WEBSTER FINANCIAL CORPORATION
2016 Annual Report
THINKING FORWARD
Investing in strategic growth
Letter to Shareholders
James C. Smith, Chairman & CEO
John R. Ciulla, President
MARCH 2017
Dear Shareholders,
2016 was Webster’s best year ever by almost
every measure. We reported record financial
performance and made meaningful progress
in advancing sound growth strategies that
add value for customers and shareholders.
This past December marked the 30th
anniversary of our initial public offering.
While our focus is squarely on the future, we
can’t resist reflecting for a moment on how
far we’ve come in the ensuing years. Webster
raised about $30 million in the IPO, bringing
total equity capital to $60 million to support
a $500 million balance sheet. Fast forward 30
years and our market value exceeds $5 billion
in support of a $26 billion balance sheet.
What began as a local thrift institution 81
years ago with Harold Webster Smith, the
24-year-old entrepreneurial banker, providing
savings accounts and residential mortgage
loans has grown into a leading regional
commercial bank helping individuals,
families and businesses achieve their
financial goals.
While the mission has evolved and the vision
has expanded over the years, Webster’s core
values have endured. Our bankers live up to
our customers each day by taking personal
responsibility for meeting their financial needs.
Respectfulness, trustworthiness, citizenship
and teamwork round out the Webster Way.
Our values define us and set us apart in the
marketplace in a most positive way.
2016 Financial Highlights
Webster delivered record revenue and net
income last year, solid results given tepid
economic growth and ongoing net interest
margin pressure from persistently low interest
rates. We’ve produced 29 consecutive quarters
of year-over-year
revenue growth due
to steady growth
in key customer
segments.
$902
$983
$831
2015
2016
2014
Total revenue
($ in millions)
At the core of our
solid performance
is loan growth,
firmly rooted in prudent underwriting and
disciplined pricing. Commercial loans once
again led the way, growing 14% and marking
18 consecutive quarters of double-digit,
year-over-year growth. Commercial loans
now comprise nearly 60% of total loans,
compared to 47% just five years ago. This shift
in loan mix has favorably altered our asset/
liability profile, positioning us well for a rising
interest rate environment. Floating-rate and
periodically adjusting loans represent nearly
70% of total loans
compared to 60%
five years ago.
$13.9
$15.7
$17.0
2015
2016
2014
Total loans ($ in billions)
Our credit metrics
remained solid in
2016. Even as the
loan portfolio has
grown, classified
asset levels,
delinquencies
and charge-offs
continued to
trend in a positive
direction having
dipped to pre-
recession levels.
This performance benefits from our success
in building a highly diversified portfolio
Comm & CRE as a % of total loans
2016
2011
47%
59%
across loan categories and geography. We
seek to grow deliberately in those sectors
where our expertise and market knowledge
enable us to achieve adequate returns for the
risks taken.
Solid growth in deposits has enabled us to
fund loan growth organically. Since 2011,
deposits have grown 7% compounded
annually. All of this growth has been in low-
cost, long-duration transactional deposits
which now represent 57% of total deposits
compared to 37% five years ago. Our loan-
to-deposit ratio remains favorable at 88%,
even with strong loan growth over the period.
Loans and deposits
each grew $1.3
billion over the past
year, demonstrating
our ability to
internally fund our
loan growth.
Non-transactional
Transactional
2014
2016
2015
$18.0
$10.9
$19.3
$15.7
$8.4
$9.9
$7.6
$8.1
$8.1
($ in billions)
$329
$347
$360
Revenue growth in all lines of business
coupled with sharp-eyed expense control has
resulted in pre-provision net revenue growth
of 8% compounded over the past five years.
In 2016, expense
growth was driven
primarily by the
Boston expansion
and higher
investment in HSA
Bank’s rapid growth.
Were it not for
these strategically
compelling
investments,
our efficiency ratio
would have been
below 60% once
again.
PPNR ($ in millions)
Efficiency ratio
62.0%
59.9%
59.2%
2014
2014
2016
2016
2015
2015
In sum, these factors produced earnings per
diluted share of $2.16, return on average
shareholder equity of 8.4% and return on
average tangible equity of 11.0%.
Thinking Forward – Our Strategic Perspective
8.3%
8.4%
8.4%
11.1%
11.3%
11.0%
We are intensely
focused on
our strategic
management
framework,
investing capital
in strategies that
create value for
customers and maximize economic profit
and shareholder value over time. We define
economic profit as earnings in excess of our
cost of equity capital, now about 9.5%.
2016
Return on average tangible equity
Return on average equity
2014
2015
We allocate capital and resources to essential
investments in infrastructure and regulatory
initiatives, and then to the highest economic
profit businesses, and we prioritize projects
accordingly. Performance objectives are clear,
and we have achieved close alignment among
strategic, financial and compensation plans.
We seek to rank in the top quartile among
our midsize bank Peer Group as measured by
financial performance against key metrics.
We currently rank in the top third having
steadily improved relative performance.
In 2016, we undertook an intensive strategic
review of every business unit, reassessing
our participation, positioning, organizational
and risk choices. We committed to invest
more capital and resources in strategically
important businesses that promise to generate
the highest economic profit. Our conclusions
called for a re-ordering and re-weighting of our
strategic priorities, including postponing some
investments and stopping others altogether.
We’ll invest when the opportunity is right –
and that means now – rather than phasing
investments over time simply for the sake
of protecting the efficiency ratio over the
near term. In the intermediate term, these
investments will drive the efficiency ratio
sustainably lower and economic profit
sustainably higher. Rest assured that even as
we invest more assertively in our future, we
continue to maintain expense discipline.
We’ve committed to invest aggressively in
HSA Bank and accelerate the expansion in
Commercial Banking. In both cases we’ll build
on a strong, sustainable competitive position
and our differentiated value proposition,
guided by highly motivated, knowledgeable
bankers driven to achieve high performance
objectives. We’ve also committed to optimize
the physical/digital balance in Community
Banking and streamline and simplify Webster
Private Bank’s operations and product set.
Investing Aggressively in HSA Bank
HSA Bank is our highest strategic priority,
and with good reason…it has the potential
to generate more economic profit than any
other business.
We continue to invest in our industry-
leading, scalable technology platform.
We’ve accelerated the expansion of the
sales force and client services teams and the
introduction of 24/7 customer service. We
recently rolled out live online chat through
member and employer portals to streamline
and enhance the customer experience. We
augmented staffing earlier and to a greater
degree than usual to smoothly handle the
welcome tsunami of new member activity
during the recent enrollment season.
More investments, sooner…to maximize
the extraordinary opportunity HSA Bank
presents to effectively serve a vast market
and maximize economic profit.
One proof-point of the early payoff can be
seen in the 660,000 new accounts opened
by HSA Bank in 2016 that nearly equal the
691,000 total accounts that existed at year-
end 2014. This business is still in the “land
grab” stage as the market leaders scoop up as
many health partners, large employers and
members as we can.
$5.2
$0.9
$1.8
$0.7
$2.6
$3.8
$4.4
2015
2016
2014
$4.5
$0.7
HSA deposits
Health savings
accounts form
a cornerstone
of consumer-
driven healthcare,
which promises
to revolutionize
the delivery of healthcare in our nation by
rewarding consumers for taking personal
responsibility for managing their healthcare,
including its cost. Today, 20 million Americans
use health savings accounts. That’s a good
start on the more than 100 million people
likely to qualify for them in the coming years.
HSA investments
($ in billions)
The full story of consumer-directed health
plans and potential explosive growth in
health savings accounts has yet to be told.
The ongoing 20%-plus compounded annual
growth rate in footings confidently predicted
by Devenir and other experts could increase
significantly given the anticipated reform
of the Affordable Care Act. Health savings
accounts are expected to play a central role
including increased eligibility, perhaps even
for Medicare and Medicaid participants, and
higher contribution limits. As the leading
bank administrator in the space, we have the
technology, service platform, scale and expertise
to capture a significant share of the market.
For Webster, health savings accounts offer an
important source of long-duration, low-cost
funding as well as account and transaction
revenue. The value of our health savings
account portfolio will increase with time as
accounts season and balances accumulate.
Consider this: more than half of our accounts
at year-end had vintages of less than two
years. That’s more than one million accounts
with average balances of approximately $1,200,
whereas accounts with vintages longer than five
years have average balances four times greater.
As health savings accounts season, their
economic value multiplies.
Accelerating the Expansion in
Commercial Banking
Optimizing the Physical/Digital Balance in
Community Banking
Commercial Banking is our highest economic
profit generator today, and we’re investing to
fuel its continued growth. Our competitive
differentiation stems from seasoned
local leadership, emphasis on long-term
relationships, deep industry expertise and
commitment to surety of execution in a
timely fashion.
$7.5
$8.5
$6.6
2015
2016
2014
Commercial banking loans
($ in billions)
Chris Motl, recently
promoted executive
vice president,
has expanded
his successful
management of
Middle Market
Banking to include
leadership responsibility for all Commercial
Banking business units. Chris and the
commercial leadership team will pursue
our primary strategic initiatives focused
on expanding our specialty segments and
commercial real estate businesses, delivering
cash management products and services
and growing our capital markets capabilities.
Coming out of the strategic review, we
accelerated investment in our front-end
systems, made meaningful upgrades to the
treasury and cash management systems and
accelerated recruitment of additional high-
quality bankers.
Our strategic decision to expand Commercial
Banking into adjacent metropolitan markets
is bearing fruit. Our successful expansion to
Boston in the midst of the Great Recession
was a model for our further expansion into
New York City and Philadelphia metropolitan
markets in recent years. These major markets
represent meaningful growth opportunities
for a relationship-driven bank of Webster’s
size and sophistication.
No segment of the banking business has faced
a more daunting path to economic profit
than retail banking, due to rapidly changing
consumer behavior and accompanying
high expectations and to a more demanding
regulatory environment. To meet these
challenges, we laid out several years ago a
transformational strategic roadmap that
would hasten the day when Community
Banking would earn its cost of capital.
Directionally this roadmap focused on
enhancing our digital presence, especially
mobile banking, to match customers’ shifting
preferences and optimizing our network of
banking centers to reach the appropriate
presence in the best locations. We announced
this past January that we’ll consolidate eight
banking centers during the second quarter of
this year. We are also adapting our product
set to appeal to high-value customers and
ensuring that our bankers have the skills to be
financial advisors and problem solvers for our
customers.
The change in customer preferences is proceeding
at a brisk pace. Webster’s banking center teller
transactions have declined almost 40% over
the past five years. In addition, nearly half
of our checking account households have
embraced mobile banking, and self-service
deposits now represent 40% of all deposits.
Meanwhile, Community Banking continues
to improve the
digital experience,
as reflected in a
16% year-over-year
increase in active
mobile banking
users and a 6%
increase in active
online subscribers.
Active mobile banking users
105,250
122,100
91,500
2014
2016
2015
Community Banking’s progress has been
gratifying, and in the process we’ve maintained
our best-in-class net promoter score. Further
validation of the ongoing high level of service
our bankers deliver came last fall when Money
magazine named Webster the “Best Bank in
New England” based on factors ranging from
product features and mobile banking experience to
customer satisfaction scores and ATM network.
Business Banking continues as an important
funding source for the bank, as deposits
significantly exceed funded loans in the segment.
Our Fast Track Business Loan initiative has cut
origination time by 75% for loans under $100,000,
boosting pull-through rates and origination
volume, and overall loan growth exceeded 10%.
We continue to build momentum in the
strategically compelling Boston market as
activity grows across all of our business lines.
While deposit and loan balance growth has
been slower than originally anticipated, the
number of new accounts opened has met
expectations. We crossed the $200 million
mark in banking center deposit balances, and
our loan pipelines are expanding. We fully
expect to exceed our estimates of $1 billion in
new deposits and $500 million in new loans
over five years.
Streamlining Webster Private Bank
Webster Private Bank continues to progress,
bringing closer the day when it, too, will earn
economic profit. Over the course of 2016, we
streamlined the Private Bank’s product set,
launched a new investment management
platform and curtailed operating expenses
through a reorganization. Our private bankers
are focused on meeting the investment
management, fiduciary administration,
financial planning and credit needs of
Webster customers, namely the owners and
executives of our commercial and business
banking clients as well as high net-worth
Community Banking customers. Webster
private bankers deliver always-objective
advice, competitively priced products and
tailored counsel. Relationship quality is at the
center of our value proposition.
Risk and Capital Management
Though the Great Recession has receded, it is
vividly embedded in our collective memory.
Risk management is integrated into everything
we do, with special attention paid to credit risk,
operating risk and regulatory compliance,
where we continue to make sizable
investments in systems and personnel.
Assessment and management of risk remain
top of mind. As we make strategic choices,
we carefully weigh the impact of our growth
strategies on Webster’s risk profile and on
capital and liquidity.
We employ stress testing as a key management
tool, helping us identify potential threats to
capital and liquidity while validating our
confidence in our capital position. Our capital
position is the strongest in our history, with
ratios comfortably above well-capitalized
levels and more than sufficient to pass the
annual regulatory severely adverse stress test
scenario. At the same time, we are returning
capital to shareholders through our cash
dividend, which
last year rose
10%, and through
opportunistic share
repurchases. Our
dividend payout
target remains in a
range of 40-50%.
Annual dividends
2014
2016
2015
$0.89
$0.98
$0.75
Looking Ahead
We look ahead to 2017 and beyond brimming
with optimism for a variety of reasons. The
national economy appears poised to pick up
its pace of growth, and the unemployment rate
is approaching a level generally regarded as
full employment. Median personal income is
rising, and the poverty level is in sharp decline.
After a period of historically low interest rates,
we’re seeing rates across the yield curve begin
to rise, rewarding savers after years of slim
returns. Our balance sheet is well positioned
for rising rates given our diverse loan portfolio
and fast-growing, low-cost funding sources.
It’s remarkable the difference a national
election can make in the economic outlook.
Nearly all the forecasted policy changes
appear to be positive for our business and
our company. The prospect of meaningful
investment in infrastructure, reduced
regulation and tax policy changes bode well
for faster economic growth and job creation,
loan growth in middle market businesses
and higher interest rates.
Midsize banks like Webster may gain relief from
some of the more onerous bank regulations
that do little to make the financial system
stronger but do increase our overhead and
compliance costs. Legislative and regulatory
actions could portend a lower cost of
operations and make credit more accessible
and at lower cost to consumers and businesses.
Taken together, these developments augur
well for increasing economic profit.
A Final Word
Webster’s solid financial performance and
strategic progress reflect the oversight and
guidance of our remarkably dedicated,
talented and deeply engaged board of
directors. Mike Jacobi will retire from the
board at the 2017 Annual Meeting, having
served since 1993. We want to recognize
and thank Mike for his faithful service and
extraordinary contributions as a director.
His knowledge, guidance and support have
helped propel Webster forward.
We live in a fascinating time of rapid change –
technological, economic, social and political.
By focusing on what we are best at and most
passionate about, and what matters most to
our customers, we are continually adapting
and advancing toward our high performance
goals. With the enthusiasm and commitment
of our 3,500 bankers, we will live up to our
promises to our customers, communities and
shareholders in the years to come.
On behalf of the board of directors and every
Webster banker, we are grateful for your
continued confidence and support.
Sincerely,
James C. Smith
Chairman and Chief Executive Officer
John R. Ciulla
President
N.B.: I am pleased to note that President John Ciulla has joined me in writing this year’s letter. John
has played a pivotal role in building Commercial Banking into a profitable growth engine and his
influence has steadily grown. The Board recently recognized John’s exemplary leadership and important
contribution to Webster’s strategic progress and financial performance by expanding his responsibilities
to include multiple support functions in addition to the lines of business that he leads. - JCS
2016 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 175 banking centers and 350 ATMs at year
end, as well as a full range of online 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,
HSA Bank, Community Banking, 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 $25 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 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 $3.1 billion
in new loans, a 3% increase from the previous
year. At year-end, Commercial Banking had
$8.5 billion in loans and $3.4 billion in deposits.
Middle Market delivers a full array of
financial services to a diversified group
of companies. By leveraging industry
specialization and delivering competitive
products and services, middle market loans
grew 15% to $4.1 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-Washington, D.C.
marketplace. Loans grew 13% to $2.8 billion.
Webster Business Credit Corporation (WBCC),
headquartered in New York, N.Y., is the
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 7% to $805 million.
Webster Capital Finance (WCF) is the
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. Loans grew 6% to $636 million.
Treasury and Payment Solutions (TPS)
delivers a broad range of deposit, lending,
treasury, and trade services via a dedicated
team of treasury professionals and local
commercial bankers. TPS comprises
Government and 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
in our treasury capabilities and grew cash
management services revenue by 9%.
HSA BANK:
HSA Bank is the leading bank administrator of
health savings accounts (HSAs) based on assets
under administration, with 14% total market
share as of year-end. With a focus on HSAs,
HSA Bank also delivers health reimbursement
arrangement (HRA) and flexible spending
account (FSA) administration services to
employers and individuals in all 50 states. At
year-end, HSA Bank held almost 2.1 million
accounts and more than $5.2 billion in health
savings account deposits and investments.
Adjusting for the anticipated attrition related
to the JPM HSA transaction, year-over-year
deposits grew over 20 percent and accounts
increased 27 percent. 2016 was HSA Bank’s
highest annual enrollment production year
on record.
COMMUNITY BANKING:
Community Banking serves nearly 390,000
customers including 48,000 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 online and mobile banking
services. At year-end, Community Banking
had $11.0 billion in deposits and $7.9 billion
in loans. Community Banking opened 17
de novo branches in greater Boston early
in 2016, giving Webster critical scale in this
important market.
Personal Banking focuses 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 $118 million and
now comprise 30% of total Personal Bank
deposits. Consumer loan balances increased
by 3% to $6.5 billion.
Business Banking loan balances grew 11% to
$1.4 billion at year end. Loan originations
increased 16% to $387 million. Total deposits
grew 9% to $2.3 billion, and transaction
balances grew 8%. In 2016, 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 14%.
The SBA loan originations grew 6%, and Webster
was the top SBA lender in Connecticut for
the ninth consecutive year. Business Banking
deposits exceeded loans by 66%, providing a
source of low-cost funding.
PRIVATE BANKING:
Private Banking provides wealth advisory,
investment management, tailored lending,
fiduciary, and banking services to high net
worth individuals and institutional clients.
During 2016, Private Banking continued to
build momentum on the basis of its fully
transformed business model. Loans grew
12% to $548 million resulting from a more
streamlined loan approval process to provide
an enhanced client experience and assets
under management and administration
increased by 3% to $1.8 billion. Private
Banking added portfolio management
capability in Boston and introduced a new
investment platform.
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 equity
STATEMENT 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 APPLICABLE
TO COMMON SHAREHOLDERS
PER COMMON SHARE DATA
Net income - diluted
Dividends declared
Tangible book value per common share
Book value per common share
2016
2015
2014
$26,072,529
24,641,118
22,497,175
17,026,588
15,671,735
13,900,025
194,320
7,151,749
174,990
159,264
6,907,683
6,666,828
19,303,857
17,952,778
15,651,605
2,527,012
2,413,960
2,322,815
718,513
56,350
264,478
149
264,627
623,191
303,450
96,323
207,127
664,625
49,300
237,777
110
237,887
555,341
297,761
93,032
204,729
628,441
37,250
202,108
1,145
203,253
501,600
291,699
91,973
199,726
$198,423
195,361
188,496
$2.16
0.98
19.94
26.17
2.13
0.89
18.69
24.99
2.08
0.75
18.10
23.99
Weighted-average common shares-diluted
91,856
91,533
90,620
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
Average shareholders’ equity to average assets
ASSET QUALITY RATIOS
Allowance for loan losses/total loans
Net charge-offs/average loans
Nonperforming loans/total loans
Nonperforming assets/total loans plus OREO
0.82 %
8.44
3.12
26.91
7.19
9.84
1.14 %
0.23
0.79
0.81
0.87
8.70
3.08
26.35
7.12
10.13
1.12
0.23
0.89
0.92
0.93
8.85
3.21
24.33
7.46
10.68
1.15
0.23
0.93
0.98
Allowance for loan losses/nonperforming loans
144.98
125.05
122.62
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, 2016, 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, 2016.
Common Stock Dividends and Market Prices
The following table shows dividends declared and the
market price per share by quarter for 2016 and 2015.
COMMON STOCK
(PER SHARE)
CASH DIVIDENDS
DECLARED
2016
Fourth
Third
Second
First
2015
Fourth
Third
Second
First
$0.25
0.25
0.25
0.23
$0.23
0.23
0.23
0.20
Annual Meeting
MARKET PRICE
HIGH
LOW
$55.80
38.97
39.61
37.18
$40.72
40.60
41.34
37.38
$36.96
31.45
31.29
30.09
$34.17
30.97
34.88
29.02
END OF
PERIOD
$54.28
38.01
33.95
35.90
$37.19
35.63
39.55
37.05
The annual meeting of shareholders of Webster
Financial Corporation will be held on April 27, 2017 at
4:00 P.M. at the New Britain Museum of American Art,
56 Lexington Street, New Britain, Connecticut.
Webster Information
For more information on Webster products and
services, call 1-800-325-2424 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
Executive Vice Chairman
Joel S. Becker
Chairman and Chief Executive Officer
Torrco
John R. Ciulla
President
John R. Ciulla*
President
John J. Crawford
President, Strategem, LLC
Elizabeth E. Flynn
Retired 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*
Executive Vice Chairman
Charles W. Shivery
Former Non-Executive Chairman of the Board
Northeast Utilities
Lauren C. States
Executive-in-Residence
Northeastern University D’Amore-McKim
School of Business
*Webster Bank, N.A. Board of Directors
Glenn I. MacInnes
Executive Vice President and Chief Financial
Officer
Daniel H. Bley
Executive Vice President and Chief Risk Officer
Colin D. Eccles
Executive Vice President and
Chief Information Officer
Bernard M. Garrigues
Executive Vice President and
Chief Human Resources Officer
Nitin J. Mhatre
Executive Vice President,
Head of Community Banking
Dawn C. Morris
Executive Vice President and
Chief Marketing Officer
Christopher J. Motl
Executive Vice President
Head of Commercial Banking
Charles L. Wilkins
Executive Vice President ,
Head of HSA Bank
Harriet Munrett Wolfe, Esq.
Executive Vice President,
General Counsel and Secretary
Elzbieta Cieslik
Senior Vice President,
General Auditor
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, 2016
Commission File Number: 001-31486
_______________________________________________________________________________
WEBSTER FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
_______________________________________________________________________________
Delaware
(State or other jurisdiction of incorporation or organization)
06-1187536
(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
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
Yes
been subject to such filing requirements for the past 90 days.
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 $3.0 billion, based
on the closing sale price of the common stock on the New York Stock Exchange on June 30, 2016, 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 February 17, 2017 was 92,016,254.
Part III: Portions of the Definitive Proxy Statement for the Annual Meeting of Shareholders to be held on April 27, 2017.
Documents Incorporated by Reference
INDEX
Page No.
Key to Acronyms and Terms
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
ii
1
12
17
18
18
18
19
22
22
60
61
123
123
126
126
128
128
128
128
129
130
131
i
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
KEY TO ACRONYMS AND TERMS
Agency CMBS ..................... Agency commercial mortgage-backed securities
Agency CMO ....................... Agency collateralized mortgage obligations
Agency MBS ........................ Agency mortgage-backed securities
ALCO ................................... Asset/Liability Committee
ALLL.................................... Allowance for loan and lease losses
AOCL ................................... Accumulated other comprehensive loss, net of tax
ASC....................................... Accounting Standards Codification
ASU....................................... Accounting Standards Update
Basel III................................ Capital rules under a global regulatory framework developed by the Basel Committee on Banking Supervision
BHC Act ............................... Bank Holding Company Act of 1956, as amended
Capital Rules ....................... Final rules establishing a new comprehensive capital framework for U.S. banking organizations
CCRP.................................... Composite Credit Risk Profile
CDI ....................................... Core deposit intangible assets
CET1 .................................... Common Equity Tier 1 Capital defined by Basel III capital rules
CFPB .................................... Consumer Financial Protection Bureau
CLO ...................................... Collateralized loan obligation securities
CMBS ................................... Non-agency commercial mortgage-backed securities
CRA ...................................... Community Reinvestment Act of 1977
DIF........................................ Federal Deposit Insurance Fund
Dodd-Frank Act .................. Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
DTA....................................... Deferred tax asset
ERMC .................................. Enterprise Risk Management Committee
FASB..................................... Financial Accounting Standards Board
FDIC..................................... Federal Deposit Insurance Corporation
FHLB.................................... Federal Home Loan Bank
FICO..................................... Fair Isaac Corporation
FINRA .................................. Financial Industry Regulatory Authority
FRA....................................... Federal Reserve Act
FRB....................................... Federal Reserve Bank
FTP ....................................... Funds Transfer Pricing, a matched maturity funding concept
GAAP ................................... U.S. Generally Accepted Accounting Principles
Holding Company ............... Webster Financial Corporation
HSA Bank ............................ A division of Webster Bank, National Association
ISDA .....................................
LBP....................................... Look back period
LEP....................................... Loss emergence period
LIBOR.................................. London Interbank Offered Rate
LPL....................................... LPL Financial Holdings Inc.
NII......................................... Net interest income
OCC...................................... Office of the Comptroller of the Currency
OCI/OCL ............................. Other comprehensive income (loss)
OREO................................... Other real estate owned
OTTI..................................... Other-than-temporary impairment
PPNR .................................... Pre-tax, pre-provision net revenue
QM........................................ Qualified mortgage
RPA....................................... Risk participation agreement
SEC....................................... United States Securities and Exchange Commission
SERP..................................... Supplemental defined benefit retirement plan
SIPC ..................................... Securities Investor Protection Corporation
TDR ...................................... Troubled debt restructuring, defined in ASC 310-40 "Receivables-Troubled Debt Restructurings by Creditors"
UTB ...................................... Unrecognized tax benefit
UTP....................................... Uncertain tax position
VIE ....................................... Variable interest entity, defined in ASC 810-10 "Consolidation-Overall"
Webster Bank ...................... Webster Bank, National Association, a wholly-owned subsidiary of Webster Financial Corporation
Webster or the Company.... Webster Financial Corporation, collectively with its consolidated subsidiaries
International Swaps Derivative Association
ii
ITEM 1. BUSINESS
Forward-Looking Statements
PART 1
This report contains 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.
General
Webster Financial Corporation is a bank holding company and financial holding company under the Bank Holding Company Act,
incorporated under the laws of Delaware in 1986, and headquartered in Waterbury, Connecticut. Its principal asset is all of the
outstanding capital stock of Webster Bank.
At December 31, 2016, Webster had assets of $26.1 billion, net loans and leases of $16.8 billion, deposits of $19.3 billion and
shareholders' equity of $2.5 billion.
At December 31, 2016, Webster had 3,168 full-time equivalent employees. None of the employees were represented by a collective
bargaining group. Management considers relations with its employees to be good.
Webster Financial Corporation's common stock is traded on the New York Stock Exchange under the symbol WBS. Webster's
internet address is www.websterbank.com and investor relations internet address is www.wbst.com. Webster makes available free
of charge on its website 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. These documents
are also available free of charge on the SEC's website at www.sec.gov. Information on Webster’s website is not incorporated by
reference into this report.
References in this report to Webster, the Company, we, our, or us, mean Webster Financial Corporation and its consolidated
subsidiaries.
Description of Business
Webster delivers financial services to individuals, families, and businesses, primarily within its regional footprint from New York
to Massachusetts. Webster provides business and consumer banking, mortgage lending, financial planning, trust, and investment
services through 175 banking offices, 350 ATMs, mobile banking, and its internet website (www.websterbank.com). Investment
services, including securities-related services, and brokerage and investment advice, is offered through a strategic partnership with
LPL, a broker dealer registered with the SEC, a registered investment advisor under federal and applicable state laws, a member
of the FINRA, and a member of the SIPC. Webster also offers equipment financing, commercial real estate lending, and asset-
based lending primarily across the Northeast. On a nationwide basis, through its HSA Bank division, Webster Bank offers and
administers health savings accounts, as well as flexible spending, health reimbursement, and commuter benefit accounts.
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. We operate 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, and marketing.
Segments
Webster has four reportable segments: Commercial Banking, Community Banking, HSA Bank, and Private Banking, and has been
operating under this structure for management reporting purposes since 2015. A description of and financial information for each
of the Company’s segments is included in the section captioned "Segment Results" in Item 7, Management’s Discussion and
Analysis of Financial Condition and Results of Operations, and Note 19: Segment Reporting in the Notes to Consolidated Financial
Statements contained elsewhere in this report.
1
Subsidiaries of Webster Financial Corporation
Webster Financial Corporation's direct consolidated subsidiaries include Webster Bank, Webster Wealth Advisors, Inc., and Webster
Licensing, LLC. Additionally, the Holding Company 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 provides consumer banking services, residential mortgage originations, various commercial banking products and
services, and financial planning and investment services. Also, its HSA Bank division offers and administers health savings
accounts, as well as flexible spending, health reimbursement, and commuter benefit accounts.
Webster Bank's significant direct subsidiaries include; Webster Mortgage Investment Corporation, a passive investment subsidiary
whose primary function is to provide servicing on qualified passive investments, such as residential real estate and commercial
mortgage real estate loans acquired from Webster Bank; Webster Business Credit Corporation, which provides asset-based lending
services; and Webster Capital Finance, Inc., which provides equipment financing for end users of equipment. Webster Bank also
has various other subsidiaries that are not significant to the consolidated group.
Competition
Webster is subject to strong competition from banks, thrifts, credit unions, non-bank health savings account trustees, consumer
finance companies, investment companies, insurance companies, e-commerce and other internet-based 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-bank entities, 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 from other commercial banks, savings institutions, credit
unions, mutual funds, and other investment alternatives. The primary factors in competing for consumer and commercial loans
are interest rates, loan origination fees, the quality and range of lending services, personalized service and ability to close within
customers' desired time frame. Competition for origination of mortgage loans comes primarily from savings institutions, mortgage
banking firms, mortgage brokers, other commercial banks, and insurance companies. Other factors which affect competition
include the general and local economic conditions, current interest rate levels, and volatility in the mortgage markets.
Supervision and Regulation
Webster and its banking and non-banking subsidiaries are subject to comprehensive regulation under federal and state laws. The
regulatory framework applicable to bank holding companies and their subsidiary banks is intended to protect depositors, the DIF,
and the U.S. banking system as a whole. This system is not designed to protect equity investors in bank holding companies.
Set forth below is a summary of the significant laws and regulations applicable to Webster and its banking and non-banking
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. Such statutes, regulations, and policies are subject to ongoing review by Congress and state legislatures
and federal and state regulatory agencies. A change in any of the statutes, regulations, or regulatory policies applicable to Webster
and its banking and non-banking subsidiaries could have a material effect on the results of the Company.
Overview
Webster Financial Corporation is a separate and distinct legal entity from Webster Bank and its other subsidiaries. As a registered
bank holding company and a financial holding company it is subject to inspection, examination, and supervision by the Board of
Governors of the Federal Reserve System, and is regulated under the BHC Act. Webster is under the jurisdiction of the SEC and
is subject to the disclosure and other 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 is subject to the rules for listed companies of the New York Stock
Exchange. In addition, the CFPB supervises Webster for compliance with federal consumer financial protection laws. Webster
also is subject to oversight by state attorneys general for compliance with state consumer protection laws. Webster's non-bank
subsidiaries are subject to federal and state laws and regulations, including regulations of the Federal Reserve System.
Webster Bank is organized as a national banking association under the National Bank Act. Webster Bank is subject to the supervision
of, and to regular examination by, the OCC as its primary supervisory agency, as well as by the FDIC as its deposit insurer. Webster
Bank's deposits are insured by the FDIC up to the applicable deposit insurance limits in accordance with FDIC laws and regulations.
The Dodd-Frank Act significantly changed the financial regulatory regime in the United States. Since the enactment of the Dodd-
Frank Act, U.S. banks and financial services firms have been subject to enhanced regulation and oversight. Several provisions of
the Dodd-Frank Act are subject to further rulemaking, guidance, and interpretation by the federal banking agencies.
2
Bank Holding Company Regulation
Webster Financial Corporation is a bank holding company as defined under the BHC Act. The BHC Act generally limits the
business of bank holding companies to banking, managing or controlling banks, and other activities that the Board of Governors
of the Federal Reserve System has determined to be so closely related to banking as to be a proper incident thereto. Bank holding
companies that have elected to become financial holding companies, such as Webster Financial Corporation, 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 Board of Governors of the Federal Reserve System 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 (as solely determined by the Board of Governors of the Federal Reserve System).
Activities that are financial in nature include securities underwriting and dealing, insurance underwriting, and making merchant
banking investments.
Mergers and Acquisitions
The BHC Act, the Bank Merger Act, and other federal and state statutes regulate acquisitions of commercial banks. The BHC Act
requires the prior Federal Reserve System approval for a bank holding company to acquire, directly or indirectly, 5% or more of
any class of voting securities of a commercial bank or its parent holding company and for a company, other than a bank holding
company, to acquire 25% or more of any class of voting securities of a bank or bank holding company. Under the Change in Bank
Control Act, any person, including a company, may not acquire, directly or indirectly, control of a bank without providing 60 days
prior notice and receiving a non-objection from the appropriate federal banking agency.
Under the Bank Merger Act, the prior approval of the appropriate federal banking agency is required for insured depository
institutions to merge or enter into purchase and assumption transactions. In reviewing applications seeking approval of merger
and purchase and assumption 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 banks, the applicant's performance record under the
CRA, and the effectiveness of the merging banks in combating money laundering. For further information relating to the CRA,
see the section titled "Community Reinvestment Act and Fair Lending Laws."
Enhanced Prudential Standards
Section 165 of the Dodd-Frank Act imposes enhanced prudential standards on larger banking organizations. Certain of these
standards are applicable to banking organizations over $10 billion, including Webster and Webster Bank. Additionally, the FDIC,
the OCC, and the Federal Reserve System issued separate but similar rules requiring covered banks and bank holding companies
with $10 billion to $50 billion in total consolidated assets, which includes Webster and Webster Bank, to conduct an annual
company-run stress test. Annual company-run stress tests are conducted for Webster and Webster Bank, as required by the Dodd-
Frank Act. Webster submitted its most recent company-run capital stress test results on July 29, 2016.
The Federal Reserve System also issued a rule further implementing the enhanced prudential standards required by the Dodd-
Frank Act. Although most of the standards only apply to bank holding companies with more than $50 billion in assets, as directed
by the Dodd-Frank Act, the rule contains certain standards that apply to bank holding companies with more than $10 billion in
assets, including a requirement to establish a risk committee of the Company's board of directors to manage enterprise-wide risk.
Webster meets these requirements.
Debit Card Interchange Fees
The Dodd-Frank Act requires that 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. Under the
Federal Reserve System's approved final debit card interchange rule pursuant to the Dodd-Frank Act, an issuer's base fee is capped
at 21 cents per transaction and allows for an additional amount equal to 5 basis points of the transaction's value. The Federal
Reserve System separately issued a final rule 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.
3
Identity Theft
The SEC and the Commodity Futures Trading Commission jointly issued final rules and guidelines implementing provisions of
the Dodd-Frank Act which require certain regulated entities to establish programs to address risks of identity theft. 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 these requirements.
In addition, the rules establish special requirements for any credit and debit card issuers that are subject to the jurisdiction of the
SEC and the Commodity Futures Trading Commission, to assess the validity of notifications of changes of address under certain
circumstances. Webster implemented an ID Theft Prevention Program, approved by its Board of Directors, to address the rules.
Volcker Rule
Section 619 of the Dodd-Frank Act, commonly known as the Volcker Rule, restricts the ability of banking entities, such as Webster
and Webster Bank, from: (i) engaging in proprietary trading and (ii) investing in or sponsoring certain covered funds, subject to
certain limited exceptions. Under the Volcker Rule, the term covered funds is defined as any issuer that would be an investment
company under the Investment Company Act but for the exemption in section 3(c)(1) or 3(c)(7) of that Act, which includes
collateralized loan obligation securities and collateralized debt obligation securities. There are also several exemptions from the
definition of covered fund, including, among other things, loan securitizations, joint ventures, certain types of foreign funds,
entities issuing asset-backed commercial paper, and registered investment companies. Compliance with the Volcker Rule provisions
is generally required by July 21, 2017. Section 619 and the Federal Reserve’s implementing Regulation Y provides for a single
compliance extension of up to five years for certain illiquid funds. Regulation Y, the Federal Reserve’s SR 16-18, dated December
9, 2016, and the Federal Reserve’s Statement of Policy Regarding Illiquid Fund Investments, dated December 12, 2016, provide
details regarding how banking entities may seek extensions to conform their illiquid funds to the Volcker Rule. As noted in these
releases, the Federal Reserve expects that the illiquid funds of banking entities will generally qualify for extensions, though
extensions may not be granted in all cases. Webster submitted an illiquid funds extension request on January 13, 2017. Webster
has not yet received notice from the Federal Reserve indicating whether Webster’s illiquid funds extension request has been
granted.
Derivatives Regulation
Title VII of the Dodd-Frank Act imposes requirements related to over-the-counter derivatives. Key provisions of the Title VII
regulation are implemented by the Commodity Futures Trading Commission. Among other things, the Commodity Futures Trading
Commission's rules apply to swap dealers, major swap participants and commercial entities that enter into OTC derivatives
transactions to hedge or mitigate risk. Under rules and guidance of the Commodity Futures Trading Commission, end users are
subject to a wide range of requirements including capital, margining, clearing, documentation, reporting, eligibility and business
conduct requirements. The Company complies with all aspects of the Title VII regulation that impact derivative activities, including
interest rate risk hedges and its customer loan hedge program.
Dividends
The principal source of the Holding Company'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 a year would exceed the sum of its net income for that year and
its undistributed net income for the preceding two years, less any required transfers to surplus. Federal law also prohibits a national
bank from paying dividends that would be greater than its undivided profits after deducting statutory bad debt in excess of ALLL.
Webster Bank paid the Holding Company $145.0 million in dividends during the year ended December 31, 2016, and $313.9
million of undistributed net income available for the payment of dividends remained at December 31, 2016.
In addition, Webster Financial Corporation 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.
4
Federal Reserve System
Federal Reserve System regulations require depository institutions to maintain reserves against their transaction accounts, primarily
interest-bearing and regular checking accounts. The 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 Federal Reserve Banks. The Board of Governors of
the Federal Reserve System generally makes annual adjustments to the tiered reserve requirements. The regulations require that
Webster maintain reserves against aggregate transaction accounts in excess of the exempt amount of $15.2 million at December 31,
2016. Amounts greater than $15.2 million up to and including $110.2 million have a reserve requirement of 3%. Amounts in excess
of $110.2 million have a reserve requirement of 10%. Webster Bank is in compliance with these reserve requirements.
As a national bank and member of the Federal Reserve System, Webster Bank is required to hold capital stock of the FRB 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 FRB of Boston stock of $50.7 million at
December 31, 2016. The FRBs pay a semi-annual dividend, to member banks with total assets greater than $10 billion, equal to
the lesser of 6% or the high yield of the 10-year Treasury note auctioned at the last auction prior to the dividend payment date.
On December 31, 2016, the FRB of Boston declared a semi-annual cash dividend equal to an annual yield of 2.485%.
Federal Home Loan Bank System
The FHLB System provides a central credit facility for member institutions. Webster Bank is a member of the FHLB of Boston.
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 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, which totaled approximately $2.8 billion at December 31, 2016.
Webster Bank was in compliance with these requirements, with a total investment in FHLB stock of $143.9 million at December 31,
2016. On October 28, 2016, the FHLB declared a quarterly cash dividend equal to an annual yield of 3.80%.
Source of Strength Doctrine
Federal Reserve System policy requires bank holding companies to act as a source of financial and managerial strength to their
subsidiary banks. Section 616 of the Dodd-Frank Act codified the requirement that bank holding companies act as a source of
financial strength. As a result, Webster Financial Corporation is expected to commit resources to support Webster Bank, including
at times when Webster Financial Corporation 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 U.S. 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 the Holding Company. If the assessment is not paid within three months, the OCC could order a sale of the Webster Bank
stock held by Webster Financial Corporation to cover any deficiency.
Capital Adequacy
The Federal Reserve System, the OCC, and the FDIC have approved Capital Rules which generally implement the Basel Committee
on Banking Supervision’s December 2010 final capital framework referred to as Basel III for strengthening international capital
standards. The 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 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
with a more risk-sensitive approach.
The Capital Rules: (i) include a new capital measure known as 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 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 the qualifying portion of loan and lease losses, in each case, subject to the Capital Rules’ specific requirements.
Pursuant to the Capital Rules, the minimum capital ratios 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 adjusted quarterly average consolidated assets, as defined (called "leverage ratio").
5
The Capital Rules also include a new capital conservation buffer, composed entirely of CET1, in addition to 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.
When fully phased-in on January 1, 2019, the capital standards applicable to Webster and Webster Bank 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 Capital Rules provide for a number of deductions from and adjustments to CET1. These include, for example, the requirement
that mortgage servicing assets, DTAs 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. The deductions and adjustments
are being incrementally phased in between January 1, 2015 and January 1, 2019.
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
GAAP are reversed for the purposes of determining regulatory capital ratios. Pursuant to the 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 made 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 Capital Rules also preclude certain hybrid securities, such as trust preferred securities, from inclusion in Tier 1 capital of bank
holding companies, subject to phase-out for bank holding companies, such as Webster Financial Corporation, that had $15 billion
or more in total consolidated assets as of December 31, 2009. The Company had approximately $18 million of trust preferred
securities included in Tier 1 capital for regulatory reporting purposes, pursuant to the capital adequacy guidelines of the Federal
Reserve System, at December 31, 2015. At December 31, 2016, trust preferred securities are excluded from Tier 1 capital.
Implementation of the deductions and other adjustments to CET1 began on January 1, 2015 and is being phased in over a 4-year
period (beginning at 40% on January 1, 2015 and an additional 20% per year thereafter). In addition, implementation of the capital
conservation buffer began on January 1, 2016 at the 0.625% level and increases by 0.625% on each subsequent January 1, until
it reaches 2.5% on January 1, 2019.
The risk-weighting categories are standardized and include a 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 is in compliance, and will continue to be in
compliance, with the targeted capital ratios as such requirements are phased in.
Prompt Corrective Action and Safety and Soundness
Pursuant to Section 38 of the Federal Deposit Insurance Act, federal banking agencies are required to take prompt corrective action
should an insured depository institution fail to meet certain capital adequacy standards. At each successive lower capital category,
an insured depository institution is subject to more restrictions and prohibitions, including restrictions on growth, restrictions on
interest rates paid on deposits, restrictions or prohibitions on payment of dividends and restrictions on the acceptance of brokered
deposits. Furthermore, if an insured depository institution is classified in one of the under capitalized categories, it is required to
submit a capital restoration plan to the appropriate federal banking agency, and the holding company must guarantee the performance
of that plan. Based upon its capital levels, a bank that is classified as well capitalized, adequately capitalized, or under capitalized
may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after notice and
opportunity for hearing, determines that an unsafe or unsound condition, or an unsafe or unsound practice, warrants such treatment.
For purposes of prompt corrective action, to be: (i) well-capitalized, an insured depository institution must have a total risk based
capital ratio of at least 10%, a Tier 1 risk based capital ratio of at least 8%, a CET1 risk based capital ratio of at least 6.5%, and a
Tier 1 leverage ratio of at least 5%; (ii) adequately capitalized, an insured depository institution must have a total risk based capital
ratio of at least 8%, a Tier 1 risk based capital ratio of at least 6%, a CET1 risk based capital ratio of at least 4.5%, and a Tier 1
leverage ratio of at least 4%; (iii) undercapitalized, an insured depository institution would have a total risk based capital ratio of
less than 8%, a Tier 1 risk based capital ratio of less than 6%, a CET1 risk based capital ratio of less than 4.5%, and a Tier 1
leverage ratio of less than 4%; (iv) significantly undercapitalized, an insured depository institution would have a total risk based
capital ratio of less than 6%, a Tier 1 risk based capital ratio of less than 4%, a CET1 risk based capital ratio of less than 3%, and
a Tier 1 leverage ratio of less than 3%; (v) critically undercapitalized, an insured depository institution would have a ratio of
tangible equity to total assets that is less than or equal to 2%.
6
Bank holding companies and insured depository institutions may also be subject to potential enforcement actions of varying levels
of severity by the federal banking agencies for unsafe or unsound practices in conducting their business, or for violation of any
law, rule, regulation, condition imposed in writing by the agency or term of a written agreement with the agency. In more serious
cases, enforcement actions may include the issuance of directives to increase capital; the issuance of formal and informal
agreements; the imposition of civil monetary penalties; the issuance of a cease and desist order that can be judicially enforced;
the issuance of removal and prohibition orders against officers, directors, and other institution affiliated parties; the termination
of the insured depository institution’s deposit insurance; the appointment of a conservator or receiver for the insured depository
institution; and the enforcement of such actions through injunctions or restraining orders based upon a judicial determination that
the FDIC, as receiver, would be harmed if such equitable relief was not granted.
Transactions with Affiliates and Insiders
Under federal law, transactions between insured depository institutions and their affiliates are governed by Sections 23A and 23B
of the FRA and its implementing Regulation W. In a bank 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 of the FRA 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 and its implementing Regulation O restricts loans to directors, executive officers, and principal
stockholders or "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) of the FRA, loans to directors,
executive officers, and principal stockholders 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 Consumer Financial Protection Bureau Supervision
The Dodd-Frank Act centralized responsibility for consumer financial protection by creating the CFPB, an independent agency
charged with responsibility for implementing, enforcing, and examining compliance with federal consumer financial 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 Fair Debt
Collection Procedures Act, the Truth in Lending Act, the Home Mortgage Disclosure Act, the Real Estate Settlement Practices
Act, various state law counterparts, and the Consumer Financial Protection Act of 2010, which is part of the Dodd-Frank Act. The
Dodd-Frank Act does not prevent states from adopting stricter consumer protection standards. State regulation of financial products
and potential enforcement actions could also adversely affect the Company’s business, financial condition or operations.
The CFPB issued a final rule implementing the ability-to-repay and qualified mortgage provisions of the Truth in Lending Act,
as amended by the Dodd-Frank Act, commonly known as the QM Rule, which became effective on January 10, 2014. 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 QM requirements and a rebutable presumption for higher-priced/subprime loans
meeting QM requirements. The QM definition 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 CFPB is expected to
continue to issue and amend rules implementing the consumer financial protection laws, which may impact Webster Bank's
operations.
Financial Privacy and Data Security
Webster is subject to federal laws, including the Gramm-Leach-Bliley Act and certain state laws containing consumer privacy
protection provisions. These provisions limit the ability of banks and other financial institutions to disclose nonpublic information
about consumers to affiliated and non-affiliated third parties and limit the reuse of certain consumer information received from
nonaffiliated financial institutions. These provisions require notice of privacy policies to clients and, in some circumstances, allow
consumers to prevent disclosure of certain nonpublic personal information to affiliates or non-affiliated third parties by means of
opt-out or opt-in authorizations.
7
The Gramm-Leach-Bliley Act requires that financial institutions implement comprehensive written information security programs
that include administrative, technical, and physical safeguards to protect consumer information. Federal banking agencies have
also adopted guidelines for establishing information security standards and programs to protect such information. Further, pursuant
to interpretive guidance issued under the Gramm-Leach-Bliley Act and certain state laws, financial institutions are required to
notify clients of security breaches resulting in unauthorized access to their personal information.
Depositor Preference
The Federal Deposit Insurance Act 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.
Federal Deposit Insurance
The FDIC uses 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. The risk matrix utilizes different risk categories distinguished by capital levels. As
a result of the Dodd-Frank Act, the base for insurance assessments is now consolidated average assets less average tangible equity.
Assessment rates are calculated using formulas that take into account the risk of the institution being assessed. FDIC deposit
insurance expense includes deposit insurance assessments and FICO assessments related to outstanding FICO bonds.
The FDIC’s deposit insurance limit is $250,000 per depositor, per insured bank, for each account ownership category. 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 Dodd-Frank Act requires that the FDIC raise the minimum reserve ratio of the DIF from 1.15% to 1.35%, and that the FDIC
offset the effect of this increase on insured depository institutions with total consolidated assets of less than $10 billion. In March
2016, the FDIC issued a final rule affecting insured depository institutions with total consolidated assets of more than $10 billion,
such as Webster Bank. The final rule imposes a surcharge of 4.5 cents per $100 of the institution’s assessment base on deposit
insurance assessment rates paid by these larger institutions. If the reserve ratio does not reach 1.35% by December 31, 2018,
through implementation of the surcharge, the FDIC will impose an additional, one-time shortfall assessment on insured depository
institutions with more than $10 billion in assets on March 31, 2019, to be paid by June 30, 2019. The FDIC also has authority to
further increase deposit insurance assessments.
Under the Federal Deposit Insurance Act, 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 the federal banking agencies and the SEC to establish joint regulations or guidelines prohibiting
incentive-based payment arrangements at specified regulated entities, including Webster and Webster Bank, with at least $1 billion
in total consolidated assets that encourage inappropriate risks by providing an executive officer, employee, director or principal
shareholder with excessive compensation, fees, or benefits that could lead to material financial loss to the entity. The federal
banking agencies and the SEC most recently proposed such regulations in 2016, but the regulations have not yet been finalized.
If the regulations are adopted in the form initially proposed, they will restrict the manner in which executive compensation is
structured.
The Dodd-Frank Act also 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 Webster's 2011 Annual
Meeting of Shareholders, its 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.
8
Community Reinvestment Act and Fair Lending Laws
Webster Bank has a responsibility under the CRA, as implemented by OCC regulations 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. Webster 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 Gramm-Leach-Bliley Act 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 government 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. The Office of Foreign Assets Control-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 the Office of Foreign Assets Control. Failure to comply with these sanctions
could have serious legal and reputational consequences.
Future Legislative Initiatives
Considering the recent changes in administration and controlling party in the United States, Congress, state legislatures, and
financial regulatory agencies are expected to introduce various legislative and regulatory initiatives that are likely to impact the
financial services industry, generally. 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.
9
Risk Management Framework
Webster’s enterprise risk management framework provides a structured approach for identifying, assessing and managing risks
across the Company in a coordinated manner, including strategic and reputational risks, as well as, credit, market, liquidity, capital,
and operational and compliance risks as discussed in detail below.
The enterprise risk management 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.
Key components of the enterprise risk management framework include a culture that promotes proactive risk management by all
Webster bankers, a risk appetite framework, which is embedded in the corporate strategy and risk culture of the bank and consists
of a risk appetite statement and board and business-level scorecards with defined risk tolerance limits, and robust risk governance
with effective and credible challenge including 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 (for example, Human Resources 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 and ensure that appropriate
risk management controls, processes and systems are in place and functioning effectively.
The Risk Committee of the Board of Directors, 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 ERMC, which reports
directly to the Risk Committee of the Board of Directors, is chaired by the Chief Risk Officer and is comprised of members of
Webster's Executive Management Committee and Senior Risk Officers.
The Chief Risk Officer is responsible for establishing and maintaining the Company's enterprise risk management framework and
overseeing credit risk, operational and compliance risk, Bank Secrecy Act compliance and loan workout/recovery programs. The
Corporate Treasurer, who reports to the Chief Financial Officer, 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 who
reports to the Chief Risk Officer. The Chief Credit Officer 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 that meets regularly
to review key credit risk topics, issues, and policies. The Credit Risk Management Committee reviews Webster's credit risk
scorecard, which covers key risk indicators and limits established as part of the Company's risk appetite framework. The Credit
Risk Management Committee is chaired by the Chief Credit Officer 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 Chief Credit Officer to the ERMC and Risk Committee of the Board
of Directors.
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 of the Board of Directors and administratively to the Chief Risk Officer. Credit Risk Review findings are
reported to the Credit Risk Management Committee, ERMC and Risk Committee of the Board of Directors. Corrective measures
are monitored and tested to ensure risk issues are mitigated or resolved.
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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 ALCO. The primary goal of ALCO is to manage
interest rate risk to maximize earnings and net economic value in changing interest rate and business environments, subject to
Board approved risk limits. ALCO is chaired by Webster's Corporate Treasurer and members include the Chief Executive Officer,
President, Chief Financial Officer and Chief Risk Officer. ALCO activities and findings are regularly reported to the ERMC and
Risk Committee of the Board of Directors.
Liquidity Risk
Liquidity risk refers to the ability to meet a demand for funds by converting assets into cash or cash equivalents and by increasing
liabilities at acceptable costs. Liquidity management of Webster Bank 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. Sources of funds include deposits, borrowings, or sales of assets such as unencumbered investment
securities.
Webster 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 and Webster Bank 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 and Risk
Committee of the 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 operating
ranges and recommends capital conservation, generation, and/or deployment strategies. ALCO also has responsibility for the
annual capital plan, capital ratio range setting, contingency planning and stress testing, which are all reviewed and approved by
the ERMC and Risk Committee of the Board of Directors, at least annually.
Operational and Compliance Risk
Operational and compliance risk are the risks 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 compliance risks associated with legal and regulatory requirements, suppliers and other third-
parties, information security, business disruption, fraud, analytical and forecasting models, and new products and services.
Webster's Operational Risk Management Committee, which consists of senior risk officers and senior managers responsible for
operational and compliance risk management, periodically reviews the aforementioned programs, as well as key operational risk
trends, issues, and mitigation activities. The Director of Operating Risk Management chairs the Operational Risk Management
Committee and is responsible for overseeing the development and implementation of Webster's operational risk management
framework.
Internal Audit
Internal Audit provides an independent and objective assurance and advisory services by testing and evaluating the design and
operating effectiveness of internal controls throughout Webster. This function brings a systematic and disciplined approach to
evaluating and improving the effectiveness of Webster's governance, risk management, and internal control processes.
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 functionally 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, 2016 and in other reports filed by
Webster Financial Corporation with the SEC.
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ITEM 1A. RISK FACTORS
An investment in our securities involves risks, some of which are inherent in the financial services industry and others of which
are more specific to our business. The discussion below addresses the material risks and uncertainties, of which we are currently
aware, that could affect our business, results of operations and financial condition. Before making an investment decision, you
should carefully consider the risks and uncertainties described below together with all of the other information included or
incorporated by reference in this report. If any of the events or circumstances described in the following risks actually occurs, our
business, financial condition or results of operations could suffer.
Risks Relating to the Economy, Financial Markets, and Interest Rates.
Difficult conditions in the economy and the financial markets may have a materially adverse effect on our business, financial
condition and results of operations.
Our financial performance is highly dependent upon the business environment in the markets where we operate and in the United
States as a whole. Unfavorable or uncertain economic and market conditions can be caused by declines in economic growth,
decreases in business activity, weakening of investor or business confidence, limitations on the availability or increases in the cost
of credit and capital, increases in inflation, changes in interest rates, changes in tax laws, high unemployment, natural disasters
or a combination of these or other factors.
In particular, we may face the following risks in connection with developments in the current economic and market environment:
consumer and business confidence levels may decline and lead to less credit usage and 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;
customer desire to do business with us may decline, 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;
the value of DTAs may be materially adversely affected by a reduction in the U.S. corporate income tax rate; and
competition in our industry could intensify as a result of the increasing consolidation of financial services companies.
•
•
•
•
•
The business environment in the U.S. has experienced volatility in recent years and may continue to do so for the foreseeable
future. There can be no assurance that economic conditions will not worsen. Difficult economic conditions could adversely affect
our business, results of operations and financial condition.
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.
The soundness 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.
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 the sub-section captioned "Dividends" in Item 1 of this report for a discussion of regulatory and other restrictions
on dividend declarations.
12
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 FRB,
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.
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 operating results;
changes in 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 actions by government regulators; and
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.
Regulatory, Compliance, Environmental and Legal Risks
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 intended to protect depositors’ funds, the DIF 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, recent changes to the legal and regulatory framework
governing our operation, including the continued implementation of Dodd-Frank Act have and will continue to affect the lending,
investment, trading and operating activities of financial institutions and their holding companies. Since the global financial crisis,
financial institutions generally have been subject to increased scrutiny from regulatory authorities. In general, bank regulatory
agencies have increased their focus on risk management and customer compliance, and we expect this focus to continue. Additional
compliance requirements are likely and can be costly to implement. Compliance personnel and resources may increase our costs
of operations and adversely impact our earnings.
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.
13
We are subject to financial and reputational risks from potential liability arising from lawsuits.
The nature of our business ordinarily results in a certain amount of claims and legal action. Whether claims and related legal
actions are founded or unfounded, if such claims and legal actions are not resolved in a manner favorable to us they may result in
significant financial liability and/or adversely affect our market perception, the products and services we offer, as well as impact
customer demand for those products and services. We assess our liabilities and contingencies in connection with outstanding legal
proceedings as well as certain threatened claims utilizing the latest and most reliable information. For matters where a loss is not
probable or the amount of the loss cannot be estimated, no accrual is established. For matters where it is probable we will incur
a loss and the amount can be reasonably estimated, we establish an accrual for the loss. Once established, the accrual is adjusted
periodically to reflect any relevant developments. The actual cost of any outstanding legal proceedings or threatened claims,
however, may turn out to be substantially higher than the amount accrued. These costs may adversely affect our business, results
of operations and prospects.
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.
Proposed health care reforms could adversely affect our HSA Bank division and our revenues, financial position and our
results of operations.
The enactment of health care reforms affecting health savings accounts at the federal or state level may affect our HSA Bank
division, which is a bank custodian of health savings accounts. We cannot predict if any such reforms will ultimately become law,
or, if enacted, what their terms or the regulations promulgated pursuant to such laws will be. Any health care reforms enacted may
be phased in over a number of years but, if enacted, could, with respect to the operations of HSA Bank, reduce our revenues,
increase our costs, and require us to revise the ways in which we conduct business or put us at risk for loss of business. In addition,
our results of operations, financial position, and cash flows could be materially adversely affected by such changes.
Proposed U.S. tax reforms could materially adversely affect us, including the value of our DTAs.
The enactment of proposed U.S. tax reforms could materially adversely affect us, including as a result of a reduction in the value
of our DTAs upon a reduction in the U.S. corporate income tax rate. We cannot predict if any such proposals will ultimately become
law, or, if enacted, what its provisions or that of the regulations promulgated thereunder will be, but they could materially adversely
affect our financial position and our results of operations.
Risks Relating to the Competitive Environment in Which We Operate
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. Some of the financial services organizations with which the Company competes are not subject
to the same degree of regulation as is imposed on bank holding companies and federally insured depository institutions, which
may give them certain advantages over the Company in accessing funding and in providing various services. The financial services
industry could become even more competitive as a result of legislative, regulatory and technological changes and continued
consolidation. Technology has lowered barriers to entry and made it possible for non-banks to offer products and services
traditionally provided by banks. 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.
14
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.
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. 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 their skills, knowledge
of the market, years of industry experience and may have difficulty promptly finding qualified replacement personnel.
Risks Relating to Risk Management
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 and capital investments. 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 within the same time frame as our large competitors.
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.
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
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 have a materially adverse affect our
results of operations and 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, capacity constraints and cyber attacks.
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 and
15
facilitate the recovery of our systems, computers, software, data and networks from attack, damage or unauthorized access remain
a high 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.
Disruptions in services provided by third-party vendors that we rely on may result in a material adverse effect on our business.
We rely on third-party vendors to provide products and services necessary to maintain day-to-day operations. For example, we
are dependent on our vendor-provided core banking processing systems to process a large number of increasingly complex
transactions. Accordingly, we are exposed to the risk that these vendors might not perform in accordance with the contracted
arrangements or service level agreements because of changes in the vendor’s organizational structure, financial condition, support
for existing products, services and technology strategic focus or for any other reason. Such failure to perform could be disruptive
to our operations, which could have a materially adverse impact on our business, results of operations and financial condition.
While we require third-party outsourced service providers to have business continuity and disaster recovery plans that are aligned
with our overall recovery plans, we cannot be assured that such plans will operate successfully or in a timely manner so as to
prevent any such material adverse impact.
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.
As disclosed in “Item 9A - Controls and Procedures,” a material weakness was identified in our internal control over financial
reporting resulting from the aggregation of control deficiencies in management’s review of the allowance for loan loss model
including certain process level controls preventing unapproved changes in modeling assumptions as well as the precision of
management’s review over the valuation of allowance for loan and lease losses balance. A material weakness is a deficiency, or
a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material
misstatement of a company's annual or interim financial statements will not be prevented or detected on a timely basis. The
material weakness did not result in any misstatement of the Company’s consolidated financial statements for any period presented.
However, our remedial measures to address the material weakness may be insufficient and we may in the future discover areas of
our internal controls that need improvement. Failure to maintain effective controls or to timely implement any necessary
improvement of our internal and disclosure controls could, among other things, result in losses from errors, harm our reputation,
or cause investors to lose confidence in the reported financial information, all of which could have a material adverse effect on
our results of operations and financial condition.
We face risks in connection with completed or potential acquisitions.
From time to time we may evaluate expansion through the acquisition of banks or branches, or other financial businesses or assets.
Acquiring other banks, businesses, or branches involves various risks commonly associated with acquisitions, including, among
other things:
• The possible loss of key employees and customers of the target;
•
•
•
•
Potential disruption of the target business;
Potential changes in banking or tax laws or regulations that may affect the target business;
Potential exposure to unknown or contingent liabilities of the target; and
Potential difficulties in integrating the target business into our own.
Acquisitions typically involve the payment of a premium over book and market values, and therefore, some dilution of the
Corporation’s tangible book value and net income per common share may occur in connection with any future transaction.
Furthermore, failure to realize the expected revenue increases, cost savings, increases in geographic or product presence, and/or
other projected benefits from an acquisition could have a material adverse effect on the Corporation’s business, financial condition
and results of operations.
Our business may be adversely affected by fraud.
As a financial institution, we are inherently exposed to operational risk in the form of theft and other fraudulent activity by
employees, customers, and other third parties targeting the Corporation or the Corporation’s customers or data. Such activity may
take many forms, including check fraud, electronic fraud, wire fraud, phishing, social engineering and other dishonest acts. Although
we devote substantial resources to maintaining effective policies and internal controls to identify and prevent such incidents, given
the increasing sophistication of possible perpetrators, we may experience financial losses or reputational harm as a result of fraud.
16
Risks Relating to Accounting Estimates
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.
If our goodwill and intangible assets are determined to be 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 us to record
charges in the future related to the impairment of our goodwill or intangible assets. If we were to conclude that a future write-
down is necessary, we would record the appropriate charge, which may have a material adverse effect on our financial condition
and results of operations.
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 OTTI, 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.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable
17
ITEM 2. PROPERTIES
The Company maintains its headquarters in Waterbury, Connecticut. This owned facility houses the Company's executive and
primary administrative functions, as well as the principal banking headquarters of Webster Bank. The Company considers its
properties are suitable and adequate for present needs.
In addition to the property noted above, the Company's segments maintain the following leased or owned offices. Lease expiration
dates vary, up to 71 years, with renewal options for 1 to 25 years. For additional information regarding leases and rental payments
see Note 20: Commitments and Contingencies in the Notes to Consolidated Financial Statements contained elsewhere in this
report.
Community Banking
The Community Banking segment maintains the following banking centers:
Location
Connecticut
Massachusetts
Rhode Island
New York
Total banking centers
Commercial Banking
Leased
76
25
9
8
118
Owned
41
12
4
—
57
Total
117
37
13
8
175
The Commercial Banking segment maintains offices across a footprint that primarily ranges from Boston, Massachusetts to
Washington, D.C. Significant properties include: Hartford, New Haven, Stamford, and Waterbury, Connecticut; New York City
and White Plains, New York; Conshohocken, Pennsylvania; and Providence, Rhode Island.
The Commercial Banking segment also includes: Webster Capital Finance with headquarters in Kensington, Connecticut and
Webster Business Credit Corporation with headquarters in New York, New York and offices in Atlanta, Georgia, Baltimore,
Maryland, Boston, Massachusetts, Chicago, Illinois, Conshohocken, Pennsylvania, and New Milford, Connecticut.
Private Banking
The Private Banking segment is headquartered in Stamford, Connecticut with offices in: Hartford, New Haven, Waterbury,
Greenwich, and Wilton, Connecticut; Boston, Massachusetts; White Plains, New York; and Providence, Rhode Island.
HSA Bank
The HSA Bank segment is headquartered in Milwaukee, Wisconsin with an office in Sheboygan, Wisconsin.
ITEM 3. LEGAL PROCEEDINGS
From time to time, Webster Financial Corporation or 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 an accrual 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 accrual 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
Not applicable
18
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND
ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Webster Financial Corporation's common shares trade on the New York Stock Exchange under the symbol WBS.
The following table sets forth the high and low intra-day sales prices per share of Webster Financial Corporation's common stock
and the cash dividends declared per share:
Fourth quarter
Third quarter
Second quarter
First quarter
2016
2015
High
Low
Cash
Dividends
Declared
High
Low
Cash
Dividends
Declared
$ 55.80
$ 36.96
$
38.97
39.61
37.18
31.45
31.29
30.09
0.25
0.25
0.25
0.23
$ 40.72
$ 34.17
$
40.60
41.34
37.38
30.97
34.88
29.02
0.23
0.23
0.23
0.20
On January 31, 2017, Webster Financial Corporation’s Board of Directors declared a quarterly dividend of $0.25 per share.
On February 17, 2017, there were 6,018 shareholders of record as determined by Broadridge, the Company’s transfer agent.
Restrictions on Dividends
Holders of Webster Financial Corporation's common stock are entitled to receive such dividends as the Board of Directors may
declare out of funds legally available for such payments. Webster Financial Corporation, as a bank holding company, is dependent
on dividend payments from Webster Bank for its legally available funds. The Bank paid the Holding Company $145 million in
dividends during the year ended December 31, 2016.
The Bank’s ability to make dividend payments to the Holding 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, 2016, Webster Bank was
in compliance with all applicable minimum capital requirements, and there was $313.9 million of undistributed net income available
for the payment of dividends by the Bank to the Holding 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 such deficiency has been repaired. See the "Supervision
and Regulation" section contained elsewhere in this report for additional information on dividends.
Webster Financial Corporation has 5,060,000 outstanding Depository Shares, each representing 1/1000th interest in a share of
6.40% Series E Non-Cumulative Perpetual Preferred Stock, par value $0.01 per share, with a liquidation preference of $25,000
per share, or $25 per depository share. The Series E Preferred Stock is redeemable at Webster Financial Corporation's option, in
whole or in part, on December 15, 2017, or any dividend payment date thereafter, or in whole but not in part, upon a "regulatory
capital treatment event" as defined in the Prospectus Supplement. The terms of the Series E Preferred Stock prohibit the Holding
Company from declaring or paying any cash dividends on its common stock, unless the Holding Company has declared and paid
full dividends on the Series E Preferred Stock for the most recently completed dividend period.
Exchanges of Registered Securities
Registered securities are exchanged as part of employee and director stock compensation plans.
Recent Sales of Unregistered Securities
No unregistered securities were sold by Webster Financial Corporation during the year ended December 31, 2016.
19
Issuer Purchases of Equity Securities
The following table provides information with respect to any purchase of equity securities for Webster Financial Corporation's
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, 2016:
Period
October 1-31, 2016
November 1-30, 2016
December 1-31, 2016
Total
Total
Number of
Shares
Purchased (1)
Average Price
Paid Per
Share
18,502
$
34,251
76,508
129,261
39.47
40.48
54.31
48.52
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum
Dollar Amount
Available for
Repurchase
Under the Plans
or Programs (1)
Total
Number of
Warrants
Purchased (2)
Average Price
Paid Per
Warrant
— $
15,488,842
— $
—
—
—
15,488,842
15,488,842
15,488,842
—
—
—
—
—
—
—
(1) On December 6, 2012, the Company announced that its Board of Directors had approved the current common stock repurchase program
which authorizes management to repurchase, in open market or privately negotiated transactions, subject to market conditions and
other factors, 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 129,261 shares purchased during the three months ended December 31, 2016 were acquired outside of the repurchase program
related to stock compensation plan activity, at market prices.
(2) On June 3, 2011, the Company announced that, with approval from its Board of Directors, it had repurchased a significant number
of the warrants issued as part of Webster's participation in the U.S. Treasury's Capital Purchase Program in a public auction conducted
on behalf of the U.S. Treasury. The Board approved plan provides for additional repurchases from time-to-time, as permitted by
securities laws and other legal requirements. There remain 53,027 outstanding warrants to purchase a share (1:1) of the Company's
common stock, which carry an exercise price of $18.28 per share and expire on November 21, 2018.
20
Performance Graph
The performance graph compares Webster Financial Corporation’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 Index").
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 Financial Corporation’s
cumulative shareholder return over a five-year period is based on an initial investment of $100 on December 31, 2011.
Webster Financial Corporation
S&P 500 Index
KRX Index
Period Ending December 31,
2011
100
100
100
$
$
$
2012
102
116
113
$
$
$
2013
159
154
166
$
$
$
2014
170
175
170
$
$
$
2015
199
177
181
$
$
$
2016
299
198
251
$
$
$
21
ITEM 6. SELECTED FINANCIAL DATA
The required information is set forth below, in Item 7, Management's Discussion and Analysis of Financial Condition and Results
of Operations, see the section captioned "Results of Operations," which is incorporated herein by reference.
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 and the accompanying Notes
thereto of Webster Financial Corporation contained elsewhere in this report.
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. 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:
•
•
•
•
projections of revenues, expenses, income or loss, earnings or loss per share, and other financial items;
statements of plans, objectives and expectations of Webster or its management or Board of Directors;
statements of future economic performance; and
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:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
local, regional, national and international economic conditions and the impact they may have on us and our customers;
volatility and disruption in national and international financial markets;
government intervention in the U.S. financial system;
changes in the level of non-performing assets and charge-offs;
changes in estimates of future reserve requirements based upon the periodic review thereof under relevant regulatory and
accounting requirements;
adverse conditions in the securities markets that lead to impairment in the value of securities in our investment portfolio;
inflation, interest rate, securities market and monetary fluctuations;
the timely development and acceptance of new products and services and perceived overall value of these products and
services by customers;
changes in consumer spending, borrowings and savings habits;
technological changes and cyber-security matters;
the ability to increase market share and control expenses;
changes in the competitive environment among banks, financial holding companies and other financial services providers;
the effect of changes in laws and regulations (including laws and regulations concerning taxes, banking, securities,
insurance and healthcare) with which we and our subsidiaries must comply, including the Dodd-Frank Act and the Capital
Rules;
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 FASB and other accounting standard setters;
the costs and effects of legal and regulatory developments including the resolution of legal proceedings or regulatory or
other governmental inquiries and the results of regulatory examinations or reviews; and
our success at assessing and managing the risks involved in the foregoing items.
Any forward-looking statements made by the Company in this Annual Report on Form 10-K speaks only as of the date they are
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.
22
Critical Accounting Policies and Accounting Estimates
The Company's significant accounting policies, as described in the Notes to Consolidated Financial Statements, are fundamental
to understanding its results of operations and financial condition. As disclosed in Note 1: Summary of Significant Accounting
Policies, the preparation of financial statements in accordance with GAAP requires management to make judgments and accounting
estimates that affect the amounts reported in the Consolidated Financial Statements and the accompanying Notes thereto. While
the Company bases estimates on historical experience, current information and other factors deemed to be relevant, actual results
could differ materially 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 are most important to the portrayal of the Company's
financial condition and results of operation and require the most difficult, subjective and complex judgment, and could potentially
result in materially different results under different assumptions and conditions. The Company has classified four policies as
critical because they require management to make difficult, subjective and complex judgments about matters that are inherently
uncertain and because it is likely that materially different amounts would be reported under different conditions or using different
assumptions. These policies, which have been identified by management and discussed with the appropriate committees of the
Board of Directors, govern:
•
•
•
•
allowance for loan and lease losses;
fair value measurements for valuation of investments and other financial instruments;
evaluation for impairment of goodwill and other intangible assets; and
assessing the realizability of DTAs and the measurement of UTPs.
These identified critical accounting policies and accounting estimates are summarized as follows.
Allowance for Loan and Lease Losses
The allowance for loan and lease losses is a reserve established through a provision for loan and lease 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 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 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, interest rate sensitivity, and regulatory authorities altering their loan classification
guidance.
Composition of the allowance for loan and lease losses is more fully illustrated in Note 4: Loans and Leases in the Notes to
Consolidated Financial Statements and in Item 7, Management's Discussion and Analysis of Financial Condition and Results of
Operations, see section captioned "Allowance for Loan and Lease Losses Methodology," contained elsewhere in this report.
Fair Value Measurements for Valuation of Investments and Other Financial Instruments
The Company records certain assets and liabilities at fair value in the Consolidated Financial Statements and the accompanying
Notes thereto. 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) unadjusted quoted prices in active markets for identical
assets or liabilities that the reporting entity has the ability to access at the measurement date; (ii) significant inputs other than
quoted prices that are directly or indirectly observable for the asset or liability; and (iii) inputs that are not observable, rather are
reliant upon pricing models and techniques that require significant management judgment or estimation. Assets and liabilities
recorded at fair value are categorized, in accordance with guidance, either on a recurring or 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.
23
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.
Information for financial instruments measured at fair value on a recurring basis is as follows:
Financial Instrument
Available-for-sale
securities
Hierarchy
Level 2
Derivative instruments
Level 2
Valuation Methodology
Consists of Agency CMO, Agency MBS, Agency CMBS, CMBS, CLO, corporate debt, and
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.
Consists of interest rate swaps and mortgage banking derivatives. Management uses readily
observable market parameters to value these contracts mortgage banking derivatives. Further,
for interest rate swaps, third-party consultants are utilized.
Originated loans held
for sale
Level 2
Consists of residential mortgage loans originated with intent to sell the loans. Management uses
quoted market prices of similar loans sold in conjunction with securitized transactions as the
basis to value these loans.
Evaluation for Impairment of Goodwill and Other Intangible Assets
Goodwill represents the excess purchase price of a business 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 performing a two-step quantitative test. The quantitative
analysis utilizes both the discounted cash flow methodology and a comparable company methodology on an equally weighted
basis. Discounted cash flow estimates, which include significant management assumptions relating to asset and revenue growth
rates, net interest and operating margins, capital requirements, weighted-average cost of capital, and future economic and market
conditions, are used to determine fair value under the two-step quantitative test. A comparable company methodology is based on
a comparison of financial and operating statistics of publicly traded companies to each of the reporting units, and the appropriate
multiples, such as equity value-to-tangible book value, core deposit premium multiples and/or price-to-earnings per share multiples,
are applied to arrive at indications of value for each reporting unit.
Under 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 of goodwill exceeds fair value, an
impairment is recognized and this difference is charged to non-interest expense.
Webster performed its annual impairment test under Step 1 as of its elected measurement date of November 30. The valuation of
goodwill involves estimates which require significant management judgment. The Company utilizes a combined, equally weighted,
income approach based on discounted cash flows and comparable company market approach to arrive at an indicated fair value
range for the reporting unit.
The income approach involves several management estimates, including developing a discounted cash flow valuation model which
utilizes variables such as asset and revenue growth rates, expense trends, capital requirements, discount rates, and terminal values.
Based upon an evaluation of key data and market factors, management selects 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. In the income approach the discount rate used for Consumer Deposits, Business Banking and HSA Bank was
7.5%, 9.6%, and 9.5%, respectively. The long-term growth rate used in determining the terminal value of the reporting unit's cash
flows was estimated at 4.0% 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.
24
The comparable company market approach includes small to mid-sized banks primarily based in the Northeast with significant
geographic or product line overlap to Webster and its reporting units to determine a fair value of each reporting unit.
At November 30, 2016, 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 and price-to-earnings per share. In determining the
appropriate multiples to be applied for each reporting unit, the financial and operating statistics of the reporting units were compared
to the comparable companies. Certain financial statistics were compared in identifying the reporting unit’s most appropriate
comparable companies whose multiples were used as the basis for the selected multiple range. For price-to-earnings per share,
2016 to 2018 net income compound annual growth rate and 2018 net income margins were used, while the return on tangible book
value and return on assets were used for equity value-to-tangible book value multiples. For core deposit premium multiples, each
of those four financial statistics were used. Additionally, a control premium was applied as the comparable company multiples
are on a minority basis.
The indicated values derived from the discounted cash flows and the market comparable company methodologies were equally
weighted to derive the fair value of each reporting unit. This fair value was then compared against the carrying value of each
reporting unit to determine if a Step 2 test is required. In estimating the carrying value of each reporting unit, Webster 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 November 30, 2016. The fair value of the Consumer
Deposits, Business Banking, and HSA Bank reporting units where goodwill resides exceeded carrying value by 1.3x, 1.7x, and
8.2x, respectively. The Consumer Deposits, Business Banking and HSA Bank reporting units had $377.6 million, $139.0 million,
and $21.8 million of goodwill at December 31, 2016, respectively.
Assessing the Realizability of Deferred Tax Assets and the Measurement of Uncertain Tax Positions
In accordance with ASC Topic 740, "Income Taxes," certain aspects of accounting for income taxes require significant management
judgment, including assessing the realizability of DTAs and the measurement of UTPs. 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 DTAs and resolution of UTPs could differ materially from the amounts
recorded in the Consolidated Financial Statements and the accompanying Notes thereto.
DTAs generally represent items for which a benefit has been recognized for financial accounting purposes that cannot be realized
for tax purposes until a future period. The realization of DTAs depends upon future sources of taxable income and the availability
of prior years' taxable income to which loss-carryback, refund claims may be made. Valuation allowances are established for those
DTAs determined not likely to be realized based on management's judgment.
Income taxes are more fully described in Note 8: Income Taxes in the Notes to Consolidated Financial Statements contained
elsewhere in this report and in Item 1A. Risk Factors, including under “Regulatory, Compliance, Environmental and Legal Risks.”
Recently Issued Accounting Standards Updates
Refer to Note 1: Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements contained elsewhere
in this report for a summary of recently issued ASUs and their expected impact on the Company's financial statements.
25
Results of Operations
Selected financial data is presented in the following table:
(Dollars in thousands, except per share data)
BALANCE SHEETS
2016
At or for the years ended December 31,
2014
2013
2015
2012
Total assets
Loans and leases, net
Investment securities
Deposits
Borrowings
Series E preferred stock
Total shareholders' equity
STATEMENTS OF INCOME
Interest income
Interest expense
Net interest income
Provision for loan and lease losses
Non-interest income (less securities amounts)
Gain on sale of investment securities, net
Impairment loss on securities recognized in earnings
Non-interest expense
Income before income tax expense
Income tax expense
Net income
Earnings applicable to common shareholders
Per Share Data
Basic earnings per common share
Diluted earnings per common share
Dividends and dividend equivalents declared per common share
Dividends declared per Series A preferred stock share
$ 26,072,529
$ 24,641,118
$ 22,497,175
$ 20,843,577
$ 20,104,149
16,832,268
15,496,745
13,740,761
12,547,203
11,851,567
7,151,749
6,907,683
6,666,828
6,465,652
6,243,689
19,303,857
17,952,778
15,651,605
14,854,420
14,530,835
4,017,948
4,040,799
4,335,193
3,612,416
3,237,886
122,710
122,710
122,710
122,710
122,710
2,527,012
2,413,960
2,322,815
2,209,348
2,093,783
$
821,913
$
760,040
$
718,941
$
687,640
$
693,502
103,400
718,513
56,350
264,213
414
(149)
623,191
303,450
96,323
207,127
198,423
2.17
2.16
0.98
—
$
$
$
95,415
664,625
49,300
237,278
609
(110)
555,341
297,761
93,032
204,729
195,361
2.15
2.13
0.89
21.25
$
$
$
90,500
628,441
37,250
197,754
5,499
(1,145)
501,600
291,699
91,973
199,726
188,496
2.10
2.08
0.75
85.00
$
$
$
90,912
596,728
33,500
197,615
712
(7,277)
497,709
256,569
77,113
179,456
168,036
1.90
1.86
0.55
85.00
$
$
$
$
$
$
114,594
578,908
21,500
189,411
3,347
—
501,294
248,872
75,133
173,739
170,531
1.96
1.86
0.35
85.00
—
22.76
16.43
Dividends declared per Series E preferred stock share
1,600.00
1,600.00
1,600.00
1,648.89
Book value per common share
Tangible book value per common share (non-GAAP)
Key Performance Ratios
26.17
19.94
24.99
18.69
23.99
18.10
22.77
16.85
Tangible common equity ratio (non-GAAP)
7.19%
7.12%
7.46%
7.50%
7.17%
Return on average assets
Return on average common shareholders’ equity
Return on average tangible common shareholders' equity (non-GAAP)
Net interest margin
Efficiency ratio (non-GAAP)
Asset Quality Ratios
Non-performing loans and leases as a percentage of loans and leases
Non-performing assets as a percentage of loans and leases plus OREO
Non-performing assets as a percentage of total assets
0.82
8.44
11.36
3.12
62.01
0.79%
0.81
0.53
0.87
8.70
11.96
3.08
59.93
0.89%
0.92
0.59
0.93
8.85
11.90
3.21
59.18
0.93%
0.98
0.61
ALLL as a percentage of non-performing loans and leases
144.98
125.05
122.62
ALLL as a percentage of loans and leases
Net charge-offs as a percentage of average loans and leases
Ratio of ALLL to net charge-offs
1.14
0.23
5.25 x
1.12
0.23
5.21 x
1.15
0.23
5.21 x
0.89
8.44
11.77
3.26
60.32
0.90
8.98
12.80
3.32
62.71
1.28%
1.61%
1.34
0.82
94.10
1.20
0.47
1.64
0.98
91.25
1.47
0.68
2.63 x
2.28 x
26
Providing the non-GAAP financial measures identified in the preceding table provides investors with information useful in
understanding the Company's financial performance, performance trends and financial position. These measures are used by
management for internal planning and forecasting purposes, as well as by securities analysts, investors and other interested parties
to compare peer company operating performance. Management believes that the presentation, together with the accompanying
reconciliations provides a complete understanding of the factors and trends affecting the Company's business and allows investors
to view its performance in a similar manner. These non-GAAP financial measures should not be considered a substitute for GAAP
basis measures and results. Because non-GAAP financial measures are not standardized, it may not be possible to compare these
measures with other companies that present measures having the same or similar names.
The following tables reconcile non-GAAP financial measures with financial measures defined by GAAP:
(Dollars and shares in thousands, except per share data)
2016
2015
2014
2013
2012
At December 31,
Tangible book value per common share (non-GAAP):
Shareholders' equity (GAAP)
Less: Preferred equity (GAAP)
Goodwill and other intangible assets (GAAP)
$ 2,527,012
$ 2,413,960
$ 2,322,815
$ 2,209,348
$ 2,093,783
122,710
572,047
122,710
577,699
151,649
532,553
151,649
535,238
151,649
540,157
Tangible common equity (non-GAAP)
$ 1,832,255
$ 1,713,551
$ 1,638,613
$ 1,522,461
$ 1,401,977
Common shares outstanding
91,868
91,677
90,512
90,369
Tangible book value per common share (non-GAAP)
$
19.94
$
18.69
$
18.10
$
16.85
$
85,341
16.43
Tangible common equity ratio (non-GAAP):
Tangible common shareholders' equity (non-GAAP)
$ 1,832,255
$ 1,713,551
$ 1,638,613
$ 1,522,461
$ 1,401,977
Total assets (GAAP)
$ 26,072,529
$ 24,641,118
$ 22,497,175
$ 20,843,577
$ 20,104,149
Less: Goodwill and other intangible assets (GAAP)
572,047
577,699
532,553
535,238
540,157
Tangible assets (non-GAAP)
$ 25,500,482
$ 24,063,419
$ 21,964,622
$ 20,308,339
$ 19,563,992
Tangible common equity ratio (non-GAAP)
7.19%
7.12%
7.46%
7.50%
7.17%
(Dollars in thousands)
Return on average tangible common shareholders' equity (non-
GAAP):
Net Income (GAAP)
Less: Preferred stock dividends (GAAP)
Add: Intangible assets amortization, tax-affected at 35% (GAAP)
Income adjusted for preferred stock dividends and 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 shareholders' equity (non-GAAP)
Return on average tangible common shareholders' equity (non-
GAAP)
Efficiency ratio (non-GAAP):
Non-interest expense (GAAP)
Less: Foreclosed property activity (GAAP)
Intangible assets amortization (GAAP)
Other expense (non-GAAP)
Non-interest expense (non-GAAP)
Net interest income (GAAP)
Add: Tax-equivalent adjustment (non-GAAP)
Non-interest income (GAAP)
Less: Gain on sale of investment securities, net (GAAP)
Other (non-GAAP)
One-time gain on the sale of an asset (GAAP)
Income (non-GAAP)
Efficiency ratio (non-GAAP)
For the years ended December 31,
2016
2015
2014
2013
2012
$
207,127
$
204,729
$
199,726
$
179,456
$
173,739
8,096
3,674
8,711
4,121
10,556
1,745
10,803
3,197
2,460
3,523
$
202,705
$
200,139
$
190,915
$
171,850
$
174,802
$ 2,481,417
$ 2,387,286
$ 2,289,699
$ 2,149,873
$ 1,946,580
122,710
574,785
134,682
579,366
151,649
533,549
151,649
537,650
38,335
542,782
$ 1,783,922
$ 1,673,238
$ 1,604,501
$ 1,460,574
$ 1,365,463
11.36%
11.96%
11.90%
11.77%
12.80%
$
623,191
$
555,341
$
501,600
$
497,709
$
501,294
$
$
$
$
(326)
5,652
3,513
614,352
718,513
13,637
264,478
414
(1,780)
7,331
$
$
517
6,340
975
547,509
664,625
10,617
237,777
609
(1,111)
—
$
$
(74)
2,685
3,029
495,960
628,441
11,124
202,108
5,499
(1,889)
—
$
$
43
4,919
5,649
487,098
596,728
13,221
191,050
712
(7,277)
—
(1,098)
5,420
5,888
491,084
578,908
14,751
192,758
3,347
—
—
$
990,663
$
913,521
$
838,063
$
807,564
$
783,070
62.01%
59.93%
59.18%
60.32%
62.71%
27
The following table summarizes daily average balances, interest and yield, and net interest margin on a fully tax-equivalent basis:
Years ended December 31,
2016
2015
2014
Average
Balance
Interest
Yield
Average
Balance
Interest
Yield
Average
Balance
Interest
Yield
(Dollars in thousands)
Assets
Interest-earning assets:
Loans and leases
$16,266,101 $ 624,300
3.84% $14,746,168 $ 554,632
3.76% $13,275,340 $ 513,705
3.87%
Securities (based upon historical amortized cost)
6,910,649
203,467
FHLB and FRB stock
Interest-bearing deposits
Loans held for sale
188,854
57,747
44,560
6,039
295
1,449
2.95
3.20
0.51
3.25
6,846,297
207,675
188,631
107,569
41,101
6,479
281
1,590
3.04
3.43
0.26
3.87
6,446,799
210,721
168,036
4,719
24,376
22,642
63
857
3.28
2.81
0.26
3.78
Total interest-earning assets
23,467,911 $ 835,550
3.56% 21,929,766 $ 770,657
3.52% 19,937,193 $ 730,065
3.67%
Non-interest-earning assets
Total assets
1,753,316
$25,221,227
1,625,196
$23,554,962
1,501,617
$21,438,810
Liabilities and equity
Interest-bearing liabilities:
Demand deposits
$ 3,853,700 $
—
—% $ 3,564,751 $
—
—% $ 3,216,777 $
—
—%
Savings, checking, & money market
deposits
Time deposits
Total deposits
13,072,577
27,331
2,027,029
22,527
18,953,306
49,858
Securities sold under agreements to
repurchase and other borrowings
FHLB advances
Long-term debt
Total borrowings
947,858
14,528
2,413,309
29,033
225,607
9,981
3,586,774
53,542
0.21
1.11
0.26
1.53
1.20
4.42
1.49
11,846,049
21,472
2,138,778
24,559
17,549,578
46,031
1,144,963
16,861
2,084,496
22,858
226,292
9,665
3,455,751
49,384
0.18
1.15
0.26
1.47
1.10
4.27
1.43
9,863,703
2,280,668
15,361,148
1,353,308
2,038,749
252,368
3,644,425
17,800
26,362
44,162
19,388
16,909
10,041
46,338
0.18
1.16
0.29
1.43
0.83
3.98
1.27
Total interest-bearing liabilities
22,540,080 $ 103,400
0.46% 21,005,329 $ 95,415
0.45% 19,005,573 $ 90,500
0.48%
Non-interest-bearing liabilities
199,730
Total liabilities
22,739,810
Preferred stock
Common shareholders' equity
Webster Financial Corporation
shareholders' equity
122,710
2,358,707
2,481,417
Total liabilities and equity
$25,221,227
162,347
21,167,676
134,682
2,252,604
2,387,286
$23,554,962
143,538
19,149,111
151,649
2,138,050
2,289,699
$21,438,810
Tax-equivalent net interest income
Less: Tax-equivalent adjustments
Net interest income
Net interest margin
732,150
(13,637)
$ 718,513
675,242
(10,617)
$ 664,625
639,565
(11,124)
$ 628,441
3.12%
3.08%
3.21%
Net interest income is the difference between interest income on earning assets, such as loans and investments, 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 73.1% of total revenue for the year ended December 31, 2016. Net interest margin is the ratio of
tax-equivalent net interest income to average earning assets for the period.
Net interest income and net interest margin are impacted by the level of interest rates, mix of assets earning and liabilities paying
those interest rates, and the volume of interest-earning assets and interest-bearing liabilities. These conditions are influenced by
changes in economic conditions that impact interest rate policy, competitive conditions that impact loan and deposit pricing
strategies, as well as the extent of interest lost to non-performing assets.
28
Webster manages the risk of changes in interest rates on net interest income and net interest margin through ALCO and its processes
related interest rate risk monitoring and management policies. Four main tools are used for managing interest rate risk:
• the size and duration and credit risk of the investment portfolio;
• the size and duration of the wholesale funding portfolio;
• off-balance sheet interest rate contracts; and
• 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, its
interest rate expectations, the portfolio risk position, and other factors. The federal funds rate target range was increased from
0.25-0.5% to 0.5-0.75% by the Federal Open Market Committee, effective December 15, 2016. See the "Asset/Liability
Management and Market Risk" section for further discussion of Webster's interest rate risk position.
Comparison of 2016 to 2015
Financial Performance
Net income of $207.1 million for the year ended December 31, 2016 increased 1.2% over the year ended December 31, 2015,
primarily due to strong loan growth, an increase in the net interest margin, and increased non-interest income, offset primarily by
increased non-interest expenses.
Income before income tax expense was $303.5 million for the year ended December 31, 2016, an increase of $5.7 million from
$297.8 million for the year ended December 31, 2015.
The primary factors positively impacting income before income tax expense include:
• interest income increased $61.9 million; and
• non-interest income increased $26.7 million.
The primary factors negatively impacting income before income tax expense include:
• non-interest expense increased $67.9 million; and
• provision for loan and lease losses increased $7.1 million.
The impact of the items outlined above, coupled with the effect from income tax expense of $96.3 million and $93.0 million for
the years ended December 31, 2016 and 2015, respectively, resulted in net income of $207.1 million and diluted earnings per
share of $2.16 for the year ended December 31, 2016 compared to net income of $204.7 million and diluted earnings per share
of $2.13 for the year ended December 31, 2015.
The efficiency ratio, a non-GAAP financial measure which quantifies the cost expended to generate a dollar of revenue was 62.01%
for 2016 and 59.93% for 2015. The increase in the ratio highlights the Company's investing in strategic opportunities such as HSA
Bank's strategic initiatives and Community Banking's Boston expansion.
Credit quality improved as demonstrated by the asset quality ratios. Net charge-offs as a percentage of average loans and leases
was 0.23% for both the year ended December 31, 2016 and 2015. Non-performing assets as a percentage of loans, leases, and
OREO decreased to 0.81% at December 31, 2016 from 0.92% at December 31, 2015, driven by loan growth, partially offset by
an increase in non-performing assets.
Net Interest Income
Net interest income totaled $718.5 million for the year ended December 31, 2016 compared to $664.6 million for the year ended
December 31, 2015, an increase of $53.9 million. Average interest-earning assets during 2016 increased $1.5 billion compared to
2015, substantially due to strong loan growth of 8.6% with overall improved yields. Net interest income increased primarily due
to the increase in average interest-earning assets, partially offset by a relatively flat securities portfolio with declining reinvestment
spreads on those assets. The average yield on interest-earning assets increased 4 basis points to 3.56% during 2016 from 3.52%
during 2015. 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. Average interest-bearing liabilities during 2016 increased $1.5
billion compared to 2015, primarily from health savings account growth, while the average cost of interest-bearing liabilities
increased 1 basis point to 0.46% during 2016 compared to 0.45% during 2015, primarily from a slight increase in the average cost
of borrowings.
Net interest margin increased 4 basis points to 3.12% for the year ended December 31, 2016 from 3.08% for the year ended
December 31, 2015. The increase in net interest margin is due primarily to increase in commercial loan yields, flat deposit costs
partially offset by lower investment portfolio yields.
29
Changes in Net Interest Income
The following table presents the components of the change in net interest income attributable to changes in rate and volume, and
reflects net interest income on a fully tax-equivalent basis:
(In thousands)
Change in interest on interest-earning assets:
Loans and leases
Loans held for sale
Investments (2)
Total interest income
Change in interest on interest-bearing liabilities:
Deposits
Borrowings
Total interest expense
Change in tax-equivalent net interest income
Years ended December 31,
2016 vs. 2015
Increase (decrease) due to
Rate (1)
Volume
Total
$
$
$
$
$
5,627
(77)
(6,297)
(747)
2,554
2,663
5,217
(5,964)
$
$
$
$
$
64,041
(65)
1,664
65,640
1,273
1,495
2,768
62,872
$
$
$
$
$
69,668
(142)
(4,633)
64,893
3,827
4,158
7,985
56,908
(1) The change attributable to mix, a combined impact of rate and volume, is included with the change due to rate.
(2) Investments include: Securities; FHLB and FRB stock; and Interest-bearing deposits.
Average loans and leases for the year ended December 31, 2016 increased $1.5 billion compared to the average for the year ended
December 31, 2015. The loan and lease portfolio comprised 69.3% of the average interest-earning assets at December 31, 2016
compared to 67.2% of the average interest-earning assets at December 31, 2015. The loan and lease portfolio yield increased 8
basis points to 3.84% for the year ended December 31, 2016, compared to the loan and lease portfolio yield of 3.76% for the year
ended December 31, 2015. The increase in the yield on average loans and leases is due to floating rate loans as well as increased
spreads on loan originations.
Average investments for the year ended December 31, 2016 increased $14.8 million compared to the average for the year ended
December 31, 2015. The investment portfolio comprised 30.5% of the average interest-earning assets at December 31, 2016
compared to 32.6% of the average interest-earnings assets at December 31, 2015. The investment portfolio yield decreased 7 basis
points to 2.93% for the year ended December 31, 2016 compared to the investment portfolio yield of 3.00% for the year ended
December 31, 2015. The decrease in the investment portfolio yield is due to reinvestment yields that are lower than yields on
securities paydowns and maturities during 2016.
Average deposits for the year ended December 31, 2016 increased $1.4 billion compared to the average for the year ended December
31, 2015. The increase is comprised of an increase of $288.9 million in non-interest-bearing deposits and an increase of $1.1
billion in average interest-bearing deposits, driven by continued growth in health savings account deposits. The average cost of
deposits was 0.26% for the year ended December 31, 2016 or flat compared with the year ended December 31, 2015. This was
as a result of product mix. Higher cost time deposits decreased to 13.4% for the year ended December 31, 2016 from 15.3% for
the year ended December 31, 2015, as a percentage of total interest-bearing deposits.
Average borrowings for the year ended December 31, 2016 increased $131.0 million compared to the average for the year ended
December 31, 2015. Average securities sold under agreements to repurchase and other borrowings decreased $197.1 million, and
average FHLB advances increased $328.8 million. The average cost of borrowings increased 6 basis points to 1.49% for the year
ended December 31, 2016 from 1.43% for the year ended December 31, 2015. The increase in average cost of borrowings is due
primarily to an increase to the Federal Funds Rate.
Cash flow hedges impacted the average cost of borrowings as follows:
(In thousands)
Interest rate swaps on repurchase agreements
Interest rate swaps on FHLB advances
Interest rate swaps on senior fixed-rate notes
Interest rate swaps on brokered CDs and deposits
Net increase to interest expense on borrowings
30
Years ended December 31,
2016
361
8,315
306
780
9,762
$
$
2015
1,442
8,272
306
632
10,652
$
$
Provision for Loan and Lease Losses
Management performs a quarterly review of the loan and lease portfolio to determine the adequacy of the ALLL. At December 31,
2016, the ALLL totaled $194.3 million, or 1.14% of total loans and leases, compared to $175.0 million, or 1.12% of total loans
and leases, at December 31, 2015.
Several factors are considered when determining the level of the ALLL, 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 current and projected net charge-offs, impact the required level of the provision for loan and lease
losses. For the year ended December 31, 2016, total net charge-offs were $37.0 million compared to $33.6 million for the year
ended December 31, 2015. The increase is primarily the result of a large charge-off for one commercial loan.
The provision for loan and lease losses totaled $56.4 million for the year ended December 31, 2016, an increase of $7.1 million
compared to the year ended December 31, 2015. 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 Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, section captioned "Allowance
for Loan and Lease Losses Methodology," contained elsewhere in this report for further details.
Non-Interest Income
(Dollars in thousands)
Deposit service fees
Loan and lease related fees
Wealth and investment services
Mortgage banking activities
Increase in cash surrender value of life insurance policies
Gain on sale of investment securities, net
Impairment loss on securities recognized in earnings
Other income
Total non-interest income
Years ended December 31,
Increase (decrease)
2016
2015
Amount
Percent
$
140,685
$
135,057
$
30,113
28,962
11,103
14,759
414
(149)
25,594
32,486
7,795
13,020
609
(110)
38,591
23,326
5,628
4,519
(3,524)
3,308
1,739
(195)
(39)
15,265
4.2%
17.7
(10.8)
42.4
13.4
(32.0)
(35.5)
65.4
$
264,478
$
237,777
$
26,701
11.2%
Total non-interest income was $264.5 million for the year ended December 31, 2016, an increase of $26.7 million, compared to
$237.8 million for the year ended December 31, 2015. The increase is attributable to higher other income, deposit service fees,
loan and lease related fees, and mortgage banking activities, partially offset by lower wealth and investment services.
Deposit service fees totaled $140.7 million for 2016 compared to $135.1 million for 2015. The increase was a result of increased
account service charges driven by HSA Bank's account growth, check card interchange income, and cash management fees, offset
by lower NSF fees.
Loan and lease related fees totaled $30.1 million for 2016 compared to $25.6 million for 2015. The increase was primarily due to
increased syndication activity, deferred loan origination fee activity, loan servicing fees net of mortgage servicing right amortization,
and increased amendment fees offset by decreases in prepayment fees and line usage fees.
Wealth and investment services totaled $29.0 million for 2016 compared to $32.5 million for 2015. The decrease was primarily
due to lower investment management activity.
Mortgage banking activities totaled $11.1 million for 2016 compared to $7.8 million for 2015. The increase was due to higher
margins on loans sold, partially offset by slightly lower volume of loan sale settlements.
Other income totaled $38.6 million for 2016 compared to $23.3 million for 2015. The increase was primarily due to a $7.3 million
gain on the redemption of an ownership interest in a privately held investment, $4.9 million increase in client interest rate hedging
activities, and a $2.0 million increase related to the gain on sale of commercial loans.
31
Non-Interest Expense
(Dollars in thousands)
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)
2016
2015
Amount
$
331,726
$
297,517
$
34,209
60,294
79,882
5,652
19,703
14,801
26,006
85,127
48,836
80,813
6,340
16,053
11,156
24,042
70,584
11,458
(931)
(688)
3,650
3,645
1,964
14,543
Percent
11.5%
23.5
(1.2)
(10.9)
22.7
32.7
8.2
20.6
$
623,191
$
555,341
$
67,850
12.2%
Total non-interest expense was $623.2 million for the year ended December 31, 2016, an increase of $67.9 million from the year
ended December 31, 2015. The increase for the year ended December 31, 2016 is primarily attributable to higher compensation
and benefits, occupancy, marketing, professional and outside services, deposit insurance and other expenses.
Compensation and benefits totaled $331.7 million for 2016 compared to $297.5 million for 2015. The increase was driven by
strategic hires within HSA Bank and the Boston expansion, variable compensation tied to Webster's share price increase, higher
medical, and increased pension related expenses.
Occupancy costs totaled $60.3 million for 2016 compared to $48.8 million for 2015. The increase was primarily due to the Boston
expansion and charges related to facilities optimization.
Marketing expenses totaled $19.7 million for 2016 compared to $16.1 million for 2015. The increase was primarily due to increased
media spend.
Professional and outside services totaled $14.8 million for 2016 compared to $11.2 million for 2015. The increase was primarily
due to strategic consulting services.
Deposit Insurance totaled $26.0 million for 2016 compared to $24.0 million for 2015. The increase was primarily due to asset
growth which increased the assessment base.
Other expense totaled $85.1 million for 2016 compared to $70.6 million for 2015. The increase was due to a favorable adjustment
recorded in the prior year to the unfunded reserve related to a refined estimate of the draw down factor assumption within the
reserve, a favorable adjustment recorded in the prior year related to a reduced deposit insurance assessment for years prior to 2015,
and increased operational expenses as a result of HSA Bank strategic initiatives and the Boston expansion.
Income Taxes
Webster recognized income tax expense of $96.3 million in 2016 and $93.0 million in 2015, and the effective tax rates were 31.7%
and 31.2%, respectively. The increase in the effective rate principally reflects a $4.4 million net deferred tax benefit recognized
in 2015, representing the portion of the $5.8 million reduction in the Company’s valuation allowance on its state and local deferred
tax assets recognized that year for a change in their estimated realizability in future years, and $1.8 million associated with higher
levels of tax-exempt interest income recognized in 2016, compared to 2015.
For additional information on Webster's income taxes, including its DTAs and uncertain tax positions, see Note 8: Income Taxes
in the Notes to Consolidated Financial Statements contained elsewhere in this report , and Item 1A. Risk Factors, including under
“Regulatory, Compliance, Environmental and Legal Risks.”
32
Comparison of 2015 to 2014
Financial Performance
Net income of $204.7 million for the year ended December 31, 2015 increased 2.5% over the year ended December 31, 2014,
largely due to record high levels of loan growth offsetting margin pressure, increased fee income; primarily due to acquired HSA
accounts, and continued expense discipline.
Income before income tax expense was $297.8 million for the year ended December 31, 2015, an increase of $6.1 million from
$291.7 million for the year ended December 31, 2014.
The primary factors positively impacting income before income tax expense include:
• interest income increased $41.1 million; and
• deposit service fees increased $31.6 million.
The primary factors negatively impacting income before income tax expense include:
• non-interest expense increased $53.7 million; and
• provision for loan and lease losses increased $12.1 million.
The impact of the items outlined above, coupled with the effect from income tax expense of $93.0 million and $92.0 million for
the years ended December 31, 2015 and 2014, respectively, resulted in net income of $204.7 million and diluted earnings per share
of $2.13 for the year ended December 31, 2015 compared to net income of $199.7 million and diluted earnings per share of $2.08
for the year ended December 31, 2014.
Expense discipline, coupled with net interest and fee income growth maintained an operating efficiency below 60%. The efficiency
ratio, a non-GAAP financial measure which quantifies the cost expended to generate a dollar of revenue was 59.93% for 2015
and 59.18% for 2014.
Credit quality improved as demonstrated by the decline in asset quality ratios. Net charge-offs as a percentage of average loans
and leases was 0.23% for both the year ended December 31, 2015 and 2014. Non-performing assets as a percentage of loans,
leases, and OREO decreased to 0.92% at December 31, 2015 from 0.98% at December 31, 2014, driven by loan growth exceeding
a slight increase in non-performing assets.
Net Interest Income
Net interest income totaled $664.6 million for the year ended December 31, 2015 compared to $628.4 million for the year ended
December 31, 2014, an increase of $36.2 million. Net interest income increased primarily due to an increase in average interest-
earning assets, substantially strong loan and lease growth of 12.7%, partially offset by an overall decline in reinvestment spreads
on earning assets, most notably securities. Average interest-earning assets during 2015 increased $2.0 billion compared to 2014.
The average yield on interest-earning assets decreased 15 basis points to 3.52% during 2015 from 3.67% during 2014. 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. Average interest-bearing liabilities during 2015 increased $2.0 billion compared to 2014,
primarily from health savings accounts, while the average cost of interest-bearing liabilities decreased 3 basis points to 0.45%
during 2015 compared to 0.48% during 2014.
Net interest margin decreased 13 basis points to 3.08% for the year ended December 31, 2015 from 3.21% for the year ended
December 31, 2014. The decrease in net interest margin is due primarily to reinvestment at reduced spreads on loans and leases
and securities, somewhat offset by a rise in lower cost deposits.
33
Changes in Net Interest Income
The following table presents the components of the change in net interest income attributable to changes in rate and volume, and
reflects net interest income on a fully tax-equivalent basis:
(In thousands)
Change in interest on interest-earning assets:
Loans and leases
Loans held for sale
Investments (2)
Total interest income
Change in interest on interest-bearing liabilities:
Deposits
Borrowings
Total interest expense
Change in tax-equivalent net interest income
Years ended December 31,
2015 vs. 2014
Increase (decrease) due to
Rate (1)
Volume
Total
$
$
$
$
$
(19,489)
151
(16,403)
(35,741)
(2,691)
6,263
3,572
(39,313)
$
$
$
$
$
60,416
583
15,334
76,333
4,560
(3,217)
1,343
74,990
$
$
$
$
$
40,927
734
(1,069)
40,592
1,869
3,046
4,915
35,677
(1) The change attributable to mix, a combined impact of rate and volume, is included with the change due to rate.
(2) Investments include: Securities; FHLB and FRB stock; and Interest-bearing deposits.
Average loans and leases increased $1.5 billion during the year ended December 31, 2015 as compared to the year ended December
31, 2014. The loan and lease portfolio comprised 67.2% of the average interest-earning assets at December 31, 2015 as compared
to 66.6% of the average interest-earning assets at December 31, 2014. The loan and lease portfolio yield decreased 11 basis points
to 3.76% for the year ended December 31, 2015, compared to the loan and lease portfolio yield of 3.87% for the year ended
December 31, 2014. The decrease in the yield on average loans and leases is due to the repayment of higher yielding loans and
leases coupled with the addition of lower yielding loans and leases in the current low interest rate environment.
Average investments increased $503.3 million during the year ended December 31, 2015 as compared to the year ended December
31, 2014. The investments portfolio comprised 32.6% of the average interest-earning assets at December 31, 2015 as compared
to 33.3% of the average interest-earnings assets at December 31, 2014. The investments portfolio yield decreased 25 basis points
to 3.00% for the year ended December 31, 2015 compared to the investments portfolio yield of 3.25% for the year ended December
31, 2014. The decrease in the yield on securities is due to lower market rates on purchases made during 2015.
Average deposits increased $2.2 billion during the year ended December 31, 2015 compared to the year ended December 31, 2014.
The increase comprised of $348.0 million in non-interest-bearing deposits and $1.8 billion in interest-bearing deposits. The increase
in interest-bearing deposits, and an improved product mix to low-cost deposits was primarily a result of $1.4 billion in acquired
health savings account deposits. The average cost of deposits decreased 3 basis points to 0.26% for the year ended December 31,
2015 from 0.29% for the year ended December 31, 2014. The decrease in the average cost of deposits is the result of product mix,
the maturity of higher costing certificates of deposit, and pricing on certain deposit products.
Average borrowings decreased $188.7 million during the year ended December 31, 2015 compared to the year ended December
31, 2014. Cash received as part of the health savings account acquisition was utilized to pay down certain short-term FHLB
advances. Average securities sold under agreements to repurchase and other borrowings decreased $208.3 million, and average
FHLB advances increased $45.7 million. The $26.1 million decrease 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 increased 16 basis points to 1.43% for the year ended December 31, 2015 from 1.27% for the year
ended December 31, 2014. The increase in average cost of borrowings is a result of the pay down of short-term lower cost FHLB
borrowings and subsequent additional borrowings at higher rates.
Cash flow hedges impacted the average cost of borrowings as follows:
(In thousands)
Interest rate swaps on repurchase agreements
Interest rate swaps on FHLB advances
Interest rate swaps on senior fixed-rate notes
Interest rate swaps on brokered CDs and deposits
Net increase to interest expense on borrowings
34
Years ended December 31,
2015
1,442
8,272
306
632
10,652
$
$
2014
2,224
6,043
267
151
8,685
$
$
Provision for Loan and Lease Losses
Management performs a quarterly review of the loan and lease portfolio to determine the adequacy of the ALLL. At December 31,
2015, the ALLL totaled $175.0 million, or 1.12% of total loans and leases, compared to $159.3 million, or 1.15% of total loans
and leases, at December 31, 2014.
Several factors are considered when determining the level of the ALLL, 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 current and projected net charge-offs, impact the required level of the provision for loan and lease
losses. For the year ended December 31, 2015, total net charge-offs were $33.6 million compared to $30.6 million for the year
ended December 31, 2014.
The provision for loan and lease losses totaled $49.3 million for the year ended December 31, 2015, an increase of $12.1 million
compared to the year ended December 31, 2014. The increase in provision for loan and lease losses was due primarily to the
increase in loan balances and increase in specific reserves on impaired loans, partially offset by improved credit quality.
Non-Interest Income
(Dollars in thousands)
Deposit service fees
Loan and lease related fees
Wealth and investment services
Mortgage banking activities
Increase in cash surrender value of life insurance policies
Gain on sale of investment securities, net
Impairment loss on securities recognized in earnings
Other income
Total non-interest income
Years ended December 31,
Increase (decrease)
2015
2014
Amount
$
135,057
$
103,431
$
31,626
25,594
32,486
7,795
13,020
609
(110)
23,326
23,212
34,946
4,070
13,178
5,499
(1,145)
18,917
2,382
(2,460)
3,725
(158)
(4,890)
1,035
4,409
Percent
30.6%
10.3
(7.0)
91.5
(1.2)
(88.9)
90.4
23.3
$
237,777
$
202,108
$
35,669
17.6%
Total non-interest income was $237.8 million for the year ended December 31, 2015, an increase of $35.7 million from the year
ended December 31, 2014. The increase is attributable to higher deposit service fees, other income, mortgage banking activities,
loan and lease related fees and a decrease in impairment loss on securities, partially offset by lower net gain on sale of investment
securities and wealth and investment services.
Deposit service fees totaled $135.1 million for 2015 compared to $103.4 million for 2014. The increase was a result of increased
checking account service charges and check card interchange income due primarily to the acquired health savings accounts and
new account growth.
Other income totaled $23.3 million for 2015 compared to $18.9 million for 2014. The increase was primarily due to alternative
investment income, estimated interest on refundable income taxes, credit card fees, and client swap activity, partially offset by
lower death benefit proceeds from bank owned life insurance.
Mortgage banking activities totaled $7.8 million for 2015 compared to $4.1 million for 2014. The increase was due to higher
settlement volume and gain on sale rate driven by lower interest rates in 2015.
Loan and lease related fees totaled $25.6 million for 2015 compared to $23.2 million for 2014. The increase was primarily due to
increased syndication activity, unused line fees, and loan servicing fees.
Impairment loss on securities recognized in earnings totaled $0.1 million for 2015 compared to $1.1 million for 2014. The decrease
was due to lower impairment losses recognized on CLO securities.
Net gain on investment securities totaled $0.6 million for 2015 compared to $5.5 million for 2014. The prior year’s amount included
gains from the sale of Volcker Rule non-compliant pooled trust preferred securities.
Wealth and investment services totaled $32.5 million for 2015 compared to $34.9 million for 2014. The decrease was primarily
due to an adverse impact on sales production driven by market volatility, and lower revenue as a result of lower assets under
administration values.
35
Non-Interest Expense
(Dollars in thousands)
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)
2015
2014
Amount
$
297,517
$
270,151
$
27,366
48,836
80,813
6,340
16,053
11,156
24,042
70,584
47,325
61,993
2,685
15,379
8,296
22,670
73,101
1,511
18,820
3,655
674
2,860
1,372
(2,517)
$
555,341
$
501,600
$
53,741
Percent
10.1%
3.2
30.4
136.1
4.4
34.5
6.1
(3.4)
10.7%
Total non-interest expense was $555.3 million for the year ended December 31, 2015, an increase of $53.7 million from the year
ended December 31, 2014. The increase for the year ended December 31, 2015 is primarily attributable to higher compensation
and benefits, technology and equipment, professional and outside services, occupancy, intangible assets amortization, and deposit
insurance expenses, partially offset by a reduction in other expenses.
Compensation and benefits totaled $297.5 million for 2015 compared to $270.2 million for 2014. The increase was primarily
driven by base compensation and temporary help to support HSA Bank’s account growth, incentives and commissions, and larger
group medical claims.
Technology and equipment totaled $80.8 million for 2015 compared to $62.0 million for 2014. The increase was due to transitional
service costs related to the HSA acquisition and implementation costs associated with a new HSA technology platform.
Professional and outside services totaled $11.2 million for 2015 compared to $8.3 million for 2014. The increase was primarily
due to information technology consulting services.
Occupancy costs totaled $48.8 million for 2015 compared to $47.3 million for 2014. The increase was primarily due to the addition
of HSA Bank’s facility in Milwaukee, WI, and additional snow removal costs.
Intangible assets amortization totaled $6.3 million for 2015 compared to $2.7 million for 2014. The increase was due to intangibles
acquired as part of the health savings accounts acquisition.
Deposit Insurance totaled $24.0 million for 2015 compared to $22.7 million for 2014. The increase was primarily due to growth
in assets.
Other expense totaled $70.6 million for 2015 compared to $73.1 million for 2014. The decrease was due to a favorable adjustment
to the unfunded reserve related to the refinement of estimates and a recovery of previous years deposit insurance expense.
Income Taxes
Webster recognized income tax expense of $93.0 million in 2015 and $92.0 million in 2014, and the effective tax rates were 31.2%
and 31.5%, respectively. The decrease in the effective rate principally reflects a $4.4 million net deferred tax benefit recognized
in 2015, partially offset by the effects of increased state and local tax expense in 2015.
The $4.4 million net deferred tax benefit was part of a $5.8 million reduction in the Company’s beginning-of-year valuation
allowance on its state and local DTAs, due to a change in their estimated realizability. This change is expected to result in increased
deferred expense in future years, including $2.0 million in 2016, or about 0.6% in effective-rate terms.
Segment Results
Webster’s operations are organized into four reportable segments that represent its primary businesses - Commercial Banking,
Community Banking, HSA Bank, and Private Banking. These four segments reflect how executive management responsibilities
are assigned by the chief operating decision maker for each of the primary businesses, the products and services provided, the
type of customer served, and how discrete financial information is currently evaluated. The Corporate Treasury Unit of the Company
and the consumer liquidating portfolio are included in the Corporate and Reconciling category along with the amounts required
to reconcile profitability metrics to amounts reported in accordance with GAAP.
36
Description of Segment Reporting Methodology
Webster’s reportable 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 periodically 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 full profitability and GAAP results are
reconciled in the Corporate and Reconciling category.
Webster allocates interest income and interest expense to each business, while also transferring the primary interest rate risk
exposures to the Corporate and Reconciling category, using a matched maturity funding concept called Funds Transfer Pricing.
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 ALCO.
Webster allocates 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 reportable segment, such as the provision for the consumer liquidating portfolio, is shown as part of
the Corporate and Reconciling category.
Webster allocates a majority of non-interest expense to each reportable segment using a full-absorption costing process. Costs,
including corporate overhead, are analyzed, pooled by process, and assigned to the appropriate reportable segment. Income tax
expense is allocated to each reportable segment based on the consolidated effective income tax rate for the period shown.
The following tables present net income (loss), selected balance sheet information, and assets under administration/management
for Webster’s reportable segments and the Corporate and Reconciling category for the periods presented:
(In thousands)
Net income (loss):
Commercial Banking
Community Banking
HSA Bank
Private Banking
Corporate and Reconciling
Consolidated Total
(In thousands)
Total assets
Loans and leases
Goodwill
Deposits
Years ended December 31,
2016
2015
2014
$
$
115,306
60,796
38,230
60
(7,265)
207,127
$
105,714
$
109,548
77,708
37,443
(511)
(15,625)
204,729
73,720
18,164
(504)
(1,202)
199,726
$
$
Commercial
Banking
Community
Banking
At December 31, 2016
Private
Banking
HSA Bank
Corporate and
Reconciling
Total
$
8,518,830 $
8,655,789 $
83,987 $
550,615 $
8,263,308 $
26,072,529
8,519,001
7,894,582
—
516,560
125
21,813
547,904
—
64,976
17,026,588
—
538,373
3,365,516
10,970,977
4,362,503
227,015
377,846
19,303,857
Not included in above amounts:
Assets under administration/management
—
2,980,113
878,190
1,781,840
—
5,640,143
(In thousands)
Total assets
Loans and leases
Goodwill
Deposits
Commercial
Banking
Community
Banking
At December 31, 2015
Private
Banking
HSA Bank
Corporate and
Reconciling
Total
$
7,505,513 $
8,441,950 $
95,815 $
493,571 $
8,104,269 $
24,641,118
7,509,453
7,592,553
—
516,560
54
21,813
490,112
—
79,563
15,671,735
—
538,373
3,073,276
10,449,231
3,802,313
228,497
399,461
17,952,778
Not included in above amounts:
Assets under administration/management
—
2,762,759
692,306
1,726,385
—
5,181,450
37
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 Bank’s Commercial Banking group
takes a relationship approach to providing lending, deposit, and cash management services to middle market companies
predominately within its franchise territory. Additionally, it serves as a referral source to Private Banking and Community Banking.
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 its footprint.
Commercial 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
Comparison of 2016 to 2015
$
$
$
$
Years ended December 31,
2015
255,845
30,160
225,685
37,784
109,718
153,751
48,037
105,714
$
$
2016
276,246
36,594
239,652
47,435
118,159
168,928
53,622
115,306
2014
238,186
13,088
225,098
37,270
102,374
159,994
50,446
109,548
Net income increased $9.6 million in 2016 compared to 2015. Net interest income increased $20.4 million, primarily due to greater
loan and deposit volumes. The provision for loan and lease losses increased $6.4 million, due primarily to the growth in loans.
Non-interest income increased $9.7 million, primarily due to fees related to loan activities, client interest rate hedging activities
and gain on loan sales. Non-interest expense increased $8.4 million, primarily due to strategic new hires and investments in
technology.
Comparison of 2015 to 2014
Net income decreased $3.8 million in 2015 as compared to 2014. Net interest income increased $17.7 million, primarily due to
greater loan and deposit volumes, greater deferred loan fees, and a continuing lower cost of funds. The provision for loan and
lease losses increased $17.1 million, due primarily to growth in loans. Non-interest income increased $0.5 million, primarily due
to fees generated from loan related activities and interest rate derivative products. Non-interest expense increased $7.3 million,
primarily related to strategic new hires.
Commercial Banking Selected Balance Sheet Information:
(In thousands)
Total assets
Loans and leases
Deposits
2016
$ 8,518,830
8,519,001
3,365,516
At December 31,
2015
$ 7,505,513
7,509,453
3,073,276
2014
$ 6,550,868
6,559,020
3,203,344
Loans and leases increased $1.0 billion at December 31, 2016 compared to December 31, 2015, due to continued growth in new
originations. Loans and leases increased $950.4 million at December 31, 2015 compared to December 31, 2014, primarily due to
new originations.
Loan originations were $3.1 billion, $3.0 billion and $2.9 billion in 2016, 2015 and 2014, respectively. The increase of $144.7
million in originations for the year ended December 31, 2016 is due to continued expansion of Commercial Banking activities
across all business lines within the segment. Management believes the reserve level is adequate to cover inherent losses in the
Commercial Banking portfolio. For additional discussion related to asset quality metrics, see the "Asset Quality" section elsewhere
within this report.
Deposits increased $292.2 million at December 31, 2016 compared to December 31, 2015, due to growth in client and operating
funds maintained for cash management services. Deposits decreased $130.1 million at December 31, 2015 compared to
December 31, 2014, due to large, short-term deposits received in the fourth quarter of 2014 that exited the bank in 2015.
38
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 the operating segments - Personal Banking and Business Banking,
as well as a distribution network consisting of 175 banking centers and 350 ATMs, a customer care center, 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 Bank's investment services division, WIS, offers
investment and securities-related services, including brokerage and investment advice through a strategic partnership with LPL,
a broker dealer registered with the SEC, and a member of the FINRA, and the SIPC. Webster has employees who are LPL registered
representatives located throughout its banking center network.
Business Banking offers credit, deposit, and cash flow management products to businesses and professional service firms with
annual revenues of up to $25 million. This unit builds 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
Comparison of 2016 to 2015
$
$
$
$
Years ended December 31,
2015
354,709
19,603
335,106
108,604
330,692
113,018
35,310
77,708
$
$
2016
365,151
21,690
343,461
110,157
364,549
89,069
28,273
60,796
2014
354,781
26,345
328,436
103,543
324,312
107,667
33,947
73,720
Net income decreased $16.9 million in 2016 compared to 2015. Net interest income increased $10.4 million, primarily due to
growth in both loans and deposits, which was partially offset by the impact of a historically low interest rate environment reducing
the value of deposits. The provision for loan and lease losses increased by $2.1 million, due primarily to loan portfolio growth.
Non-interest income increased $1.6 million, primarily due to an increase in fees from mortgage banking activities, credit card and
client interest rate hedging activities, partially offset by lower NSF fees collected and reduced investment income driven by lower
average per sale revenue due to the implementation of regulatory changes. Non-interest expense increased $33.9 million, primarily
due to $21.7 million in expenses associated with the Boston expansion as well as increases in compensation, benefits, marketing
expenses and expenses tied to branch optimization, partially offset by lower loan workout expenses.
Comparison of 2015 to 2014
Net income increased $4.0 million in 2015 compared to 2014. Net interest income was flat in 2015 compared to 2014 as benefits
of increased loan and deposit growth were offset by the effects of a persistent low interest environment. The provision for loan
and lease losses decreased $6.7 million, driven by lower charge-offs and improved asset quality. Non-interest income increased
$5.1 million, primarily due to an increase in gains on the sale of mortgage loans and growth in fees associated with credit and
debit cards. Non-interest expense increased $6.4 million, primarily due to increased compensation and benefits, marketing expenses
and increased snow removal costs, partially offset by a decrease in amortization expense of intangible assets.
39
Community Banking Selected Balance Sheet Information and Assets Under Administration:
(In thousands)
Total assets
Loans
Deposits
Not included in above amounts:
Assets under administration
2016
$ 8,655,789
7,894,582
10,970,977
At December 31,
2015
$ 8,441,950
7,592,553
10,449,231
2014
$ 8,123,928
6,853,115
10,103,698
2,980,113
2,762,759
2,754,775
Loans increased $302.0 million at December 31, 2016 compared to December 31, 2015, due to growth in residential mortgages,
business banking loans, and unsecured personal loans, partially offset by net runoff in the home equity portfolios.
Loans increased $739.4 million at December 31, 2015 compared to December 31, 2014, due to growth in the business banking,
residential mortgages, home equity lines, and personal loans.
Loan originations were $2.3 billion, $2.4 billion and $1.7 billion for the years ended 2016, 2015 and 2014, respectively. The
decrease of $161.0 million in originations for the year ended December 31, 2016 is due to a decrease of $206.6 million in residential
originations partially offset by a $52.7 million increase in originations of business banking loans. Management believes the reserve
level is adequate to cover inherent losses in the Community Banking portfolio. For additional discussion related to asset quality
metrics, see the "Asset Quality" section elsewhere within this report.
Deposits increased $521.7 million at December 31, 2016 compared to December 31, 2015, due to growth in business and personal
transaction account balances which was partially offset by a decrease in time deposit balances. Deposits increased $345.5 million
at December 31, 2015 compared to December 31, 2014, due to continued growth in both business and consumer transaction deposit
balances.
Additionally, at December 31, 2016 WIS had $3.0 billion of assets under administration in conjunction with its strategic partnership
with LPL compared to $2.8 billion at December 31, 2015 and December 31, 2014.
40
HSA Bank
HSA Bank offers health savings accounts, health reimbursement accounts, flexible spending accounts, and other financial solutions
to employers for the benefit of their employees, and individuals. Health savings accounts are used in conjunction with high
deductible health plans and are intended to facilitate tax advantages with respect to health care spending for taxpayers holding
accounts, in accordance with applicable law. Health savings accounts are offered through employers or directly to consumers and
are distributed nationwide directly and through multiple partnerships. HSA Bank's deposits provide long duration low-cost funding
that is used to support the Company’s loan growth and to reduce the Company’s reliance on wholesale funding. HSA Bank's net
interest income represents the difference between the funding credit received reflecting the value of the long duration funding,
less the interest paid on deposits. HSA Bank generates non-interest revenue predominantly through service fees and interchange
income. As of December 31, 2016, there were $5.2 billion in total footings (a combination of $4.4 billion in deposit balances and
$878 million in assets under administration through linked brokerage accounts). HSA Bank deposits accounted for 22.6% and
21.2% of the Company’s total deposits as of December 31, 2016 and December 31, 2015, respectively.
HSA Bank 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
Comparison of 2016 to 2015
$
$
$
$
Years ended December 31,
2015
73,433
—
73,433
62,475
81,449
54,459
17,016
37,443
$
$
2016
81,451
—
81,451
71,710
97,152
56,009
17,779
38,230
2014
38,822
—
38,822
28,553
40,900
26,475
8,311
18,164
Net income increased $0.8 million in 2016 compared to 2015. Net interest income increased $8.0 million, primarily due to both
account growth and deposit balance growth, offset by an adjustment in the funding credit due to a change in the duration value of
deposits. Non-interest income increased $9.2 million, primarily due to service fees and interchange income growth related to
health savings account growth. Non-interest expense increased $15.7 million, primarily due to increased processing costs needed
to support the account growth and investments made in human capital and technology.
Comparison of 2015 to 2014
Net income increased $19.3 million in 2015 compared to 2014. Net interest income increased $34.6 million, primarily due to both
deposit balance growth and account growth, as well as pricing initiatives and a positive impact on deposit cost. The cost of deposits
declined 6 basis points, primarily an effect of the JPM health savings accounts acquisition. Non-interest income increased $33.9
million, primarily due to growth in service fees and interchange income. Non-interest expense increased $40.5 million, primarily
due to an increase in processing costs to support organic growth and the acquired health savings accounts. Third party servicing
costs to service the JPM portfolio were $12.9 million for 2015.
HSA Bank Selected Balance Sheet Information and Assets Under Administration:
(In thousands)
Total assets
Deposits
Not included in above amounts:
Assets under administration
$
2016
83,987
4,362,503
At December 31, 2016
2015
95,815
3,802,313
$
$
2014
26,680
1,824,799
878,190
692,306
746,983
Deposits increased $0.6 billion at December 31, 2016 compared to December 31, 2015, The increase is related to organic deposit
and account growth. Deposits increased $2.0 billion at December 31, 2015 compared to December 31, 2014. Of the $2.0 billion,
$1.4 billion was attributable to the balances acquired from JPM and $577.5 million was attributable to organic deposit growth.
HSA Bank held $878.2 million in assets under administration through linked brokerage accounts at December 31, 2016 compared
to $692.3 million at December 31, 2015. The $185.9 million increase in linked brokerage balances is driven primarily by continued
organic account growth.
41
Private Banking
Private Banking provides local, full relationship banking that serves high net worth clients, not-for-profit organizations, and
business clients with asset management, trust, loan, and deposit products and financial planning services. The segment is focused
on generating revenues from fees earned on clients’ assets under management and administration. The majority of the client
relationships include lending and/or deposit accounts, which also generate revenues through net interest income, along with
ancillary fee and interest rate derivative revenues.
Private 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 (loss) before income taxes
Income tax expense (benefit)
Net income (loss)
Comparison of 2016 to 2015
$
$
$
$
Years ended December 31,
2015
10,240
386
9,854
9,183
19,781
(744)
(233)
(511)
$
$
2016
11,350
861
10,489
9,818
20,220
87
27
60
2014
8,877
765
8,112
9,843
18,691
(736)
(232)
(504)
Net income increased $0.6 million in 2016 compared to 2015. Net interest income increased $1.1 million, primarily due to $57.8
million growth in Private Banking loan balances. Non-interest income increased $0.6 million, primarily due to growth in assets
under management and steady performance. Non-interest expense increased $0.4 million, primarily due to an increase in share of
corporate expenses.
Comparison of 2015 to 2014
The net loss was flat in 2015 compared to 2014. Net interest income increased $1.4 million, due to $94.4 million growth in Private
Banking loan balances. Non-interest income decreased $0.7 million, primarily due to the full-year impact of reduced fee revenue
from net assets under management outflows in 2014. In 2015, net positive assets under management inflows were offset by a net
decline in assets under management valuations resulting from volatile market performance, primarily in the second half of the
year. Non-interest expense increased $1.1 million, primarily due to: an increased investment in marketing; consulting related to
enhancing investment management systems; occupancy expenses related to the physical move of the wealth advisory business;
and, expenses in support of the increased level of loan production in 2015.
Private Banking Selected Balance Sheet Information and Assets Under Administration/Management:
(In thousands)
Total assets
Loans
Deposits
Not included in above amounts:
$
2016
550,615
547,904
227,015
$
At December 31, 2016
2015
493,571
490,112
228,497
$
2014
398,893
395,667
211,298
Assets under administration/management
1,781,840
1,726,385
1,676,961
Loans increased $57.8 million at December 31, 2016 compared to December 31, 2015, as loan originations and advances outpaced
principal paydowns. Loans increased $94.4 million at December 31, 2015 compared to December 31, 2014, as loan originations
and advances outpaced principal paydowns.
Loan originations were $140.4 million, $183.1 million and $103.4 million for the years ended 2016, 2015 and 2014, respectively.
The decrease of $42.7 million in originations for the year ended December 31, 2016 is due to non-controllable market activity.
Private Banking held approximately $271.7 million, $276.1 million and $214.7 million in assets under administration at
December 31, 2016, December 31, 2015, and December 31, 2014, respectively, and $1.5 billion in assets under management at
December 31, 2016, December 31, 2015, and December 31, 2014, respectively. Private Banking assets under administration and
assets under management include assets attributable to Webster Wealth Advisers, Inc., a wholly-owned subsidiary of Webster
Financial Corporation, and are administered or managed under contractual arrangements between advisory personnel of that entity
and Commonwealth Financial Network, a provider of investment and insurance programs for financial institutions, a broker dealer
and investment advisor registered with the SEC and a member of the FINRA and the SIPC. Such assets were $451.1 million at
December 31, 2016 compared to $419.8 million at December 31, 2015 and $389.2 million at December 31, 2014.
42
Private Banking continued to build momentum on the basis of its fully transformed business model. During 2016, Private Banking
loans grew 11.8%, deposits decreased by 0.6% and assets under administration/management increased by 3.2%. Private Banking
also initiated the strategic build out of its presence in the Massachusetts and Rhode Island markets with the hiring of highly
experienced local market professionals.
Financial Condition
Webster had total assets of $26.1 billion at December 31, 2016 compared to $24.6 billion at December 31, 2015, an increase of
$1.5 billion, or 5.8%.
Loans and leases of $16.8 billion, net of ALLL of $194.3 million, at December 31, 2016 increased $1.3 billion compared to loans
and leases of $15.5 billion, net of ALLL of $175.0 million, at December 31, 2015. The increases were driven by strong loan
origination activity.
Total deposits of $19.3 billion at December 31, 2016 increased $1.3 billion compared to $18.0 billion at December 31, 2015. Non-
interest-bearing deposits increased 8.3%, and interest-bearing deposits increased 7.3% during the year ended December 31, 2016
primarily due to growth in health savings accounts.
At December 31, 2016, total shareholders' equity was $2.5 billion compared to $2.4 billion at December 31, 2015, an increase of
$113.1 million or, 4.7%. Changes in shareholders' equity for the year ended December 31, 2016 consisted of an increase of $207.1
million for net income and $1.1 million for other comprehensive income, partially offset by $89.9 million for dividends to common
shareholders, and $8.1 million for dividends paid to preferred shareholders.
The quarterly cash dividend to common shareholders was increased for the sixth consecutive year, on January 31, 2017, to $0.25
per common share from $0.23 per common share. See the "Selected Financial Highlights" section contained elsewhere in this
item and Note 13: Regulatory Matters in the Notes to Consolidated Financial Statements contained elsewhere in 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
OCC may establish additional individual limits on a certain type of investment if the concentration in such investment presents a
safety and soundness concern. In addition to the Bank, the Holding Company also may directly hold investment securities from
time-to-time.
The Company maintains, through its Corporate Treasury Unit, an investment securities portfolio that is primarily structured to
provide a source of liquidity for operating needs, to generate interest income, and as a means to 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 CMO, Agency MBS, Agency CMBS, CMBS, and CLO. The held-to-maturity portfolio consists primarily of
Agency CMO, Agency MBS, Agency CMBS, municipal bonds and notes, and CMBS. At December 31, 2016, the Company had
no investments in obligations of individual states, counties, or municipalities which exceeded 10% of consolidated shareholders’
equity.
The combined carrying value of investment securities totaled $7.2 billion and $6.9 billion at December 31, 2016 and December 31,
2015, respectively. Available-for-sale securities increased by $6.5 million, primarily due to principal purchase activity exceeding
principal paydowns, and sales. Held-to-maturity securities increased by $237.6 million, primarily due to the purchase activity
exceeding principal paydowns. On a tax-equivalent basis, the yield in the securities portfolio for the years ended December 31,
2016 and 2015 was 2.95% and 3.04%, respectively.
The Company held $4.4 billion in investment securities that are in an unrealized loss position at December 31, 2016. Approximately
$3.6 billion of this total has been in an unrealized loss position for less than twelve months, while the remainder, $0.8 billion, has
been in an unrealized loss position for twelve months or longer. The total unrealized loss was $114.0 million at December 31,
2016. 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.
For the year ended December 31, 2016, the Company recorded OTTI of $149 thousand on its available-for-sale securities. The
amortized cost of available-for-sale securities is net of $3.2 million and $3.3 million of OTTI at December 31, 2016 and
December 31, 2015, respectively, related to previously impaired CLO securities identified as Covered Fund investments as defined
under the Volcker Rule.
43
The following table summarizes the amortized cost and fair value of investment securities:
(In thousands)
Available-for-sale:
U.S. Treasury Bills
Agency CMO
Agency MBS
Agency CMBS
CMBS
CLO
Single issuer trust preferred
securities
Corporate debt securities
Equities-financial institutions
2016
2015
At December 31,
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair Value
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair Value
$
734 $
— $
— $
734
$
924 $
— $
— $
924
419,865
969,460
587,776
473,974
425,083
30,381
108,490
—
3,344
4,398
63
4,093
2,826
—
1,502
—
(3,503)
(19,509)
(14,567)
(702)
(519)
(1,748)
(350)
—
419,706
954,349
573,272
477,365
427,390
28,633
109,642
—
546,168
1,075,941
215,670
574,686
431,837
42,168
104,031
3,499
5,532
6,459
639
7,485
592
—
2,290
—
(2,946)
548,754
(17,291)
1,065,109
(959)
(2,905)
(3,270)
(4,998)
—
(921)
215,350
579,266
429,159
37,170
106,321
2,578
Securities available-for-sale
$ 3,015,763 $
16,226 $
(40,898) $ 2,991,091
$ 2,994,924 $
22,997 $
(33,290) $ 2,984,631
Held-to-maturity:
Agency CMO
Agency MBS
Agency CMBS
Municipal bonds and notes
CMBS
Private Label MBS
$
339,455 $
1,977 $
(3,824) $
337,608
$
407,494 $
3,717 $
(2,058) $
409,153
2,317,449
547,726
655,813
298,538
1,677
26,388
694
4,389
4,107
12
37,567 $
(41,768)
(1,348)
(25,749)
(411)
—
2,302,069
547,072
634,453
302,234
1,689
(73,100) $ 4,125,125
2,030,176
686,086
435,905
360,018
3,373
$ 3,923,052 $
38,813
4,253
12,019
5,046
46
63,894 $
(19,908)
(325)
(417)
(2,704)
—
2,049,081
690,014
447,507
362,360
3,419
(25,412) $ 3,961,534
Securities held-to-maturity
$ 4,160,658 $
The following table summarizes the amount and weighted-average yield by contractual maturity for debt securities:
(Dollars in thousands)
Available-for-sale:
U.S. Treasury Bills
Agency CMO
Agency MBS
Agency CMBS
CMBS
CLO
Single issuer trust preferred
securities
Corporate debt securities
Securities available-for-sale
Held-to-maturity:
Agency CMO
Agency MBS
Agency CMBS
Municipal bonds and notes
CMBS
Private Label MBS
Securities held-to-maturity
Total debt securities
$
$
$
$
$
Within 1 Year
1 - 5 Years
5 - 10 Years
After 10 Years
Total
Amount
Weighted
Average
Yield
Amount
Weighted
Average
Yield
Amount
Weighted
Average
Yield
Amount
Weighted
Average
Yield
Amount
Weighted
Average
Yield
At December 31, 2016
734
—
—
—
—
—
—
0.45% $
—
—
—
—
—
—
—
—
—
—
—
—
—
—% $
—
—
—
—
—
—
7,473
11,307
—
135,632
377,941
—% $
2.68
2.15
—
2.68
3.06
—
412,233
943,042
573,272
341,733
49,449
—% $
2.63
2.36
2.47
3.45
3.12
734
419,706
954,349
573,272
477,365
427,390
0.45%
2.63
2.35
2.47
3.23
3.07
—
—
—
28,633
2.42
28,633
2.42
75,649
76,383
3.21
3.19% $
22,190
22,190
2.89
—
2.89% $ 532,353
—
11,803
2.94% $2,360,165
2.60
109,642
2.60% $2,991,091
3.08
2.68%
—
—
—
1,595
—
—
1,595
—% $
—
—% $
6,293
3.08% $ 333,162
2.66% $ 339,455
—
—
6.02
—
—
6.02% $
9,855
—
5,781
—
1,677
17,313
4.12
—
6.82
—
4.61
5.07% $
27,672
—
12,869
—
—
46,834
2.98
—
6.19
—
—
2,279,922
547,726
635,568
298,538
—
3.88% $4,094,916
2.46
2.76
5.20
3.19
—
2,317,449
547,726
655,813
298,538
1,677
3.00% $4,160,658
2.66%
2.48
2.76
5.23
3.19
4.61
3.02%
77,978
3.24% $
39,503
3.86% $ 579,187
3.02% $6,455,081
2.85% $7,151,749
2.87%
The benchmark 10-year U.S. Treasury rate increased to 2.45% on December 31, 2016 from 2.27% on December 31, 2015. Webster
Bank has the ability to use its investment portfolio, as well as interest-rate derivative financial instruments within internal policy
guidelines, to hedge and manage interest rate risk as part of its asset/liability strategy. See Note 15: Derivative Financial Instruments
in the Notes to Consolidated Financial Statements contained elsewhere in this report for additional information concerning the
use of derivative financial instruments.
44
Alternative Investments
Investments in Private Equity Funds. The Company has investments in private equity funds. These investments, which totaled
$10.8 million at December 31, 2016 and $10.9 million at December 31, 2015, 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 16: Fair Value Measurements
in the Notes to Consolidated Financial Statements contained elsewhere in this report. The Company recognized a net gain of $256
thousand, $2.7 million, and $733 thousand for the years ended December 31, 2016, 2015, and 2014, 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 $5.7 million and $5.5 million at December 31, 2016 and
December 31, 2015, respectively, are included in other assets in the accompanying Consolidated Balance Sheets. These funds are
held at cost and subject to impairment testing. The Company recorded a net gain of $35 thousand, a net loss of $398 thousand,
and a net gain of $110 thousand for the years ended December 31, 2016, 2015, and 2014, respectively, related to these investments.
These amounts are included in other non-interest income in the accompanying Consolidated Statements of Income.
The Volcker Rule prohibits investments in private equity funds and non-public funds that are considered Covered Funds, as defined
in the regulation. Compliance with the rule provisions is generally required by July 21, 2017. Webster submitted an illiquid funds
extension request on January 13, 2017. See the "Supervision and Regulation" section contained elsewhere in this report for
additional information on the Volcker Rule, including Covered Funds.
Loans and Leases
The following table provides the composition of loans and leases:
(Dollars in thousands)
Amount
%
Amount
%
Amount
%
Amount
%
Amount
%
2016
2015
At December 31,
2014
2013
2012
Residential
Consumer:
Home equity
Liquidating - home equity
Other consumer
Total consumer
Commercial:
$ 4,232,771
24.9
$ 4,042,960
25.8
$ 3,498,675
25.2
$ 3,353,967
26.5
$ 3,285,945
27.2
2,330,508
13.7
2,360,244
15.1
2,367,402
17.0
2,355,257
18.5
2,448,207
20.4
64,975
274,336
0.4
1.6
79,171
248,830
0.5
1.6
92,056
75,307
0.7
0.5
104,902
60,681
0.8
0.5
121,875
43,672
1.0
0.4
2,669,819
15.7
2,688,245
17.2
2,534,765
18.2
2,520,840
19.8
2,613,754
21.8
Commercial non-mortgage
4,151,740
24.4
3,575,042
22.8
3,098,892
22.3
2,734,025
21.5
2,409,816
20.0
Asset-based
808,836
4.8
755,709
4.8
662,615
4.8
560,666
4.4
505,425
4.2
Total commercial
4,960,576
29.1
4,330,751
27.6
3,761,507
27.1
3,294,691
25.9
2,915,241
24.2
Commercial real estate:
Commercial real estate
4,141,025
24.3
3,696,596
23.6
3,326,906
23.9
2,856,110
22.5
2,644,229
22.0
Commercial construction
375,041
2.2
300,246
1.9
235,449
1.7
205,397
1.6
142,070
1.2
Total commercial real estate
4,516,066
26.5
3,996,842
25.5
3,562,355
25.6
3,061,507
24.1
2,786,299
23.2
Equipment financing
Net unamortized premiums
Net deferred fees
630,040
9,402
7,914
3.7
0.1
—
594,984
7,477
10,476
3.8
—
0.1
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
Total loans and leases
$ 17,026,588 100.0
$ 15,671,735 100.0
$ 13,900,025 100.0
$ 12,699,776 100.0
$ 12,028,696 100.0
45
Total residential loans were $4.2 billion at December 31, 2016, a net increase of $189.8 million from December 31, 2015, primarily
the result of originations of $421.0 million during the year ended December 31, 2016, partially offset by loan payments.
Total consumer loans were $2.7 billion at December 31, 2016, a net decrease of $18.4 million from December 31, 2015, primarily
the result of net paydowns in the equity line and loan products partially offset by originations of $686.7 million during the year
ended December 31, 2016.
Total commercial loans were $5.0 billion at December 31, 2016, a net increase of $629.8 million from December 31, 2015. The
growth in commercial loans is primarily related to new originations of $1.7 billion in commercial non-mortgage loans for the year
ended December 31, 2016, partially offset by loan payments. Asset-based loans increased $53.1 million from December 31, 2015,
reflective of $360.5 million in originations and line usage during the year ended December 31, 2016, partially offset by loan
payments.
Total commercial real estate loans were $4.5 billion at December 31, 2016, a net increase of $519.2 million from December 31,
2015 as a result of originations of $1.2 billion during the year ended December 31, 2016, partially offset by loan payments.
Equipment financing loans and leases were $630.0 million at December 31, 2016, a net increase of $35.1 million from December 31,
2015, primarily the result of $242.6 million in originations during the year ended December 31, 2016, partially offset by loan
payments.
The following table provides contractual maturity and interest-rate sensitivity information for loans and leases:
(In thousands)
Residential
Consumer:
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
Total loans and leases
(In thousands)
Fixed rate
Variable rate
At December 31, 2016
Contractual Maturity
One Year Or Less
More Than One
To Five Years
More Than Five
Years
Total
$
1,539
$
51,359
$ 4,201,784
$ 4,254,682
3,392
5,382
8,774
521,507
112,781
634,288
356,040
169,745
525,785
16,017
150,547
253,349
403,896
3,160,507
692,525
3,853,032
1,732,195
132,669
1,864,864
463,189
2,255,954
15,876
2,271,830
453,611
—
453,611
2,049,049
71,148
2,120,197
156,423
2,409,893
274,607
2,684,500
4,135,625
805,306
4,940,931
4,137,284
373,562
4,510,846
635,629
$ 1,186,403
$ 6,636,340
$ 9,203,845
$ 17,026,588
Interest-Rate Sensitivity
One Year Or Less
More Than One
To Five Years
More Than Five
Years
Total
$
223,797
$ 1,195,396
$ 3,886,846
$ 5,306,039
962,606
5,440,944
5,316,999
11,720,549
Total loans and leases
$ 1,186,403
$ 6,636,340
$ 9,203,845
$ 17,026,588
46
Asset Quality
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:
Non-performing loans and leases as a percentage of loans and leases
0.79%
0.89%
0.93%
1.28%
1.61%
Non-performing assets as a percentage of loans and leases plus OREO
Non-performing assets as a percentage of total assets
0.81
0.53
0.92
0.59
0.98
0.61
1.34
0.82
1.64
0.98
ALLL as a percentage of non-performing loans and leases
144.98
125.05
122.62
94.10
91.25
At or for the years ended December 31,
2016
2015
2014
2013
2012
ALLL as a percentage of loans and leases
Net charge-offs as a percentage of average loans and leases
Ratio of ALLL to net charge-offs
Non-performing Assets
1.14
0.23
1.12
0.23
1.15
0.23
1.20
0.47
1.47
0.68
5.25x
5.21x
5.21x
2.63x
2.28x
The following table provides information regarding lending-related non-performing assets:
(Dollars in thousands)
Residential
Consumer:
Home equity
Liquidating - home equity
Other consumer
Total consumer
Commercial:
Commercial non-mortgage
Asset-based loans
Total commercial
Commercial real estate:
Commercial real estate
Commercial construction
Total commercial real estate
Equipment financing
Total non-performing loans and leases (3)
2016
Amount (1) % (2)
2015
Amount (1) % (2)
At December 31,
2014
Amount (1) % (2)
2013
Amount (1) % (2)
2012
Amount (1) % (2)
$
47,201
1.12
$
54,101
1.34
$
64,022
1.83
$
80,589
2.40
$
94,854
2.89
32,992
2,883
1,663
37,538
38,550
—
38,550
9,859
662
10,521
225
134,035
1.42
4.44
0.61
1.41
0.93
—
0.78
0.24
0.18
0.23
0.04
0.79
1.42
4.88
0.22
1.41
0.76
—
0.63
0.45
1.15
0.51
0.12
0.89
33,414
3,865
558
37,837
27,086
—
27,086
16,750
3,461
20,211
706
139,941
128
1.50
4.84
0.37
1.59
0.21
—
0.17
0.45
1.55
0.52
0.10
0.94
35,490
4,460
280
40,230
6,436
—
6,436
15,016
3,659
18,675
518
129,881
267
1.93
5.95
0.23
2.06
0.40
—
0.33
0.47
2.06
0.58
0.25
1.28
45,434
6,245
139
51,818
10,933
—
10,933
13,428
4,235
17,663
1,141
162,144
303
2.02
6.67
0.31
2.21
0.73
—
0.60
0.59
3.58
0.74
0.80
1.62
49,402
8,133
135
57,670
17,538
—
17,538
15,634
5,092
20,726
3,325
194,113
351
Deferred costs and unamortized premiums
(219)
Total
$ 133,816
$ 140,069
$ 130,148
$ 162,447
$ 194,464
Total non-performing loans and leases
$ 134,035
$ 139,941
$ 129,881
$ 162,144
$ 194,113
Foreclosed and repossessed assets:
Residential and consumer
Commercial
Total foreclosed and repossessed assets
3,911
—
3,911
5,029
—
5,029
3,517
2,999
6,516
4,930
3,752
8,682
2,659
723
3,382
Total non-performing assets
$ 137,946
$ 144,970
$ 136,397
$ 170,826
$ 197,495
(1) Balances by class exclude the impact of net deferred costs and unamortized premiums.
(2) Represents the principal balance of non-performing loans and leases as a percentage of the outstanding principal balance within the
comparable loan and lease category. The percentage excludes the impact of deferred costs and unamortized premiums.
(3) Includes non-accrual restructured loans and leases of $75.7 million, $100.9 million, $76.9 million, $103.0 million and $115.6 million
as of December 31, 2016, 2015, 2014, 2013 and 2012, respectively.
47
The following table provides detail of non-performing loan and lease activity:
(In thousands)
Beginning balance
Additions
Paydowns/draws
Charge-offs
Other reductions
Ending balance
Impaired Loans and Leases
Years ended December 31,
2016
139,941 $
109,002
(64,057)
(39,738)
(11,113)
134,035 $
2015
129,881
136,863
(84,219)
(34,363)
(8,221)
139,941
$
$
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, all TDR, and all loans that have had a partial charge-off 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
individual 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 ALLL. 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 ALLL. Any impaired loan for which no specific valuation
allowance was necessary at December 31, 2016 and December 31, 2015 is the result of either sufficient cash flow or sufficient
collateral coverage of the book balance.
At December 31, 2016, there were 1,635 impaired loans and leases with a recorded investment balance of $249.4 million, which
included loans and leases of $152.6 million with an impairment allowance of $18.6 million, compared to 1,764 impaired loans
and leases with a recorded investment balance of $279.2 million, which included loans and leases of $183.9 million, with an
impairment allowance of $22.2 million at December 31, 2015.
The overall reduction in the number of impaired loans is due primarily to small dollar consumer loans being resolved. Overall
commercial impaired balances did not change, due to four credits entering impaired status offset by the resolution of four credits.
The reduction of $3.6 million in impaired reserve balance reflects management's current assessment on the resolution of these
credits based on collateral considerations, guarantees, or expected future cash flows of the impaired loans.
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 borrower has been discharged under Chapter 7 bankruptcy are considered collateral dependent TDR and thus, impaired at the
date of discharge and charged down to the fair value of collateral less cost to sell.
48
The Company’s policy is to place each consumer loan TDR, except those that were performing prior to TDR status, on non-accrual
status for a minimum period of 6 months. Commercial TDR 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 TDR are reported as impaired. Generally,
TDR are classified as impaired loans and reported as TDR 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 tables provide information for TDR:
(In thousands)
Beginning balance
Additions
Paydowns/draws
Charge-offs
Transfers to OREO
Ending balance
(In thousands)
Accrual status
Non-accrual status
Total recorded investment of TDR (1)
Accruing TDR performing under modified terms more than one year
Specific reserves for TDR included in the balance of ALLL
Additional funds committed to borrowers in TDR status
Years ended December 31,
2016
272,690
41,662
(66,596)
(18,588)
(5,640)
223,528
2015
318,794
44,787
(76,615)
(11,785)
(2,491)
272,690
$
$
At December 31,
2016
147,809
75,719
223,528
57.1%
14,583
459
$
$
$
2015
171,784
100,906
272,690
55.0%
21,405
1,133
$
$
$
$
$
(In thousands)
Residential
Consumer
Commercial (1)
Total recorded investment of TDR (2)
2016
Amount % (3)
2.81
$ 119,391
1.70
45,673
0.58
58,464
1.31
$ 223,528
2015
Amount % (3)
3.31
$ 134,448
1.79
48,425
1.01
89,817
1.74
$ 272,690
At December 31,
2014
Amount % (3)
4.05
$ 141,982
1.97
50,249
1.61
126,563
2.29
$ 318,794
2013
Amount % (3)
4.24
$ 142,413
2.05
52,092
2.15
146,428
2.68
$ 340,933
2012
Amount % (3)
4.45
$ 146,479
2.08
54,675
3.30
201,488
3.35
$ 402,642
(1) Consists of commercial, commercial real estate and equipment financing loans and leases.
(2) Excludes accrued interest receivable of $0.7 million, $1.1 million, $1.4 million, $1.0 million and $1.5 million at December 31, 2016,
2015, 2014, 2013 and 2012, respectively.
(3) Represents the balance of TDR as a percentage of the outstanding balance within the comparable loan and lease category. The
percentage includes the impact of deferred costs and unamortized premiums.
49
Delinquent loans and leases
The following table provides information regarding loans and leases past due 30 days or more and accruing income:
At December 31,
(Dollars in thousands)
Residential
Consumer:
Home equity
Liquidating - home equity
Other consumer
Commercial:
2016
2014
Amount (1) % (2) Amount (1) % (2) Amount (1) % (2) Amount (1) % (2) Amount (1) % (2)
0.77
$
25,182
17,216
18,285
15,032
11,202
0.49
0.37
0.26
0.55
2012
2013
2015
$
$
$
$
13,484
1,094
3,715
0.58
1.68
1.35
12,225
1,036
2,000
0.52
1.31
0.80
14,757
1,658
1,110
0.62
1.80
1.47
18,290
1,806
636
0.78
1.72
1.05
24,344
3,588
516
0.99
2.94
1.18
Commercial non-mortgage
1,949
0.05
4,052
0.11
2,099
0.07
4,100
0.15
2,769
0.11
Commercial real estate:
Commercial real estate
Equipment financing
Loans and leases past due 30-89 days
Residential
Commercial non-mortgage
Commercial real estate
Loans and leases past due 90 days and
accruing
Total loans and leases over 30 days past
due and accruing income
Deferred costs and unamortized premiums
8,173
1,596
41,213
0.20
0.25
0.24
— —
749
0.02
— —
2,250
602
37,197
2,029
0.06
0.10
0.24
0.05
22 —
— —
2,714
701
40,255
2,039
0.08
0.13
0.29
0.06
48 —
— —
4,897
362
48,376
781
4,269
232
0.17
0.08
0.38
0.02
0.16
0.01
14,710
1,926
73,035
686
346
891
0.56
0.46
0.61
0.02
0.01
0.03
749 —
2,051
0.01
2,087
0.02
5,282
0.04
1,923
0.02
41,962
0.25
39,248
0.25
42,342
0.30
53,658
0.42
74,958
0.62
86
86
96
189
214
Total
$
42,048
$
39,334
$
42,438
$
53,847
$
75,172
(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.
Allowance for Loan and Lease Losses Methodology
The ALLL is maintained at a level deemed sufficient by management to cover probable losses inherent within the loan and lease
portfolios. Executive management reviews and advises on the adequacy of these reserves. The ALLL policy is considered a critical
accounting policy.
The quarterly process for estimating probable losses is based on predictive models, the current risk profile of loan portfolios, and
other relevant factors. Management's judgment and assumptions influence loss estimates and ALLL balances. Management
considers factors such as the nature and volume of portfolio growth, national and regional economic conditions and trends, and
other internal performance metrics, and how each of these factors is expected to impact near term loss trends. While actual future
conditions and realized losses may vary significantly from assumptions, management believes the ALLL is adequate as of
December 31, 2016.
Webster Bank’s methodology for assessing an appropriate level of the ALLL includes three key elements:
• Impaired loans and leases are either analyzed on an individual or pooled basis and assessed for specific reserves based on
collateral, cash flow, and probability of re-default specific to each loan or lease;
• Loans and leases with similar risk characteristics are segmented into homogeneous pools and modeled using quantitative
methods. The commercial portfolio loss estimate is based on the expected loss methodology - specifically, 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. Residential and consumer portfolio loss estimates are based on roll
rate models. Webster Bank considers other quantitative contributing factors for risks impacting the performance of loan
portfolios that are not explicitly included in the quantitative models and may adjust loss estimates based on these factors.
Contributing factors may include, but are not limited to, collateral values, unemployment, and other changes in economic
activity, and internal performance metrics; and
• Webster Bank also considers qualitative factors that are not explicitly factored into the quantitative models but that can have
an incremental or regressive impact on losses incurred in the current loan and lease portfolio. Examples include staffing levels,
credit concentrations, and macro-economic trends. The quantitative and qualitative contributing factors are consistent with
interagency regulatory guidance.
50
The ALLL reserve coverage increased to 1.14% at December 31, 2016 compared to 1.12% at December 31, 2015 and remains
adequate to cover probable losses embedded in the portfolio.
Webster Bank has credit policies and procedures in place designed to support loan growth within an acceptable level of risk.
Management reviews and approves these policies and procedures on a regular basis. To assist management with its review, reports
related to loan production, loan quality, concentrations of credit, loan delinquencies, non-performing loans, and potential problem
loans are generated by loan reporting systems.
Commercial loans are underwritten after evaluating and understanding the borrower’s ability to operate and service its debt.
Underwriting standards are designed in support for the promotion of relationships rather than transactional banking. Once it is
determined that the borrower’s management possesses sound ethics and solid business acumen, the Company 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.
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. In addition, these loans often include partial or full
completion guarantees. 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 with 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 and non-qualified mortgage loans as defined by the CFPB rules that went into effect on January 10, 2014.
The ALLL methodology for groups of loans collectively evaluated for impairment are comprised of both a quantitative and
qualitative analysis. A key assumption in the quantitative component of the reserve is the LEP, which 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 the Company's annual review of ALLL assumptions, management has performed an analysis
of the LEP for both commercial and consumer loans, using charge-off, servicing and behavioral data. The analysis confirmed a
24 month LEP for the home equity, business banking and commercial & industrial loan portfolios. The LEP for unsecured consumer
portfolio is 12 months and the LEP for residential mortgages and commercial real estate portfolio are 30 months and 36 months,
respectively. Another key ALLL assumption is the LBP, which represents the historical period of time over which data is used to
estimate loss rates. Commercial loss models continue to use an LBP that goes back to 2006, with the more recent 2010-2014 years
weighted more heavily than the 2006-2009 prior years. 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, 2016 the ALLL was $194.3 million compared to $175.0 million at December 31, 2015. The increase of $19.3
million in the reserve at December 31, 2016 compared to December 31, 2015 is primarily due to a combination of loan growth,
portfolio mix and higher reserve coverage for the consumer and commercial portfolios. The ALLL as a percentage of the total
loan and lease portfolio increased to 1.14% at December 31, 2016 from 1.12% at December 31, 2015. The ALLL as a percentage
of total non-performing loans and leases increased to 144.98% at December 31, 2016 from 125.05% at December 31, 2015.
51
The following table provides an allocation of the ALLL by portfolio segment:
At December 31,
(Dollars in thousands)
Residential
Consumer
Commercial
Commercial real estate
Equipment financing
2016
Amount
$
23,226
45,233
71,905
47,477
6,479
Total ALLL
$ 194,320
2015
Amount
$
25,876
42,052
59,977
41,598
5,487
$ 174,990
% (1)
0.55
1.68
1.46
1.05
1.02
1.14
2014
Amount
$
25,452
43,518
47,068
37,148
6,078
$ 159,264
% (1)
0.64
1.56
1.39
1.04
0.91
1.12
2013
Amount
$
23,027
41,951
46,655
36,754
4,186
$ 152,573
% (1)
0.73
1.71
1.26
1.05
1.13
1.15
2012
Amount
$
32,030
56,995
47,650
36,122
4,332
$ 177,129
% (1)
0.69
1.65
1.42
1.20
0.91
1.20
% (1)
0.97
2.17
1.64
1.30
1.03
1.47
(1) Percentage represents allocated ALLL 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 allocated to the residential loan portfolio at December 31, 2016 decreased $2.7 million compared to
December 31, 2015. The year-over-year decrease is primarily attributable to reduction in the impaired loan reserves.
The ALLL reserve allocated to the consumer portfolio at December 31, 2016 increased $3.2 million compared to December 31,
2015. The year-over-year increase is primarily attributable to growth in the unsecured portfolio.
The ALLL reserve allocated to the commercial portfolio at December 31, 2016 increased $11.9 million compared to December 31,
2015. The year-over-year increase is primarily attributable to a $624.9 million increase in loans during the year.
The ALLL reserve allocated to the commercial real estate portfolio at December 31, 2016 increased $5.9 million compared to
December 31, 2015. The year-over-year increase is primarily attributable to loan growth of more than $519.2 million.
The ALLL reserve allocated to the equipment financing portfolio at December 31, 2016 increased $1.0 million compared to
December 31, 2015. The increase is attributed to loan growth of $35.1 million.
52
The following tables provide detail of activity in the ALLL:
(In thousands)
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
Residential
Consumer
Commercial
Commercial real estate
Equipment financing
Net charge-offs
Ending balance
At or for the years ended December 31,
2016
$ 174,990
56,350
2015
$ 159,264
49,300
2014
$ 152,573
37,250
2013
$ 177,129
33,500
2012
$ 233,487
21,500
(4,636)
(20,669)
(18,360)
(2,682)
(565)
(46,912)
1,756
5,343
1,626
631
536
9,892
(6,508)
(17,679)
(11,522)
(7,578)
(273)
(43,560)
875
4,366
2,738
647
1,360
9,986
(6,214)
(20,712)
(13,668)
(3,237)
(595)
(44,426)
1,324
5,055
4,369
885
2,234
13,867
(11,592)
(29,037)
(19,126)
(15,425)
(279)
(75,459)
1,402
6,185
5,123
1,648
3,045
17,403
(12,927)
(43,920)
(35,793)
(9,894)
(1,668)
(104,202)
803
7,040
6,817
2,210
9,474
26,344
(2,880)
(15,326)
(16,734)
(2,051)
(29)
(37,020)
$ 194,320
(5,633)
(13,313)
(8,784)
(6,931)
1,087
(33,574)
$ 174,990
(4,890)
(15,657)
(9,299)
(2,352)
1,639
(30,559)
$ 159,264
(10,190)
(22,852)
(14,003)
(13,777)
2,766
(58,056)
$ 152,573
(12,124)
(36,880)
(28,976)
(7,684)
7,806
(77,858)
$ 177,129
Net charge-offs for the years ended December 31, 2016 and 2015 were $37.0 million and $33.6 million, respectively. Net charge-
offs increased by $3.4 million during the year ended December 31, 2016 compared to the year ended December 31, 2015. The
increase in net charge-off activity reflects higher levels of losses, offset somewhat by lower levels of recoveries, coupled with
increased loan balances for the year ended December 31, 2016.
The following table provides a summary of total net charge-offs (recoveries) to average loans and leases by category:
Residential
Consumer
Commercial
Commercial real estate
Equipment financing
Total net charge-offs to total average loans and leases
Reserve for Unfunded Credit Commitments
2016
0.07%
0.56
0.36
0.05
—
0.23%
Years ended December 31,
2014
2013
2015
0.15%
0.51
0.22
0.18
(0.20)
0.23%
0.14%
0.61
0.26
0.07
(0.34)
0.23%
0.31%
0.89
0.46
0.48
(0.67)
0.47%
2012
0.37%
1.37
1.12
0.30
(1.84)
0.68%
A reserve for unfunded credit commitments provides for probable losses inherent with funding the unused portion of legal
commitments to lend. Reserve calculation factors are consistent with the ALLL methodology for funded loans using the loss given
default, probability of default, and a draw down factor applied to the underlying borrower risk and facility grades.
The following tables provide detail of activity in the reserve for unfunded credit commitments:
(In thousands)
Beginning balance
Provision (benefit) (1)
Ending balance
2016
At or for the years ended December 31,
2014
2015
2013
$
$
2,119
168
2,287
$
$
5,151
(3,032)
2,119
$
$
4,384
767
5,151
$
$
5,662
(1,278)
4,384
$
$
2012
5,449
213
5,662
(1) See Note 20: Commitments and Contingencies for information regarding a change in the draw down factor estimation for 2015.
53
Sources of Funds and Liquidity
Sources of Funds. The primary source of Webster Bank’s cash flows for use in lending and meeting its general operational needs
is deposits. Operating activities, such as loan and mortgage-backed securities repayments, and securities sale proceeds and
maturities, also provide cash flows. 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. Additional sources of funds are provided by FHLB advances or other borrowings.
Federal Home Loan Bank and Federal Reserve Bank Stock. Webster Bank is a member of the FHLB 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 sources of funds and liquidity 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 FHLB capital stock of $143.9 million at December 31, 2016
and $137.6 million at December 31, 2015 for its membership and for outstanding advances and other extensions of credit. Webster
Bank received $5.0 million in dividends from the FHLB during 2016.
Additionally, Webster Bank is required to hold FRB of Boston 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 Federal Reserve System. A 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, 2016 and December 31,
2015, Webster Bank held $50.7 million of FRB of Boston capital stock. Beginning in 2016, the semi-annual dividend payment
from the FRBs is calculated as the lesser of three percent or yield of the 10-year Treasury note auctioned at the last auction held
prior to the payment of the dividend. Webster Bank received $1.1 million in dividends from the FRB of Boston during 2016.
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 for both consumer and business customers throughout 175 banking centers within its primary market area.
Webster Bank manages the flow of funds in its deposit accounts and provides a variety of accounts and rates consistent with 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 average deposits increased $1.4 billion, or 8.0%, in 2016 compared to 2015 and increased $2.2 billion, or 14.2%, in 2015
compared to 2014. The increase was driven by the overall growth in accounts, which a significant component was due to the
acquired JPMorgan Chase health savings accounts. Additionally, there has been steady growth in deposits, most significantly for
health savings accounts and non-interest bearing classifications, partially offset by declining money market and time deposits.
Daily average balances of deposits by type and weighted-average rates paid thereon for the periods as 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,
2016
2015
2014
Average
Balance
Average
Rate
Average
Balance
Average
Rate
Average
Balance
Average
Rate
$
3,853,700
$
3,564,751
$
3,216,777
2,422,862
4,150,733
2,279,301
4,219,681
2,027,029
15,099,606
18,953,306
$
0.07%
0.23
0.36
0.19
1.11
0.33
0.26% $
2,245,015
3,561,900
2,076,770
3,962,364
2,138,778
13,984,827
17,549,578
0.06%
0.24
0.23
0.18
1.15
0.33
0.26% $
2,054,318
1,738,368
2,171,469
3,899,548
2,280,668
12,144,371
15,361,148
0.05%
0.30
0.19
0.19
1.16
0.36
0.29%
Total deposits were $19.3 billion, $18.0 billion, and $15.7 billion at December 31, 2016, 2015, and 2014, respectively, with time
deposits that meet or exceed the FDIC limit, presently $250 thousand, representing approximately 5.2%, 5.6%, and 6.6%,
respectively, of total deposits.
For additional information, see Note 9: Deposits in the Notes to Consolidated Financial Statements contained elsewhere in this
report.
54
The following table presents time deposits with a denomination of $100 thousand or more at December 31, 2016 by maturity
periods:
(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
$
$
117,078
182,921
288,981
419,603
1,008,583
Borrowings. Utilized as a source of funding for liquidity and interest rate risk management purposes, borrowings primarily consist
of FHLB advances and securities sold under agreements to repurchase, whereby securities are delivered to counterparties under
an agreement to repurchase the securities at a fixed price in the future. At December 31, 2016 and December 31, 2015, FHLB
advances totaled $2.8 billion and $2.7 billion, respectively. Webster Bank had additional borrowing capacity from the FHLB of
approximately $1.2 billion for both December 31, 2016 and December 31, 2015, respectively. Webster Bank also had additional
borrowing capacity from the FRB of $0.6 billion at December 31, 2016 and $0.7 billion December 31, 2015. In addition, unpledged
securities of $4.2 billion at December 31, 2016 could have been used to increase borrowing capacity by $3.7 billion with the
FHLB, and $3.6 billion with the FRB, or alternatively used to collateralize other borrowings such as repurchase agreements.
In addition, Webster Bank may utilize term and overnight Fed 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. Total borrowed funds
were $4.0 billion, $4.0 billion and $4.3 billion, and represented 15.4%, 16.4% and 19.3% of total assets at December 31, 2016,
2015 and 2014, respectively. For additional information, see Note 10: Borrowings in the Notes to Consolidated Financial Statements
contained elsewhere in this report.
Daily average balances of borrowings by type and weighted-average rates paid thereon for the periods as indicated:
(Dollars in thousands)
FHLB advances
Securities sold under agreements to repurchase
Federal funds
Long-term debt
Total average borrowings
Years ended December 31,
2016
Average
Balance
2,413,309
744,957
202,901
225,607
3,586,774
$
$
Average
Rate
1.20% $
1.82
0.46
4.42
1.49% $
2015
Average
Balance
2,084,496
842,207
302,756
226,292
3,455,751
Average
Rate
1.10% $
1.93
0.21
4.27
1.43% $
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%
Total average borrowings increased $131.0 million, or 3.8%, in 2016 compared to 2015 and decreased $188.7 million, or 5.2%,
in 2015 compared to 2014. The increase in 2016 compared to 2015 was primarily due to an increase in FHLB borrowings. The
decrease in 2015 compared to 2014 was primarily due to lower borrowings of securities sold under agreements to repurchase and
Federal funds. Average borrowings represented 14.2%, 14.7%, and 17.0% of average total assets for December 31, 2016, 2015,
and 2014, respectively.
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,
2016
2015
2014
Amount
Rate
Amount
Rate
Amount
Rate
$ 340,526
321,460
365,361
0.16% $ 334,400
325,015
0.16
409,756
—
0.15% $ 409,756
374,935
0.15
459,259
—
209,000
202,893
294,000
0.60
0.46
—
317,000
302,756
479,000
0.39
0.21
—
291,000
387,004
457,000
0.15%
0.16
—
0.17
0.20
—
55
The following table summarizes contractual obligations to make future payments as of December 31, 2016:
(In thousands)
Senior notes
Junior subordinated debt
FHLB advances
Securities sold under agreements to repurchase
Fed funds purchased
Deposits with stated maturity dates
Operating leases
Purchase obligations
Total contractual obligations
Less than
one year
$
$
— $
—
2,130,500
440,526
209,000
846,160
28,713
49,823
3,704,722 $
Payments Due by Period (1)
1-3 years
3-5 years
After 5
years
— $
—
328,026
300,000
—
892,762
52,690
74,264
1,647,742 $
— $
—
225,000
—
—
285,775
45,760
27,476
584,011 $
150,000 $
77,320
159,370
—
—
111
88,211
—
475,012 $
Total
150,000
77,320
2,842,896
740,526
209,000
2,024,808
215,374
151,563
6,411,487
(1) Amounts for borrowings do not include interest. Amounts for leases are reflected as specified in the underlying contracts.
The Company also has the following obligations which have been excluded from the above table:
• unfunded commitments remaining for particular investments in private equity funds of $7.7 million, for which neither the
payment timing, nor eventual obligation is certain;
• credit related financial instruments with contractual amounts totaling $5.4 billion, of which many of these commitments
are expected to expire unused or only partially used, and therefore, the total amount of these commitments does not necessarily
reflect future cash payments; and
• liabilities for UTPs totaling $5.6 million, for which uncertainty exists regarding the amount that may ultimately be paid,
as well as the timing of any such payment.
Liquidity. Webster meets its cash flow requirements at an efficient cost under various operating environments through proactive
liquidity management at both the Holding 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.
To a lesser extent, 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 its 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 the section captioned "Supervision and Regulation" in Item 1. At December 31, 2016, there was $313.9 million of
retained earnings available for the payment of dividends by Webster Bank to the Holding Company. Webster Bank paid $145.0
million in dividends to the Holding Company during the year ended December 31, 2016.
The Company has a common stock repurchase program authorized by the Board of Directors, with $15.5 million of remaining
repurchase authority at December 31, 2016. In addition, Webster periodically acquires common shares outside of the repurchase
program related to stock compensation plan activity. The Company records the purchase of shares of common stock at cost based
on the settlement date for these transactions. During the year ended December 31, 2016, a total of 638,964 shares of common
stock were repurchased at a cost of approximately $22.9 million, of which 350,000 shares were purchased under the common
stock repurchase program at a cost of approximately$11.2 million, and 288,964 shares were purchased related to stock compensation
plan activity at a cost of approximately $11.7 million.
Webster Bank Liquidity. Webster Bank's primary source of funding is core deposits, consisting of demand, checking, savings,
health savings, and money market accounts. The primary use of this funding is for loan portfolio growth. Webster Bank had a loan
to total deposit ratio of 88.2% and 87.3% at December 31, 2016 and December 31, 2015, respectively.
Webster Bank is required by regulations adopted by the OCC to maintain liquidity sufficient to ensure safe and sound operations.
Whether liquidity is adequate, as assessed by the OCC, depends on such factors as the overall asset/liability structure, market
conditions, competition, and the nature of the institution’s deposit and loan customers. Webster Bank exceeded all regulatory
liquidity requirements as of December 31, 2016. The Company 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.
56
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 minimum tangible capital requirements.
As of December 31, 2016, Webster Bank was in compliance with all applicable capital requirements and exceeded the FDIC
requirements for a well capitalized institution. See Note 13: Regulatory Matters in the Notes to Consolidated Financial Statements
contained elsewhere in this report for a further discussion of regulatory requirements applicable to the Holding Company 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
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. Such transactions are utilized in the normal course of business,
for general corporate purposes or for customer financing needs. Corporate purpose transactions are structured to manage credit,
interest rate, and liquidity risks, or to optimize capital. Customer transactions are structured to manage their funding requirements
or facilitate certain trade arrangements. These transactions give rise to, in varying degrees, elements of credit, interest rate, and
liquidity risk. For the year ended December 31, 2016, 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, interest rate sensitivity is monitored
on an ongoing basis by ALCO. 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 policy 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 at December 31, 2016 and 2015, the declining interest rate scenarios for both the
earnings at risk for parallel ramps and the equity at risk for parallel shocks have been temporarily suspended per ALCO policy.
ALCO also regularly reviews earnings at risk scenarios for non-parallel changes in rates, as well as longer-term earnings at risk
for up to four years in the future.
Management measures interest rate risk using simulation analysis to calculate earnings and equity at risk. These risk measures are
quantified using simulation software from one of the leading firms in the field of asset/liability modeling. Key assumptions relate
to the behavior of interest rates and spreads, prepayment speeds, and the run-off of deposits. From such simulations, interest rate
risk is quantified, and appropriate strategies are formulated and implemented.
Earnings at risk is defined as the change in earnings (excluding provision for loan and lease losses and income tax expense) due
to changes in interest rates. Interest rates are assumed to change up or down in a parallel fashion, and earnings results are compared
to a flat rate scenario as a base. The flat rate scenario holds the end of the period yield curve constant over the twelve month
forecast horizon. Earnings simulation analysis incorporates assumptions about balance sheet changes such as asset and liability
growth, loan and deposit pricing, and changes to the mix of assets and liabilities. It is a measure of short-term interest rate risk.
Equity at risk is defined as the change in the net economic value of assets and liabilities due to changes in interest rates compared
to a base net economic value. Equity at risk analyzes sensitivity in the present value of cash flows over the expected life of existing
assets, liabilities, and off-balance sheet contracts. It is a measure of the long-term interest rate risk to future earnings streams
embedded in the current balance sheet.
Asset sensitivity is defined as earnings or net economic value increasing compared to a base scenario when interest rates rise and
decreasing when interest rates fall. In other words, assets are more sensitive to changing interest rates than liabilities and, therefore,
re-price faster. Likewise, liability sensitivity is defined as earnings or net economic value decreasing compared to a base scenario
when interest rates rise and increasing when interest rates fall.
Key assumptions underlying the present value of cash flows include the behavior of interest rates and spreads, asset prepayment
speeds, and attrition rates on deposits. Cash flow projections from the model are compared to market expectations for similar
collateral types and adjusted based on experience with Webster Bank's own portfolio. The model's valuation results are compared
to observable market prices for similar instruments whenever possible. The behavior of deposit and loan customers is studied
using historical time series analysis to model future customer behavior under varying interest rate environments.
57
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 NII 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:
• the size and duration of the investment portfolio;
• the size and duration of the wholesale funding portfolio;
• off-balance sheet interest rate contracts; and
• 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, and therefore, should not be taken as a measure of credit risk. See Note 15: 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.
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, 2016 and December 31, 2015, might have on Webster’s NII for the subsequent twelve
month period compared to NII assuming no change in interest rates:
December 31, 2016
December 31, 2015
-200bp
N/A
N/A
-100bp
N/A
N/A
+100bp
2.4%
1.6%
+200bp
4.7%
3.2%
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, 2016 and December 31, 2015, might have on Webster’s PPNR for the subsequent
twelve month period, compared to PPNR assuming no change in interest rates:
December 31, 2016
December 31, 2015
-200bp
N/A
N/A
-100bp
N/A
N/A
+100bp
2.9%
1.9%
+200bp
6.3%
4.0%
58
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. The flat rate scenario as of December 31, 2015 assumed a Fed Funds rate of 0.50%, while the flat rate scenario as of
December 31, 2016 assumed a Fed Funds rate of 0.75%. Asset sensitivity for both NII and PPNR on December 31, 2016 was
higher as compared to December 31, 2015, due to increased health savings accounts and demand deposit balances. Since the Fed
Funds rate was at 0.75% on December 31, 2016, 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, 2016 and December 31, 2015:
December 31, 2016
December 31, 2015
Short End of the Yield Curve
Long End of the Yield Curve
-100bp
N/A
N/A
-50bp
N/A
N/A
+50bp
1.2%
0.2%
+100bp
2.3%
0.8%
-100bp
(3.8)%
(4.2)%
-50bp
(1.6)%
(1.8)%
+50bp
1.3%
1.5%
+100bp
2.3%
2.7%
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, 2016 and December 31, 2015:
December 31, 2016
December 31, 2015
Short End of the Yield Curve
Long End of the Yield Curve
-100bp
N/A
N/A
-50bp
N/A
N/A
+50bp
1.4%
(0.5)%
+100bp
2.7%
(0.3)%
-100bp
(5.6)%
(6.9)%
-50bp
(2.1)%
(3.0)%
+50bp
1.7%
2.7%
+100bp
3.7%
5.0%
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 of less than
eighteen months, and the long end as terms of greater than eighteen months. These 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 increases in the short end of the yield curve for NII and PPNR increased from December 31, 2015 due to higher
forecasted health savings accounts and demand deposit balances.
Sensitivity to increases in the long end of the yield curve was more positive than December 31, 2015 in both NII and PPNR due
to higher market interest rates and the resulting decreased forecast prepayment speeds in the residential loan and investment
portfolios. Sensitivity to decreases in the long end of the yield curve was less negative than at December 31, 2015 in both NII and
PPNR due to decreased forecasted prepayment speeds in the residential loan and investment portfolios.
The following table summarizes the estimated economic value of assets, liabilities, and off-balance sheet contracts at December 31,
2016 and December 31, 2015 and the projected change to economic values if interest rates instantaneously increase or decrease
by 100 basis points:
(Dollars in thousands)
At December 31, 2016
Assets
Liabilities
Net
Net change as % base net economic value
At December 31, 2015
Assets
Liabilities
Net
Net change as % base net economic value
Book
Value
Estimated
Economic
Value
Estimated Economic Value Change
-100 bp
+100 bp
26,072,529 $
23,545,517
2,527,012 $
25,527,648
22,650,967
2,876,681
24,641,118 $
22,227,158
2,413,960 $
24,407,172
21,484,973
2,922,199
N/A
N/A
N/A
N/A
N/A
N/A
$
$
$
$
(633,934)
(555,854)
(78,080)
(2.7)%
(490,190)
(553,740)
63,550
2.2 %
$
$
$
$
59
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 to 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 or minimal changes (positive or negative) in estimated economic value for a
small change in interest rates, however, larger rate movements typically result in a measurable level of price sensitivity. Webster's
duration gap was negative 0.4 years at December 31, 2016 when measured using 50 basis point changes in rates. At December 31,
2015, the duration gap was a negative 1.0 year. During 2016 changes in long term market rates impacted forecast prepayment
speeds in the residential loan and investment portfolios resulting in an extension of asset duration. Rising market rate shortened
the duration of liabilities but the shortening was partially offset due to the growth of health savings accounts and demand deposits.
Combining the two effects resulted in the narrowing of the duration gap in 2016. An increase of 100 basis points would result in
a slightly positive duration gap. A positive duration gap implies that liabilities are shorter than assets and, therefore, they have less
price sensitivity than assets and will reset their interest rates faster than assets for a small change in interest rates leading to a
decrease in net economic value when rates rise.
These estimates assume that management does not take any action to mitigate any positive or negative effects from changing
interest rates. The earnings and economic values estimates are subject to factors that could cause actual results to differ. Management
believes that Webster's interest rate risk position at December 31, 2016 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 GAAP, which
requires 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
The required information is set forth above, in Item 7, Management’s Discussion and Analysis of Financial Condition and Results
of Operations, see the section captioned "Asset/Liability Management and Market Risk," which is incorporated herein by reference.
60
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
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.
62
63
64
65
66
67
69
61
KPMG LLP
One Financial Plaza
755 Main Street
Hartford, CT 06103
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Webster Financial Corporation:
We have audited the accompanying consolidated balance sheets of Webster Financial Corporation and subsidiaries (the Company)
as of December 31, 2016 and 2015, and the related consolidated statements of income, comprehensive income, shareholders’
equity, and cash flows for each of the years in the three-year period ended December 31, 2016. 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, 2016 and 2015, and the results of their operations and their
cash flows for each of the years in the three-year period ended December 31, 2016, 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 and subsidiaries' internal control over financial reporting as of December 31, 2016, 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 March 1, 2017 expressed an adverse opinion on the effectiveness of the
Company’s internal control over financial reporting.
Hartford, Connecticut
March 1, 2017
62
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
2016
2015
$
190,663
29,461
2,991,091
4,160,658
194,646
67,577
17,026,588
(194,320)
16,832,268
84,391
137,413
538,373
33,674
517,852
294,462
$ 26,072,529
$
199,693
155,907
2,984,631
3,923,052
188,347
37,091
15,671,735
(174,990)
15,496,745
101,578
129,426
538,373
39,326
503,093
343,856
$ 24,641,118
$
4,021,061
15,282,796
19,303,857
949,526
2,842,908
225,514
223,712
23,545,517
$
3,713,063
14,239,715
17,952,778
1,151,400
2,664,139
225,260
233,581
22,227,158
122,710
122,710
937
1,125,937
1,425,320
(70,899)
(76,993)
2,527,012
$ 26,072,529
937
1,124,325
1,315,948
(71,854)
(78,106)
2,413,960
$ 24,641,118
(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 $4,125,125 and $3,961,534)
Federal Home Loan Bank and Federal Reserve Bank stock
Loans held for sale (valued under fair value option $60,260 and $0)
Loans and leases
Allowance for loan and lease losses
Loans and leases, net
Deferred tax assets, 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 E issued and outstanding (5,060 shares)
Common stock, $.01 par value: Authorized - 200,000,000 shares;
Issued (93,651,601 shares)
Paid-in capital
Retained earnings
Treasury stock, at cost (1,899,502 and 2,090,409 shares)
Accumulated other comprehensive loss, net of tax
Total shareholders' equity
Total liabilities and shareholders' equity
See accompanying Notes to Consolidated Financial Statements.
63
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 and lease related fees
Wealth and investment services
Mortgage banking activities
Increase in cash surrender value of life insurance policies
Gain on sale of investment securities, net
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 and other
Earnings applicable to common shareholders
Earnings per common share:
Basic
Diluted
See accompanying Notes to Consolidated Financial Statements.
64
Years ended December 31,
2016
2015
2014
$
$
$
621,028
180,346
19,090
1,449
821,913
49,858
14,528
29,033
9,981
103,400
718,513
56,350
662,163
140,685
30,113
28,962
11,103
14,759
414
(149)
38,591
264,478
331,726
60,294
79,882
5,652
19,703
14,801
26,006
85,127
623,191
303,450
96,323
207,127
(8,704)
198,423
2.17
2.16
$
$
$
552,441
190,061
15,948
1,590
760,040
46,031
16,861
22,858
9,665
95,415
664,625
49,300
615,325
135,057
25,594
32,486
7,795
13,020
609
(110)
23,326
237,777
297,517
48,836
80,813
6,340
16,053
11,156
24,042
70,584
555,341
297,761
93,032
204,729
(9,368)
195,361
2.15
2.13
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
73,101
501,600
291,699
91,973
199,726
(11,230)
188,496
2.10
2.08
$
$
$
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Net income
Other comprehensive income (loss), net of tax:
Total available-for-sale and transferred securities
Total derivative instruments
Total defined benefit pension and postretirement benefit plans
Other comprehensive income (loss), net of tax
Comprehensive income
See accompanying Notes to Consolidated Financial Statements.
Years ended December 31,
2016
207,127
$
2015
204,729
$
2014
199,726
$
(9,069)
5,912
4,270
1,113
208,240
$
(22,828)
2,550
(1,567)
(21,845)
182,884
$
19,038
(7,324)
(19,426)
(7,712)
192,014
$
65
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands, except per share data)
Balance at December 31, 2013
Net income
Other comprehensive loss, net of tax
Dividends and dividend equivalents declared on common
stock $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
Preferred
Stock
Common
Stock
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Loss, Net of
Tax
Treasury
Stock, at
cost
Total
Shareholders'
Equity
$ 151,649 $
934 $ 1,125,584 $ 1,080,648 $ (100,918) $
(48,549) $ 2,209,348
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
2
—
—
—
—
—
—
—
57
—
—
433
3,223
(1,760)
—
—
(3)
199,726
—
(67,747)
(2,460)
(8,096)
—
180
—
—
—
—
—
—
—
6,710
3,981
—
(2,326)
— (10,741)
—
—
—
199,726
(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
1,202,251
(103,294)
(56,261)
2,322,815
Net income
Other comprehensive loss, net of tax
Dividends and dividend equivalents declared on common
stock $0.89 per share
Dividends on Series A preferred stock $21.25 per share
Dividends on Series E preferred stock $1,600.00 per share
Common stock issued
Preferred stock conversion
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
—
—
—
—
—
—
(28,939)
—
—
—
—
—
—
—
—
—
—
1
—
—
—
—
—
—
—
—
204,729
—
119
(81,316)
(615)
(8,096)
—
—
—
—
—
—
—
—
32,368
(1,005)
11,046
—
—
5,841
(5,251)
— (12,564)
—
—
—
—
(1)
(3,429)
2,906
(2,781)
—
—
(23)
—
204,729
(21,845)
(21,845)
—
—
—
—
—
—
—
—
—
—
(81,197)
(615)
(8,096)
—
—
12,947
3,060
(5,251)
(12,564)
(23)
Balance at December 31, 2015
122,710
937
1,124,325
1,315,948
(71,854)
(78,106)
2,413,960
Net income
Other comprehensive income, net of tax
Dividends and dividend equivalents declared on common
stock $0.98 per share
Dividends on Series E preferred stock $1,600.00 per share
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
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
149
—
207,127
—
(90,062)
(8,096)
—
—
—
—
2,976
(1,350)
403
—
10,713
13,112
—
—
— (11,664)
— (11,206)
(163)
—
—
—
207,127
1,113
1,113
—
—
—
—
—
—
—
(89,913)
(8,096)
14,092
11,762
(11,664)
(11,206)
(163)
Balance at December 31, 2016
$ 122,710 $
937 $ 1,125,937 $ 1,425,320 $ (70,899) $
(76,993) $ 2,527,012
See accompanying Notes to Consolidated Financial Statements.
66
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Operating Activities:
Years ended December 31,
2016
2015
2014
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
$
207,127
$
204,729
$
199,726
Provision for loan and lease losses
Deferred tax expense (benefit)
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
Loss (gain) on sale, net of write-down, on premises and equipment
Impairment loss on securities recognized in earnings
Gain on the sale of investment securities, net
Increase in cash surrender value of life insurance policies
Gain from life insurance policies
Mortgage banking activities
Proceeds from sale of loans held for sale
Originations of loans held for sale
Net decrease (increase) in derivative contract assets net of liabilities
Gain on redemption of other assets
Net decrease (increase) in accrued interest receivable and other assets
Net (decrease) increase in accrued expenses and other liabilities
Net cash provided by operating activities
Investing Activities:
Net decrease (increase) 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) proceeds of Federal Home Loan Bank stock
Alternative investments (capital call) return of capital, net
Net increase in loans
Proceeds from loans not originated for sale
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
Additions to premises and equipment
Acquisition of business, net cash acquired
Net cash used for investing activities
See accompanying Notes to Consolidated Financial Statements.
56,350
17,700
36,449
57,331
11,438
(976)
397
149
(414)
(14,759)
—
(11,103)
438,925
(452,886)
27,929
(7,331)
50,737
(18,918)
398,145
126,446
(980,870)
672,965
259,283
(1,066,156)
795,953
(6,299)
(381)
(1,440,141)
34,170
—
—
9,205
1,550
(40,731)
—
(1,635,006)
49,300
(15,513)
34,678
54,555
10,935
(311)
(244)
110
(609)
(13,020)
(220)
(7,795)
452,590
(449,048)
(6,489)
—
(44,334)
33,478
302,792
(23,212)
(903,240)
558,301
123,270
(761,033)
681,124
4,943
458
(1,813,811)
33,644
(50,000)
3,912
10,511
650
(36,115)
1,396,414
(774,184)
37,250
(5,154)
30,585
50,758
10,223
(1,297)
(292)
1,145
(5,499)
(13,178)
(2,229)
(4,070)
287,132
(296,996)
(49,158)
—
(2,552)
6,601
242,995
(109,021)
(217,920)
416,821
98,402
(1,113,958)
575,009
(34,412)
(115)
(1,269,290)
—
—
2,178
8,995
3,565
(30,039)
—
(1,669,785)
67
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
(In thousands)
Financing Activities:
Net increase in deposits
Contingent consideration
Proceeds from Federal Home Loan Bank advances
Repayments of Federal Home Loan Bank advances
Net decrease in securities sold under agreements to repurchase and other
borrowings
Issuance of long-term debt
Repayment of long-term debt
Debt issuance costs
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 (decrease) increase 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
Deposits assumed in business acquisition
Preferred stock conversion
See accompanying Notes to Consolidated Financial Statements.
Years ended December 31,
2016
2015
2014
1,351,609
5,000
19,630,000
(19,451,219)
853,921
—
13,505,000
(13,700,279)
797,244
—
10,372,226
(9,565,192)
(201,874)
—
—
—
(89,522)
(8,096)
11,762
3,204
—
(11,206)
(11,664)
(163)
1,227,831
(9,030)
199,693
190,663
102,438
80,143
6,769
39,383
—
—
$
$
$
(99,356)
—
—
—
(80,964)
(8,711)
3,060
2,338
—
(12,564)
(5,251)
(23)
457,171
(14,221)
213,914
199,693
95,428
106,991
8,714
585
1,446,899
28,939
$
$
$
(80,906)
150,000
(150,000)
(1,349)
(67,431)
(10,556)
2,221
1,161
435
(10,741)
(2,326)
(3)
1,434,783
7,993
205,921
213,914
89,942
102,973
5,532
—
—
—
$
$
$
68
Note 1: Summary of Significant Accounting Policies
Nature of Operations
Webster Financial Corporation is a bank holding company and financial holding company under the Bank Holding Company Act,
incorporated under the laws of Delaware in 1986 and headquartered in Waterbury, Connecticut. At December 31, 2016, Webster
Financial Corporation's principal asset is all of the outstanding capital stock of Webster Bank.
Webster delivers financial services to individuals, families, and businesses primarily within its regional footprint from New York
to Massachusetts. Webster provides business and consumer banking, mortgage lending, financial planning, trust, and investment
services through banking offices, ATMs, mobile banking and its internet website (www.websterbank.com or www.wbst.com).
Webster also offers equipment financing, commercial real estate lending, and asset-based lending primarily across the Northeast.
On a nationwide basis, through its HSA Bank division, Webster Bank offers and administers health savings accounts, flexible
spending accounts, health reimbursement accounts, and commuter benefits.
Basis of Presentation
The Consolidated Financial Statements and the accompanying Notes thereto include the accounts of Webster Financial Corporation
and all other entities in which it has a controlling financial interest. Intercompany accounts and transactions have been eliminated
in consolidation. Webster's accounting and financial reporting policies conform, in all material respects, to GAAP and to general
practices within the financial services industry.
Assets that the Company holds or manages in a fiduciary or agency capacity for customers, typically referred to as assets under
administration or assets under management are not included in the accompanying Consolidated Balance Sheets since those assets
are not Webster's, and the Company is not the primary beneficiary.
Certain prior period amounts have been reclassified to conform to the current year's presentation. These reclassifications had an
immaterial effect on net income, comprehensive income, total assets, total liabilities, total shareholders' equity, net cash provided
by operating activities, and net cash used for investing activities.
Correction of Immaterial Errors Related to Prior Periods
Cash Collateral Associated with Derivative Instruments.
During the three months ended March 31, 2016, the Company identified an error relating to the accounting for cash collateral
associated with derivative instruments. Based on requirements of ASC Topic 305, "Cash and Cash Equivalents," the Company
determined the cash collateral was incorrectly classified as cash and due from banks. In accordance with the requirements of ASC
Topic 815, "Derivatives and Hedging," the variation margin of cash collateral, pertaining to derivatives reported on a net basis,
subject to a legally enforceable master netting arrangement, with the same counterparty, are offset against the net derivative position
on the Company's Consolidated Balance Sheets. The cash collateral, relating to the initial margin, is included within accrued
interest receivable and other assets on the Company's Consolidated Balance Sheets.
The Company reviewed the impact of this error on the prior periods in accordance with Securities and Exchange Commission
Staff Accounting Bulletin No. 99, Materiality, and ASC Topic 250, "Accounting Changes and Error Corrections," and determined
that the error was immaterial to previously reported amounts contained in the Company's annual and quarterly reports.
HSA Bank segment fee accruals and certain expenses.
During the three months ended June 30, 2016, the Company identified immaterial errors, impacting the quarter ended March 31,
2015 through the quarter ended March 31, 2016, relating to the reporting of certain fee accruals and certain expenses within the
Company's HSA Bank segment. The Company determined that such fee and expense accruals were not accurately reported. As a
result, deposit service fees were overstated and technology and equipment expense was understated.
The Company reviewed the impact of the errors on prior periods in accordance with Securities and Exchange Commission Staff
Accounting Bulletin No. 99, Materiality and ASC Topic 250, "Accounting Changes and Error Corrections," and determined that
the errors, individually and in the aggregate, were immaterial to all prior periods impacted. While the errors were immaterial, the
Company has elected to correct the previously reported amounts. The errors had no effect on individual customer's accounts.
69
The effects of correcting the immaterial errors in the Consolidated Balance Sheets, Consolidated Statements of Income and
Consolidated Statements of Cash Flows are summarized in the following tables:
(In thousands)
Consolidated Balance Sheets
Cash and due from banks
Accrued interest receivable and other assets (1)
Accrued expenses and other liabilities
Retained earnings
December 31, 2015
As Reported
As Revised
$
251,258
$
328,993
267,576
199,693
343,856
233,581
1,317,559
1,315,948
(1) The amount recorded as revised includes the impact of a $1.1 million reclassification of debt issuance cost from accrued interest
receivable and other assets into long-term debt. The reclassification was made in accordance with the Company's adoption of ASU
No. 2015-03, Interest-Imputation of Interest (Subtopic 835-30) - Simplifying the Presentation of Debt Issuance Costs, and is not
considered part of the error correction.
(In thousands, except per share data)
Consolidated Statements of Income
Deposit service fees
Other income
Technology and equipment
Income tax expense
Net income
Earnings per common share:
Basic
Diluted
HSA Segment:
Net income
Year ended December 31, 2015
As Reported
As Revised
$
$
$
$
136,578
23,573
80,026
93,976
206,340
$
2.17
2.15
135,057
23,326
80,813
93,032
204,729
2.15
2.13
39,173
$
37,443
(In thousands)
Consolidated Statements of Cash Flows
Net (increase) in accrued interest receivable and other assets (1)
Net increase in accrued expenses and other liabilities (1)
December 31, 2015
December 31, 2014
As Reported
As Revised
As Reported
As Revised
$
(49,899) $
35,336
(44,334) $
33,478
(24,502) $
9,213
(2,552)
6,601
(1) An additional line item, net decrease (increase) in derivative contract assets net of liabilities, was added to the Consolidated Statements
of Cash Flows to detail the net change in derivative balances subject to offsetting. The update removed $6.5 million and $49.2 million
in net increases in derivative contract assets net of liabilities from the net (increase) in accrued interest receivable and other assets
and net increase in accrued expenses and other liabilities line items for the years ended December 31, 2015 and December 31, 2014
respectively.
Variable Interest Entities
A VIE is an entity that has either a total equity investment that is insufficient to finance its activities without additional subordinated
financial support or whose equity investors lack the ability to control the entity’s activities or lack the ability to receive expected
benefits or absorb obligations in a manner that’s consistent with their investment in the entity. The Company evaluates each VIE
to understand the purpose and design of the entity, and its involvement in the ongoing activities of the VIE.
The Company will consolidate the VIE if it has:
•
•
the power to direct the activities of the VIE that most significantly affect the VIE's economic performance; and
an obligation to absorb losses of the VIE, or the right to receive benefits from the VIE, that could potentially be significant
to the VIE.
See Note 3: Variable Interest Entities for further information.
70
Use of Estimates
The preparation of financial statements in accordance with GAAP, requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities as of the date of the financial statements as well as income and expense during
the period. The allowance for loan and lease losses, the fair value measurements for valuation of investments and other financial
instruments, evaluation of investments for OTTI, valuation of goodwill and other intangible assets, and assessing the realizability
of deferred tax assets and the measurement of uncertain tax position, as well as the status of contingencies, are particularly subject
to change. Actual results could differ from those estimates.
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 FRB of
Boston, 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 FRB of Boston 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.
Investment Securities
Investment securities are classified as available-for-sale or held-to-maturity at the time of purchase. Any subsequent change to
classification is reviewed for compliance with corporate objectives and accounting policy. Debt securities classified as held-to-
maturity are those which Webster has the ability and intent to hold to maturity. Securities classified as held-to-maturity 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 available-for-sale are recorded at fair value with unrealized gains and losses
recorded as a component of OCI/OCL. Securities transferred from available-for-sale to held-to-maturity are recorded at fair value
at the time of transfer, and the respective gain or loss is recorded as a separate component of OCI/OCL and amortized as an
adjustment to interest income over the remaining life of the security.
All securities classified as available-for-sale or held-to-maturity that are in an unrealized loss position are evaluated for OTTI on
a quarterly basis. The evaluation considers several qualitative factors, including the period of time the security has been in a loss
position, and 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 the unrealized loss is recorded as an impairment charge to a debt security and
recognized as a loss. The remaining loss component would be recorded to AOCL in the accompanying Consolidated Balance
Sheets. The entire amount of an unrealized loss position of an equity security that is considered OTTI is recorded as an impairment
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. See Note 2: Investment
Securities for further information.
Federal Home Loan Bank and Federal Reserve Bank Stock
Webster Bank is a member of the FHLB and the Federal Reserve System, and is required to maintain an investment in capital
stock of the FHLB of Boston and FRB of Boston. Based on redemption provisions, the stock of both the FHLB and the FRB has
no quoted market value and is carried at cost. Membership stock is not reviewed for impairment unless economic circumstances
warrant special review.
Loans Held for Sale
Effective January 1, 2016, on a loan by loan election, residential mortgage loans that are classified as held for sale are accounted
for under either the fair value option method of accounting or the lower of cost or fair value method of accounting with the election
being made at the time the asset is first recognized. The Company has elected the fair value option to mitigate accounting mismatches
between held for sale derivative commitments and loan valuations. Prior to January 1, 2016, residential mortgage loans that were
classified as held for sale were accounted for at the lower of cost or fair value method of accounting and were valued on an
individual asset basis.
71
Loans not originated for sale but subsequently transferred to held for sale continue to be valued at the lower of cost or fair value
method of accounting 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. 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. See Note 5: Transfers of Financial Assets for further information.
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
covering certain characteristics of the mortgage loans sold and the Company's origination process. The gain or loss on sale depends
on the previous carrying amount of the transferred financial assets, the consideration received, and any liabilities incurred in
exchange for the transferred assets.
When the Company sells financial assets, it may retain servicing rights and/or other interests in the financial assets. Servicing
assets and any other interests held by the Company are recorded at fair value upon transfer, and thereafter are carried at the lower
of cost or fair value. See Note 5: Transfers of Financial Assets for further information.
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 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 loans, excluding loans fully insured against loss and in the process
of collection, 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. Residential loans that are more than 90 days past due, fully insured against loss, and in the process
of collection, remain accruing and are reported as 90 days or more past due and accruing. 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 U.S. bankruptcy
code, loans are removed from non-accrual status when they become current as to principal and interest or demonstrate a period
of performance under contractual terms and, in the opinion of management, are fully collectible as to principal and interest. 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. See Note 4: Loans and Leases
for further information.
72
Allowance for Loan and Lease Losses
The 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, consumer
loans and small business loans. Commercial, commercial real estate, and equipment financing loans and leases over a specific
dollar amount and all 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 if a specific valuation allowance is to be established. The current or weighted-average (for multiple
notes within a commercial borrowing arrangement) interest rate of the loan is used as the discount rate, for determining net present
value of the loan evaluated for impairment, when the interest rate floats with a specified index. A change in terms or payments
would be included in the impairment calculation. See Note 4: Loans and Leases for further information.
Reserve for Unfunded Commitments
The reserve for unfunded commitments provides for probable losses inherent with funding the unused portion of legal commitments
to lend. The unfunded reserve calculation includes factors that are consistent with the ALLL methodology for funded loans using
the loss given default, probability of default, and a draw down factor applied to the underlying borrower risk and facility grades.
The reserve for unfunded credit commitments is included within other liabilities in the accompanying Consolidated Balance Sheets,
and changes in the reserve are reported as a component of other expense in the accompanying Consolidated Statements of Income.
See Note 20: Commitments and Contingencies for further information.
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 TDR, 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 TDR, except those that were performing prior to TDR status, on non-accrual
status for a minimum period of six months. Commercial TDR 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 TDR are reported as impaired.
Generally, TDR are classified as impaired loans and reported as TDR 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 a fiscal year-end and the restructuring agreement specifies a market rate of interest equal to that which would be
73
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 Company’s loan and lease portfolio includes loans that have been restructured into an A-Note/B-Note
structure as a result of evaluating the cash flow of the borrowers to support repayment. Following these restructurings, 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. See Note 4: Loans and Leases for further
information.
Foreclosed and Repossessed Assets
Real estate acquired through foreclosure or completion of a deed in lieu of foreclosure and 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 ALLL. 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.
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
years
3 - 7
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. See Note 6: Premises
and Equipment for further information.
Goodwill
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. The Company utilizes an equally weighted combined income and market approach
to arrive at an indicated fair value range for the reporting unit. 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. See
Note 7: Goodwill and Other Intangible Assets for further information.
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. Core deposit intangible assets resulting from the health savings account
acquisition are amortized on an accelerated basis over their estimated useful lives. Core deposit intangible assets existing prior to
the health savings account acquisition continue to be amortized on a straight line basis over their remaining estimated useful lives.
Intangible assets relating to customer relationships are amortized on a straight line basis over their estimated useful lives. See Note
7: Goodwill and Other Intangible Assets for further information.
74
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.
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, which may sell, loan,
or otherwise hypothecate such securities to other parties in the normal course of their operations, agree to resell to Webster the
same securities at the maturity date of the agreements. The securities underlying the agreements with Bank customers are pledged;
however, the customer does not have ability to hypothecate the underlying securities. See Note 10: Borrowings for further
information.
Share-Based Compensation
Webster maintains an equity incentive plan 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 reported as a component of compensation and benefits expense. All
awards are subject to a minimum 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 a three year performance period. Awards vest in a
range from zero to 150% 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 18: Share-Based Plans for further information.
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. The current component reflects taxes
payable or refundable for a current period based on applicable tax laws, and the deferred component represents the tax effects of
temporary differences between amounts recognized for financial accounting and tax purposes. Deferred tax assets and liabilities
reflect the tax effects of such differences that are anticipated to result in taxable or deductible amounts in the future, when the
temporary differences reverse. DTAs are recognized if it is more likely than not they will be realized, and may be reduced by a
valuation allowance if 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. See Note
8: Income Taxes for further information.
75
Earnings Per Common Share
Earnings per common share is computed under the two-class method. Basic earnings per common share is computed by dividing
earnings allocated to common shareholders by the weighted-average number of common shares outstanding during the applicable
period, excluding outstanding non-participating securities. Certain 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 14: Earnings Per Common Share.
Comprehensive Income
Comprehensive income includes all changes in shareholders’ equity during a period, except those resulting from transactions with
shareholders. Comprehensive income consists of net income, and the after-tax effect of the following items; 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, Consolidated Statements of
Comprehensive Income, and Note 12: Accumulated Other Comprehensive Loss, Net of Tax.
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 of time. 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), or 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 AOCL 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.
76
Counterparty Credit Risk. The Company's exposures with the majority of its approved financial institution counterparties are
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. 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. See Note 15: Derivative Financial Instruments for further information.
Offsetting Assets and Liabilities
The Company presents derivative receivables and derivative payables with the same counterparty and the related variation margin
of cash collateral receivables and payables on a net basis on the Consolidated Balance Sheets when a legally enforceable master
netting agreement exists. The cash collateral, relating to the initial margin, is included within accrued interest receivable and other
assets in the Consolidated Balance Sheets.
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, available-for-sale securities and loans held for sale where the
Company has elected the fair value option. Additionally, fair value is used on a non-recurring basis to evaluate assets or liabilities
for impairment. Examples of these include impaired loans and leases, mortgage servicing assets, long-lived assets, goodwill, and
loans not originated for sale but subsequently transferred to 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 16: 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. An asset is recognized for an overfunded plan and a liability is recognized for an underfunded
plan. A supplemental retirement plan is also maintained for select executive level employees that were participants on or before
December 31, 2007. Webster Bank also provides postretirement healthcare benefits to certain retired employees.
In December 2016, the Company elected to change the approach to estimating service and interest components of net periodic
pension cost for the retirement benefit plans. Starting in January 2017, a full yield curve approach will be utilized to measure the
benefit obligation. The Company changed to the new estimate method to improve the correlation between projected benefit cash
flows and the corresponding yield spot rates and to provide a more precise measurement of service and interest costs.
Historically the Company estimated service and interest costs utilizing a single-weighted average discount rate derived from the
yield curve used to measure the benefit obligation at the beginning of the period. The new method measures service and interest
costs separately using the full yield curve approach applied to each corresponding obligation. Service costs are determined based
on duration-specific spot rates applied to the service cost cash flows. The interest cost calculation is determined by applying
duration-specific spot rates to the year-by-year projected benefit obligation.
The change in method is not anticipated to have a material impact on the Company's financial statements.
Fee Revenue
Generally, fee revenue from deposit service charges and loans is recorded when earned, except where ultimate collection is
uncertain, in which case revenue is recognized as received. Trust revenue is recorded as earned on individual accounts based upon
a percentage of asset value. Fee income on managed institutional accounts is recognized as earned and collected quarterly based
on the quarter-end value of assets managed.
Marketing Costs
Marketing costs are expensed as incurred over the projected benefit period.
77
Recently Adopted Accounting Standards Updates
Effective January 1, 2016, the following new accounting guidance was adopted by the Company:
• ASU No. 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40) - Disclosures of Uncertainties
about an Entity's Ability to Continue as a Going Concern;
• ASU No. 2015-02, Consolidation (Topic 810) - Amendments to the Consolidation Analysis;
• ASU No. 2015-03, Interest-Imputation of Interest (Subtopic 835-30) - Simplifying the Presentation of Debt Issuance Costs;
• ASU No. 2015-07, Fair Value Measurement (Topic 820) - Disclosures for investments in Certain Entities That Calculate
Net Asset Value per Share (or its Equivalent) (a consensus of the FASB Emerging Issues Task Force); and
• ASU No. 2015-16, Business Combinations (Topic 805) - Simplifying the Accounting for Measurement - Period Adjustments.
The adoption of these accounting standards did not have a material impact on the Company's financial statements.
Accounting Standards Issued but not yet Adopted
The following table identifies ASUs applicable to the Company that have been issued by the FASB but are not yet effective:
ASU
Description
ASU No. 2016-15 - Statement
of Cash Flows (Topic 230):
Classification of Certain
Cash Receipts and Cash
Payments.
ASU No. 2016-13 - Financial
Instruments - Credit Losses
(Topic 326): Measurement of
Credit Losses on Financial
Instruments.
ASU No. 2016-09,
Compensation - Stock
Compensation (Topic 718) -
Improvements to Employee
Share Based Payment
Accounting.
The Update addresses eight specific cash flow issues
with the objective of reducing the existing diversity in
practice. The Update addresses the following eight
issues: Debt prepayment or debt extinguishment costs;
settlement of zero-coupon debt instruments or other
debt instruments with coupon interest rates that are
insignificant in relation to the effective interest rate of
the borrowing; contingent consideration payments
made after a business combination; proceeds from the
settlement of insurance claims; proceeds from the
settlement of corporate-owned life insurance policies,
including bank-owned
insurance policies;
distributions received from equity method investees;
beneficial interests in securitization transactions; and
separately identifiable cash flows and application of the
predominance principle.
loss"
Current GAAP
methodology for recognizing credit losses that delays
recognition until it is probable a loss has been incurred.
Both financial institutions and users of their financial
statements expressed concern that current GAAP
restricts the ability to record credit losses that are
expected, but do not yet meet the "probable" threshold.
"incurred
requires
life
an
range of
the expected credit
The main objective of this Update is to provide financial
statement users with more decision-useful information
losses on financial
about
instruments and other commitments to extend credit
held by a reporting entity at each reporting date. To
achieve this objective, the amendments in this Update
replace the incurred loss impairment methodology in
current GAAP with a methodology that reflects
expected credit losses and requires consideration of a
broader
reasonable and supportable
information to determine credit loss estimates.
The Update impacts the accounting for employee share-
based payment transactions, including the income tax
consequences, classification of awards as either equity
or liabilities, and classification on the statement of cash
flows. In addition, the amendments in this Update
eliminates the guidance in Topic 718 that was
indefinitely deferred shortly after the issuance of FASB
Statement No. 123 (revised 2004), Share-Based
Payment.
78
Effective Date and Financial
Statement Impact
The Company intends to adopt the
Update for the first quarter of 2019.
Adoption is not anticipated to have a
material impact on the Company's
financial statements.
The Change from an "incurred loss"
method to an "expected loss" method
represents a fundamental shift from
existing GAAP, and may result in
material changes to the Company's
losses on
accounting for credit
financial instruments. The Company
is evaluating the effect that this ASU
will have on its financial statements
and related disclosures. The ASU will
be effective for the Company as of
January 1, 2020.
The Company intends to adopt the
Update for the first quarter of 2017.
Adoption is not anticipated to have a
material impact on the Company's
financial statements.
Effective Date and Financial
Statement Impact
The Company intends to adopt the
Update for the first quarter of 2017.
Adoption is not anticipated to have a
material impact on the Company's
financial statements.
The Company intends to adopt the
Update for the first quarter of 2019.
The Company expects the Update will
have a significant effect on the
Company's financial statements.
While the Company is continuing to
assess
the effect of adoption,
management currently believes the
most significant changes relate to the
recognition of new right of use assets
and lease liabilities on the Company's
balance sheet for operating leases.
The Company intends to adopt the
Update for the first quarter of 2018.
Adoption is not anticipated to have a
material impact on the Company's
financial statements.
The Company intends to adopt the
Update for the first quarter of 2018.
The Company's revenue is comprised
of net interest income on financial
assets and financial liabilities, and
non-interest income.
While the Company is continuing to
the effect of adoption,
assess
management currently believes the
Update may require the Company to
change how certain
trust and
investment management fees within
non-interest income are recognized.
Management does not expect those
changes to have a significant impact
on
financial
Company's
statements. Management continues to
evaluate the Update's impact on other
components of non-interest income.
the
ASU
Description
ASU No. 2016-06,
Derivatives and Hedging
(Topic 815) - Contingent Put
and Call Options in Debt
Instruments.
ASU No. 2016-02, Leases
(Topic 842).
ASU No. 2016-01, Financial
Instruments—Overall
(Subtopic 825-10) -
Recognition and
Measurement of Financial
Assets and Financial
Liabilities.
ASU No. 2014-09, Revenue
from Contracts with
Customers (Topic 606)
The Update clarifies the requirements for assessing
whether contingent call (put) options that can accelerate
the payment of principal on debt instruments are clearly
and closely related to their debt hosts. The Update
requires the assessment of embedded call (put) options
solely in accordance with the four-step decision
sequence.
The Update introduces a lessee model that brings most
leases on the balance sheet. The Update also aligns
certain of the underlying principles of the new lessor
model with those in ASC Topic 606 "Revenue from
Contracts with Customers," the FASB’s new revenue
recognition
how
collectability should be considered and determining
when profit can be recognized).
evaluating
standard
(e.g.,
Furthermore, the Update addresses other concerns
including the elimination of the required use of bright-
line tests for determining lease classification. Lessors
are required to provide additional transparency into the
exposure to the changes in value of their residual assets
and how they manage that exposure.
Equity investments not accounted for under the equity
method or those that do not result in consolidation of
the investee are to be measured at fair value with
changes in the fair value recognized through net
income. Entities are to present separately in other
comprehensive income, the portion of the total change
in the fair value of a liability resulting from a change
in the instrument-specific credit risk when an election
to measure the liability at fair value in accordance with
the fair value option for financial instruments has been
made. Also, the requirement to disclose the method(s)
and significant assumptions used to estimate the fair
value for financial instruments measured at amortized
cost on the balance sheet has been eliminated.
A single comprehensive model has been established 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, and clarify and
converge revenue recognition principles under GAAP
and International Financial Reporting Standards. The
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; and (v)
recognize revenue when each performance obligation
is satisfied. One of the most significant potential
impacts relates to less prescriptive derecognition
requirements on the sale of owned real estate properties.
An entity may elect either a full retrospective or a
modified retrospective application. ASU No. 2015-14
- Revenue from Contracts with Customers (Topic 606),
defers the effective date to annual and interim periods
beginning after December 15, 2017. During 2016, the
FASB issued amendments to this standard (ASC
Updates 2016-08, 2016-10, 2016-11 and 2016-20). The
Updates provide further clarification to the standard.
79
Note 2: Investment Securities
A Summary of the amortized cost and fair value of investment securities is presented below:
(In thousands)
Available-for-sale:
U.S. Treasury Bills
Agency CMO
Agency MBS
Agency CMBS
CMBS
CLO
Single issuer trust preferred
securities
Corporate debt securities
Equities - financial institutions
At December 31,
2016
2015
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair Value
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair Value
$
734 $
— $
— $
734
$
924 $
— $
— $
924
419,865
969,460
587,776
473,974
425,083
30,381
108,490
—
3,344
4,398
(3,503)
419,706
546,168
(19,509)
954,349
1,075,941
63
(14,567)
573,272
4,093
2,826
—
1,502
—
(702)
(519)
477,365
427,390
(1,748)
28,633
(350)
109,642
—
—
215,670
574,686
431,837
42,168
104,031
3,499
5,532
6,459
639
7,485
592
—
2,290
—
(2,946)
548,754
(17,291)
1,065,109
(959)
215,350
(2,905)
(3,270)
579,266
429,159
(4,998)
37,170
—
106,321
(921)
2,578
Total available-for-sale
$ 3,015,763 $
16,226 $ (40,898) $ 2,991,091
$ 2,994,924 $
22,997 $ (33,290) $ 2,984,631
Held-to-maturity:
Agency CMO
Agency MBS
Agency CMBS
Municipal bonds and notes
CMBS
Private Label MBS
$ 339,455 $
1,977 $
(3,824) $ 337,608
$ 407,494 $
3,717 $
(2,058) $ 409,153
2,317,449
26,388
(41,768)
2,302,069
2,030,176
38,813
(19,908)
2,049,081
547,726
655,813
298,538
1,677
694
4,389
4,107
12
(1,348)
547,072
(25,749)
634,453
(411)
302,234
—
1,689
686,086
435,905
360,018
3,373
4,253
12,019
5,046
46
(325)
(417)
690,014
447,507
(2,704)
362,360
—
3,419
Total held-to-maturity
$ 4,160,658 $
37,567 $ (73,100) $ 4,125,125
$ 3,923,052 $
63,894 $ (25,412) $ 3,961,534
Other-Than-Temporary Impairment
The balance of OTTI, included in the amortized cost columns above, is related to certain CLO positions that were previously
considered Covered Funds as defined by Section 619 of the Dodd-Frank Act commonly known as the Volcker Rule. The Company
has taken measures to bring its CLO positions into conformance with the Volcker Rule.
To the extent that changes occur in interest rates, credit movements, and other factors that impact fair value and expected recovery
of amortized cost of its investment securities, the Company may be required to recognize OTTI in earnings, in future periods.
The following table presents the changes in OTTI:
(In thousands)
Beginning balance
Reduction for securities sold or called
Additions for OTTI not previously recognized
Ending balance
Years ended December 31,
2016
2015
2014
$
$
3,288
$
3,696
$
16,633
(194)
149
(518)
110
3,243
$
3,288
$
(14,082)
1,145
3,696
80
Fair Value and Unrealized Losses
The following tables provide information on fair value and unrealized losses for the individual securities with an unrealized loss,
aggregated by investment security type and length of time that the individual securities have been in a continuous unrealized loss
position:
(Dollars in thousands)
Available-for-sale:
Agency CMO
Agency MBS
Agency CMBS
CMBS
CLO
Single issuer trust preferred securities
Corporate debt securities
Equities-financial institutions
Total available-for-sale in an unrealized
loss position
Held-to-maturity:
Agency CMO
Agency MBS
Agency CMBS
Municipal bonds and notes
CMBS
At December 31, 2016
Less Than Twelve Months
Twelve Months or Longer
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
# of
Holdings
Total
Fair
Value
Unrealized
Losses
$
107,853 $
(2,168) $
67,351 $
(1,335)
(10,503)
252,779
(9,006)
512,075
554,246
12,427
49,946
—
—
—
(14,567)
(24)
(54)
—
—
—
—
63,930
50,237
28,633
7,384
—
15
97
32
12
5
5
2
$
175,204 $
(3,503)
764,854
554,246
76,357
100,183
28,633
7,384
—
(19,509)
(14,567)
(702)
(519)
(1,748)
(350)
—
—
(678)
(465)
(1,748)
(350)
—
—
$ 1,236,547 $
(27,316) $ 470,314 $
(13,582)
168
$ 1,706,861 $
(40,898)
$
163,439 $
(3,339) $
17,254 $
(485)
1,394,623
(32,942)
273,779
(8,826)
347,725
384,795
60,768
(1,348)
(25,745)
(411)
—
1,192
—
—
(4)
—
16
150
25
196
8
$
180,693 $
(3,824)
1,668,402
(41,768)
347,725
385,987
60,768
(1,348)
(25,749)
(411)
Total held-to-maturity in an unrealized loss
position
$ 2,351,350 $
(63,785) $ 292,225 $
(9,315)
395
$ 2,643,575 $
(73,100)
(Dollars in thousands)
Available-for-sale:
Agency CMO
Agency MBS
Agency CMBS
CMBS
CLO
Single issuer trust preferred securities
Corporate debt securities
Equities-financial institutions
Total available-for-sale in an unrealized
loss position
Held-to-maturity:
Agency CMO
Agency MBS
Agency CMBS
Municipal bonds and notes
CMBS
Total held-to-maturity in an unrealized
loss position
At December 31, 2015
Less Than Twelve Months
Twelve Months or Longer
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
# of
Holdings
Total
Fair
Value
Unrealized
Losses
$
195,369 $
(2,195) $
26,039 $
(751)
481,839
124,241
276,330
211,515
4,087
—
2,578
(6,386)
(959)
(2,879)
(2,709)
(128)
—
(921)
351,911
(10,905)
—
19,382
15,708
33,083
—
—
—
(26)
(561)
(4,870)
—
—
14
84
7
29
13
8
—
1
$
221,408 $
(2,946)
833,750
124,241
295,712
227,223
37,170
—
2,578
(17,291)
(959)
(2,905)
(3,270)
(4,998)
—
(921)
$ 1,295,959 $
(16,177) $
446,123 $
(17,113)
156
$ 1,742,082 $
(33,290)
$
143,364 $
(1,304) $
27,928 $
(754)
551,918
110,864
29,034
142,382
(7,089)
(325)
(130)
(1,983)
470,828
(12,819)
—
13,829
30,129
—
(287)
(721)
13
87
7
27
18
$
171,292 $
(2,058)
1,022,746
(19,908)
110,864
42,863
172,511
(325)
(417)
(2,704)
$
977,562 $
(10,831) $
542,714 $
(14,581)
152
$ 1,520,276 $
(25,412)
81
Impairment Analysis
The following impairment analysis by investment security type, summarizes the basis for evaluating if investment securities within
the Company’s available-for-sale and held-to-maturity portfolios have been impacted by OTTI. Unless otherwise noted for an
investment security type, management does not intend to sell these investments and has determined, based upon available evidence,
that it is more likely than not that the Company will not be required to sell these securities before the recovery of their amortized
cost. As such, based on the following impairment analysis, the Company does not consider these securities, in unrealized loss
positions, to be other-than-temporarily impaired at December 31, 2016.
Available-for-Sale Securities
Agency CMO. There were unrealized losses of $3.5 million on the Company’s investment in Agency CMO at December 31, 2016,
compared to $2.9 million at December 31, 2015. Unrealized losses increased due to higher market rates which resulted in lower
security prices since December 31, 2015. These investments are issued by a government or 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.
Agency MBS. There were unrealized losses of $19.5 million on the Company’s investment in residential mortgage-backed securities
issued by government agencies at December 31, 2016, compared to $17.3 million at December 31, 2015. Unrealized losses
increased due to higher market rates which resulted in lower security prices since December 31, 2015. These investments are
issued by a government or 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.
Agency CMBS. There were unrealized losses of $14.6 million on the Company's investment in commercial mortgage-backed
securities issued by government agencies at December 31, 2016, compared to $1.0 million at December 31, 2015. Unrealized
losses increased due to higher market rates which resulted in lower security prices since December 31, 2015. These investments
are issued by a government or 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.
CMBS. There were unrealized losses of $702 thousand on the Company’s investment in CMBS at December 31, 2016, compared
to $2.9 million at December 31, 2015. The portfolio of mainly floating rate CMBS experienced reduced market spreads which
resulted in higher market prices and smaller unrealized losses at December 31, 2016 compared to December 31, 2015. 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. Contractual cash flows for the bonds continue to perform as expected.
CLO. There were unrealized losses of $519 thousand on the Company’s investments in CLO at December 31, 2016 compared to
$3.3 million unrealized losses at December 31, 2015. Unrealized losses decreased due to reduced market spreads for the asset
class which resulted in higher security prices since December 31, 2015. Internal stress tests are performed on individual bonds to
monitor potential losses under stress scenarios.
Single issuer trust preferred securities. There were unrealized losses of $1.7 million on the Company's investment in single issuer
trust preferred securities at December 31, 2016, compared to $5.0 million at December 31, 2015. Unrealized losses decreased due
to reduced market spreads which resulted in higher security prices since December 31, 2015. The single issuer portfolio consists
of three investments issued by two large capitalization money center financial institutions, which continue to service the debt. A
security was transferred to corporate debt securities as detailed below. The Company performs periodic credit reviews of the issuer
to assess the likelihood for ultimate recovery of amortized cost.
Corporate debt securities. There were $350 thousand unrealized losses on the Company's corporate debt securities at December 31,
2016, as a result of a mandatory exchange in a security reclassification from single issuer trust preferred securities. The company
performs periodic credit reviews of the issuer to assess the likelihood for ultimate recovery of amortized cost.
Held-to-Maturity Securities
Agency CMO. There were unrealized losses of $3.8 million on the Company’s investment in Agency CMO at December 31, 2016,
compared to $2.1 million at December 31, 2015. Unrealized losses increased due to higher market rates which resulted in lower
security prices since December 31, 2015. These investments are issued by a government or 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.
Agency MBS. There were unrealized losses of $41.8 million on the Company’s investment in residential mortgage-backed securities
issued by government agencies at December 31, 2016, compared to $19.9 million at December 31, 2015. Unrealized losses
increased due to higher market rates which resulted in lower security prices since December 31, 2015. These investments are
issued by a government or 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.
82
Agency CMBS. There were unrealized losses of $1.3 million on the Company’s investment in commercial mortgage-backed
securities issued by government agencies at December 31, 2016, compared to $325 thousand at December 31, 2015. Unrealized
losses increased due to higher market rates which resulted in lower security prices since December 31, 2015. These investments
are issued by a government or 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.
Municipal bonds and notes. There were unrealized losses of $25.7 million on the Company’s investment in municipal bonds and
notes at December 31, 2016, compared to $417 thousand at December 31, 2015. Unrealized losses increased due to higher market
rates which resulted in lower security prices since December 31, 2015. The Company performs periodic credit reviews of the
issuers and the securities are currently performing as expected.
CMBS. There were unrealized losses of $411 thousand on the Company’s investment in CMBS at December 31, 2016, compared
to $2.7 million unrealized losses at December 31, 2015. Unrealized losses decreased due to lower market rates on mainly seasoned
fixed rate conduit transactions which resulted in higher security prices since December 31, 2015. 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.
Sales of Available-for Sale Securities
The following table provides information on sales of available-for-sale securities:
(In thousands)
Proceeds from sales
Gross realized gains on sales
Less: Gross realized losses on sales
Gain on sale of investment securities, net
Contractual Maturities
$
$
$
Years ended December 31,
2015
2016
259,273
2,891
2,477
414
$
$
$
95,101
1,029
420
609
$
$
$
2014
126,580
7,268
1,769
5,499
The amortized cost and fair value of debt securities 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
At December 31, 2016
Available-for-Sale
Held-to-Maturity
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
$
$
76,383
75,466 $
22,190
21,781
532,352
529,247
2,389,269
2,360,166
3,015,763 $ 2,991,091
$
13,612 $
17,313
46,835
4,082,898
13,721
17,611
47,780
4,046,013
$ 4,160,658 $ 4,125,125
For the maturity schedule above, mortgage-backed securities and CLO, 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 as borrowers have the right to prepay obligations with or without prepayment penalties. At December 31, 2016, the
Company had a carrying value of $1.9 billion in callable securities in its CMBS, CLO, and municipal bond portfolios. The Company
considers prepayment risk in the evaluation of its interest rate risk profile. These maturities do not reflect actual duration which
are impacted by prepayments.
Securities with a carrying value totaling $2.5 billion at December 31, 2016 and $2.6 billion at December 31, 2015 were pledged
to secure public funds, trust deposits, repurchase agreements, and for other purposes, as required or permitted by law.
83
Note 3: Variable Interest Entities
The Company evaluates each VIE to understand the purpose and design of the entity, and its involvement in the ongoing activities
of the VIE. The Company will consolidate the VIE if it has:
•
•
the power to direct the activities of the VIE that most significantly affect the VIE's economic performance; and
an obligation to absorb losses of the VIE, or the right to receive benefits from the VIE, that could potentially be significant
to the VIE.
Consolidated
Rabbi Trust. The Company established a Rabbi Trust to meet its obligations due under Webster's Deferred Compensation Plan
for Directors and Officers and to mitigate the the expense volatility oft he aforementioned plans. The funding of the Rabbi Trust
and the discontinuation of Webster's Deferred Compensation Plan for Directors and Officers occurred during 2012.
Investments held in the Rabbi Trust primarily consist of mutual funds that invest in equity and fixed income securities. The
Company is considered the primary beneficiary of the Rabbi Trust as it has the power to direct the activities of the Rabbi Trust
that significantly affect the VIE's economic performance and it has the obligation to absorb losses of the VIE that could potentially
be significant to the VIE.
The Company consolidates the invested assets of the trust along with the total deferred compensation obligations and includes
them in accrued interest receivable and other assets and accrued expenses 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 and fair value associated with the assets and liabilities of this trust are not significant.
Refer to Note 16: Fair Value Measurements for additional information.
Non-Consolidated
Securitized Investments. The Company, through normal investment activities, makes passive investments in securities issued by
VIEs for which the Company is not the manager. These securities consist of Agency CMO, Agency MBS, Agency CMBS, CLO,
and single issuer trust preferred securities. The Company has not provided financial or other support with respect to these
investments other than its original investment. For these investments, the Company determined it is not the primary beneficiary
due to the relative size of the Company’s investment in comparison to the principal amount of the structured securities issued by
the VIEs, the level of credit subordination which reduces the Company’s obligation to absorb losses or right to receive benefits
and the Company’s inability to direct the activities that most significantly impact the economic performance of the VIEs. The
Company’s maximum exposure to loss on these investments is limited to the amount of the Company’s investment. Refer to Note
2: Investment Securities for additional information.
Tax Credit - Finance Investments. The Company makes equity investments in entities that finance affordable housing and other
community development projects and provide a return primarily through the realization of tax benefits. In most instances the
investments require the funding of capital commitments in the future. While the Company's investment in an entity may exceed
50% of its outstanding equity interests, the entity is not consolidated as Webster is not involved in its management. For these
investments, the Company determined it is not the primary beneficiary due to its inability to direct the activities that most
significantly impact the economic performance of the VIEs.
At December 31, 2016 and December 31, 2015, the aggregate carrying value of the Company's tax credit-finance investments
were $22.8 million and $25.9 million, respectively. At December 31, 2016 and December 31, 2015, unfunded commitments, which
are recognized as a component of accrued expenses and other liabilities, were $14.0 million and $16.5 million, respectively.
Webster Statutory Trust. The Company owns all of the outstanding common stock of Webster Statutory Trust, which is a financial
vehicle that has issued, and may issue in the future, 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 accrued interest receivable and other assets in the accompanying Consolidated Balance Sheets. Interest expense on the junior
subordinated debentures is reported as interest expense on long-term debt in the accompanying Consolidated Statements of Income.
Other Investments. The Company invests in various alternative investments in which it holds a variable interest. Alternative
investments are non-public entities which cannot be redeemed since the Company’s investment is distributed as the underlying
investments are liquidated. For these investments, the Company has determined it is not the primary beneficiary due to its inability
to direct the activities that most significantly impacts the economic performance of the VIEs.
At December 31, 2016 and December 31, 2015, the aggregate carrying value of the Company's other investments in VIEs were
$12.3 million and $12.1 million, respectively, and the total exposure of the Company's other investments in VIEs, including
unfunded commitments, were $19.9 million and $19.0 million, respectively.
84
Note 4: Loans and Leases
The following table summarizes loans and leases:
(In thousands)
Residential
Consumer
Commercial
Commercial Real Estate
Equipment Financing
Loans and leases (1) (2)
At December 31,
2016
4,254,682
2,684,500
4,940,931
4,510,846
635,629
17,026,588
$
$
$
2015
4,061,001
2,702,560
4,315,999
3,991,649
600,526
$ 15,671,735
(1) Loans and leases include net deferred fees and net premiums and discounts of $17.3 million and $18.0 million at December 31, 2016
and December 31, 2015, respectively.
(2) At December 31, 2016, the Company had pledged $6.4 billion of eligible loans as collateral to support borrowing capacity at the
FHLB of Boston and the FRB of Boston.
Loans and Leases Portfolio Aging
The following tables summarize the aging of loans and leases:
At December 31, 2016
(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
(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
30-59 Days
Past Due and
Accruing
8,631
$
60-89 Days
Past Due and
Accruing
2,609
$
90 or More
Days Past
Due
and Accruing Non-accrual
47,279
$
— $
Total Past Due
and
Non-accrual
58,519
$
Current
Total Loans
and Leases
$ 4,196,163 $ 4,254,682
8,831
2,233
1,382
—
6,357
—
903
28,337
$
5,782
1,485
577
—
1,816
—
693
12,962
$
$
—
—
749
—
—
—
—
749
35,926
1,663
38,190
—
50,539
5,381
40,898
—
2,359,354
269,226
2,409,893
274,607
4,094,727
805,306
4,135,625
805,306
9,871
662
225
$ 133,816
18,044
662
1,821
175,864
4,117,742
374,398
633,808
4,135,786
375,060
635,629
$ 16,850,724 $ 17,026,588
$
At December 31, 2015
30-59 Days
Past Due and
Accruing
10,365
$
60-89 Days
Past Due and
Accruing
4,703
$
9,061
1,390
768
—
1,624
—
543
23,751
$
4,242
615
3,288
—
625
—
59
13,532
$
90 or More
Days Past
Due
and Accruing Non-accrual
54,201
$
2,029
$
Total Past Due
and
Non-accrual
71,298
$
Current
Total Loans
and Leases
$ 3,989,703 $ 4,061,001
—
—
22
—
37,337
560
27,037
—
50,640
2,565
31,115
—
2,402,758
246,597
2,453,398
249,162
3,531,669
753,215
3,562,784
753,215
—
—
—
2,051
16,767
3,461
706
$ 140,069
$
19,016
3,461
1,308
179,403
3,673,408
295,764
599,218
3,692,424
299,225
600,526
$ 15,492,332 $ 15,671,735
$
Interest on non-accrual loans and leases that would have been recorded as additional interest income for the years ended December
31, 2016, 2015, and 2014, had the loans and leases been current in accordance with their original terms, totaled $11.0 million,
$8.2 million, and $9.3 million, respectively.
85
Allowance for Loan and Lease Losses
The following tables summarize the activity in, as well as the loan and lease balances that were evaluated for, the ALLL:
Loans and leases
$ 4,254,682 $ 2,684,500 $ 4,940,931 $ 4,510,846 $
119,424 $
45,719 $
53,037 $
24,755 $
4,135,258
2,638,781
4,887,894
4,486,091
6,420 $
249,355
629,209
16,777,233
635,629 $ 17,026,588
At or for the Year ended December 31, 2016
Residential
Consumer
Commercial
Commercial
Real Estate
Equipment
Financing
Total
25,876 $
230
(4,636)
1,756
23,226 $
8,090 $
15,136 $
42,052 $
18,507
(20,669)
5,343
45,233 $
2,903 $
42,330 $
59,977 $
28,662
(18,360)
1,626
71,905 $
7,422 $
64,483 $
41,598 $
7,930
(2,682)
631
47,477 $
169 $
47,308 $
5,487 $
1,021
(565)
536
6,479 $
9 $
6,470 $
174,990
56,350
(46,912)
9,892
194,320
18,593
175,727
At or for the Year ended December 31, 2015
Residential
Consumer
Commercial
Commercial
Real Estate
Equipment
Financing
Total
25,452 $
6,057
(6,508)
875
25,876 $
10,364 $
15,512 $
43,518 $
11,847
(17,679)
4,366
42,052 $
3,477 $
38,575 $
47,068 $
21,693
(11,522)
2,738
59,977 $
5,197 $
54,780 $
37,148 $
11,381
(7,578)
647
41,598 $
3,163 $
38,435 $
6,078 $
(1,678)
(273)
1,360
5,487 $
3 $
5,484 $
159,264
49,300
(43,560)
9,986
174,990
22,204
152,786
(In thousands)
Allowance for loan and lease losses:
Balance at January 1, 2016
Provision (benefit) charged to expense
Losses charged off
Recoveries
Balance at December 31, 2016
Individually evaluated for impairment
Collectively evaluated for impairment
Loan and lease balances:
Individually evaluated for impairment
Collectively evaluated for impairment
$
$
$
$
$
(In thousands)
Allowance for loan and lease losses:
Balance at January 1, 2015
Provision (benefit) charged to expense
Losses charged off
Recoveries
Balance at December 31, 2015
Individually evaluated for impairment
Collectively evaluated for impairment
Loan and lease balances:
Individually evaluated for impairment
Collectively evaluated for impairment
$
$
$
$
$
Loans and leases
$ 4,061,001 $ 2,702,560 $ 4,315,999 $ 3,991,649 $
134,448 $
48,425 $
56,581 $
39,295 $
3,926,553
2,654,135
4,259,418
3,952,354
422 $
279,171
600,104
15,392,564
600,526 $ 15,671,735
(In thousands)
Allowance for loan and lease losses:
Balance at January 1, 2014
Provision (benefit) charged to expense
Losses charged off
Recoveries
Balance at December 31, 2014
Individually evaluated for impairment
Collectively evaluated for impairment
Loan and lease balances:
Individually evaluated for impairment
Collectively evaluated for impairment
$
$
$
$
$
At or for the Year ended December 31, 2014
Residential
Consumer
Commercial
Commercial
Real Estate
Equipment
Financing
Total
23,027 $
7,315
(6,214)
1,324
25,452 $
12,094 $
13,358 $
41,951 $
17,224
(20,712)
5,055
43,518 $
4,237 $
39,281 $
46,655 $
9,712
(13,668)
4,369
47,068 $
2,710 $
44,358 $
36,754 $
2,746
(3,237)
885
37,148 $
6,232 $
30,916 $
4,186 $
253
(595)
2,234
6,078 $
28 $
6,050 $
152,573
37,250
(44,426)
13,867
159,264
25,301
133,963
141,982 $
50,249 $
36,176 $
101,817 $
3,367,193
2,499,152
3,713,094
3,452,611
632 $
330,856
537,119
13,569,169
537,751 $ 13,900,025
Loans and leases
$ 3,509,175 $ 2,549,401 $ 3,749,270 $ 3,554,428 $
86
Impaired Loans and Leases
The following tables summarize impaired loans and leases:
(In thousands)
Residential:
1-4 family
Consumer:
Home equity
Commercial:
Commercial non-mortgage
Commercial real estate:
Commercial real estate
Commercial construction
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
Total
At December 31, 2016
Unpaid
Principal
Balance
Total
Recorded
Investment
Recorded
Investment
No Allowance
Recorded
Investment
With Allowance
Related
Valuation
Allowance
$
131,468
$
119,424
$
21,068
$
98,356
$
8,090
52,432
45,719
22,746
22,973
57,732
53,037
26,006
27,031
24,146
1,188
6,398
273,364
23,568
1,187
6,420
249,355
$
$
$
19,591
1,187
6,197
96,795
$
3,977
—
223
152,560
$
2,903
7,422
169
—
9
18,593
At December 31, 2015
Unpaid
Principal
Balance
Total
Recorded
Investment
Recorded
Investment
No Allowance
Recorded
Investment
With Allowance
Related
Valuation
Allowance
$
148,144
$
134,448
$
23,024
$
111,424
$
10,364
56,680
48,425
25,130
23,295
67,116
56,581
31,600
24,981
36,980
7,010
612
316,542
$
33,333
5,962
422
279,171
$
$
9,204
5,939
328
95,225
$
24,129
23
94
183,946
$
3,477
5,197
3,160
3
3
22,204
The following table summarizes the average recorded investment and interest income recognized for impaired loans and leases:
(In thousands)
Residential
Consumer
Commercial
Commercial real estate:
Commercial real estate
Commercial
construction
Equipment financing
Total
Years ended December 31,
Average
Recorded
Investment
$ 126,936 $
47,072
54,708
2016
Accrued
Interest
Income
Cash Basis
Interest
Income
4,377 $
1,361
1,540
1,200
985
—
Average
Recorded
Investment
$ 138,215 $
49,337
46,379
2015
Accrued
Interest
Income
Cash Basis
Interest
Income
4,473 $
1,451
1,319
1,139
1,099
—
Average
Recorded
Investment
$ 142,198 $
51,171
44,097
2014
Accrued
Interest
Income
Cash Basis
Interest
Income
4,644 $
1,484
2,326
28,451
511
—
64,495
1,165
—
93,209
3,429
3,574
3,421
$ 264,162 $
92
184
8,065 $
—
—
2,185
6,062
527
$ 305,015 $
133
16
8,557 $
—
—
2,238
8,381
421
$ 339,477 $
269
28
12,180 $
87
1,221
1,203
—
—
—
—
2,424
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 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 position and outlook, risk profile, and their related collateral and structural position. 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.
The following table summarizes commercial, commercial real estate and equipment financing loans and leases segregated by risk
rating exposure:
(In thousands)
(1) - (6) Pass
(7) Special Mention
(8) Substandard
(9) Doubtful
Total
Commercial
Commercial Real Estate
Equipment Financing
At December 31,
2016
4,655,007
$
At December 31,
2015
4,023,255
$
At December 31,
2016
4,357,458
$
At December 31,
2015
$
3,857,019
At December 31,
2016
618,084
$
At December 31,
2015
586,445
$
56,240
226,603
3,081
70,904
220,389
1,451
69,023
84,365
—
55,030
79,289
311
1,324
16,221
—
1,628
12,453
—
$
4,940,931
$
4,315,999
$
4,510,846
$
3,991,649
$
635,629
$
600,526
For residential and consumer loans, the Company considers factors such as past due status, 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)
Accrual status
Non-accrual status
Total recorded investment of TDR (1)
Accruing TDR performing under modified terms more than one year
Specific reserves for TDR included in the balance of ALLL
Additional funds committed to borrowers in TDR status
At December 31,
2016
147,809
75,719
223,528
57.1%
14,583
459
$
$
$
2015
171,784
100,906
272,690
55.0%
21,405
1,133
$
$
$
(1) Total recorded investment of TDRs exclude $0.7 million and $1.1 million at December 31, 2016 and December 31, 2015, respectively,
of accrued interest receivable.
For years ended December 31, 2016, 2015 and 2014, Webster charged off $18.6 million, $11.8 million, and $13.5 million,
respectively, for the portion of TDRs deemed to be uncollectible.
88
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
Adjusted Interest rates
Combination Rate and Maturity
Other (2)
Equipment Financing
Extended Maturity
Total
Years ended December 31,
2016
2015
2014
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)
17
2
13
24
11
—
15
52
12
—
2
13
3
1
2
1
$
2,801
528
1,537
4,090
484
—
1,156
3,131
14,883
—
648
1,767
4,921
237
335
509
27
3
26
30
12
—
12
68
3
1
7
20
1
—
1
1
$
4,909
573
5,315
4,366
1,012
—
945
3,646
254
24
5,361
22,048
315
—
42
405
27
3
22
55
19
1
6
90
7
1
22
6
—
—
2
—
$
3,547
448
4,220
11,791
944
51
411
4,931
422
25
1,212
7,431
—
—
11,106
—
7
175
6,642
43,669
$
—
212
—
49,215
$
1
262
492
47,031
$
(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.
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
Consumer
Total
Years ended December 31,
2016
2015
2014
Number of
Loans and
Leases
—
—
—
Recorded
Investment
—
—
—
$
$
Number of
Loans and
Leases
1
1
2
$
$
Recorded
Investment
55
3
58
Number of
Loans and
Leases
7
2
9
Recorded
Investment
1,494
24
1,518
$
$
The recorded investment of TDRs in commercial, commercial real estate, and equipment financing segregated by risk rating
exposure is as follows:
(In thousands)
(1) - (6) Pass
(7) Special Mention
(8) Substandard
(9) Doubtful
Total
At December 31,
$
2016
10,210
7
45,509
2,738
$
2015
12,970
2,999
72,132
1,717
$
58,464
$
89,818
89
Note 5: Transfers of Financial Assets
Transfers of Financial Assets
The Company sells financial assets in the normal course of business, primarily residential mortgage loans sold to government-
sponsored enterprises through established programs and securitizations. The gain or loss on residential mortgage loans sold and
the fair value adjustment to loans held for sale are included as mortgage banking activities in the accompanying Consolidated
Statements of Income.
The Company may be required to repurchase a loan in the event of certain breaches of the representations and warranties, or in
the event of default of the borrower within 90 days of sale, as provided for in the sale agreements. A reserve for loan repurchases
provides for estimated losses pertaining to the potential repurchase of loans associated with the Company's mortgage banking
activities. The reserve reflects management’s evaluation of the identity of counterparty, the vintage of the loans sold, the amount
of open repurchase requests, specific loss estimates for each open request, the current level of loan losses in similar vintages held
in the residential loan portfolio, and estimated recoveries on the underlying collateral. The reserve also reflects management’s
expectation of losses from repurchase requests for which the Company has not yet been notified, as the performance of loans sold
and the quality of the servicing provided by the acquirer may also impact the reserve. The provision recorded at the time of the
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 charged to expense
Repurchased loans and settlements charged off
Ending balance
The following table provides information for mortgage banking activities:
(In thousands)
Residential mortgage loans held for sale:
Proceeds from sale
Net gain on sale
Fair value option adjustment
Loans sold with servicing rights retained
Years ended December 31,
2015
$ 1,059
133
—
$ 1,192
2014
$ 2,254
(493)
(702)
$ 1,059
2016
$ 1,192
(303)
(99)
790
$
Years ended December 31,
2015
2014
2016
$
$
438,925
11,629
(526)
399,318
452,590
7,795
—
416,277
$
287,132
4,070
—
264,292
The Company has retained servicing rights on residential mortgage loans totaling $2.6 billion and $2.5 billion at December 31,
2016 and 2015, respectively.
The following table presents the changes in carrying value for mortgage servicing assets:
(In thousands)
Beginning balance
Additions
Amortization
Valuation recovery (provision) (1)
Ending balance
Years ended December 31,
2015
2014
2016
$
$
20,698
11,312
(7,554)
10
24,466
$
$
19,379
8,027
(6,699)
(9)
20,698
$
$
20,983
4,581
(6,318)
133
19,379
(1) The valuation recovery (provision) resulted in a valuation allowance balance of $22 thousand, $32 thousand, and $23 thousand at
December 31, 2016, 2015, and 2014, respectively.
Loan servicing fees, net of mortgage servicing rights amortization, were $1.1 million, $1.5 million, and $1.5 million, for the years
ended December 31, 2016, 2015, and 2014, respectively, and are included as a component of loan related fees in the accompanying
Consolidated Statements of Income.
See Note 16: Fair Value Measurements for additional fair value information on loans held for sale and mortgage servicing assets.
Additionally, loans not originated for sale were sold for cash proceeds of $26.5 million for certain commercial loans, resulting in
a gain of $2.1 million, and loans not originated for sale were sold approximately at carrying value, for cash proceeds of $7.6
million for certain residential loans, for the year ended December 31, 2016. Loans not originated for sale were sold approximately
at carrying value for cash proceeds of $729 thousand for certain commercial loans and $32.9 million for certain consumer loans,
for the year ended December 31, 2015.
90
Note 6: 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,
2016
12,595
90,778
83,995
76,146
220,002
483,516
(346,103)
137,413
$
$
2015
12,899
94,686
79,917
73,686
195,308
456,496
(327,070)
129,426
$
$
Depreciation and amortization of premises and equipment was $30.8 million, $28.4 million, and $27.9 million for the years ended
December 31, 2016, 2015, and 2014, respectively.
The following table provides a summary of activity for assets held for disposition:
(In thousands)
Beginning balance
Additions
Write-downs
Sales
Ending balance
Years ended December 31,
2016
2015
$
$
637
—
—
—
637
$
$
759
144
—
(266)
637
Note 7: Goodwill and Other Intangible Assets
Goodwill and other intangible assets by reportable segment consisted of the following:
(In thousands)
Other intangible assets:
Community Banking, CDI
HSA Bank:
CDI
Customer relationships
Total HSA Bank
Total other intangible assets
Goodwill:
Community Banking
HSA Bank
Total goodwill
At December 31,
2016
2015
Gross Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
Gross Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
$
49,420 $
(49,420) $
— $
49,420 $
(48,277) $
1,143
22,000
21,000
43,000
92,420 $
(6,162)
(3,164)
(9,326)
(58,746) $
15,838
17,836
33,674
33,674
516,560
21,813
538,373
$
$
516,560
21,813
538,373
22,000
21,000
43,000
92,420 $
(3,269)
(1,548)
(4,817)
(53,094) $
18,731
19,452
38,183
39,326
516,560
21,813
538,373
$
$
516,560
21,813
538,373
$
$
$
$
$
$
As of December 31, 2016, the remaining estimated aggregate future amortization expense for intangible assets is as follows:
(In thousands)
2017
2018
2019
2020
2021
Thereafter
$
4,062
3,847
3,847
3,847
3,847
14,224
91
Note 8: Income Taxes
Income tax expense reflects the following expense (benefit) components:
(In thousands)
Current:
Federal
State and local
Total current
Deferred:
Federal
State and local
Total deferred
Total federal
Total state and local
Income tax expense
Years ended December 31,
2015
2014
2016
$
$
73,194
5,429
78,623
12,542
5,158
17,700
85,736
10,587
96,323
$
$
97,575
10,970
108,545
90,542
6,585
97,127
(7,279)
(8,234)
(15,513)
(3,784)
(1,370)
(5,154)
90,296
2,736
93,032
$
86,758
5,215
91,973
$
The Company's income tax expense reflects the benefits of an operating loss carryforward of $3.0 million in 2015, and net tax
credits of $1.0 million, $2.1 million, and $0.3 million for the years ended December 31, 2016, 2015, and 2014, respectively.
The following table reflects a reconciliation of 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 income taxes, net of federal benefit
Tax-exempt interest income, net
Decrease in valuation allowance applicable to net
state deferred tax assets, net of federal effects
Increase in cash surrender value of life insurance
Other, net
Years ended December 31,
2016
2015
2014
Amount
Percent
Amount
Percent
Amount
Percent
$
106,208
35.0% $
104,217
35.0% $
102,095
35.0%
6,882
(8,917)
—
(5,166)
(2,684)
2.3
(2.9)
—
(1.7)
(1.0)
7,563
(7,117)
(5,785)
(4,557)
(1,289)
2.5
(2.4)
(1.9)
(1.5)
(0.5)
3,390
(7,335)
—
(4,612)
(1,565)
1.2
(2.5)
—
(1.6)
(0.6)
Income tax expense and effective tax rate
$
96,323
31.7% $
93,032
31.2% $
91,973
31.5%
Refundable income taxes totaling $0.7 million and $56.6 million at December 31, 2016 and 2015, respectively, are reflected in
accrued interest receivable and other assets in the accompanying Consolidated Balance Sheets. Early in 2016 Webster received
refunds of tax with interest from the carryback of its losses during tax years 2008 and 2009. Later in the year the Internal Revenue
Service completed an examination of the Company’s 2010 through 2012 tax years, and Webster received refunds of tax with
interest applicable to those years.
92
The following table reflects the significant components of the deferred tax assets, net:
(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:
Equipment-financing leases
Deferred income on repurchase of debt
Intangible assets
Mortgage servicing assets
Other
Gross deferred tax liabilities
Deferred tax assets, net
At December 31,
2016
2015
77,908
64,644
46,433
8,624
9,898
17,682
225,189
(71,474)
153,715
41,910
4,251
9,952
7,313
5,898
69,324
84,391
$
$
$
$
70,937
68,735
52,422
11,734
4,138
21,663
229,629
(74,918)
154,711
23,934
6,376
9,298
7,127
6,398
53,133
101,578
$
$
$
$
The Company's DTAs decreased by $17.2 million during 2016, reflecting primarily the $17.7 million deferred tax expense and a
$1.7 million benefit allocated directly to shareholders equity.
The $71.5 million valuation allowance at December 31, 2016 consisted of $67.8 million attributable to net state deferred tax assets
and $3.7 million to capital losses, deductible only to the extent of capital gains for federal tax purposes. The decrease in the
valuation allowance includes: (i) a $1.7 million net decrease in the portion applicable to capital losses, including $2.1 million
related to the redemption of an equity interest in 2016, characterized as capital for tax purposes; and (ii) a $1.8 million decrease
applicable to changes in net state deferred tax assets, which had a full valuation allowance at both the beginning and end of the
year.
Management believes it is more likely than not that Webster will realize its total deferred tax asset, 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 2016 and 2015; and projected
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.
Capital losses approximating $12.3 million at December 31, 2016 are scheduled to expire in varying amounts during tax years
2017 and 2018. A valuation allowance has been established for the tax effect of substantially all of these losses, as noted above.
State net operating losses approximating $1.2 billion at December 31, 2016 are scheduled to expire in varying amounts during
tax years 2021 through 2032, and credits, totaling $1.4 million at December 31, 2016, have a five-year carryover period, with
excess credits subject to expiration annually. A valuation allowance of $56.5 million, net, has been established for those state net
operating losses and credits not expected to be utilized, and is included in the valuation allowance attributable to net state deferred
tax assets as noted above.
A deferred tax liability of $21.4 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 a liquidation. Webster does not expect any of those events to occur. At
December 31, 2016 and 2015 the cumulative taxable temporary differences applicable to those reserves approximated $58.0
million.
93
The following table reflects a reconciliation of the beginning and ending balances for UTBs:
(In thousands)
Beginning balance
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
Ending balance
Years ended December 31,
2015
2014
2016
$
$
5,094
613
—
(625)
(693)
(542)
3,847
$
$
4,593
865
1,254
(247)
(992)
(379)
5,094
$
$
3,109
956
1,031
—
—
(503)
4,593
At December 31, 2016, 2015, and 2014, there are $2.5 million, $3.3 million, and $3.0 million, respectively, of UTBs that, if
recognized, would affect the effective tax rate.
Webster recognizes interest and penalties related to UTBs, where applicable, in income tax expense. During the years ended
December 31, 2016, 2015, and 2014, Webster recognized interest and penalties resulting in a benefit of $0.2 million, and an expense
of $1.1 million, and $0.5 million, respectively. At December 31, 2016 and 2015, the Company had accrued interest and penalties
related to UTBs of $1.7 million and $2.5 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
$2.1 million by the end of 2017, primarily as a result of potential settlements with state and local taxing authorities concerning
tax-base and apportionment determinations.
Webster is currently under, or subject to, examination by various taxing authorities. Federal tax returns for all years subsequent
to 2012 remain open to examination. For Webster's principal state tax jurisdictions (Connecticut, Massachusetts, New York and
Rhode Island) returns for years subsequent to 2012 are either under, or remain open to, examination.
94
Note 9: 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,
2016
2015
$ 4,021,061
$ 3,713,063
2,528,274
4,362,503
2,047,121
4,320,090
2,024,808
15,282,796
$ 19,303,857
2,369,971
3,802,313
1,933,460
4,047,817
2,086,154
14,239,715
$ 17,952,778
Time deposits and interest-bearing checking, included in above balances, obtained through brokers
Time deposits, included in above balance, that meet or exceed the FDIC limit
Demand deposit overdrafts reclassified as loan balances
$
$
848,618
490,721
1,885
910,304
542,206
1,356
The scheduled maturities of time deposits are as follows:
(In thousands)
2017
2018
2019
2020
2021
Thereafter
Total time deposits
At December 31,
2016
$
$
846,160
409,785
482,977
181,197
104,578
111
2,024,808
95
Note 10: Borrowings
Total borrowings of $4.0 billion at December 31, 2016 and December 31, 2015 are described in detail below.
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
Total securities sold under agreements to repurchase
Fed funds purchased
Securities sold under agreements to repurchase and other borrowings
At December 31,
2016
Total
Outstanding
$
$
340,526
400,000
740,526
209,000
949,526
Rate
0.16
3.09
1.82
0.46
1.53
2015
Total
Outstanding
$
334,400
500,000
834,400
317,000
$ 1,151,400
Rate
0.15
3.04
1.93
0.21
1.47
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 counterparties are limited to primary dealers in
government securities and commercial/municipal customers through Webster’s Treasury Unit. 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 all repurchase agreement assets and liabilities. Total securities sold under agreements to repurchase represents the gross
amount for these transactions, as only liabilities are outstanding for the periods presented.
The following table provides information for FHLB advances:
(Dollars in thousands)
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
Premiums on advances
Federal Home Loan Bank advances
Aggregate carrying value of assets pledged as collateral
Remaining borrowing capacity
At December 31,
2016
2015
Total
Outstanding
2,130,500
200,000
128,026
175,000
200,000
9,370
2,842,896
12
2,842,908
5,967,318
1,192,758
$
$
$
$
Weighted-
Average Contractual
Coupon Rate
0.71%
1.36
1.73
1.77
1.81
2.59
0.95
Total
Outstanding
2,025,934
500
200,000
103,026
175,000
159,655
2,664,115
24
2,664,139
5,719,746
1,203,057
$
$
$
$
Weighted-
Average Contractual
Coupon Rate
0.55%
5.66
1.36
1.54
1.77
1.60
0.79
Webster Bank was in compliance with FHLB collateral requirements for the periods presented. Eligible collateral, primarily certain
residential and commercial real estate loans, has been pledged to secure FHLB advances.
The following table summarizes long-term debt:
(Dollars in thousands)
4.375% Senior fixed-rate notes due February 15, 2024
Junior subordinated debt Webster Statutory Trust I floating-rate notes due September 17, 2033 (1)
Total notes and subordinated debt
Discount on senior fixed-rate notes
Debt issuance cost on senior fixed-rate notes (2)
Long-term debt
At December 31,
2016
2015
$ 150,000
77,320
227,320
(845)
(961)
$ 225,514
$ 150,000
77,320
227,320
(964)
(1,096)
$ 225,260
(1) The interest rate on Webster Statutory Trust I floating-rate notes, which varies quarterly based on 3-month LIBOR plus 2.95%, was
3.94% at December 31, 2016 and 3.48% at December 31, 2015.
(2) In accordance with the adoption of ASU No. 2015-03, Interest-Imputation of Interest (Subtopic 835-30) - Simplifying the Presentation
of Debt Issuance Costs, debt issuance cost is accounted for as a reduction to long-term debt. Previously debt issuance cost was included
in accrued interest receivable and other assets within the accompanying Consolidated Balance Sheets.
96
Note 11: Shareholders' Equity
Share activity during the year ended December 31, 2016 is as follows:
Balance at January 1, 2016
Restricted share activity
Stock options exercised
Common stock repurchased
Balance at December 31, 2016
Common Stock
Preferred
Stock Series E
5,060
—
—
—
5,060
Common
Stock Issued
93,651,601
—
—
—
93,651,601
Treasury
Stock Held
2,090,409
(248,603)
(292,304)
350,000
1,899,502
Common
Stock
Outstanding
91,561,192
248,603
292,304
(350,000)
91,752,099
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 the open market or in privately negotiated transactions,
subject to market conditions and other factors. Common stock repurchased during 2016 was acquired at an average cost of $32.02
per common share, which results in a remaining repurchase authority for the common stock repurchase program of $15.5 million
at December 31, 2016.
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, and expire on November 21, 2018. Concurrent
with the U.S. Treasury's action, the Board of Directors approved the repurchase of a significant number of warrants in a public
auction conducted on behalf of the U.S. Treasury. The board approved plan provides for additional repurchases from time-to-time,
as permitted by securities laws and other legal requirements. During 2016 the Company purchased 10,317 warrants at an average
price of $15.74 per warrant leaving 53,027 warrants outstanding and exercisable at December 31, 2016.
On June 1, 2015, Webster exercised its right, as specified in the Prospectus Supplement, for conversion of all the outstanding
shares of 8.50% Series A Non-Cumulative Perpetual Convertible Preferred Stock, par value $0.01 per share, previously known
as Series A Preferred Stock, for Webster common stock, issued from treasury stock held. Each share of Series A Preferred Stock
received 36.8046 shares of Webster common stock, reflecting an approximate conversion price of $27.17 per share based on the
initial issuance price of $1,000 per share of Series A Preferred Stock, and cash in lieu of any fractional share of common stock.
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 are not cumulative and are not 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 terms of the Series E Preferred Stock prohibit the Company from declaring or
paying any cash dividends on its common stock, unless Webster has declared and paid full dividends on the Series E Preferred
Stock for the most recently completed dividend period.
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, or in whole but not in part upon a "regulatory capital treatment event" as defined in the Prospectus
Supplement, at a redemption price equal to the liquidation preference 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.
97
Note 12: Accumulated Other Comprehensive Loss, Net of Tax
The following table summarizes the changes in AOCL by component:
(In thousands)
Balance at December 31, 2013
Available
For Sale
and
Transferred
Securities
Derivative
Instruments
Defined
Benefit
Pension and
Other
Postretirement
Benefit Plans
Total
$
(2,617)
$
(18,206)
$
(27,726)
$ (48,549)
(21,329)
(12,024)
Other comprehensive income (loss) before reclassifications
Amounts reclassified from accumulated other comprehensive (loss) income
Net current-period other comprehensive income (loss), net of tax
Balance at December 31, 2014
Other comprehensive (loss) income before reclassifications
Amounts reclassified from accumulated other comprehensive (loss) income
Net current-period other comprehensive (loss) income, net of tax
Balance at December 31, 2015
Other comprehensive (loss) income before reclassifications
Amounts reclassified from accumulated other comprehensive (loss) income
Net current-period other comprehensive (loss) income, net of tax
21,811
(2,773)
19,038
16,421
(22,512)
(316)
(22,828)
(6,407)
(8,901)
(168)
(9,069)
(12,506)
5,182
(7,324)
(25,530)
(3,136)
5,686
2,550
1,903
(19,426)
(47,152)
(5,500)
3,933
(1,567)
(22,980)
(48,719)
825
5,087
5,912
(232)
4,502
4,270
4,312
(7,712)
(56,261)
(31,148)
9,303
(21,845)
(78,106)
(8,308)
9,421
1,113
Balance at December 31, 2016
$
(15,476)
$
(17,068)
$
(44,449)
$ (76,993)
The following table provides information for the items reclassified from AOCL:
Accumulated Other Comprehensive Loss
Components
(In thousands)
Available-for-sale and transferred securities:
Unrealized gains on investments
Unrealized losses on investments
Total before tax
Tax expense
Net of tax
Derivative instruments:
Cash flow hedges
Tax benefit
Net of tax
Defined benefit pension and other
postretirement benefit plans:
Amortization of net loss
Prior service costs
Total before tax
Tax benefit
Net of tax
Years ended December 31,
2016
2015
2014
Associated Line Item in the
Consolidated Statements Of Income
$
$
414
(149)
265
(97)
168
$
$
609
(110)
499
(183)
316
$
5,499
Gain on sale of investment securities, net
(1,145)
Impairment loss recognized in earnings
4,354
(1,581)
Income tax expense
$
2,773
$ (8,020)
$ (8,965)
$ (8,100)
Total interest expense
2,933
3,279
2,918
Income tax expense
$ (5,087)
$ (5,686)
$ (5,182)
$ (7,126)
$ (6,161)
$ (2,921)
(14)
(7,140)
2,638
(73)
(6,234)
2,301
(1)
(1)
(73)
(2,994)
1,091
Income tax expense
$ (4,502)
$ (3,933)
$ (1,903)
(1) These accumulated other comprehensive income components are included in the computation of net periodic benefit cost (see Note 17 Retirement Benefit
Plans for further details).
98
The following tables summarize the items and related tax effects for each component of OCI/OCL, net of tax:
(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 net loss included in net income
Total derivative instruments
Defined benefit pension and other postretirement benefit plans:
Current year actuarial loss
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, net of tax
(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 loss during the period
Reclassification adjustment for net loss included in net income
Total derivative instruments
Defined benefit pension and other postretirement benefit plans:
Current year actuarial loss
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 loss, net of tax
(In thousands)
Available-for-sale and transferred securities:
Net unrealized gain 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 loss during the period
Reclassification adjustment for net loss included in net income
Total derivative instruments
Defined benefit pension and other postretirement benefit plans:
Current year actuarial loss
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 loss, net of tax
99
$
$
$
$
$
$
Year ended December 31, 2016
Tax Benefit
(Expense)
Net of Tax
Amount
Pre-Tax
Amount
(14,113)
(414)
149
—
(14,378)
1,331
8,020
9,351
(368)
7,126
14
6,772
1,745
$
$
5,212
152
(55)
—
5,309
(506)
(2,933)
(3,439)
136
(2,633)
(5)
(2,502)
(632)
$
$
(8,901)
(262)
94
—
(9,069)
825
5,087
5,912
(232)
4,493
9
4,270
1,113
Year ended December 31, 2015
Tax Benefit
(Expense)
Net of Tax
Amount
Pre-Tax
Amount
(35,701)
(609)
110
37
(36,163)
(4,945)
8,965
4,020
(8,719)
6,161
73
(2,485)
(34,628)
$
$
13,166
223
(40)
(14)
13,335
1,809
(3,279)
(1,470)
3,219
(2,274)
(27)
918
12,783
$
$
(22,535)
(386)
70
23
(22,828)
(3,136)
5,686
2,550
(5,500)
3,887
46
(1,567)
(21,845)
Year ended December 31, 2014
Tax Benefit
(Expense)
Net of Tax
Amount
Pre-Tax
Amount
34,242
(5,499)
1,145
60
29,948
(19,589)
8,100
(11,489)
(33,567)
2,921
73
(30,573)
(12,114)
$
$
(12,469)
1,999
(418)
(22)
(10,910)
7,083
(2,918)
4,165
12,238
(1,065)
(26)
11,147
4,402
$
$
21,773
(3,500)
727
38
19,038
(12,506)
5,182
(7,324)
(21,329)
1,856
47
(19,426)
(7,712)
Note 13: Regulatory Matters
Capital Requirements
Webster Financial Corporation is subject to regulatory capital requirements administered by the Federal Reserve System, while
Webster Bank is subject to regulatory capital requirements administered by the OCC. Regulatory authorities can initiate certain
mandatory actions if Webster Financial Corporation or Webster Bank fail to meet minimum capital requirements, which could
have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework
for prompt corrective action, both Webster Financial Corporation and Webster Bank must meet specific capital guidelines that
involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting
practices. These quantitative measures require minimum amounts and ratios to ensure capital adequacy.
Under Basel III, total risk-based capital is comprised of three categories: CET1 capital, additional Tier 1 capital, and Tier 2 capital.
CET1 capital includes common shareholders' equity, less deductions for goodwill and other intangibles adjusted for certain deferred
tax liabilities. Webster's common shareholders' equity, for purposes of CET1 capital, excludes AOCL components as permitted
by the opt-out election taken by Webster upon adoption of Basel III. Tier 1 capital is comprised of CET1 capital plus perpetual
preferred stock, while Tier 2 capital includes qualifying subordinated debt and qualifying allowance for credit losses, that together
equal total capital.
The following table provides information on the capital ratios for Webster Financial Corporation and Webster Bank:
(Dollars in thousands)
At December 31, 2016
Webster Financial Corporation
CET1 risk-based capital
Total risk-based capital
Tier 1 risk-based capital
Tier 1 leverage capital
Webster Bank
CET1 risk-based capital
Total risk-based capital
Tier 1 risk-based capital
Tier 1 leverage capital
At December 31, 2015
Webster Financial Corporation
CET1 risk-based capital
Total risk-based capital
Tier 1 risk-based capital
Tier 1 leverage capital
Webster Bank
CET1 risk-based capital
Total risk-based capital
Tier 1 risk-based capital
Tier 1 leverage capital
Dividend Restrictions
Actual
Minimum
Well Capitalized
Amount
Ratio
Amount
Ratio
Amount
Ratio
Capital Requirements
$ 1,932,171
2,328,808
2,054,881
2,054,881
10.5% $
12.7
11.2
8.1
826,504
1,469,341
1,102,006
1,010,857
4.5% $ 1,193,840
1,836,677
8.0
1,469,341
6.0
1,263,571
4.0
$ 1,945,332
2,141,939
1,945,332
1,945,332
10.6% $
11.7
10.6
7.7
825,228
1,467,071
1,100,304
1,010,005
4.5% $ 1,191,995
1,833,839
8.0
1,467,071
6.0
1,262,507
4.0
$ 1,824,106
2,201,245
1,966,146
1,966,146
10.7% $
12.9
11.5
8.2
766,848
1,363,286
1,022,464
954,369
4.5% $ 1,107,670
1,704,107
8.0
1,363,286
6.0
1,192,962
4.0
$ 1,869,241
2,046,350
1,869,241
1,869,241
11.0% $
12.0
11.0
7.8
765,152
1,360,271
1,020,203
953,300
4.5% $ 1,105,220
1,700,338
8.0
1,360,271
6.0
1,191,626
4.0
6.5%
10.0
8.0
5.0
6.5%
10.0
8.0
5.0
6.5%
10.0
8.0
5.0
6.5%
10.0
8.0
5.0
Webster Financial Corporation 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 Financial Corporation totaled $145 million
and $110 million during the years ended December 31, 2016 and 2015, respectively.
Cash Restrictions
Webster Bank is required by Federal Reserve System regulations to hold cash reserve balances, on hand or with Federal Reserve
Banks. Pursuant to this requirement, the Bank held $58.6 million and $109.4 million at December 31, 2016 and 2015, respectively.
100
Note 14: Earnings Per Common Share
Reconciliation of 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
Less: Preferred stock dividends
Net income available to common shareholders
Less: Earnings applicable to participating securities
Earnings applicable to common shareholders
Shares:
Years ended December 31,
2016
2015
2014
$ 207,127
8,096
199,031
608
$ 198,423
$ 204,729
8,711
196,018
657
$ 195,361
$ 199,726
10,556
189,170
674
$ 188,496
Weighted-average common shares outstanding - basic
91,367
90,968
89,899
Effect of dilutive securities:
Stock options and restricted stock
Warrants
Weighted-average common shares outstanding - diluted
Earnings per common share:
Basic
Diluted
461
28
91,856
524
41
91,533
466
255
90,620
$
$
2.17
2.16
$
2.15
2.13
2.10
2.08
Potential common shares excluded from the effect of dilutive securities because they would have been anti-dilutive, are as follows:
(In thousands)
Stock options (shares with exercise price greater than market price)
Restricted stock (due to performance conditions on non-participating shares)
Years ended December 31,
2016
41
125
2015
213
92
2014
587
171
Basic weighted-average common shares outstanding includes the effect of conversion of the Series A Preferred Stock which
occurred on June 1, 2015. Prior to that, the Series A Preferred Stock was considered to be anti-dilutive. Refer to Note 11:
Shareholders' Equity and Note 18: Share-Based Plans for further information relating to potential common shares excluded from
the effect of dilutive securities.
101
Note 15: Derivative Financial Instruments
Risk Management Objective of Using Derivatives
Webster manages economic risks, including interest rate, liquidity, and credit risk by managing the amount, sources, and duration
of its debt funding along with the use of interest rate derivative financial instruments. Webster enters into interest rate derivative
financial instruments to manage exposure related to business activities that result in the receipt or payment of both future known
and uncertain cash amounts determined by interest rates.
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 interest rate 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. Forward-settle interest rate swaps 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.
Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for
the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.
Interest rate caps designated as cash flow hedges involve the receipt of variable amounts from a counterparty if interest rates rise
above the strike rate on the contract in exchange for payment of an up-front premium.
Derivative instruments designated as cash flow hedges are recorded on the balance sheet at fair value. The effective portion of the
change in the fair value of derivatives which are designated as cash flow hedges, and that qualify for hedge accounting, is recorded
to AOCL and is reclassified into earnings in the subsequent periods that the hedged forecasted transaction affects earnings. During
the periods presented, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt and
forecasted issuances of debt. The ineffective portion of the change in the fair value of the derivatives is recognized directly in
earnings. For the twelve months ended December 31, 2016 and 2015, the Company recorded no ineffectiveness in earnings
attributable to the difference in the effective date of the hedge and the effective date of the debt issuance.
Webster is also 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. For a qualifying derivative designated as a fair value hedge, the gain or loss on the
derivative, as well as the gain or loss on the hedged item, is recognized in interest expense. Webster did not have interest rate
derivative financial instruments designated as fair value hedges at December 31, 2016 and December 31, 2015. As a result, there
was no impact to interest expense during the periods presented.
Additionally, in order to address certain other risk management matters, the Company utilizes the following derivative instruments
that do not qualify for hedge accounting. These derivative instruments are recorded on the balance sheet at fair value, with changes
in fair value recognized each period as other non-interest income in the accompanying Consolidated Statements of Income.
Interest rate swap and cap contracts are sold to commercial and other customers who wish to modify loan interest rate sensitivity.
These contracts are offset with dealer counterparty transactions structured with matching terms. As a result, there is minimal impact
on earnings, except for fee income earned in such transactions.
RPAs are entered into as 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.
Other derivatives include foreign currency forward contracts related to lending arrangements, a VISA equity swap transaction,
and mortgage banking derivatives such as mortgage-backed securities related to residential loan commitments and loans held for
sale. Mortgage banking derivatives 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 mortgage-backed securities. Mandatory forward commitments 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.
102
Fair Value of Derivative Instruments
The following table presents the notional amounts and fair values of derivative positions:
At December 31, 2016
At December 31, 2015
Asset Derivatives
Liability Derivatives
Asset Derivatives
Liability Derivatives
Notional
Amounts
Fair
Value
Notional
Amounts
Fair
Value
Notional
Amounts
Fair
Value
Notional
Amounts
Fair
Value
(In thousands)
Designated as hedging instruments:
Positions subject to a master netting
agreement (1)
Interest rate derivatives
$
225,000 $
3,270
$
100,000 $
792
$
200,000 $
2,507
$
100,000 $
1,359
Not designated as hedging
instruments:
Positions subject to a master netting
agreement (1)
Interest rate derivatives
1,943,485
32,226
1,242,937
24,388
989,695
2,255
1,543,479
40,302
Other
10,634
231
14,265
120
8,237
183
4,561
66
Positions not subject to a master netting
agreement (2)
Interest rate derivatives
1,734,679
38,668
1,451,762
19,001
2,050,460
58,304
RPAs
Mortgage banking derivatives (3)
Other
86,037
103,440
1,438
139
3,084
19
87,273
59,895
181
166
711
11
41,798
62,514
—
153
819
—
482,738
92,985
—
60
571
245
—
9
Total not designated as hedging
instruments
Gross derivative instruments, before
netting
Less: Legally enforceable master
netting agreements
Less: Cash collateral posted
Total derivative instruments, after
netting
3,879,713
74,367
2,856,313
44,397
3,152,704
61,714
2,123,823
41,193
$ 4,104,713
77,637
$ 2,956,313
45,189
$ 3,352,704
64,221
$ 2,223,823
42,552
24,253
11,475
24,253
600
4,945
—
4,945
31,330
$
41,909
$
20,336
$
59,276
$
6,277
(1) The Company has elected to report derivative positions subject to a legally enforceable master netting agreement on a net basis, net
of cash collateral. Refer to the Offsetting Derivatives section of this footnote for additional information.
(2) Derivative positions not subject to a legally enforceable master netting agreement are reported on a gross basis in the accompanying
Consolidated Balance Sheets.
(3) Notional amounts include mandatory forward commitments of $99.0 million, while notional amounts do not include approved floating
rate commitments of $27.8 million, at December 31, 2016.
Changes in Fair Value
Changes in the fair value of derivatives not qualifying for hedge accounting treatment are reported as a component of other non-
interest income in the accompanying Consolidated Statements of Income as follows:
(In thousands)
Interest rate derivatives
RPA
Mortgage banking derivatives
Other
Total impact on other non-interest income
Years ended December 31,
2016
8,668
(361)
1,553
(67)
9,793
$
$
2015
4,361
(33)
801
(63)
5,066
$
$
2014
4,482
51
(522)
(253)
3,758
$
$
Amounts for the effective portion of changes in the fair value of derivatives are reclassified to interest expense as interest payments
are made on Webster's variable-rate debt. Over the next twelve months, the Company estimates that $1.7 million will be reclassified
from AOCL as an increase to interest expense.
Webster records gains and losses related to swap terminations as OCI. These balances are subsequently amortized into interest
expense over the respective terms of the hedged debt instruments. At December 31, 2016, the remaining unamortized loss on the
termination of cash flow hedges is $21.3 million. Over the next twelve months, the Company estimates that $6.4 million will be
reclassified from AOCL as an increase to interest expense.
103
Additional information about cash flow hedge activity impacting AOCL, and the related amounts reclassified to interest expense
is provided in Note 12: Accumulated Other Comprehensive Loss, Net of Tax. Information about the valuation methods used to
measure fair value is provided in Note 16: Fair Value Measurements.
Offsetting Derivatives
Webster has entered into transactions with counterparties that are subject to a legally enforceable master netting agreement.
Derivatives subject to a legally enforceable master netting agreement are reported on a net basis, net of cash collateral. Net positions
are recorded in other assets for a net gain position and in other liabilities for a net loss position in the accompanying Consolidated
Balance Sheets.
The following table is presented on a gross basis, prior to the application of counterparty netting agreements. Derivative assets
and liabilities are shown net of cash collateral:
(In thousands)
Derivative instrument assets
Hedged Accounting Positions
Non-Hedged Accounting Positions
Total
Derivative instrument liabilities
Hedged Accounting Positions
Non-Hedged Accounting Positions
Total
At December 31, 2016
At December 31, 2015
Gross
Amount
Amount
Offset
Net
Amount (1) (2)
Gross
Amount
Amount
Offset
Net
Amount(1) (2)
$
$
$
$
3,270
32,457
35,727
792
24,508
25,300
$
$
$
$
(3,270)
$
— $
(32,457)
—
(35,727)
$
— $
2,507
2,438
4,945
(792)
$
— $
1,359
(24,062)
(24,854)
$
446
446
40,368
$
41,727
$
$
$
$
(2,507)
$
(2,438)
(4,945)
$
—
—
—
(1,359)
$
(34,916)
(36,275)
$
—
5,452
5,452
(1) Net amount is net of $10.9 million and $31.3 million of cash collateral at December 31, 2016 and December 31, 2015, respectively,
as presented in the accompanying Consolidated Balance Sheets.
(2) Net amount excludes $42.5 million and $20.2 million of initial margin requirements posted at the derivative clearing organization at
December 31, 2016 and December 31, 2015, respectively. Initial margin is recorded as a component of accrued interest receivable
and other assets in the accompanying Consolidated Balance Sheets
Counterparty Credit Risk
Use of derivative contracts may expose the bank to counterparty credit risk. The Company has ISDA master agreements, including
a Credit Support Annex, with all derivative counterparties. The ISDA master agreements provide that on each payment date, all
amounts otherwise owing the same currency under the same transaction are netted so that only a single amount is owed in that
currency. The ISDA 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 Credit Support Annex,
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, of all such instruments, reduced by the amount of collateral pledged by the counterparties. The Company's
credit exposure related to derivatives with dealer counterparties is significantly mitigated with cash collateral equal to, or in excess
of, the market value of the instrument updated daily.
In accordance with counterparty credit agreements and derivative clearing rules, the Company had approximately $23.8 million
in net margin collateral posted with financial counterparties at December 31, 2016, comprised of $42.5 million in initial margin
and $18.7 million in variation margin collateral received from financial counterparties or the derivative clearing organization.
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 the 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 $38.7 million at December 31, 2016. 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 $26.4 million at December 31, 2016. The credit exposures are
mitigated as transactions with customers are generally secured by the same collateral of the underlying transactions being hedged.
104
Note 16: 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, categorization within the
valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. As such, the fair value
estimates may not be realized in an immediate transfer of the respective asset or liability.
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. 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.
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 significant 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.
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. Equity securities in financial services and U.S. Treasury Bills are classified within Level
1 of the fair value hierarchy.
When quoted market prices are not available, the Company engages 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 out of tolerance with expected results.
Available-for-Sale investment securities which include Agency CMO, Agency MBS, Agency CMBS, CMBS, CLO, single-issuer
trust preferred securities, and corporate debt securities, are classified within Level 2 of the fair value hierarchy.
Derivative Instruments. Foreign exchange contracts are valued based on unadjusted quoted prices in active markets and classified
within Level 1 of the fair value hierarchy. Derivative instruments are valued using third-party valuation software, which considers
the present value of cash flows discounted using observable forward rate assumptions. The resulting fair values are validated
against valuations performed by independent third parties and are classified within Level 2 of the fair value hierarchy. In determining
if any fair value adjustment related to credit risk is 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.
105
Mortgage Banking Derivatives. Forward sales of mortgage loans and 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 the 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 in other assets within the accompanying Consolidated Balance Sheets. Earnings in the Rabbi Trust,
including appreciation or depreciation, are reflected as other non-interest income within the accompanying Consolidated Statements
of Income. The cost basis of the investments held in the Rabbi Trust is $3.3 million as of December 31, 2016.
Alternative Investments. The Company generally records alternative investments at cost, subject to impairment testing. 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. There are certain funds in which the ownership percentage is greater than 3% and are, therefore, recorded at fair value
on a recurring basis based upon the net asset value of the respective fund. Alternative investments are non-public entities that
cannot be redeemed since the Company’s investment is distributed as the underlying investments are liquidated. As such, these
investments are classified within Level 3 of the fair value hierarchy. The Company has $7.7 million in unfunded commitments
remaining for its alternative investments as of December 31, 2016. See the Investment Securities Portfolio section of Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations for additional discussion of the Company's
alternative investments.
Originated Loans Held For Sale. Residential mortgage loans typically are classified as held for sale upon origination based on
management's intent to sell such loans. The Company generally records residential mortgage loans held for sale under the fair
value option of ASC Topic 825 "Financial Instruments." 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
within Level 2 of the fair value hierarchy.
106
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:
U.S. Treasury Bills
Agency CMO
Agency MBS
Agency CMBS
CMBS
CLO
Single issuer trust preferred securities
Corporate debt securities
Equities - financial services
Total available-for-sale investment securities
Gross derivative instruments, before netting (1)
Investments held in Rabbi Trust
Alternative investments
Originated loans held for sale (2)
Contingent consideration
Total financial assets held at fair value
Financial liabilities held at fair value:
Gross derivative instruments, before netting (1)
Contingent liability
Total financial liabilities held at fair value
(In thousands)
Financial assets held at fair value:
U.S. Treasury Bills
Agency CMO
Agency MBS
Agency CMBS
CMBS
CLO
Single issuer trust preferred securities
Corporate debt securities
Equities - financial services
Total available-for-sale investment securities
Gross derivative instruments, before netting (1)
Investments held in Rabbi Trust
Alternative investments
Originated loans held for sale
Contingent Consideration
Total financial assets held at fair value
Financial liabilities held at fair value:
Gross derivative instruments, before netting (1)
Contingent liability
Total financial liabilities held at fair value
Level 1
Level 2
Level 3
Total
At December 31, 2016
$
$
$
$
$
$
$
$
734
—
—
—
—
—
—
—
—
734
250
5,119
—
—
—
6,103
120
—
120
Level 1
924
—
—
—
—
—
—
—
2,578
3,502
183
5,372
—
—
—
9,057
66
—
66
$
— $
419,706
954,349
573,272
477,365
427,390
28,633
109,642
—
2,990,357
77,387
—
—
60,260
—
3,128,004
45,069
—
45,069
$
$
$
— $
—
—
—
—
—
—
—
—
—
—
—
5,502
—
—
5,502
$
734
419,706
954,349
573,272
477,365
427,390
28,633
109,642
—
2,991,091
77,637
5,119
5,502
60,260
—
3,139,609
—
—
—
$
$
45,189
—
45,189
At December 31, 2015
Level 2
Level 3
Total
— $
548,754
1,065,109
215,350
579,266
429,159
37,170
106,321
—
2,981,129
64,038
—
—
—
—
3,045,167
42,486
—
42,486
$
$
$
— $
—
—
—
—
—
—
—
—
—
—
—
3,471
—
5,331
8,802
$
— $
6,000
6,000
$
924
548,754
1,065,109
215,350
579,266
429,159
37,170
106,321
2,578
2,984,631
64,221
5,372
3,471
—
5,331
3,063,026
42,552
6,000
48,552
$
$
$
$
$
$
$
(1) For information relating to the impact of netting derivative assets and derivative liabilities as well as the impact from offsetting cash
collateral paid to the same derivative counterparties see Note 15: Derivative Financial Instruments.
(2) Loans held for sale accounted for under the fair value option of ASC Topic 825 "Financial Instruments" at December 31, 2016. The
Company made this policy election on loans originated for sale. See Note 1: Summary of Significant Accounting Policies.
107
The following table presents the changes in Level 3 assets and liabilities that are measured at fair value on a recurring basis:
(In thousands)
Balance at January 1, 2016
Gain included in net income
Purchases/capital funding
Receipts
Payments
Balance at December 31, 2016
Alternative
Investments
3,471
$
349
1,682
—
—
5,502
$
$
Financial Assets
Contingent
Consideration
$
$
5,331
2,690
—
(8,021)
—
— $
Total
8,802
3,039
1,682
(8,021)
—
5,502
Contingent
Liability
6,000
—
—
—
(6,000)
—
$
$
Contingent Consideration. As part of the health savings accounts acquisition, the contingent consideration arrangement entitled
the Company to receive a rebate of the purchase price relating to the premium paid, for account attrition during the eighteen-month
period beginning on the acquisition date of January 13, 2015. In periods subsequent to the initial valuation the fair value was
adjusted for measurable attrition milestones. The contingent consideration was classified within Level 3 of the fair value hierarchy
as the valuation is based on a contractual obligation that is reliant upon calculation inputs, and as such could be subject to
miscalculation. On November 30, 2016, the funds were received to settle the contingent consideration arrangement.
Contingent Liability. As part of the health savings accounts acquisition, the contingent liability arrangement provided for the
Company to assume a pre-existing liability as part of the transaction. The fair value of the contingency represented the estimated
price to transfer the liability between market participants at the measurement date under current market conditions. The contingent
liability was classified within Level 3 of the fair value hierarchy as its valuation was based upon unobservable inputs. On August
18, 2016, the funds were paid to settle the contingent liability arrangement.
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.
Transferred Loans Held For Sale. Certain loans are transferred to loans held for sale once a decision has been made to sell such
loans. These loans 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. This activity is primarily commercial loans with observable inputs and are classified within Level 2.
On the occasion should these loans include adjustments for changes in loan characteristics using unobservable inputs, the loans
would be classified within Level 3.
Collateral Dependent 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 customized discounting criteria. As such, collateral dependent impaired loans and leases are classified
as Level 3 of the fair value hierarchy.
Other Real Estate Owned and Repossessed Assets. The total book value of OREO and repossessed assets was $3.9 million at
December 31, 2016. 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, as such, OREO and repossessed assets are classified within Level 3 of the fair value hierarchy.
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 with any change included as
a component of other non-interest income in the accompanying Consolidated Statements of Income. 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, the primary risk inherent in valuing mortgage servicing assets
is the impact of fluctuating interest rates on the servicing revenue stream. Mortgage servicing assets are classified within Level 3
of the fair value hierarchy.
108
The following table presents the changes in fair value for mortgage servicing assets:
(In thousands)
Beginning balance
Originations of servicing assets
Changes in fair value:
Due to payoffs/paydowns
Due to market changes
Ending balance
Years ended December 31,
2016
2015
$
$
33,568
11,312
(2,447)
9,642
52,075
$
$
28,690
8,027
(2,741)
(408)
33,568
The table below presents the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a non-
recurring basis as of December 31, 2016:
(Dollars in thousands)
Asset
Collateral dependent impaired loans and leases
Fair Value Valuation Methodology
Unobservable Inputs
Range of Inputs
$ 7,374
Real Estate Appraisals Discount for appraisal type
Discount for costs to sell
15%
0% -
8%
0%
8%
OREO
$
166
Real Estate Appraisals Discount for appraisal type
Discount for costs to sell
Mortgage servicing assets
$ 52,075
Discounted cash flow
Constant prepayment rate
2.8% -
27.7%
Discount rates
1.9% -
3.6%
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, these 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 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. Held-to-Maturity investment securities, which include Agency CMO, Agency MBS, Agency CMBS, CMBS,
municipal bonds and notes, and private label MBS securities, are classified within Level 2 of the fair value hierarchy.
Loans and Leases, net. The estimated fair value of loans and leases held for investment is calculated using a discounted cash flow
method, using future prepayments and market interest rates inclusive of an illiquidity premium for comparable loans 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. The 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 FHLB 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. FHLB advances and long-term debt are classified within Level 2 of the fair value hierarchy.
109
The estimated fair values of selected financial instruments and servicing assets are as follows:
(In thousands)
Financial Assets:
Level 2
At December 31,
2016
2015
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
Held-to-maturity investment securities
Loans held for sale (1)
$
4,160,658
7,317
$
4,125,125
7,444
$
3,923,052
37,091
$
3,961,534
37,457
Level 3
Loans and leases, net
Mortgage servicing assets
Alternative investments
Financial Liabilities:
Level 2
16,832,268
24,466
11,034
16,678,106
52,075
13,189
15,496,745
20,698
12,900
15,453,892
33,568
14,294
Deposit liabilities, other than time deposits
Time deposits
Securities sold under agreements to repurchase and other borrowings
FHLB advances (2)
Long-term debt (2)
$ 17,279,049
2,024,808
949,526
2,842,908
225,514
$ 17,279,049
2,024,395
955,660
2,825,101
225,514
$ 15,866,624
2,086,154
1,151,400
2,664,139
225,260
$ 15,866,624
2,095,357
1,163,974
2,647,872
218,143
(1) Loans held for sale that are accounted for at the lower of cost or market. At December 31, 2016, the amounts include transferred
residential and commercial loans not originated for sale, and at December 31, 2015, the amounts include transferred commercial
loans not originated for sale and residential loans originated for sale prior to the adoption of the fair value option of ASC Topic 825
"Financial Instruments."
(2) The following adjustments to the carrying amount are not included for determination of fair value, see Note 10: Borrowings:
• FHLB advances - unamortized premiums on advances
• Long-term debt - unamortized discount and debt issuance cost on senior fixed-rate notes
110
Note 17: Retirement Benefit Plans
Defined benefit 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 are based upon employee earnings during the period
of credited service. A SERP was also offered to certain employees who were at the Executive Vice President level or above through
December 31, 2007. The SERP provides eligible participants with additional pension benefits. Webster Bank also provides other
postretirement healthcare benefits to certain retired employees.
The Webster Bank Pension Plan and the SERP were frozen as of December 31, 2007. No additional benefits have been accrued
since that time. 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 or 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.
During 2016, the Company made a discretionary $20.0 million contribution to the Webster Bank Pension Plan. 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.
There were $124 thousand and $241 thousand in company contributions to the SERP for the years ended December 31, 2016 and
2015, respectively.
The mortality assumptions used in the pension liability assessment for the year ended December 31, 2016 were the RP-2014
adjusted to 2006 dataset mortality table projected to measurement date with Mercer's mortality improvement scale MMP-2007.
The measurement date is December 31 for the Webster Bank Pension Plan, SERP, and other postretirement healthcare benefits.
The following table sets forth changes in benefit obligation, changes in plan assets, and the funded status of the defined benefit
pension and other postretirement benefits at December 31:
(In thousands)
Change in benefit obligation:
Beginning balance
Service cost
Interest cost
Actuarial loss (gain)
Benefits paid and administrative expenses
Ending balance
Change in plan assets:
Beginning balance
Actual return on plan assets
Employer contributions
Benefits paid and administrative expenses
Ending balance
Funded status of the plan at year end
Pension Plan
SERP
Other Benefits
2016
2015
2016
2015
2016
2015
$ 203,645
45
8,441
6,108
(6,731)
211,508
$ 210,548
45
8,008
(8,588)
(6,368)
203,645
161,369
18,284
20,000
(6,731)
192,922
172,976
(5,239)
—
(6,368)
161,369
$ (18,586) $ (42,276)
$
$
10,518 $
—
389
1,023
(124)
11,806
$
10,041
—
345
373
(241)
10,518
—
—
124
(124)
—
(11,806) $
—
—
241
(241)
—
(10,518) $
3,853 $
—
125
59
(185)
3,852
—
—
185
(185)
—
(3,852) $
4,133
—
123
(178)
(225)
3,853
—
—
225
(225)
—
(3,853)
The accumulated benefit obligation for the defined benefit pension and other postretirement benefits was $227.2 million and
$218.0 million at December 31, 2016 and 2015, respectively.
Amounts recognized in the accompanying Consolidated Balance Sheets consist of the following:
(In thousands)
Accrued expenses and other liabilities
2016
(18,586) $
2015
(42,276) $
2016
(11,806) $
2015
(10,518) $
$
Pension Plan
SERP
Other Benefits
2016
2015
(3,852) $
(3,853)
The Company expects that $6.5 million in net actuarial loss will be recognized as a component of net periodic benefit cost in 2017.
111
The components of AOCL related to the defined benefit pension and other postretirement benefits at December 31, 2016 and 2015
are summarized below:
(In thousands)
Net actuarial loss
Prior service cost
Total pre-tax amounts included in AOCL
Deferred tax benefit
Amounts included in accumulated AOCL, net of
tax
Pension Plan
SERP
Other Benefits
2016
2015
2016
2015
2016
2015
$
65,857 $
—
65,857
23,727
$
73,238
—
73,238
26,447
3,009 $
—
3,009
1,084
$
2,412
—
2,412
871
616 $
—
616
222
$
42,130 $
46,791
$
1,925 $
1,541
$
394 $
591
14
605
218
387
Expected future benefit payments for the defined benefit pension and other postretirement benefits are presented below:
(In thousands)
2017
2018
2019
2020
2021
2022-2026
$
Pension
Plan
7,786
8,604
8,654
9,072
9,828
53,711
$
SERP
1,208
1,091
8,104
141
140
683
$
Other
Benefits
404
398
387
375
358
1,457
The components of the net periodic benefit cost (benefit) for the defined benefit pension and other postretirement benefits were
as follows for the years ended December 31:
(In thousands)
Service cost
Interest cost on benefit obligations
Expected return on plan assets
Amortization of prior service cost
Recognized net loss
Net periodic benefit cost (benefit)
$
Pension Plan
2016
2015
2014
2016
SERP
2015
Other Benefits
2014
2016
2015
2014
$
45 $
45 $
8,441
(11,461)
—
6,665
3,690 $
8,008
(11,873)
—
5,724
1,904 $
$
40
8,068
(11,495)
—
2,781
(606) $
— $
389
—
—
426
815 $
— $
345
—
—
390
735 $
— $ — $ — $ —
139
—
73
5
217
123
—
73
47
243 $
125
—
14
35
174 $
364
—
—
135
499
$
Changes in funded status related to the defined benefit pension and other postretirement benefits and recognized as a component
of OCI in the accompanying Consolidated Statements of Comprehensive Income as follows for the years ended December 31:
Pension Plan
(In thousands)
Net (gain) loss
Amounts reclassified from AOCL
Amortization of prior service cost
2016
$
(715) $
(6,665)
—
Total (gain) loss recognized in OCI
$ (7,380) $
2014
2015
8,525 $ 31,951
(2,781)
(5,724)
—
—
2,801 $ 29,170
2016
1,023 $
(426)
—
597 $
$
$
SERP
2015
372 $
(390)
—
(18) $
2014
1,145
(134)
—
1,011
$
$
Other Benefits
2016
2015
2014
60 $
(35)
(14)
11 $
(178) $
(47)
(73)
(298) $
470
(5)
(73)
392
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 Standard & Poor's 500 Index.
Common collective trust funds. The net asset value (NAV), as provided by the trustee, is used as the fair value of the investments.
The NAV is based on the fair value of the underlying investments held by the fund less its liabilities. 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.
112
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 the fair value and hierarchy classification of financial assets of the pension plan is as follows:
(In thousands)
Registered investment companies:
Exchange traded funds
Cash and cash equivalents
Common collective trust funds:
At December 31,
2016
2015
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Total
$ 31,526 $
701
— $
—
— $ 31,526
701
—
$ 28,329 $
295
— $
—
— $ 28,329
295
—
Fixed Income funds
Equity Funds
Insurance company investment contract
— 96,429
— 63,285
—
—
Total
$ 32,227 $159,714 $
— 96,429
— 63,285
793
793
793 $192,734
— 80,783
— 51,028
—
—
$ 28,624 $131,811 $
— 80,783
— 51,028
934
934
934 $161,369
The following table sets forth a summary of changes in the fair value of Level 3 assets of the pension plan:
(In thousands)
Beginning balance
Unrealized gains relating to instruments still held at the reporting date
Benefit payments, administrative expenses, and interest income, net
Ending balance
Asset Management
Years ended December 31,
2016
934
(10)
(131)
793
$
$
2015
$ 1,077
(28)
(115)
934
$
The following table presents the target allocation and the pension plan asset allocation for the periods indicated, by asset
category:
Fixed income investments
Equity investments
Total
Target
Allocation
2017
Percentage of Pension
Plan assets
2016
2015
50%
50
100%
51%
49
100%
51%
49
100%
The Retirement Plan 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 Retirement Plan 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 investment policy guidelines and objectives is reviewed at a minimum annually
by the Retirement Plan Committee.
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 volatility,
as measured by standard deviation, of the pension plan assets should not exceed that of the Composite Index. The investment
policy guidelines allow the pension 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 pension plan investment strategy is designed to maintain a diversified portfolio, with a target average long-term rate of 7.00%,
however, there is no certainty that the portfolio will perform to expectations. Asset allocations are monitored monthly, and the
portfolio is rebalanced as needed.
113
Weighted-average assumptions used to determine benefit obligations at December 31 are as follows:
Discount rate
Rate of compensation increase
Pension Plan
SERP
Other Benefits
2016
4.01%
n/a
2015
4.20%
n/a
2016
3.63%
n/a
2015
3.75%
n/a
2016
3.27%
n/a
2015
3.35%
n/a
Weighted-average assumptions used to determine net periodic benefit cost for the years ended December 31 are as follows:
Discount rate
Expected long-term return on assets
Rate of compensation increase
Assumed healthcare cost trend
Pension Plan
2016
4.20%
7.00%
n/a
n/a
2015
3.85%
7.00%
n/a
n/a
2014
4.80%
7.25%
n/a
n/a
2016
3.75%
n/a
n/a
n/a
SERP
2015
3.50%
n/a
n/a
n/a
2014
4.25%
n/a
n/a
n/a
Other Benefits
2016
3.35%
n/a
n/a
8.25%
2015
3.15%
n/a
n/a
8.00%
2014
3.75%
n/a
n/a
8.00%
The assumed healthcare cost-trend rate is 8.25% for 2016 and 2017, declining 1.0% each year thereafter until 2024 when the rate
will be 4.75%. An increase of 1.0% in the assumed healthcare cost-trend rate for 2016 would have increased the net periodic
postretirement benefit cost by $6 thousand and increased the accumulated benefit obligation by $205 thousand. A decrease of
1.0% in the assumed healthcare cost trend rate for 2016 would have decreased the net periodic postretirement benefit cost by $6
thousand and decreased the accumulated postretirement benefit obligation by $185 thousand.
Multiple-employer plan
Webster Bank, for the benefit of former employees of a bank acquired by the Company, is a sponsor of a multiple-employer pension
plan that does not segregate the assets or liabilities of its employers participating in the plan. According to the plan administrator,
as of July 1, 2016, the date of the latest actuarial valuation, Webster Bank’s portion of this plan was under-funded by $1.1 million.
The following table sets forth contributions and funding status of Webster Bank's portion of this plan:
(Dollars in thousands)
Contributions by Webster Bank
for the year ended December 31,
Funded Status of the Plan
at December 31,
Plan Name
Employer
Identification
Number
Plan
Number
2016
2015
2014
2016
2015
Pentegra Defined Benefit Plan for Financial Institutions
13-5645888
333
$690
$340
$765
At least 80
percent
At least 80
percent
Multi-employer accounting is applied to the Fund. As a multiple-employer pension plan, there are no collective bargained contracts
affecting its contribution or benefit provisions. Any shortfall amortization basis is 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 this plan
did not exceed more than 5% of total contributions in the plan for the years ended December 31, 2016, 2015, and 2014.
Webster Bank Retirement Savings Plan
Webster Bank provides an employee retirement savings plan governed by section 401(k) of the Internal Revenue Code. Webster
Bank matches 100% of the first 2% and 50% of the next 6% of employees’ pre-tax contributions based on annual 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.
Compensation and benefit expense included $11.1 million, $10.9 million, and $10.6 million for the years ended December 31,
2016, 2015, and 2014, respectively, for employer contributions.
114
Note 18: Share-Based Plans
Stock compensation plans
Webster maintains stock compensation 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 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 13.4
million shares of common stock. At December 31, 2016, there were 3.1 million common shares remaining available for grant,
while no stock appreciation rights have been granted.
The following table provides a summary of stock compensation expense, and the related income tax benefit, recognized in the
accompanying Consolidated Statements of Income:
(In thousands)
Stock options
Restricted stock
Total stock compensation expense
Income tax benefit
2016
43
11,395
11,438
4,132
$
$
$
Years ended December 31,
2015
$
$
$
379
10,556
10,935
3,903
$
$
$
2014
1,175
9,048
10,223
3,553
At December 31, 2016 there was $12.3 million of unrecognized stock compensation expense for restricted stock, expected to be
recognized over a weighted-average period of 1.9 years.
The following table provides a summary of the activity under the stock compensation plans for the year ended December 31, 2016:
Unvested Restricted Stock Awards
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
Balance at January 1, 2016
236,145 $
32.58
2,088 $
34.45
115,721 $
34.14
1,527,074 $
23.92
Granted
248,418
33.52
12,946
32.89
150,392
32.75
Exercised options
Vested restricted stock awards (1)
Forfeited
—
216,933
14,269
—
30.21
32.89
—
—
—
12,876
33.23
140,531
—
—
9,398
—
33.12
33.63
—
412,538
—
41,562
Balance at December 31, 2016
253,361 $
32.24
2,158 $
32.89
116,184 $
33.62
1,072,974 $
—
28.47
—
47.92
21.24
(1) Vested for purposes of recording compensation expense.
Time-based restricted stock. Time-based restricted stock awards vest over the applicable service period ranging from one to five
years. The number of time-based awards that may be granted to an eligible individual in a calendar year is limited 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.
Performance-based restricted stock. Performance-based restricted stock awards vest after a three year performance period. The
awards vest with a share quantity dependent on that performance, in a range from zero to150%. For the performance-based shares
granted in 2016, 50% vest based upon Webster's ranking for total shareholder return versus Webster's compensation peer group
companies and 50% vest based upon Webster's average of return on equity during the three year vesting period. The compensation
peer group companies are utilized because they represent the 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, 2016, 2015, and 2014 was $11.6 million,
$11.6 million, and $9.4 million, respectively.
115
Stock options. Stock option awards have an exercise price equal to the market price of Webster's stock on the date of grant. Each
option grants the holder the right to acquire a share of Webster common stock over a contractual life of up to ten years. There have
been no stock options granted since 2013. All awarded options have vested. There were 998,185 non-qualified stock options and
74,789 incentive stock options outstanding at December 31, 2016.
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 they all exercised their options at that time. At December 31, 2016, as all awarded options have
vested, all of the outstanding options are exercisable, and the aggregate intrinsic value of these options was $35.5 million. The
total intrinsic value of options exercised during the years ended December 31, 2016, 2015, and 2014 was $6.4 million, $4.3 million,
and $1.9 million, respectively.
The following table summarizes information for options, all of which are both outstanding and exercisable, at December 31, 2016:
Range of Exercise Prices
$ 5.14 - 20.00
$ 20.01 - 30.00
$ 30.01 - 40.00
$ 40.01 - 48.88
Note 19: Segment Reporting
Weighted-
Average
Remaining
Contractual
Life (years)
2.2
5.2
1.0
0.4
3.5
Weighted-
Average
Exercise
Price
$
$
8.95
23.53
32.03
44.91
21.24
Number of
Shares
317,814
562,040
151,715
41,405
1,072,974
Webster’s operations are organized into four reportable segments that represent its primary businesses - Commercial Banking,
Community Banking, HSA Bank, and Private Banking. These four reportable segments reflect how executive management
responsibilities are assigned by the chief operating decision maker for each of the primary businesses, the products and services
provided, the type of customer served, and reflects 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 reportable 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 periodically 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 full profitability and GAAP results are
reconciled in the Corporate and Reconciling category.
Webster allocates interest income and interest expense to each business, while also transferring the primary interest rate risk
exposures to the Corporate and Reconciling category, using a matched maturity funding concept called Funds Transfer Pricing.
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 ALCO.
Webster allocates 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 reportable segment, such as the provision for the consumer liquidating portfolio, is shown as part of
the Corporate and Reconciling category.
Webster allocates a majority of non-interest expense to each reportable segment using a full-absorption costing process. Costs,
including corporate overhead, are analyzed, pooled by process, and assigned to the appropriate reportable segment. Income tax
expense is allocated to each reportable segment based on the consolidated effective income tax rate for the period shown.
116
The following tables present the operating results, including all appropriate allocations, for Webster’s reportable segments and
the Corporate and Reconciling category:
Year ended December 31, 2016
(In thousands)
Net interest income (loss)
Provision (benefit) for loan and lease losses
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)
Commercial
Banking
Community
Banking
$
276,246
36,594
$
365,151
21,690
$
HSA Bank
81,451
—
239,652
47,435
118,159
168,928
53,622
115,306
343,461
110,157
364,549
89,069
28,273
60,796
$
$
$
81,451
71,710
97,152
56,009
17,779
38,230
Private
Banking
11,350
861
10,489
9,818
20,220
87
27
60
$
$
Corporate and
Reconciling
(15,685)
(2,795)
$
Consolidated
Total
718,513
56,350
$
(12,890)
25,358
23,111
(10,643)
(3,378)
(7,265)
$
662,163
264,478
623,191
303,450
96,323
207,127
$
Year ended December 31, 2015
(In thousands)
Net interest income (loss)
Provision (benefit) for loan and lease losses
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)
Commercial
Banking
Community
Banking
$
255,845
30,160
$
354,709
19,603
$
HSA Bank
73,433
—
225,685
37,784
109,718
153,751
48,037
105,714
335,106
108,604
330,692
113,018
35,310
77,708
$
$
$
73,433
62,475
81,449
54,459
17,016
37,443
Private
Banking
10,240
386
9,854
9,183
19,781
(744)
(233)
(511)
$
$
Corporate and
Reconciling
(29,602)
(849)
$
Consolidated
Total
664,625
49,300
$
(28,753)
19,731
13,701
(22,723)
(7,098)
(15,625)
$
615,325
237,777
555,341
297,761
93,032
204,729
$
Year ended December 31, 2014
(In thousands)
Net interest income (loss)
Provision (benefit) for loan and lease losses
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)
Commercial
Banking
Community
Banking
$
238,186
13,088
$
354,781
26,345
$
HSA Bank
38,822
—
225,098
37,270
102,374
159,994
50,446
109,548
328,436
103,543
324,312
107,667
33,947
73,720
$
$
$
38,822
28,553
40,900
26,475
8,311
18,164
Private
Banking
8,877
765
8,112
9,843
18,691
(736)
(232)
(504)
$
$
Corporate and
Reconciling
(12,225)
(2,948)
$
Consolidated
Total
628,441
37,250
$
(9,277)
22,899
15,323
(1,701)
(499)
(1,202)
$
591,191
202,108
501,600
291,699
91,973
199,726
$
The following table presents total assets for Webster's reportable segments and the Corporate and Reconciling category:
(In thousands)
At December 31, 2016
At December 31, 2015
Total Assets
Commercial
Banking
Community
Banking
HSA Bank
Private
Banking
Corporate and
Reconciling
Consolidated
Total
$ 8,518,830
$ 8,655,789
$
83,987
$
550,615
$ 8,263,308
$26,072,529
7,505,513
8,441,950
95,815
493,571
8,104,269
24,641,118
117
Note 20: Commitments and Contingencies
Lease Commitments
Webster is obligated under various non-cancelable operating leases for properties used as banking centers and other office facilities.
The leases contain renewal options and escalation clauses which provide for increased rental expense, or for equipment upgrades.
Rental expense under the leases was $30.4 million, $21.5 million, and $20.5 million for the years ended December 31, 2016, 2015,
and 2014, 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 netted 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 for the years ended December 31, 2016,
2015, and 2014.
The following table summarizes future minimum rental payments and receipts under lease agreements:
(In thousands)
2017
2018
2019
2020
2021
Thereafter
Total future minimum rental payments and receipts
Credit-Related Financial Instruments
At December 31, 2016
Rental
Payments
28,713
27,046
25,644
23,900
21,860
88,211
215,374
$
$
Rental
Receipts
601
451
364
293
202
918
2,829
$
$
The Company offers credit-related financial instruments, in the normal course of business to meet certain financing needs of its
customers, that involve off-balance sheet risk. These transactions may include an unused commitment to extend credit, standby
letter of credit, or commercial letter of credit. Such transactions involve, to varying degrees, elements of credit risk.
The following table summarizes the outstanding amounts of credit-related financial instruments with off-balance sheet risk:
(In thousands)
Commitments to extend credit
Standby letter of credit
Commercial letter of credit
Total credit-related financial instruments with off-balance sheet risk
At December 31,
2016
$ 5,224,280
128,985
46,497
$ 5,399,762
2015
$ 4,851,994
133,294
45,742
$ 5,031,030
Commitments to Extend Credit. The Company makes commitments under various terms to lend funds to customers at a future
point in time. These commitments include revolving credit arrangements, term loan commitments, and short-term borrowing
agreements. Most of these loans have fixed expiration dates or other termination clauses where a fee may be required. Since
commitments routinely expire without being funded, or after required availability of collateral occurs, the total commitment amount
does not necessarily represent future liquidity requirements.
Standby Letter of Credit. A standby letter of credit commits 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, which is often part of a larger credit agreement under which security is provided. Historically, a
large percentage of standby letters of credit expire without being funded. The contractual amount of a standby letter of credit
represents the maximum amount of potential future payments the Company could be required to make, and is the Company's
maximum credit risk.
Commercial Letter of Credit. A commercial letter of credit is issued to facilitate either domestic or foreign trade arrangements
for customers. As a general rule, drafts are committed to be drawn when the goods underlying the transaction are in transit. Similar
to a standby letter of credit, a commercial letter of credit is often secured by an underlying security agreement including the assets
or inventory they relate to.
118
These commitments subject the Company to potential exposure in excess of amounts recorded in the financial statements, and
therefore, management maintains a specific reserve for unfunded credit commitments. This reserve is reported as a component of
accrued expenses and other liabilities in the accompanying Consolidated Balance Sheets.
The following table provides a summary of activity in the reserve for unfunded credit commitments:
(In thousands)
Beginning balance
Provision (benefit)
Ending balance
Years ended December 31,
2016
2,119
168
2,287
$
$
2015
5,151
(3,032)
2,119
$
$
2014
4,384
767
5,151
$
$
The change in the provision is attributable to a benefit recorded in 2015. The benefit was the result of a change in a key assumption
used in calculating expected incremental utilization of credit. The updated assumption is based on a more detailed analysis of
customer behavior and performance in the months prior to a charge-off, rather than a general overall utilization rate, which should
result in a better estimate of potential loss on credit-related financial instruments.
Litigation
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 at December 31, 2016 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 amounts currently accrued by Webster
or that the Company’s litigation accrual 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.
119
Note 21: 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
Securities available for sale, at fair value
Intercompany debt securities
Investment in subsidiaries
Alternative investments
Other assets
Total assets
Liabilities and shareholders’ equity:
Senior notes
Junior subordinated debt
Accrued interest payable
Due to subsidiaries
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 deposits
(Loss) gain on sale of investment securities, net
Alternative investments income
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
December 31,
2016
2015
$
152,947
$
279,644
—
150,000
2,578
—
2,425,398
2,345,457
4,275
24,659
6,795
15,263
$ 2,757,279
$ 2,649,737
$
148,194
$
147,940
77,320
2,589
365
1,799
77,320
2,591
48
7,878
230,267
235,777
2,527,012
2,413,960
$ 2,757,279
$ 2,649,737
Years ended December 31,
2015
2014
2016
$
145,000
$
110,000
$
100,000
1,911
(2,410)
176
7,485
546
—
2,274
152
613
1,185
804
151
152,162
112,972
102,753
9,981
11,461
6,278
27,720
124,442
3,086
79,599
9,665
10,965
6,005
26,635
86,337
2,929
115,463
10,041
10,290
4,562
24,893
77,860
8,798
113,068
Net income
$
207,127
$
204,729
$
199,726
120
Condensed Statements of Comprehensive Income
(In thousands)
Net income
Other comprehensive income (loss), net of tax:
Net unrealized gains (losses) on available for sale securities
Net unrealized gains (losses) on derivative instruments
Other comprehensive loss of subsidiaries and associated companies
Other comprehensive income (loss), net of tax
Comprehensive income
Condensed Statements of Cash Flows
(In thousands)
Operating activities:
Net income
Years ended December 31,
2016
2015
2014
$
207,127
$
204,729
$
199,726
584
1,223
(694)
1,113
(2,109)
1,223
(20,959)
(21,845)
725
(2,932)
(5,505)
(7,712)
$
208,240
$
182,884
$
192,014
Years ended December 31,
2016
2015
2014
$
207,127
$
204,729
$
199,726
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed earnings of subsidiaries and associated companies
(79,599)
(115,463)
(113,068)
Stock-based compensation
Gain on redemption of other assets
Other, net
Net cash provided by operating activities
Investing activities:
Purchases of available for sale securities
Proceeds from sale of available for sale securities
Purchases of intercompany debt securities
Net cash used for investing activities
Financing activities:
Issuance of long-term debt
Repayment of long-term debt
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
11,438
(7,331)
(3,736)
10,935
—
9,066
127,899
109,267
—
1,089
(150,000)
(148,911)
—
—
(89,522)
(8,096)
11,762
3,204
—
—
—
—
—
—
—
(80,964)
(8,711)
3,060
2,338
—
10,223
—
(10,721)
86,160
(3,500)
3,499
—
(1)
150,000
(150,000)
(67,431)
(10,556)
2,221
1,161
435
Common stock repurchased/shares acquired related to employee share-based plans
(22,870)
(17,815)
(13,067)
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
(163)
(105,685)
(126,697)
279,644
(23)
(102,115)
7,152
272,492
(3)
(87,240)
(1,081)
273,573
$
152,947
$
279,644
$
272,492
121
Note 22: 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
Non-interest income
Non-interest expense
Income before income tax expense
Income tax expense
Net income
Earnings applicable to common shareholders
Earnings per common share:
Basic
Diluted
(In thousands, except per share data)
Interest income
Interest expense
Net interest income
Provision for loan and lease losses
Non-interest income
Non-interest expense
Income before income tax expense
Income tax expense
Net income
Earnings applicable to common shareholders
Earnings per common share:
Basic
Diluted
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2016
$
202,335
$
202,431
$
205,715
$
26,183
176,152
15,600
62,374
152,445
70,481
23,434
25,526
176,905
14,000
65,075
152,778
75,202
24,599
25,518
180,197
14,250
66,412
156,097
76,262
24,445
47,047
$
50,603
$
51,817
$
44,921
$
48,398
$
49,634
$
55,501
$
0.49
0.49
$
0.53
0.53
$
0.54
0.54
0.61
0.60
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2015
$
182,912
$
186,970
$
191,998
$
23,148
159,764
9,750
57,561
134,087
73,488
23,984
23,459
163,511
12,750
59,245
137,537
72,469
20,426
23,988
168,010
13,000
61,292
139,937
76,365
24,995
49,504
$
52,043
$
51,370
$
211,432
26,173
185,259
12,500
70,617
161,871
81,505
23,845
57,660
198,160
24,820
173,340
13,800
59,679
143,780
75,439
23,627
51,812
46,719
$
49,819
$
49,176
$
49,646
$
0.52
0.51
$
0.55
0.55
$
0.54
0.53
0.54
0.54
$
$
$
$
$
$
122
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not applicable
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Under the supervision and with the participation of the Company’s management, including Chief Executive Officer and Chief
Financial Officer, the Company has 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) as of the end of
the period covered by this report. Based upon that evaluation, because of the material weakness in internal control over financial
reporting described below, management, including the Chief Executive Officer and Chief Financial Officer, concluded that
Webster’s disclosure controls and procedures were not effective as of the end of the period covered by this report.
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, 2016. As of December 31, 2016, senior management concluded that Webster did not maintain effective
internal control over financial reporting due to a material weakness. The material weakness discussed below was originally identified
in the assessment of internal control that was conducted as of December 31, 2016. The reports of Webster’s management and of
Webster’s independent registered public accounting firm follow.
Management’s Report on Internal Control over Financial Reporting
The management of Webster Financial Corporation and its Subsidiaries ("Webster" or the "Company") is responsible for
establishing and maintaining adequate internal control over financial reporting (as defined in Rule13a-15(f) under the Securities
Exchange Act of 1934, as amended). Our internal control over financial reporting is a process designed under the supervision of
our Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of our financial statements for external purposes in accordance with generally accepted accounting
principles.
A material weakness is defined as a deficiency, or a combination of deficiencies, in internal control over financial reporting, such
that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not
be prevented or detected on a timely basis.
Management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2016 based
on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO). Based on this assessment, management concluded that our internal control over financial
reporting was not effective as of December 31, 2016 as a result of an identified material weakness resulting from the aggregation
of control deficiencies in management’s review of the allowance for loan loss model including certain process level controls
preventing unapproved changes in modeling assumptions as well as the precision of management’s review over the valuation of
allowance for loan and lease losses balance. This material weakness did not result in any misstatement of the Company’s
consolidated financial statements for any period presented.
Based on management's assessment, and as a result of the material weakness discussed above, management concluded that, as of
December 31, 2016, the Company's internal control over financial reporting was not effective based on criteria established in
Internal Control-Integrated Framework (2013) issued by COSO.
The Company’s independent registered public accounting firm, KPMG LLP, have been engaged to render an independent
professional opinion on the financial statements and issue an attestation report on the Company’s internal control over financial
reporting, based on procedures conducted in accordance with auditing standards of the Public Company Accounting Oversight
Board. Their opinion on the financial statements expressed an unqualified opinion on those consolidated financial statements, and
their attestation on internal control over financial reporting expressed an adverse opinion.
123
Remediation Plan
In response to the material weakness identified above, the Company has implemented or is in the process of implementing changes
to its internal control over financial reporting, including: 1) engaged a qualified external expert to recalculate the value of the
allowance for loan and lease losses that was independent of management’s valuation and found no differences, 2) hired a qualified
and highly experienced Allowance for Loan Loss Manager to ensure the effectiveness of management’s review of the allowance
for loan loss model and related changes in modeling assumptions, 3) hired a new Director of Internal Controls and 4) contracted
with an independent third party expert to reassess the end-to-end design of internal controls over the allowance process to ensure
more comprehensive oversight exists that operates at the level of precision that would prevent a material misstatement from being
recorded.
/s/ James C. Smith
James C. Smith
Chairman and Chief Executive Officer
March 1, 2017
/s/ Glenn I. MacInnes
Glenn I. MacInnes
Executive Vice President and Chief Financial Officer
124
KPMG LLP
One Financial Plaza
755 Main Street
Hartford, CT 06103
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Webster Financial Corporation:
We have audited Webster Financial Corporation and subsidiaries’ (the Company) internal control over financial reporting as of
December 31, 2016, based on criteria established in Internal Control
Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). The Company’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’s Report on Internal Control over Financial Reporting appearing under Item
9A. 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 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 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.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there
is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented
or detected on a timely basis. A material weakness related to the Company’s allowance for loan and lease losses process has been
identified and included in management’s assessment. We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of the Company as of December 31, 2016 and 2015,
and the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the
years in the three-year period ended December 31, 2016. This material weakness was considered in determining the nature, timing,
and extent of audit tests applied in our audit of the 2016 consolidated financial statements, and this report does not affect our report
dated March 1, 2017, which expressed an unqualified opinion on those consolidated financial statements.
In our opinion, because of the effect of the aforementioned material weakness on the achievement of the objectives of the control
criteria, Webster Financial Corporation and subsidiaries has not maintained effective internal control over financial reporting as
of December 31, 2016, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO).
We do not express an opinion or any other form of assurance on management’s statements referring to remediation plans, or results
thereof taken after December 31, 2016, relative to the aforementioned material weakness in internal control over financial reporting.
Hartford, Connecticut
March 1, 2017
125
ITEM 9B. OTHER INFORMATION
Not applicable
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
John R. Ciulla
Glenn I. MacInnes
Daniel H. Bley
Colin D. Eccles
Bernard M. Garrigues
Nitin J. Mhatre
Dawn C. Morris
Christopher J. Motl
Charles L. Wilkins
Harriet Munrett Wolfe
Gregory S. Madar
Age at
December 31, 2016
67
64
51
55
48
58
58
46
49
46
55
63
54
Positions Held
Chairman, Chief Executive Officer and Director
Executive Vice Chairman and Director of Webster Bank
President and Director of Webster Bank
Executive Vice President and Chief Financial Officer
Executive Vice President and Chief Risk Officer
Executive Vice President and Chief Information Officer
Executive Vice President and Chief Human Resources Officer
Executive Vice President, Community Banking
Executive Vice President and Chief Marketing Officer
Executive Vice President, Commercial Banking
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 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 serves as Vice Chairman of the
Midsize Banks Coalition of America. He is a past member of the board of directors of the American Bankers Association and
served several years as co-chairman of the ABA’s American Bankers Council for midsize banks. He is a past member of the board
of directors of the Financial Services Roundtable. Mr. Smith served as a member of the Federal Advisory Council, which advises
the deliberations of the Federal Reserve Board of Governors, and served on the board of directors of the Federal Reserve Bank
of Boston. He served on the board of directors of the Federal Home Loan Bank of Boston. He served on the executive committee
of the Connecticut Bankers Association. Mr. Smith is actively engaged in community service and supports numerous civic
organizations including serving as General Chairman of the Hartford Bishops’ Foundation; serving on the Trinity Health-New
England Strategic Planning Committee; and serving until very recently as a member of Saint Mary’s Health System board in
Waterbury, Connecticut.
Joseph J. Savage is Executive Vice Chairman of Webster and Webster Bank. 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 2014. He was appointed to his current position in October 2015. Prior to joining Webster, Mr. Savage was Executive
Vice President of the Communications and Energy Banking Group for CoBank in Denver, Colorado from 1996 to April 2002. He
serves on the board of directors of Horizon Technology Finance Corporation, (NASDAQ: HRZN). Mr. Savage serves as a director
of the Travelers Championship Committee. He serves as Chairman of the MetroHartford Alliance, and also serves on the board
of the Bushnell and the Connecticut Bankers Association. He was also the chair of the 2013-14 United Way Campaign for United
Way of Central and Northeastern Connecticut.
John R. Ciulla is President of Webster and Webster Bank. 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 and President in October 2015. Prior to joining Webster, Mr. Ciulla was managing
director of The Bank of New York, where he worked from 1997 to 2004. He is the Chairman of the board of the Connecticut
Business & Industry Association and serves on the board of the Business Council of Fairfield County.
126
Glenn I. MacInnes is Executive Vice President and Chief Financial Officer of Webster and Webster Bank. He joined Webster in
2011. Prior to joining Webster, 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 senior 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.
Daniel H. Bley is Executive Vice President and Chief Risk Officer of Webster and Webster Bank since August of 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 Financial Institutions Credit Risk and Group Senior Vice President, Head of Financial Institutions and Trading Credit
Risk Management. Mr. Bley currently serves on the Board of Directors of Junior Achievement of Western Connecticut.
Colin D. Eccles is Executive Vice President and Chief Information Officer of Webster and Webster Bank. He joined Webster in
January of 2013. Prior to joining Webster, Mr. Eccles served as CIO for Umpqua Holdings in Portland, Ore. Before that, he worked
for Washington Mutual Bank from January 2002 to January 2009 and was the CIO for the Retail Bank. He worked for Hogan
Systems in Dallas, Texas from May 1994 to January 2002.
Bernard M. Garrigues is Executive Vice President and Chief Human Resources Officer of Webster and Webster Bank. Mr.
Garrigues joined Webster in 2014. Prior to joining Webster, Mr. Garrigues was with TIMEX Group in Middlebury, Connecticut,
where he was the Chief Human Resources Officer having comprehensive global HR responsibility for several thousand employees
in 22 countries. Previously, he worked 21 years for General Electric where he served as global head of HR with a number of GE
businesses, including GE Commercial Finance, GE Capital Real Estate, GE Capital IT Solutions and Healthcare in both the United
States and Europe. Mr. Garrigues is Six Sigma Green Belt certified, a published author, and a seasoned guest lecturer.
Nitin J. Mhatre is Executive Vice President, Head of Community Banking of Webster 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 joining Webster, Mr.
Mhatre worked at Citigroup across multiple geographies including St. Louis, Missouri, Stamford, Connecticut, Guam, USA and
India, 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. 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 and Webster Bank. She joined Webster in March
2014. Prior to joining Webster, 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 The Hartford Stage, Marketing EDGE and the Girl Scouts of Connecticut. She is
also on the Executive Committee for the Connecticut Veterans Day Parade and is co-chair with Connecticut Governor Dannel
Malloy of the Governor’s Prevention Partnership.
Christopher J. Motl is Executive Vice President, Head of Commercial Banking of Webster and Webster Bank. He joined Webster
in 2004 and was most recently Executive Vice President and Director of Middle Market Banking. Prior to joining Webster, Mr.
Motl worked at CoBank, where he was Vice President and Relationship Manager. Mr. Motl is on the board of Special Olympics
of Connecticut.
Charles L. Wilkins is Executive Vice President and Head of HSA Bank of Webster and Webster Bank. He joined Webster in 2014.
Prior to joining Webster, he was president of his own consulting practice specializing in healthcare and financial services from
June 2012 to December 2013. Prior to this, Mr. Wilkins was general manager and chief executive officer of OptumHealth Financial
Services, a division of UnitedHealth Group in Minnesota from August 2007 to June 2012. He is an active volunteer with the
American Heart Association and the American Diabetes Association.
Harriet Munrett Wolfe is Executive Vice President, General Counsel and Corporate Secretary of Webster 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. 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 and Webster Bank. He joined Webster in
1995 as Vice President and Tax Manager. Mr. Madar served in a number of senior finance positions including Senior Vice President
and Controller from February 2002 to February 2011 when he was promoted to his current position. Mr. Madar is a Certified
Public Accountant and previously worked for KPMG LLP.
127
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 and charters for the Audit, Compensation, Nominating and Corporate Governance, Executive, and Risk Committees
of the Board of Directors. The Corporate Governance 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, 2016, 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 Proxy
Statement under the sections captioned "Compensation Discussion and Analysis" and "Compensation of Directors," and the
information included therein is incorporated herein by reference.
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, 2016, is
presented in the table below:
Plan Category
Plans approved by shareholders
Plans not approved by shareholders
Total
Number of
Shares to be
Issued Upon
Exercise of
Outstanding
Awards
1,072,974
—
1,072,974
Weighted-
Average
Exercise
Price of
Outstanding
Awards
$
$
21.24
—
21.24
Number of
Shares
Available
for Future
Grants
3,125,482
—
3,125,482
Further information required by this Item is omitted herewith 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 such information included
therein is incorporated herein by reference. Additional information is presented in Note 18: Share-Based Plans in the Notes to
Consolidated Financial Statements contained elsewhere in this report.
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.
128
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
PART IV
(a) The following documents are filed as part of the Annual Report on Form 10-K:
(1) Consolidated Financial Statements of Registrant and its subsidiaries are included within Item 8 of Part II of this report.
(2) 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 of Part II of this report.
(3) 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
129
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 March 1, 2017.
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 March 1, 2017.
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/ 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
/s/ Lauren C. States
Lauren C. States
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
130
WEBSTER FINANCIAL CORPORATION
EXHIBIT INDEX
Exhibit
Number
Exhibit Description
Filed
Herewith
Incorporated by Reference
Form
Exhibit
Filing Date
3
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
10.4
10.5
10.6
Certificate of Incorporation and Bylaws.
Fourth Amended and Restated Certificate of Incorporation
Certificate of Designations establishing the rights of the
Company's 8.50% Series A Non-Cumulative Perpetual
Convertible Preferred Stock
Certificate of Designations establishing the rights of the
Company's Fixed Rate Cumulative Perpetual Preferred Stock,
Series B
Certificate of Designations establishing the rights of the
Company's Perpetual Participating Preferred Stock, Series C
Certificate of Designations establishing the rights of the
Company's Non-Voting Perpetual Participating Preferred Stock,
Series D
Certificate of Designations establishing the rights of the
Company's 6.40% Series E Non-Cumulative Perpetual
Preferred Stock
Bylaws, as amended effective June 9, 2014
Instruments Defining the Rights of Security Holders.
Specimen common stock certificate
Specimen stock certificate for the Company's 8.50% Series A
Non-Cumulative Perpetual Convertible Preferred Stock
Form of specimen stock certificate for the Company's 6.40%
Series E Non-Cumulative Perpetual Preferred Stock
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
Warrant to purchase shares of Corporation common stock
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
Senior Debt Indenture, dated as of February 11, 2014, between
the Company and The Bank of New York Mellon, as trustee
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
Material Contracts
Amended and Restated 1992 Stock Option Plan
Amended and Restated Deferred Compensation Plan for
Directors and Officers of Webster Bank effective January 1,
2005
Supplemental Retirement Plan for Employees of Webster Bank,
as amended and restated effective January 1, 2005
Qualified Performance-Based Compensation Plan
Employee Stock Purchase Plan
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
131
10-Q
8-K
3.1
3.1
8/9/2016
6/11/2008
8-K
3.1
11/24/2008
8-K
8-K
3.1
3.2
7/31/2009
7/31/2009
8-A12B
3.3
12/4/2012
8-K
10-K
8-K
8-K
3.1
4.1
4.1
4.3
6/12/2014
3/10/2006
6/11/2008
12/4/2012
10-K
10.41
3/27/1997
8-K
8-K
8-K
8-K
4.2
4.1
4.1
4.2
11/24/2008
12/04/2012
2/11/2014
2/11/2014
10-Q
8-K
10.1
10.2
5/2/2012
12/21/2007
8-K
10.1
12/21/2007
DEF 14A
DEF 14A
A
A
3/7/2008
3/23/2000
8-K
10.1
12/27/2012
Filed
Herewith
Incorporated by Reference
Form
10-K
Exhibit
10.13
Filing Date
2/28/2013
10-K
10.13
2/28/2014
8-K
10.2
12/27/2012
10-K
10.22
2/28/2013
10-K
10.18
2/28/2014
10-Q
10.3
5/7/2014
10-Q
10.4
5/7/2014
10-Q
10.1
8/6/2014
10-Q
10.2
8/6/2014
10-K
10.22
2/27/2015
10-K
10.18
2/29/2016
10-K
10.19
2/29/2016
X
X
X
X
X
X
X
X
Exhibit
Number
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
21
23.1
31.1
31.2
Exhibit Description
Form of Change in Control Agreement, effective as of February
1, 2013, by and between Webster Financial Corporation and
Daniel H. Bley, Colin D. Eccles, Daniel M. FitzPatrick, Nitin J.
Mhatre and Harriet Munrett Wolfe
Change in Control Agreement, effective as of January 3, 2014,
by and between Webster Financial Corporation and Charles L.
Wilkins
Form of Non-Competition Agreement, effective as of
December 31, 2012, between Webster Financial Corporation
and James C. Smith, and Joseph J. Savage
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, Colin D. Eccles, Daniel M. FitzPatrick, Nitin J.
Mhatre and Harriet Munrett Wolfe
Non-Solicitation Agreement, effective as of January 3, 2014, by
and between Webster Financial Corporation and Charles L.
Wilkins
Change in Control Agreement, dated as of March 10, 2014, by
and between Webster Financial Corporation and Dawn C.
Morris
Non-Solicitation Agreement, dated as of March 10, 2014, by
and between Webster Financial Corporation and Dawn C.
Morris
Change in Control Agreement, dated as of April 28, 2014, by
and between Webster Financial Corporation and Bernard
Garrigues
Non-Solicitation Agreement, dated as of April 28, 2014, by and
between Webster Financial Corporation and Bernard Garrigues
Non-Competition Agreement, dated as of November 13, 2014,
between Webster Bank, N.A., acting through its division, HSA
Bank, and Charles L. Wilkins
Non-Competition Agreement, dated as of February 24, 2016,
between Webster Bank, N.A., and Nitin Mhatre
Non-Competition Agreement, dated as of February 24, 2016,
between Webster Bank, N.A., and Daniel H. Bley
Non-Competition Agreement, dated as of February 22, 2017,
between Webster Bank, N.A., and Glenn I. MacInnes
Subsidiaries.
Consent of KPMG LLP.
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.
32.1 + Written statement pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002, signed by the Chief Executive Officer.
32.2 + Written statement pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002, signed by the Chief Financial Officer.
132
Exhibit
Number
Exhibit Description
Filed
Herewith
Incorporated by Reference
Form
Exhibit
Filing Date
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definitions Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
X
X
X
X
X
X
Note: Exhibit numbers 10.1 – 10.20 are management contracts or compensatory plans or arrangements in which directors or executive officers are
eligible to participate.
+ This exhibit shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of
that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange
Act of 1934.
133
EXHIBIT 31.1
I, James C. Smith, certify that:
CERTIFICATION
1.
I have reviewed this annual report on Form 10-K of Webster Financial Corporation;
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other financial information included in this 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 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 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 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 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 fiscal quarter in the 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: March 1, 2017
/s/ James C. Smith
James C. Smith
Chairman and Chief Executive Officer
EXHIBIT 31.2
I, Glenn I. MacInnes, certify that:
CERTIFICATION
1.
I have reviewed this annual report on Form 10-K of Webster Financial Corporation;
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other financial information included in this 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 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 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 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 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 fiscal quarter in the 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: March 1, 2017
/s/ Glenn I. MacInnes
Glenn I. MacInnes
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
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
EXHIBIT 32.1
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, 2016 filed on the date hereof with the Securities and
Exchange Commission (the “Report”) 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 the Report fairly presents, in all material respects, the financial condition and results of operations
of the Company.
Date: March 1, 2017
/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 of the Sarbanes Oxley Act of 2002 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.
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
EXHIBIT 32.2
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, 2016 filed on the date hereof with the Securities and
Exchange Commission (the “Report”) 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 the Report fairly presents, in all material respects, the financial condition and results of operations
of the Company.
Date: March 1, 2017
/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 of the Sarbanes Oxley Act of 2002 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.
2
Our mission:
To help individuals, families and businesses achieve their financial goals.
Our vision:
To rank among the highest performing regional banks in the country.
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 brand promise:
Living Up To You.
The Webster symbol is a registered trademark in the U.S.