1,028,518
80,266
553,393
425,734
—
38,245
110,301
5,903
2,793,873
52,872
18
5,901
475
$ 2,853,139
$
$
36,777
36,777
$
$
$
$
525
—
—
—
—
—
—
—
—
5,903
6,428
—
—
5,901
—
12,329
293
293
$
— $
550,988
1,028,518
80,266
553,393
425,734
—
38,245
110,301
—
2,787,445
52,872
18
—
—
$ 2,840,335
$
$
36,484
36,484
$
$
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
475
475
—
—
At December 31, 2013
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
$
$
$
$
325
—
—
—
—
—
—
—
—
3,309
3,634
32
—
6,097
—
9,763
259
259
$
— $
806,912
1,226,702
70,977
464,274
357,641
—
34,935
113,091
275
3,074,807
41,763
540
—
—
$ 3,117,110
$
$
23,779
23,779
$
$
$
—
—
—
—
—
—
28,490
—
—
—
28,490
—
—
—
565
29,055
—
—
$
325
806,912
1,226,702
70,977
464,274
357,641
28,490
34,935
113,091
3,584
3,106,931
41,795
540
6,097
565
$ 3,155,928
$
$
24,038
24,038
117
The following table presents the changes in Level 3 assets that are measured at fair value on a recurring basis:
(In thousands)
Level 3, beginning of period
Transfers out of Level 3 (1)
Change in unrealized loss included in other comprehensive income
Unrealized loss included in net income
Realized gain on sale of available for sale securities
Purchases/capital calls
Sales/proceeds
Accretion/amortization
Calls/paydowns
Level 3, end of period
Years ended December 31,
2014
29,055
—
3,410
(263)
2,656
173
(34,576)
62
(42)
475
$
$
2013
116,280
(249,844)
17,401
(392)
269
160,412
(7,740)
243
(2,908)
29,055
$
$
(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 of 2013,
the Company engaged a third-party pricing vendor to provide monthly fair value measurements. This 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 CLO is an active market, and there is ample price
transparency.
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.
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 residential mortgage loans held for sale is based on quoted market prices of similar
loans sold in conjunction with securitization transactions. Accordingly, such loans are classified as Level 2 measurements. On
occasion, the loans held-for-sale portfolio includes commercial loans which require adjustments for changes in loan characteristics.
When observable data is unavailable, such loans are classified within Level 3. At December 31, 2013, the Company transferred
loans held for sale from Level 3 to Level 2 as the secondary market for securities backed by similar loan types is actively traded,
providing readily observable market pricing to be used as inputs for the estimated fair value of these loans.
Impaired Loans and Leases
Impaired loans and leases for which repayment 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.
Other Real Estate Owned (OREO) and Repossessed Assets
The total book value of OREO and repossessed assets was $6.5 million at December 31, 2014. 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
valuation may consider available pricing guides, auction results, and price opinions. 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
Mortgage servicing assets are accounted for 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.
118
The table below presents the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a non-
recurring basis at December 31, 2014:
(Dollars in thousands)
Asset
Impaired loans and leases
Fair Value Valuation Methodology
$ 50,978
Real Estate Appraisals
Other real estate owned
$
2,641
Real Estate Appraisals
Mortgage servicing assets
$ 28,690
Discounted cash flow
Unobservable Inputs
Discount for appraisal type
Discount for costs to sell
Discount for appraisal type
Discount for costs to sell
Constant prepayment rate
Discount rates
Range of Inputs
2% - 15%
0% - 8%
0% - 20%
8%
7.6% - 24.9%
1.5% - 3.0%
Fair Value of Financial Instruments
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.
Held-to-Maturity Investment Securities
When quoted market prices are not available, the Company employs an independent pricing service 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. Webster has procedures to monitor the pricing service's assumptions and establishes processes to challenge the
pricing service's valuations that appear unusual or unexpected. Held-to-maturity investments, which include agency CMO, agency
MBS, agency CMBS, municipal, non-agency CMBS, and private label MBS securities, are classified within Level 2 of the fair
value hierarchy.
Loans and Leases
The estimated fair value of loans and leases held for investment is based on discounted cash flow analysis, using future prepayments
and market interest rates inclusive of an illiquidity premium for comparable loans and leases. 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. Loans and leases 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 Federal Home Loan Bank advances and 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.
Federal Home Loan Bank advances and long-term debt are classified within Level 2 of the fair value hierarchy.
119
The estimated fair values of selected financial instruments are as follows:
(In thousands)
Financial Assets
Level 2 inputs:
At December 31, 2014
At December 31, 2013
Carrying
Amount
Fair Value
Carrying
Amount
Fair Value
Held-to-maturity investment securities
Loans held for sale
$ 3,872,955
67,952
$ 3,948,706
68,705
$ 3,358,721
20,802
$ 3,370,912
20,903
Level 3 inputs:
Loans and leases
Mortgage servicing assets (1)
Alternative investments
Financial Liabilities
Level 2 inputs:
13,740,761
19,379
16,524
13,775,850
28,690
18,046
12,547,203
20,983
16,582
12,515,714
29,150
17,047
Deposit liabilities, other than time deposits
Time deposits
Securities sold under agreements to repurchase and other
borrowings
Federal Home Loan Bank advances (2)
Long-term debt (3)
$ 13,380,018
2,271,587
$ 13,380,018
2,288,760
$ 12,627,276
2,227,144
$ 12,627,276
2,250,141
1,250,756
2,859,431
226,237
1,271,596
2,872,515
227,751
1,331,662
2,052,421
228,365
1,365,427
2,063,312
221,613
(1) The carrying amount of mortgage servicing assets is net of $23 thousand and $156 thousand reserves at December 31, 2014 and
December 31, 2013, respectively. The estimated fair value does not include such adjustments.
(2) The carrying amount of FHLB advances is net of $37 thousand and $61 thousand in hedge accounting adjustments and discounts at
December 31, 2014 and December 31, 2013, respectively. The estimated fair value does not include such adjustments.
(3) The carrying amount of long-term debt is net of $1.1 million in discount at December 31, 2014 and $1.0 million in discount and hedge
accounting adjustments, net at December 31, 2013. The estimated fair value does not include such adjustments.
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial
instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the entire
holdings or any part of a particular financial instrument. Because no active market exists for a significant portion of Webster’s
financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments, and other factors. These factors are subjective in nature and involve
uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions
could significantly affect the estimates.
120
NOTE 18: Pension and Other Postretirement Benefits
Webster Bank offered a defined benefit noncontributory pension plan through December 31, 2007 for eligible employees who
met certain minimum service and age requirements. Pension plan benefits were based upon employee earnings during the period
of credited service. A supplemental defined benefit retirement plan was also offered to certain employees who were at the Executive
Vice President level or above through December 31, 2007. The supplemental defined benefit retirement plan provides eligible
participants with additional pension benefits. Webster also provides postretirement healthcare benefits to certain retired employees
(“Other Benefits”).
The Webster Bank Pension Plan and the supplemental defined benefit retirement plan were frozen as of December 31, 2007.
Employees hired on or after January 1, 2007 receive no qualified or supplemental retirement income under the plans. All other
employees accrue no additional qualified supplemental retirement income after January 1, 2008, and the amount of their qualified
and supplemental retirement income will not exceed the amount of benefits determined as of December 31, 2007. There were
$143 thousand and $114 thousand in Company contributions to the supplemental defined benefit retirement plan for the years
ended December 31, 2014 and 2013, respectively.
Effective December 31, 2014, the mortality assumptions used in the pension liability assessment was updated to the RP-2014 table
with the Mercer MMP-2007 mortality improvement projection scale applied generationally.
December 31st is the measurement date used for the pension, supplemental pension, and postretirement benefit plans. The following
table sets forth changes in benefit obligation, changes in plan assets, and the funded status of the pension plans and other
postretirement benefit plans at December 31:
(In thousands)
Change in benefit obligation:
Webster Pension
Webster SERP
Other Benefits
2014
2013
2014
2013
2014
2013
Benefit obligation at beginning of year
$ 171,189
$ 187,145
$
8,675 $
8,660
$
3,821 $
4,229
Service cost
Interest cost
Actuarial loss (gain)
Benefits paid and administrative expenses
Benefit obligation at end of year
Change in plan assets:
Fair value of plan assets at beginning of year
Actual return on plan assets
Employer contributions
Benefits paid and administrative expenses
Fair value of plan assets at end of year
Funded status of the plan at year end accrued
liability recognized
40
8,068
38,472
(7,221)
210,548
40
7,365
(17,909)
(5,452)
171,189
162,182
151,191
18,015
16,443
—
(7,221)
172,976
—
(5,452)
162,182
—
364
1,145
(143)
10,041
—
—
143
(143)
—
—
289
(160)
(114)
8,675
—
—
114
(114)
—
—
139
470
(297)
4,133
—
—
297
(297)
—
—
109
(239)
(278)
3,821
—
—
278
(278)
—
$ (37,572) $ (9,007)
$ (10,041) $
(8,675) $
(4,133) $
(3,821)
The accumulated benefit obligation for the pension plans and the postretirement benefit plan was $224.7 million and $183.7 million
at the years ended December 31, 2014 and 2013, respectively.
The funded status of the pension and other postretirement benefit plans has been recognized as follows in the accompanying
Consolidated Balance Sheets at December 31, 2014 and 2013. An asset is recognized for an overfunded plan, and a liability is
recognized for an underfunded plan.
(In thousands)
Accrued expenses and other liabilities
Funded status of the plan
Webster
Pension
2014
Webster
SERP
Other
Benefits
Webster
Pension
2013
Webster
SERP
Other
Benefits
$ (37,572) $ (10,041) $
$ (37,572) $ (10,041) $
(4,133) $
(4,133) $
(9,007) $
(9,007) $
(8,675) $
(8,675) $
(3,821)
(3,821)
121
Webster expects that $6.1 million in net actuarial loss and $73 thousand in prior service cost will be recognized as components of
net periodic benefit cost in 2015. The components of accumulated other comprehensive loss related to pensions and other
postretirement benefits at December 31, 2014 and 2013 are summarized below:
(In thousands)
Net actuarial loss
Prior service cost
Total pre-tax amounts included in accumulated
other comprehensive loss
Deferred tax benefit
Amounts included in accumulated other
comprehensive loss, net of tax
Webster
Pension
2014
Webster
SERP
Other
Benefits
Webster
Pension
2013
Webster
SERP
Other
Benefits
$
70,437 $
2,430 $
816
$
41,267 $
1,419 $
—
—
$
70,437 $
2,430 $
25,415
877
87
903
326
—
—
$
41,267 $
1,419 $
14,779
508
$
45,022 $
1,553 $
577
$
26,488 $
911 $
351
159
510
183
327
Expected future benefit payments for the pension plans and other postretirement benefit plans are presented below:
(In thousands)
2015
2016
2017
2018
2019
2020-2024
$
Webster
Pension
7,327
7,088
8,040
8,329
8,681
49,390
$
Webster
SERP
4,208
993
828
888
1,764
714
$
Other
Benefits
390
388
383
372
357
1,516
The components of the net periodic benefit cost (benefit) for the Company’s defined benefit pension plans were as follows:
(In thousands)
Service cost
Interest cost on benefit obligations
Expected return on plan assets
Amortization of prior service cost
Years ended December 31,
Webster Pension
Webster SERP
Other Benefits
2014
2013
2012
2014
2013
2012
2014
2013
2012
$
40 $
40 $
30
$ — $ — $ — $ — $ — $ —
8,068
7,307
7,365
(11,495) (11,114) (10,069)
—
—
—
364
—
—
135
289
—
—
125
316
139
109
—
—
71
—
73
5
—
73
—
177
—
73
107
357
Recognized net loss
2,781
6,355
6,103
Net periodic benefit cost (benefit) $
(606) $ 2,646 $ 3,371
$
499 $
414 $
387
$
217 $
182 $
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.
Amounts related to the Company’s defined benefit pension plans recognized as a component of other comprehensive income were
as follows:
(In thousands)
Changes in Funded Status Recognized in Other
Comprehensive Income:
Webster Pension
Webster SERP
Other Benefits
2014
2013
2012
2014
2013
2012
2014
2013
2012
Net loss (gain)
$ 31,951 $(23,238) $ 6,416
$ 1,145 $
(160) $
353
$
470 $
(239) $
(698)
Amounts reclassified from accumulated other
comprehensive income
(2,781)
(6,355)
(6,103)
(134)
(125)
(71)
(5)
—
(107)
Amortization of prior service cost
—
—
—
—
—
—
(73)
(73)
(73)
Total loss (gain) recognized in other comprehensive
income (loss)
$ 29,170 $(29,593) $
313
$ 1,011 $
(285) $
282
$
392 $
(312) $
(878)
122
Fair Value Measurements: The following is a description of the valuation methodologies used for the pension plan assets measured
at fair value, including the general classification of such instruments pursuant to the valuation hierarchy:
Registered investment companies: Exchange traded funds are quoted at market prices in an exchange and active market, which
represent the net asset values of shares held by the plan at year end. Money market funds are shown at cost, which approximates
fair value. The exchange traded fund is benchmarked against the S&P 500 Index.
Common collective trusts: The net asset value (NAV), as provided by the trustee, is used as a practical expedient to estimate fair
value. The NAV is based on the fair value of the underlying investments held by the fund less its liabilities. This practical expedient
is not used when it is determined to be probable that the fund will sell the investment for an amount different than the reported
NAV. Plan transactions (purchases and sales) may occur daily. Were the Plan to initiate a full redemption of the collective trust,
the investment adviser reserves the right to temporarily delay withdrawal from the trust in order to ensure that securities liquidations
will be carried out in an orderly business manner. The common collective trust funds performance are benchmarked against the
Standard and Poor’s 500 Stock Index, the S&P 400 Mid Cap Index, the Russell 2000 Index, the MSCI ACWI ex U.S. Index, and
the Barclays Capital U.S. Long Credit Index.
Investment contract with insurance company: These investments are valued at fair value by discounting the related cash flows
based on current yields of similar instruments with comparable durations considering the credit-worthiness of the issuer. Holdings
of insurance company investment contracts are classified as Level 3 investments.
A summary of fair values of the pension plan assets measured at fair value, including the classification of such instruments pursuant
to the valuation hierarchy follows:
December 31, 2014
December 31, 2013
Quoted Prices
In Active
Markets for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Quoted Prices
In Active
Markets for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
(In thousands)
Total
Fair value of financial
assets of the Plan:
Registered investment
companies:
Exchange traded funds
$
28,287 $
28,287 $
Cash and cash equivalents
871
871
— $
29,831 $
29,831 $
269
269
— $
—
Common collective funds
Fixed Income funds
Equity Funds
Insurance company
investment contract
Total
94,928
47,813
1,077
—
—
—
— $
—
94,928
47,813
—
—
—
79,800
51,086
—
1,077
1,196
—
—
—
79,800
51,086
—
—
—
—
—
1,196
1,196
$
172,976 $
29,158 $
142,741 $
1,077
$
162,182 $
30,100 $
130,886 $
The following table sets forth a summary of changes in the fair value of the plan’s Level 3 assets for the years ended December 31,
2014 and 2013:
(In thousands)
Level 3—pension assets, beginning of period
Unrealized gains relating to instruments still held at the reporting date
Benefit payments, administrative expenses, and interest income, net
Balance, end of year
2014
$ 1,196
(2)
(117)
$ 1,077
2013
$ 1,336
(39)
(101)
$ 1,196
The allocation of the fair value of the pension plan’s assets at the December 31 measurement date is shown in the following table:
Assets Category:
Fixed income investments
Equity investments
Total
123
2014
2013
56%
44
100%
50%
50
100%
The Retirement Plan Committee (the “Committee”) is a fiduciary under ERISA and is charged with the responsibility for directing
and monitoring the investment management of the pension plan. To assist the Committee in this function, it engages the services
of investment managers and advisors who possess the necessary expertise to manage the pension plan assets within the established
investment policy guidelines and objectives. The statement of investment policy guidelines and objectives is reviewed no less
often than annually by the Committee.
The investment policy guidelines in effect as of December 31, 2014 set the following asset allocation targets:
Assets Category:
Fixed income investments
Equity investments
Total
Target
55%
45
100%
The primary objective of the pension plan investment strategy is to provide long-term total return through capital appreciation
and dividend and interest income. The Plan invests in registered investment companies and bank collective trusts. The performance
benchmarks for the plan include a composite of the Standard and Poor’s 500 Stock Index, the S&P 400 Mid Cap Index, the Russell
2000 Index, the MSCI ACWI ex U.S. Index, and the Barclays Capital U.S. Long Credit Index. The volatility, as measured by
standard deviation, of the pension plan’s assets should not exceed that of the Composite Index. The investment policy guidelines
allow the plan assets to be invested in certain types of cash equivalents, fixed income securities, equity securities, mutual funds,
and collective trusts. Investments in mutual funds and collective trust funds are substantially limited to funds with the securities
characteristic of their assigned benchmarks.
The basis for Webster’s 2014 assumption for the expected long-term rate of return on assets is as follows:
Asset Category:
Fixed income investments
U.S. equity investments
International equity investments
Portfolio
Return
55%
32
13
5.4%
8.9
9.3
The investment strategy for the pension plan assets is to maintain a diversified portfolio designed to achieve our target rate of an
average long-term rate of 7.25%. While we believe we can achieve a long-term average rate of return of 7.25%, we cannot be
certain that portfolio will perform to our expectations. Actual asset allocations are monitored monthly, and rebalancing actions
are executed at least quarterly, if needed.
Weighted-average assumptions used to determine benefit obligations at December 31 are as follows:
Discount rate
Rate of compensation increase
Webster Pension
Webster SERP
Other Benefits
2014
2013
2014
2013
2014
2013
3.85%
n/a
4.80%
n/a
3.50%
n/a
4.25%
n/a
3.15%
n/a
3.75%
n/a
Weighted-average assumptions used to determine net periodic benefit cost for the years ended December 31 are as follows:
Webster Pension
Webster SERP
Other Benefits
Discount rate
Expected long-term return on assets
Rate of compensation increase
Assumed healthcare cost trend
2013
2012
2014
4.80% 3.90% 4.35%
7.25% 7.50% 7.50%
n/a
n/a
n/a
n/a
n/a
n/a
2013
2012
2014
4.25% 3.40% 4.00%
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
2012
2013
2014
3.75% 2.85% 3.60%
n/a
n/a
n/a
n/a
8.0%
8.0%
n/a
n/a
8.0%
The assumed healthcare cost-trend rate is 8.0% for 2014 and 2015, declining 1.0% each year after until 2018 when the rate will
be 5.0%. An increase of 1.0% in the assumed healthcare cost trend rate for 2014 would have increased the net periodic postretirement
benefit cost by $6.8 thousand and increased the accumulated benefit obligation by $239.2 thousand. A decrease of 1.0% in the
assumed healthcare cost trend rate for 2014 would have decreased the net periodic postretirement benefit cost by $6 thousand and
decreased the accumulated benefit obligation by $214 thousand.
124
Multiple-employer plan
Webster Bank is a sponsor of a multiple-employer pension plan administered by Pentegra (the “Fund”) for the benefit of former
employees of a bank acquired by Webster. The Fund does not segregate the assets or liabilities of its participating employers in
the ongoing administration of this plan. According to the Fund’s administrators, as of July 1, 2014, the date of the latest actuarial
valuation, Webster’s portion of the plan was over-funded by $0.3 million.
The following table sets forth contributions and funding status of the Fund:
(In thousands)
EIN/Pension Plan Number
13-5645888/333
Contributions by Webster Bank
period ended December 31,
2014
$765
2013
$870
2012
$1,230
Funded Status of Plan
2014
2013
At least 80 percent
At least 80 percent
Multi-employer accounting is applied to the Fund. As a multiple-employer plan, there are no collective bargained contracts affecting
the Fund's contribution or benefit provisions. All shortfall amortization bases are being amortized over seven years, as required
by the Pension Protection Act. All benefit accruals were frozen as of September 1, 2004. The Company's contributions to the Fund
did not exceed more than 5 percent of total Fund contributions for the years ended December 31, 2014, 2013, and 2012.
Webster Bank Retirement Savings Plan
Webster provides an employee retirement savings plan governed by section 401(k) of the Internal Revenue Code (the "Code”).
For the period March 1, 2009 through February 1, 2012, Webster matched 100% of a participant’s pre-tax contributions to the
extent the pre-tax contributions did not exceed 5% of compensation. If a participant fails to make a pre-tax contribution election
within 90 days of his or her date of hire, automatic pre-tax contributions will commence 90 days after his or her date of hire at a
rate equal to 3% of compensation. The 2% non-elective contribution has been eliminated; however, Webster continues to contribute
the special transition credits.
Effective February 1, 2012, Webster matches 100% of the first 2% and 50% of the next 6% of employees’ pre-tax contributions
based on annual compensation. Webster continues to contribute the special transition credits under the employee retirement savings
plan.
Compensation and benefit expense included $10.6 million, $11.2 million, and $11.4 million for the years ended December 31,
2014, 2013, and 2012, respectively, for employer contributions.
Webster Financial Corporation Employee Stock Purchase Plan
The Webster Financial Corporation Employee Stock Purchase Plan ("ESPP") is a shareholder approved plan governed by section
423 of the Code under which eligible employees may elect to purchase the Company's common stock through payroll deductions,
of between 1% and 10%, up to a maximum $25,000 during any calendar year. Effective April 1, 2013, participants are able to
purchase shares at a price equal to 95% of the fair market value of the stock as of the end of each three-month offering period.
125
NOTE 19: Stock-Based Compensation Plans
Webster maintains stock-based compensation plans (collectively, the "Plans") under which non-qualified stock options, incentive
stock options, restricted stock, restricted stock units, or stock appreciation rights may be granted to employees and directors. The
Company believes these share awards better align the interests of its employees with those of its shareholders. Stock-based
compensation cost is recognized over the required service vesting period for the awards, based on the grant-date fair value, net of
estimated forfeitures, and is included as a component of compensation and benefits reflected in non-interest expense. The Plans
have shareholder approval for up to 10.9 million shares of common stock. At December 31, 2014, there were 2.0 million common
shares remaining available for grant, while no stock appreciation rights have been granted.
The following table provides a summary of stock-based compensation expense, and the related income tax benefit, recognized in
the accompanying Consolidated Statements of Income:
(In thousands)
Stock options
Restricted stock
Stock-based compensation
Income tax benefit
$
$
$
Years ended December 31,
2013
3,902
6,762
10,664
$
$
$
$
2014
1,175
9,048
10,223
2012
2,405
6,550
8,955
3,553
$
5,344
$
2,841
The following table provides a summary of unrecognized stock-based compensation expense:
(Dollars in thousands)
Stock options
Restricted stock
At December 31, 2014
Unrecognized
Compensation
Expense
$
$
422
9,406
Weighted-
Average Period
To Be Recognized
1.1 years
1.9 years
The following table provides a summary of the activity under the Plans for the year ended December 31, 2014:
Restricted Stock Awards Outstanding
Time-Based
Performance-Based
Stock Options
Outstanding
Number
of
Shares
Weighted-
Average
Grant Date
Fair Value
Number
of
Units
Weighted-
Average
Grant Date
Fair Value
Number
of
Shares
Weighted-
Average
Grant Date
Fair Value
Number
of
Shares
Weighted-
Average
Exercise
Price
Outstanding, at January 1, 2014
267,119 $
22.96
1,705 $
22.75
138,450 $
24.43
2,325,797 $
26.97
Granted
218,894
29.68
13,678
29.34
146,248
29.94
—
—
Exercised options
Vested restricted stock awards (1)
Forfeited
—
(219,224)
(23,774)
—
24.87
25.35
—
—
—
(13,104)
28.48
(137,597)
—
—
(16,908)
—
26.09
26.47
(132,862)
16.72
—
(292,791)
Outstanding, at December 31, 2014
243,015 $
27.03
2,279 $
29.34
130,193 $
28.61
1,900,144 $
Options exercisable, at December 31, 2014
Options expected to vest, at December 31, 2014
(1) Vested for purposes of recording compensation expense.
1,591,862 $
299,172 $
—
44.72
24.95
25.28
23.24
Time-based restricted stock awards 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. Compensation
expense is recorded over the vesting period based on fair value, which is measured using the Company's common stock closing
price at the date of grant. During 2012, certain time-based restricted shares were converted into time-based restricted units, and
there was no additional compensation expense recognized as a result of the modification.
Performance-based restricted stock awards vest after a three year performance period, with share quantity dependent on that
performance. Awards granted in 2014 vest in a range from zero to150% while previous awards vest in a range from zero to 200%
of the target number of shares under the grant. The performance-based shares granted in 2014 vest, based 50% upon Webster's
ranking for total shareholder return versus Webster's compensation peer group companies and 50% upon Webster's average of
return on equity for each year during the three year vesting period. The compensation peer group companies are utilized because
126
they represent the mix of size and type of financial institutions that best compare with Webster. The Company 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 compensation peer group, and based on a fair value of the market price on the date of grant for the remaining 50% of the
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 total fair value of restricted stock awards vested during the years ended December 31, 2014, 2013, and 2012 was $6.7 million,
$2.0 million, and $9.1 million, respectively.
Stock option awards have an exercise price equal to the market price of Webster's stock on 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:
Expected term
Expected dividend yield
Expected forfeiture rate
Expected volatility
Risk-free interest rate
Fair value of option at grant date
(1) There were no stock options granted in 2014.
2014 (1)
—
—
—
—
—
—
2013
6.9 years
1.80%
10.00%
58.97%
1.36%
10.96
$
2012
6.6 years
1.00%
9.00%
61.03%
1.30%
11.71
$
These assumptions can be highly subjective and, therefore, Webster uses historical data within the valuation model. The expected
term of options granted is derived from actual option exercise and employee termination tendencies. The expected dividend yield
is based on the current annual dividend on a current stock price. The expected forfeiture rate is calculated based on actual forfeiture
activity trends. The expected volatility is derived from historical returns of the daily closing stock price over periods of time equal
to the duration of the expected term of options granted. The risk-free interest rate is based on the U.S. Treasury yield curve in
effect at the date of grant for periods that coincide with the contractual life of the option. The weighted-average remaining contractual
term for options expected to vest at December 31, 2014 was 7.8 years.
Aggregate intrinsic value represents the total pretax intrinsic value (the difference between Webster's closing stock price on the
last trading day of the year and the weighted-average exercise price, multiplied by the number of shares) that would have been
received by the option holders had all option holders exercised their options at that time. At December 31, 2014, the aggregate
intrinsic value of options outstanding, options exercisable, and options expected to vest was $19.6 million, $16.7 million, and $2.8
million, respectively. The total intrinsic value of options exercised during the years ended December 31, 2014, 2013, and 2012
was $1.9 million, $1.8 million, and $771.1 thousand, respectively.
There were 1,726,226 non-qualified stock options and 173,918 incentive stock options outstanding at December 31, 2014.
The following table summarizes information about options outstanding and options exercisable at December 31, 2014:
Range of Exercise Prices
$ 5.14 - 20.00
$ 20.01 - 30.00
$ 30.01 - 40.00
$ 40.01 - 48.88
Options Outstanding
Options Exercisable
Weighted-
Average
Remaining
Contractual
Life (years)
4.1
6.9
2.8
1.5
4.5
Weighted-
Average
Exercise
Price
$
$
10.40
23.48
32.18
47.16
24.95
Number of
Shares
582,053
731,145
232,939
354,007
1,900,144
Weighted-
Average
Remaining
Contractual
Life (years)
Weighted-
Average
Exercise
Price
4.1
6.3
2.8
1.5
3.9
$
$
10.40
23.67
32.18
47.16
25.28
Number of
Shares
582,053
422,863
232,939
354,007
1,591,862
127
NOTE 20: Segment Reporting
Webster’s operations are divided into three reportable 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.
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.” This process is
executed by the Company’s Financial Planning and Analysis division and 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,
is shown as part of the Corporate and Reconciling category. For the years ended December 31, 2014, 2013, and 2012, 103.8%,
115.4%, and 83.7%, respectively, of the provision for loan and lease losses is specifically attributable to business segments and
reported accordingly.
Webster allocates a majority of non-interest expense to each business segment using a full-absorption costing process. Costs,
including corporate overhead, are analyzed, pooled by process, and assigned to the appropriate business segment. Income tax
expense is allocated to each business segment based on the effective income tax rate for the period shown.
The following tables present the results for Webster’s business segments 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:
Year ended December 31, 2014
(In thousands)
Net interest income (loss)
Commercial
Banking
Community
Banking
Other
Segment
Totals
Corporate and
Reconciling
Consolidated
Total
$
238,186
$
354,781
$
47,699
$
640,666
$
(12,225)
$
628,441
Provision (benefit) for loan and lease losses
12,629
25,960
81
38,670
(1,420)
37,250
Net interest income (loss) after provision for loan and lease
losses
Non-interest income
Non-interest expense
Income (loss) before income tax expense
Income tax expense (benefit)
Net income (loss)
225,557
37,270
102,374
160,453
50,373
328,821
103,543
324,312
108,052
33,922
47,618
38,396
59,591
26,423
8,295
601,996
179,209
486,277
294,928
92,590
(10,805)
591,191
22,899
15,861
(3,767)
(1,181)
202,108
502,138
291,161
91,409
$
110,080
$
74,130
$
18,128
$
202,338
$
(2,586)
$
199,752
128
Year ended December 31, 2013
(In thousands)
Net interest income (loss)
Commercial
Banking
Community
Banking
Other
Segment
Totals
Corporate and
Reconciling
Consolidated
Total
$
217,582
$
347,395
$
40,992
$
605,969
$
(9,241)
$
596,728
Provision (benefit) for loan and lease losses
18,581
19,973
93
38,647
(5,147)
33,500
Net interest income (loss) after provision for loan and lease
losses
Non-interest income
Non-interest expense
Income (loss) before income tax expense
Income tax expense (benefit)
Net income (loss)
199,001
30,797
99,801
129,997
38,900
327,422
116,182
337,795
105,809
31,662
40,899
32,926
49,745
24,080
7,205
567,322
179,905
487,341
259,886
77,767
(4,094)
563,228
11,145
10,718
(3,667)
(1,097)
191,050
498,059
256,219
76,670
$
91,097
$
74,147
$
16,875
$
182,119
$
(2,570)
$
179,549
(In thousands)
Net interest income
Year ended December 31, 2012
Commercial
Banking
Community
Banking
Other
Segment
Totals
Corporate and
Reconciling
Consolidated
Total
$
188,666
$
342,268
$
33,308
$
564,242
$
14,666
$
578,908
Provision (benefit) for loan and lease losses
(7,498)
26,167
(680)
Net interest income after provision for loan and lease losses
196,164
Non-interest income
Non-interest expense
Income before income tax expense
Income tax expense
Net income
(In thousands)
At December 31, 2014
At December 31, 2013
At December 31, 2012
29,324
98,718
126,770
38,111
316,101
116,978
340,907
92,172
27,710
33,988
28,680
44,649
18,019
5,417
17,989
546,253
174,982
484,274
236,961
71,238
3,511
11,155
17,776
17,530
11,401
3,427
21,500
557,408
192,758
501,804
248,362
74,665
$
88,659
$
64,462
$
12,602
$
165,723
$
7,974
$
173,697
Total Assets
Commercial
Banking
Community
Banking
Other
Segment
Totals
Corporate and
Reconciling
Consolidated
Total
$ 6,550,868
$8,198,115
$ 425,573
$ 15,174,556
$
7,358,454
$ 22,533,010
5,682,129
7,809,343
365,863
13,857,335
6,995,664
20,852,999
5,113,898
7,708,159
282,414
13,104,471
7,042,294
20,146,765
129
NOTE 21: Commitments and Contingencies
Lease Commitments. At December 31, 2014, Webster was obligated under various non-cancelable operating leases for properties
used as banking 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 the leases expire. Rental expense under leases was $20.5
million, $20.3 million, and $20.0 million for the years ended December 31, 2014, 2013, and 2012, respectively, and is recorded
as a component of occupancy expense in the accompanying Consolidated Statements of Income. Rental income from sub-leases
on certain of these properties is also recorded as a component of occupancy expense, 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
Consolidated Statements of Income. Rental income was $0.8 million, $0.9 million, and $1.0 million for the years ended December
31, 2014, 2013, and 2012, respectively.
The following is a schedule of future minimum rental payments and receipts required under these leases as of December 31, 2014:
(In thousands)
For years ending December 31,
2015
2016
2017
2018
2019
Thereafter
Total
Rental
Payments
Rental
Receipts
$
21,347 $
20,370
17,938
14,970
13,055
64,758
759
692
446
258
159
442
$ 152,438 $
2,756
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 amounts of these commitments as it is for on-balance sheet instruments.
The following table summarizes outstanding contract amounts for off-balance sheet instruments that represent credit risk:
(In thousands)
Unused commitments to extend credit
Standby letters of credit
Commercial letters of credit
Total financial instruments with off-balance sheet risk
At December 31,
2014
4,376,733
142,964
27,787
4,547,484
$
$
2013
4,127,089
135,761
13,621
4,276,471
$
$
Unused commitments to extend credit. The Company makes commitments under various terms to lend funds to customers. These
commitments include revolving credit arrangements, term loan commitments, and short-term borrowing agreements. Many of
these loans have fixed expiration dates or other termination clauses where a fee may be required. Since commitments are expected
to expire without being funded, the total commitment amounts do not necessarily represent future liquidity requirements.
Standby letters of credit. Standby letters of credit 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
amounts of standby letters of credit represent 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.
130
The reserve for unfunded credit commitments is reported as a component of accrued expenses and other liabilities in the
accompanying Consolidated Balance Sheets. The following table provides activity details for the Company’s reserve for unfunded
credit commitments:
(In thousands)
Balance, beginning of period
Provision (benefit)
Balance, end of period
At or for the twelve months ended December 31,
2014
4,384
767
5,151
$
$
2013
5,662
(1,278)
4,384
$
$
2012
5,449
213
5,662
$
$
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 December 31, 2014 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.
131
NOTE 22: Parent Company Information
Financial information for the Parent Company only is presented in the following tables:
Condensed Balance Sheets
(In thousands)
Assets:
Cash and due from banks
Interest-bearing deposits
Securities available for sale, at fair value
Investment in subsidiaries
Due (to) from subsidiaries
Alternative investments
Other assets
Total assets
Liabilities and shareholders’ equity:
Senior notes
Junior subordinated debt
Accrued interest payable
Other liabilities
Total liabilities
Shareholders’ equity
Total liabilities and shareholders’ equity
Condensed Statements of Income
(In thousands)
Operating Income:
Dividend income from bank subsidiary
Interest on securities and interest-bearing deposits
Net gain on sale of investment securities
Alternative investments income (loss)
Other non-interest income
Total operating income
Operating Expense:
Interest expense on borrowings
Compensation and benefits
Other non-interest expense
Total operating expense
Income before income tax benefit and equity in undistributed earnings of subsidiaries
and associated companies
Income tax benefit
Equity in undistributed earnings of subsidiaries and associated companies
Net income
132
December 31,
2014
2013
$
11,357 $
261,135
5,902
2,249,776
(165)
10,046
14,356
12,452
261,121
3,584
2,142,222
37
11,016
11,859
$ 2,552,407 $ 2,442,291
$
148,917 $
77,320
2,582
907
229,726
2,322,681
151,045
77,320
1,732
3,006
233,103
2,209,188
$ 2,552,407 $ 2,442,291
Years ended December 31,
2014
2013
2012
$ 100,000 $
613
1,185
804
151
102,753
10,041
10,290
4,562
24,893
90,000 $ 140,000
634
409
(720)
157
140,480
1,025
1,273
(392)
152
92,058
7,273
10,787
5,966
24,026
13,186
10,245
5,746
29,177
77,860
8,798
113,094
111,303
10,107
52,287
$ 199,752 $ 179,549 $ 173,697
68,032
9,742
101,775
Condensed Statements of Comprehensive Income
(In thousands)
Net income
Other comprehensive income, net of taxes:
Net unrealized losses (gains) on available for sale securities
Net unrealized (gains) losses on derivative instruments
Other comprehensive (loss) income of subsidiaries and associated companies
Other comprehensive (loss) income
Comprehensive income
Condensed Statements of Cash Flows
(In thousands)
Operating activities:
Net income
Adjustments to reconcile income from continuing operations to net cash provided by
operating activities:
Equity in undistributed earnings of subsidiaries and associated companies
Stock-based compensation
Other, net
Net cash provided by operating activities
Investing activities:
Increase in interest-bearing deposits
Purchases of available for sale securities
Proceeds from maturities and principal payments of available for sale securities
Proceeds from sale of available for sale securities
Net cash used for investing activities
Financing activities:
Issuance of long-term debt
Repayment of long-term debt
Preferred stock issued
Cash dividends paid to common shareholders
Cash dividends paid to preferred shareholders
Exercise of stock options
Excess tax benefits from stock-based compensation
Common stock issued
Common stock repurchased
Common stock warrants repurchased
Net cash used for financing activities
(Decrease) increase in cash and due from banks
Cash and due from banks at beginning of year
Cash and due from banks at end of year
133
Years ended December 31,
2014
2013
$ 199,752 $ 179,549 $ 173,697
2012
725
(2,932)
(5,505)
(7,712)
(525)
(632)
29,095
27,938
$ 192,040 $ 163,266 $ 201,635
(616)
1,152
(16,819)
(16,283)
Years ended December 31,
2014
2013
2012
$ 199,752 $ 179,549 $ 173,697
(113,094)
10,223
(10,721)
86,160
(101,775)
10,664
(1,934)
86,504
(14)
(3,500)
—
3,499
(15)
(41,011)
(75)
—
13,544
(27,542)
(52,287)
8,955
(7,422)
122,943
(24,081)
(8,272)
775
1,073
(30,505)
150,000
(150,000)
—
(67,431)
(10,556)
2,221
1,161
435
(13,067)
(3)
(87,240)
(1,095)
12,452
11,357 $
$
—
—
— (136,070)
— 122,710
(30,667)
(2,460)
996
812
560
(53,243)
(388)
(97,750)
(5,312)
15,403
10,091
(48,952)
(10,803)
2,736
389
731
(672)
(30)
(56,601)
2,361
10,091
12,452 $
NOTE 23: Selected Quarterly Consolidated Financial Information (Unaudited)
(In thousands, except per share data)
Interest income
Interest expense
Net interest income
Provision for loan and lease losses
Net gain on sale of investment securities
Impairment loss recognized in earnings
Other non-interest income
Non-interest expense
Income before income tax expense
Income tax expense
Net income
Preferred stock dividends
Net income available to common shareholders
Net income per common share:
Basic
Diluted
(In thousands, except per share data)
Interest income
Interest expense
Net interest income
Provision for loan and lease losses
Net gain on sale of investment securities
Impairment loss recognized in earnings
Other non-interest income
Non-interest expense
Income before income tax expense
Income tax expense
Net income
Preferred stock dividends
Net income available to common shareholders
Net income per common share:
Basic
Diluted
NOTE 24: Subsequent Event
First Quarter
177,779
$
22,478
155,301
9,000
4,336
(88)
45,580
124,617
71,512
21,089
50,423
(2,639)
47,784
$
2014
Second Quarter
177,497
$
22,375
155,122
9,250
—
(73)
47,669
122,585
70,883
23,027
47,856
(2,639)
45,217
$
Third Quarter
179,914
$
22,544
157,370
9,500
42
(85)
50,952
124,642
74,137
23,679
50,458
(2,639)
47,819
$
Fourth Quarter
183,751
$
23,103
160,648
9,500
1,121
(899)
53,553
130,294
74,629
23,614
51,015
(2,639)
48,376
$
$
$
0.53
0.53
$
0.50
0.50
$
0.53
0.53
0.54
0.53
2013
First Quarter
170,083
$
24,287
145,796
7,500
106
—
48,172
125,535
61,039
18,922
42,117
(2,886)
39,231
$
Second Quarter
170,093
$
23,032
147,061
8,500
333
—
51,918
123,604
67,208
20,835
46,373
(2,639)
43,734
$
Third Quarter
171,753
$
21,766
149,987
8,500
269
—
45,988
122,281
65,463
18,158
47,305
(2,639)
44,666
$
Fourth Quarter
175,711
$
21,827
153,884
9,000
4
(7,277)
51,537
126,639
62,509
18,755
43,754
(2,639)
41,115
$
$
$
0.46
0.44
$
0.49
0.48
$
0.50
0.49
0.46
0.45
On January 13, 2015, the Company, having previously received regulatory approval, completed its acquisition of the health savings
account business of JPMorgan Chase Bank, N.A., for a cash purchase price of $50.5 million. Webster received approximately
$1.4 billion in deposit liabilities and a corresponding amount of cash. The estimated fair values of identifiable intangible assets
acquired, as well as any goodwill to be recognized, are presently being evaluated and are yet to be determined.
134
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Webster’s management, including the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the
design and operation of Webster’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended) (the “Exchange Act”) as of the end of the period covered by this report. Based
upon that evaluation, management, including the Chief Executive Officer and Chief Financial Officer, concluded that Webster’s
disclosure controls and procedures were effective as of the end of the period covered by this report for recording, processing,
summarizing and reporting the information Webster is required to disclose in the reports it files under the Exchange Act within
the time periods specified in the SEC’s rules and forms.
Internal Control Over Financial Reporting
Webster’s management has issued a report on its assessment of the effectiveness of Webster’s internal control over financial
reporting as of December 31, 2014.
Webster’s independent registered public accounting firm has issued a report on the effectiveness of Webster’s internal control over
financial reporting as of December 31, 2014. The report expresses an unqualified opinion on the effectiveness of the Company’s
internal control over financial reporting as of December 31, 2014.
There were no changes made in Webster’s internal control over financial reporting that occurred during the most recent fiscal
quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial
reporting. The reports of Webster’s management and of Webster’s independent registered public accounting firm follow.
135
MANAGEMENT REPORT ON INTERNAL CONTROL
We, as management of Webster Financial Corporation and its Subsidiaries (“Webster” or the “Company”), are responsible for
establishing and maintaining effective internal control over financial reporting. Pursuant to the rules and regulations of the Securities
and Exchange Commission, internal control over financial reporting is a process designed by, or under the supervision of, the
Company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the
Company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted
accounting principles, and includes those policies and procedures that:
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions
of the assets of the Company;
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the Company are being made
only in accordance with authorizations of management and directors of the Company; and
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the
Company’s assets that could have a material effect on the financial statements.
Management has evaluated the effectiveness of Webster’s internal control over financial reporting as of December 31, 2014 based
on the control criteria established in a report entitled Internal Control – Integrated Framework (2013), issued by the Committee
of Sponsoring Organizations of the Treadway Commission. Based on such evaluation, we have concluded that Webster’s internal
control over financial reporting is effective as of December 31, 2014.
The independent registered public accounting firm of KPMG LLP, as auditor of Webster’s financial statements, has issued an
opinion on Webster’s internal control over financial reporting as of December 31, 2014.
/s/ James C. Smith
James C. Smith
Chairman and Chief Executive Officer
February 27, 2015
/s/ Glenn I. MacInnes
Glenn I. MacInnes
Executive Vice President and Chief Financial Officer
136
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Webster Financial Corporation:
We have audited Webster Financial Corporation’s internal control over financial reporting as of December 31, 2014, based on
criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO). Webster Financial Corporation’s management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in
the accompanying Management Report on Internal Control. Our responsibility is to express an opinion on the Company’s internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control
over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted
accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets
of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Webster Financial Corporation maintained, in all material respects, effective internal control over financial reporting
as of December 31, 2014, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Webster Financial Corporation and subsidiaries as of December 31, 2014 and 2013, and the related
consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for the years then ended, and our
report dated February 27, 2015 expressed an unqualified opinion on those consolidated financial statements.
Hartford, Connecticut
February 27, 2015
137
ITEM 9B. OTHER INFORMATION
The annual meeting of shareholders will be held on Thursday, April 23, 2015 at 4:00 P.M. at the Webster Bank Resource Center,
436 Slater Road, New Britain, Connecticut.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The following table sets forth certain information for Webster’s executive officers, each of whom is appointed to serve for a one-
year period.
Name
James C. Smith
Joseph J. Savage
Glenn I. MacInnes
Daniel H. Bley
John R. Ciulla
Colin D. Eccles
Daniel M. FitzPatrick
Bernard M. Garrigues
Nitin J. Mhatre
Dawn C. Morris
Charles L. Wilkins
Harriet Munrett Wolfe
Gregory S. Madar
Age at
December 31, 2014
65
62
53
46
49
56
56
56
44
47
53
61
52
Positions Held
Chairman, Chief Executive Officer and Director
President and Director of Webster Bank
Executive Vice President and Chief Financial Officer
Executive Vice President and Chief Risk Officer
Executive Vice President, Commercial Banking
Executive Vice President and Chief Information Officer
Executive Vice President, Private Banking
Executive Vice President and Chief Human Resources Officer
Executive Vice President, Community Banking
Executive Vice President and Chief Marketing Officer
Executive Vice President, HSA Bank
Executive Vice President, General Counsel and Secretary
Senior Vice President and Chief Accounting Officer
Information concerning the principal occupation of these executive officers of Webster Financial Corporation and Webster Bank
during at least the last five years is set forth below.
James C. Smith is Chairman and Chief Executive Officer of Webster Financial Corporation and Webster Bank. Mr. Smith joined
Webster Bank in 1975 and was appointed CEO of the bank and the holding company in 1987 and Chairman in 1995. He was
elected President, Chief Operating Officer and a director of Webster Bank in 1982 and of the holding company at its inception in
1986. He served as President of Webster and Webster Bank until 2000, and again from 2008 through 2011. Mr. Smith is past
member of the board of directors of the American Bankers Association and served until recently as co-chairman of the ABA’s
American Bankers Council for midsize banks. He is actively involved in the Midsize Banks Coalition of America. He is a past
member of the board of directors of the Financial Services Roundtable. He served on the board of directors of the Federal Reserve
Bank of Boston and on the board of directors of the Federal Home Loan Bank of Boston. He is a past member of the Federal
Advisory Council, which advises the deliberations of the Federal Reserve Board of Governors. Mr. Smith served on the executive
committee of the Connecticut Bankers Association. He is actively engaged in community service and serves on the board of Saint
Mary’s Health System in Waterbury, Connecticut.
Joseph J. Savage is President of Webster Bank and Webster Financial Corporation. He joined Webster in April 2002 as Executive
Vice President, Commercial Banking and was promoted to President of Webster Bank and elected to the board of directors of
Webster Bank in January of 2014. Prior to this, Mr. Savage was Executive Vice President of the Communications and Energy
Banking Group for CoBank in Denver, Colorado from 1996 to April 2002. Mr. Savage serves as a director of the MetroHartford
Alliance and the Travelers Championship Committee. He serves on the board of the Bushnell and CBA. He was also the chair of
the 2013-14 United Way Campaign for United Way of Central and Northeastern Connecticut.
Glenn I. MacInnes is Executive Vice President and Chief Financial Officer of Webster Bank and Webster Financial Corporation.
He joined Webster in 2011. Prior to that, Mr. MacInnes was Chief Financial Officer at New Alliance Bancshares for two years
and was employed for 11 years at Citigroup in a series of positions, including deputy CFO for Citibank North America and CFO
of Citibank (West) FSB. Mr. MacInnes serves on the Board of Wellmore Behavioral Health, Inc.
138
Daniel H. Bley is Executive Vice President and Chief Risk Officer of Webster Bank and Webster Financial Corporation since
2010. Prior to joining Webster, Mr. Bley worked at ABN Amro and Royal Bank of Scotland from 1990 to 2010, having served as
Managing Director of the Financial Institutions Credit Group and Group Senior Vice President, Head of Financial Institutions and
Trading Credit Risk Management at ABN Amro North America. Mr. Bley currently serves on the Board of Directors of Junior
Achievement of Western Connecticut.
John R. Ciulla is Executive Vice President, Commercial Banking of Webster Bank and Webster Financial Corporation. Mr. Ciulla
joined Webster in 2004 and has served in a variety of management positions at the company, including chief credit risk officer
and senior vice president, commercial banking, where he was responsible for several business units. He was promoted from
executive vice president and head of Middle market banking to lead Commercial Banking in January 2014. Prior to joining Webster,
Mr. Ciulla was managing director of The Bank of New York, where he worked from 1997 to 2004. He practiced law in New York
as an associate with McDermott Will & Emery from 1996 to 1997 and with Hughes Hubbard & Reed from 1994 to 1996. He
serves on the boards of the Connecticut Business & Industry Association and the Stamford Partnership.
Colin D. Eccles is Executive Vice President and Chief Information Officer of Webster Bank and Webster Financial Corporation.
He joined Webster in January of 2013. Prior to this, Mr. Eccles served as CIO for Umpqua Holdings in Portland, Ore. A native of
South Africa, he worked for the First National Bank of South Africa before joining Hogan System in Dallas, Texas. He also worked
for Washington Mutual Bank and was the CIO for the Retail Bank prior to joining Umpqua holdings.
Daniel M. FitzPatrick is Executive Vice President, Private Banking of Webster Financial Corporation and Webster Bank. He
joined Webster in October 2012. Prior to this, Mr. FitzPatrick was Regional Managing Director for the BNY Mellon Wealth
Management business in Fairfield and Westchester counties. Before that, he held the positions of Managing Director, Goldman
Sachs and CEO at The Goldman Sachs Trust Company, N.A.; Managing Director at Citigroup and CEO of its Citi Trust division;
Managing Director of Samoset Capital Group LLC and CEO of Samoset Financial Services LLC; and Managing Director and
head of Fiduciary Management at J.P. Morgan. Prior to that, he practiced law as an attorney at Davis Polk & Wardwell. Mr.
FitzPatrick serves as a Board Member for Greenwich Emergency Medical Services, Inc.
Bernard M. Garrigues is Executive Vice President and Chief Human Resources Officer of Webster Financial Corporation and
Webster Bank. Mr. Garrigues joined Webster in 2014. Prior to that, Mr. Garrigues was with TIMEX Group in Middlebury,
Connecticut, where he was the Chief Human Resources Officer providing comprehensive global HR responsibility for several
thousand employees in 22 countries. Earlier in his career, he worked 21 years for General Electric, where he served in senior HR
leadership roles with a number of GE businesses, including commercial finance, capital real estate, healthcare, and capital IT
solutions in both the United States and Europe. Mr. Garrigues is Six Sigma, Greenbelt certified, a published author, and a seasoned
guest lecturer.
Nitin J. Mhatre is Executive Vice President, Community Banking of Webster Financial Corporation and Webster Bank. He joined
Webster in October 2008 as Executive Vice President, Consumer Lending of Webster Bank and was appointed Executive Vice
President, Consumer Finance in January 2009. He was promoted to his current position in August of 2013. Prior to this, Mr. Mhatre
worked at Citigroup in St. Louis, Missouri and Stamford, Connecticut in various capacities. In his most recent position, he was
the Managing Director for the Home Equity Retail business for CitiMortgage based in Stamford, Connecticut. Prior to that, he
was Director, Cards Cross-Sell and Portfolio Management for CitiMortgage based in St. Louis, Missouri, Marketing Director for
Citibank Guam, Product management head for Mass affluent & Diners Club Cards for Citibank, India based in Chennai, India
and Cards Sales Manager for Citibank India based in Mumbai, India. Mr. Mhatre is a board member of Consumer Bankers
Association headquartered in Washington, D.C. and also serves on the board of Junior Achievement of Southwest New England.
Dawn C. Morris is Executive Vice President, Chief Marketing Officer of Webster Financial Corporation and Webster Bank. She
joined Webster in 2014. Prior to that, Ms. Morris was with Citizens Bank in Dedham, Mass., where she served in a variety of
roles, including head of customer segment management, product and segment marketing, and business banking product
management. Earlier in her career, Ms. Morris worked in a number of business line and marketing roles at RBC Bank in North
Carolina. Ms. Morris serves on the boards of Marketing EDGE and the Girl Scouts of Eastern Massachusetts. She is also co-
chair with Connecticut Governor Dannel Malloy of the Governor’s Prevention Partnership.
Charles L. Wilkins is Executive Vice President, and Head of HSA Bank for Webster Financial Corporation and Webster Bank.
He joined Webster in 2014, bringing more than 25 years of banking and health insurance industry experience. He was most recently
president of his own consulting practice specializing in healthcare and financial services. Prior to that, Mr. Wilkins was general
manager and chief executive officer of OptumHealth Financial Services, a division of UnitedHealth Group in Minnesota. He is
an active volunteer with the United Way, Special Olympics, and Crossroad Career Network.
139
Harriet Munrett Wolfe is Executive Vice President, General Counsel and Corporate Secretary of Webster Financial Corporation
and Webster Bank. She joined Webster in March 1997 as Senior Vice President and Counsel, was appointed Secretary in June
1997, and General Counsel in September 1999. In January 2003, she was appointed Executive Vice President. Prior to this, Ms.
Wolfe was in private practice. From November 1990 to January 1996, she was Vice President and Senior Counsel of Shawmut
Bank Connecticut, N.A., in Hartford, Connecticut. Ms. Wolfe serves as a board member of the University of Connecticut
Foundation, Inc., and as a member of the Foundation’s Executive Committee, Audit Committee, and Chair of the Real Estate
Committee.
Gregory S. Madar is Senior Vice President and Chief Accounting Officer of Webster Financial Corporation and Webster Bank.
He was promoted to this position in February 2011 and previously served as Senior Vice President and Controller of Webster and
Webster Bank since February 2002, and has been employed by Webster since January 3, 1995. Mr. Madar is a Certified Public
Accountant and previously worked for KPMG LLP.
Webster has adopted a Code of Business Conduct and Ethics that applies to all directors, officers and employees, including the
principal executive officers, principal financial officer and principal accounting officer. It has also adopted Corporate Governance
Guidelines (“Guidelines”) and charters for the Audit, Compensation, Nominating and Corporate Governance, Executive and Risk
Committees of the Board of Directors. The Guidelines and the charters of the Audit, Compensation, and Nominating and Corporate
Governance Committees can be found on Webster's website (www.websterbank.com).
You can also obtain a printed copy of any of these documents without charge by contacting Webster at the following address:
Webster Financial Corporation
145 Bank Street
Waterbury, Connecticut 06702
Attn: Investor Relations
Telephone: (203) 578-2202
Additional information required under this item may be found under the sections captioned “Information as to Nominees” and
“Section 16(a) Beneficial Ownership Reporting Compliance” in Webster's Proxy Statement (“the Proxy Statement”), which will
be filed with the Securities and Exchange Commission no later than 120 days after the close of the fiscal year ended December
31, 2014, and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding compensation of executive officers and directors is omitted from this report and may be found in the
Company's 2015 Proxy Statement (Schedule 14A) under the sections captioned “Compensation Discussion and Analysis” and
“Compensation of Directors”, and the information included therein is incorporated herein by reference.
140
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
Stock-Based Compensation Plans
Information regarding stock-based compensation awards outstanding and available for future grants as of December 31, 2014,
represents stock-based compensation plans approved by shareholders and is presented in the table below. There are no plans that
have not been approved by shareholders. Additional information is presented in Note 19 - Stock-Based Compensation Plans in
the Notes to Consolidated Financial Statements included elsewhere within this report.
Plan Category
Plans approved by shareholders
Plans not approved by shareholders
Total
Number of
Shares to be
Issued Upon
Exercise of
Outstanding
Awards
1,900,144
—
1,900,144
Weighted-
Average
Exercise
Price of
Outstanding
Awards
$
$
24.95
—
24.95
Number of
Shares
Available
for Future
Grants
1,957,089
—
1,957,089
Additional information required by this Item is omitted from this report and may be found under the sections captioned “Stock
Owned by Management” and “Principal Holders of Voting Securities of Webster” in the Proxy Statement and the information
included therein is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information regarding certain relationships and related transactions, and director independence is omitted from this report and
may be found under the sections captioned “Certain Relationships”, “Compensation Committee Interlocks and Insider
Participation” and “Corporate Governance” in the Proxy Statement and the information included therein is incorporated herein
by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information regarding principal accounting fees and services is omitted from this report and may be found under the section
captioned “Auditor Fee Information” in the Proxy Statement and the information included therein is incorporated herein by
reference.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
PART IV
(a)
(1)
(2)
(3)
Consolidated Financial Statements of Registrant and its subsidiaries are included within Item 8 of Part II of this report.
Consolidated Financial Statement schedules for which provision is made in the applicable accounting regulations of the
Securities and Exchange Commission have been omitted because they are not applicable or the required information is
included in the Consolidated Financial Statements or Notes thereto included within Item 8.
The exhibits to this Annual Report on Form 10-K are set forth on the Exhibit Index immediately preceding such exhibits
and is incorporated herein by reference.
(b) Exhibits to this Form 10-K are attached or incorporated herein by reference as stated above.
(c) Not applicable.
141
Pursuant to the requirements of Section 13 or 15(d) 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, on February 27, 2015.
SIGNATURES
WEBSTER FINANCIAL CORPORATION
By /s/ James C. Smith
James C. Smith
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities indicated on February 27, 2015.
Signature:
Title:
/s/ James C. Smith
James C. Smith
/s/ Glenn I. MacInnes
Glenn I. MacInnes
/s/ Gregory S. Madar
Gregory S. Madar
/s/ William L. Atwell
William L. Atwell
/s/ Joel S. Becker
Joel S. Becker
/s/ John J. Crawford
John J. Crawford
/s/ Robert A. Finkenzeller
Robert A. Finkenzeller
/s/ Elizabeth E. Flynn
Elizabeth E. Flynn
/s/ C. Michael Jacobi
C. Michael Jacobi
/s/ Laurence C. Morse
Laurence C. Morse
/s/ Karen R. Osar
Karen R. Osar
/s/ Mark Pettie
Mark Pettie
/s/ Charles W. Shivery
Charles W. Shivery
Chairman and Chief Executive Officer
(Principal Executive Officer)
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
Senior Vice President – Chief Accounting Officer
(Principal Accounting Officer)
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
142
WEBSTER FINANCIAL CORPORATION
EXHIBIT INDEX
Exhibit No.
3
Certificate of Incorporation and Bylaws.
Exhibit Description
3.1
3.2
3.3
3.4
3.5
3.6
3.7
4
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
10
10.1
10.2
10.3
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).
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).
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).
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).
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).
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).
Bylaws, as amended effective June 9, 2014 (filed as Exhibit 3.1 to the Company's Current Report on Form 8-K filed
with the SEC on June 12, 2014 and incorporated herein by reference).
Instruments Defining the Rights of Security Holders.
Specimen common stock certificate (filed as Exhibit 4.1 to the Company's Annual Report on Form 10-K for the year
ended December 31, 2005 filed with the SEC on March 10, 2006 and incorporated herein by reference).
Specimen stock certificate for the Company's 8.50% Series A Non-Cumulative Perpetual Convertible Preferred Stock
filed as Exhibit 4.1 to the Company's Current Report on Form 8-K filed with the SEC on June 11, 2008 and incorporated
herein by reference).
Form of specimen stock certificate for the Company's 6.40% Series E Non-Cumulative Perpetual Preferred Stock
(filed as Exhibit 4.3 to the Company's Current Report on Form 8-K filed with the SEC on December 4, 2012 and
incorporated herein by reference).
Junior Subordinated Indenture, dated as of January 29, 1997, between the Company and The Bank of New York, as
trustee, relating to the Company's Junior Subordinated Deferrable Interest Debentures (filed as Exhibit 10.41 to the
Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 and incorporated herein by
reference).
Warrant to purchase shares of Corporation common stock (filed as Exhibit 4.2 to the Company's Current Report on
Form 8-K filed with the SEC on November 24, 2008 and incorporated herein by reference).
Deposit Agreement, dated as of December 4, 2012, by and among the Company, Computershare Shareowner Services
LLC, as Depositary, and the Holders of Depositary Receipts described therein (filed as Exhibit 4.1 to the Company's
Current Report on Form 8-K filed with the SEC on December 4, 2012 and incorporated herein by reference).
Senior Debt Indenture, dated as of February 11, 2014, between the Company and The Bank of New York Mellon, as
trustee (filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the SEC on February 11, 2014,
and incorporated herein by reference).
Supplemental Indenture, dated as of February 11, 2014, between the Company and The Bank of New York Mellon,
as trustee, relating to the Company’s 4.375% Senior Notes due February 15, 2024 (filed as Exhibit 4.2 to the Company’s
Current Report on Form 8-K filed with the SEC on February 11, 2014, and incorporated herein by reference).
Material Contracts
Mechanics Savings Bank 1996 Officer Stock Plan (filed as Exhibit 10.1 of MECH Financial, Inc.'s Annual Report
on Form 10-K for the year ended December 31, 1997 and incorporated herein by reference).
Amendment No. 1 to Mechanics Savings Bank 1996 Officer Stock Option Plan (filed as Exhibit 4.1 (b) of MECH
Financial Inc.'s Registration Statement on Form S-8 as filed with the SEC on April 2, 1998 and incorporated herein
by reference).
Mechanics Savings Bank 1996 Director Stock Option Plan (filed as Exhibit 10.2 of MECH Financial, Inc.'s Annual
Report on Form 10-K filed with the SEC on March 30, 1998 and incorporated herein by reference).
143
Exhibit No.
10.4
Exhibit Description
Amendment No. 1 to Mechanics Savings Bank 1996 Director Stock Option Plan (filed as Exhibit 4.2 (b) of MECH
Financial, Inc.'s Registration Statement on Form S-8 as filed with the SEC on April 2, 1998 and incorporated herein
by reference).
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
Amended and Restated 1992 Stock Option Plan (filed as Exhibit 10.1 to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 2012 as filed with the SEC on May 2, 2012 and incorporated herein by reference).
Amended and Restated Deferred Compensation Plan for Directors and Officers of Webster Bank effective January
1, 2005 (filed as Exhibit 10.2 to the Company's Current Report on Form 8-K filed with the SEC on December 21,
2007 and incorporated herein by reference).
Supplemental Retirement Plan for Employees of Webster Bank, as amended and restated effective January 1, 2005
(filed as Exhibit 10.1 to the Company's Current Report on Form 8-K with the SEC on December 21, 2007 and
incorporated herein by reference).
Qualified Performance-Based Compensation Plan (filed as Exhibit A to the Company's definitive proxy materials
for the Company's 2008 Annual Meeting of Shareholders and incorporated herein by reference).
Employee Stock Purchase Plan (filed as Appendix A to Webster's Definitive Proxy Statement filed with the SEC on
March 23, 2000 and incorporated herein by reference).
Form of Change in Control Agreement, effective as of December 31, 2012, by and between Webster Financial
Corporation and James C. Smith, Glenn I. MacInnes and Joseph J. Savage (filed as Exhibit 10.1 to the Company's
Current Report on Form 8-K filed with the SEC on December 27, 2012 and incorporated herein by reference).
Form of Change in Control Agreement, effective as of February 1, 2013, by and between Webster Financial
Corporation and Daniel H. Bley, Jennifer Buchholz, Michelle M. Crecca, Colin D. Eccles, Daniel M. FitzPatrick,
Nitin J. Mhatre and Harriet Munrett Wolfe (filed as Exhibit 10.13 to the Company's Annual Report on Form 10-K
filed with the SEC on February 28, 2013 and incorporated herein by reference).
Change in Control Agreement, effective as of January 3, 2014, by and between Webster Financial Corporation and
Charles L. Wilkins (filed as Exhibit 10.13 to the Company's Annual Report on Form 10-K for the year ended December
31, 2013 as filed with the SEC on February 28, 2014 and incorporated herein by reference).
Form of Non-Competition Agreement, effective as of December 31, 2012, between Webster Financial Corporation
and each of James C. Smith, Glenn I. MacInnes and Joseph J. Savage (filed as Exhibit 10.2 to the Company's Current
Report on Form 8-K filed with the SEC on December 27, 2012 and incorporated herein by reference).
Letter Agreement, dated as of November 21, 2008, between Webster Financial Corporation and the United States
Department of the Treasury, and the Securities Purchase Agreement - Standard Terms attached thereto (filed as Exhibit
10.1 to the Company's Current Report on Form 8-K filed with SEC on November 24, 2008 and incorporated herein
by reference).
Description of Arrangement for Directors Fees.
Form of Non-Solicitation Agreement, effective as of February 1, 2013, by and between Webster Financial Corporation
and Daniel H. Bley, Jennifer Buchholz, Michelle M. Crecca, Colin D. Eccles, Daniel M. FitzPatrick, Nitin J. Mhatre
and Harriet Munrett Wolfe (filed as Exhibit 10.22 to the Company's Annual Report on Form 10-K filed with the SEC
on February 28, 2013 and incorporated herein by reference).
Non-Solicitation Agreement, effective as of January 3, 2014, by and between Webster Financial Corporation and
Charles L. Wilkins (filed as Exhibit 10.18 to the Company's Annual Report on Form 10-K for the year ended December
31, 2013 as filed with the SEC on February 28, 2014 and incorporated herein by reference).
Change in Control Agreement, dated as of March 10, 2014, by and between Webster Financial Corporation and Dawn
C. Morris (filed as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31,
2014 as filed with the SEC on May 7, 2014 and incorporated herein by reference).
Non-Solicitation Agreement, dated as of March 10, 2014, by and between Webster Financial Corporation and Dawn
C. Morris (filed as Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31,
2014 as filed with the SEC on May 7, 2014 and incorporated herein by reference).
Change in Control Agreement, dated as of April 28, 2014, by and between Webster Financial Corporation and Bernard
Garrigues (filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
2014 as filed with the SEC on August 6, 2014 and incorporated herein by reference).
Non-Solicitation Agreement, dated as of April 28, 2014, by and between Webster Financial Corporation and Bernard
Garrigues (filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
2014 as filed with the SEC on August 6, 2014 and incorporated herein by reference).
Non-Competition Agreement, dated as of November 13, 2014, between Webster Bank, N.A., acting through its
division, HSA Bank, and Charles L. Wilkins.
144
Exhibit No.
21
23.1
23.2
31.1
31.2
32.1
32.2
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
Subsidiaries.
Consent of KPMG LLP.
Consent of Ernst & Young LLP.
Exhibit Description
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, signed by the Chief Executive Officer.
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, signed by the Chief Financial Officer.
Written statement pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by the Chief Executive Officer.
Written statement pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by the Chief Financial Officer.
XBRL Instance Document.
XBRL Taxonomy Extension Schema Document.
XBRL Taxonomy Extension Calculation Linkbase Document.
XBRL Taxonomy Extension Definitions Linkbase Document.
XBRL Taxonomy Extension Label Linkbase Document.
XBRL Taxonomy Extension Presentation Linkbase Document.
Note: Exhibit numbers 10.1 – 10.13 and 10.15 – 10.22 are management contracts or compensatory plans or arrangements in which
directors or executive officers are eligible to participate.
145
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EXHIBIT 31.2
I, Glenn I. MacInnes, certify that:
1.
I have reviewed this annual report on Form 10-K of Webster Financial Corporation;
CERTIFICATION
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the consolidated financial statements, and other financial information included in this annual report,
fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this annual report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in
Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under
our supervision to ensure that material information relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in which this annual report is being
prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting
principles;
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures; and presented in this annual report our
conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this
report based on such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth quarter in case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: February 27, 2015
/s/ Glenn I. MacInnes
Glenn I. MacInnes
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
EXHIBIT 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to 18 U.S.C. § 1350, as created by section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Webster
Financial Corporation (the “Company”) hereby certifies that, to his knowledge on the date hereof:
(a) the Form 10-K Report of the Company for the year ended December 31, 2014 filed on the date hereof with the Securities
and Exchange Commission fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the
Securities Exchange Act of 1934, as amended; and
(b) the information contained in this report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Date: February 27, 2015
/s/ James C. Smith
James C. Smith
Chairman and Chief Executive Officer
Pursuant to Securities and Exchange Commission Release 33-8238, dated June 5, 2003, this certification is being furnished and
shall not be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended or
incorporated by reference in any registration statement of the Company filed under the Securities Act of 1933, as amended, except
to the extent that the Company specifically incorporates it by reference.
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the
Company and furnished to the Securities and Exchange Commission or its staff upon request.
EXHIBIT 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to 18 U.S.C. § 1350, as created by section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Webster
Financial Corporation (the “Company”) hereby certifies that, to his knowledge on the date hereof:
(a) the Form 10-K Report of the Company for the year ended December 31, 2014 filed on the date hereof with the Securities
and Exchange Commission fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the
Securities Exchange Act of 1934, as amended; and
(b) the information contained in this report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Date: February 27, 2015
/s/ Glenn I. MacInnes
Glenn I. MacInnes
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Pursuant to Securities and Exchange Commission Release 33-8238, dated June 5, 2003, this certification is being furnished and
shall not be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended or
incorporated by reference in any registration statement of the Company filed under the Securities Act of 1933, as amended, except
to the extent that the Company specifically incorporates it by reference.
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the
Company and furnished to the Securities and Exchange Commission or its staff upon request.
Our mission:
To help individuals, families and businesses achieve their financial goals.
Our values:
The Webster Way
We take personal responsibility for meeting our customers’ needs.
We respect the dignity of every individual.
We earn trust through ethical behavior.
We give of ourselves in the communities we serve.
We work together to achieve outstanding results.
Our vision:
To be a high performing regional bank.
Our brand promise:
Living Up To You.
The Webster Symbol is registered in the U.S. Patent and Trademark Office.