Note 1:
Summary of Significant Accounting Policies
Nature of Operations
Webster Financial Corporation (collectively, with its consolidated subsidiaries, “Webster” or the “Company”) is a bank holding company and financial holding company under the Bank Holding Company Act of 1956, as amended, incorporated under the laws of Delaware in 1986 and headquartered in Waterbury, Connecticut. At
March 31, 2016
, Webster Financial Corporation's principal asset is all of the outstanding capital stock of Webster Bank, National Association ("Webster Bank").
Webster, through Webster Bank and various non-banking financial services subsidiaries, delivers financial services to individuals, families, and businesses primarily from New York to Massachusetts. Webster provides business and consumer banking, mortgage lending, financial planning, trust, and investment services through banking offices, ATMs, telephone banking, mobile banking, and its internet website (
www.websterbank.com
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 accounting and reporting policies of the Company that materially affect its financial statements conform with U.S. Generally Accepted Accounting Principles ("GAAP"). The accompanying unaudited Condensed Consolidated Financial Statements of the Company have been prepared in conformity with the instructions for Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all the information and notes required by GAAP for complete financial statements and should be read in conjunction with the Company's Consolidated Financial Statements, and notes thereto, for the year ended
December 31, 2015
, included in the Company's Annual Report on Form 10-K filed with the SEC on February 29, 2016.
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts of assets and liabilities as of the date of the financial statements as well as income and expense during the period. Actual results could differ from those estimates. Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for the full year or any future period.
Certain prior period amounts have been reclassified to conform to the current year's presentation. These reclassifications had an immaterial effect on total assets, total liabilities, net cash provided by operating activities, net cash used for investing activities, and net cash provided by financing activities.
Correction of Immaterial Error Related to Prior Periods
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 Financial Accounting Standards Board Accounting Standards Codification ("ASC") 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 FASB ASC 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 Condensed Consolidated Balance Sheets. The cash collateral, relating to the initial margin, is included within accrued interest receivable and other assets on the Company's Condensed 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 determined that the error was immaterial to previously reported amounts contained in the Company's annual and quarterly reports. Accordingly, within this Form 10-Q the Company revised its Condensed Consolidated Balance Sheet for
December 31, 2015
and its Condensed Consolidated Statement of Cash Flows for the
three months ended March 31, 2015
.
The effects of recording this immaterial correction are as follows:
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
(In thousands)
|
As
Reported
|
|
As
Revised
|
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
|
|
Cash and due from banks
|
$
|
251,258
|
|
|
$
|
199,693
|
|
Accrued interest receivable and other assets
(1)
|
328,993
|
|
|
346,721
|
|
Accrued expenses and other liabilities
|
267,576
|
|
|
233,739
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2015
|
(In thousands)
|
As
Reported
|
|
As
Revised
|
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
Net increase in accrued interest receivable and other assets
|
$
|
(33,912
|
)
|
|
$
|
(38,117
|
)
|
Net increase (decrease) in accrued expenses and other liabilities
|
14,552
|
|
|
(4,088
|
)
|
|
|
(1)
|
The amount recored as revised excludes 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.
|
Significant Accounting Policy Updates
Loans Held For Sale.
Prior to and for the period ended December 31, 2015,
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. 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. 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.
Financial Accounting Standards Board ("FASB") Standards Adopted during 2016
Effective January 1, 2016, the following new accounting guidance was adopted by the Company:
|
|
•
|
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 New 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.
|
As a result of ASU No. 2015-02, the Company did not identify any additional investments requiring consolidation, however, has included additional disclosures of variable interest entities in
Note 3:
Variable Interest Entities
.
The adoption of these accounting standards did not have a material impact on the Company's financial statements.
FASB 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
|
Effective Date and Financial Statement Impact
|
ASU No. 2016-09, Compensation - Stock Compensation (Topic 718) - Improvements to Employee Share Based Payment Accounting.
|
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.
|
The Company intends to adopt the Update for the first quarter of 2017 and is in the process of assessing the impact on its financial statements.
|
ASU No. 2016-06, Derivatives and Hedging (Topic 815) - Contingent Put and Call Options in Debt Instruments.
|
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 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.
|
ASU No. 2016-02, Leases (Topic 842).
|
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 606, the FASB’s new revenue recognition standard (e.g., evaluating how collectability should be considered and determining when profit can be recognized).
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.
|
The Company intends to adopt the Update for the first quarter of 2019 and is in the process of assessing the impact on its financial statements.
|
ASU No. 2016-01, Financial Instruments—Overall (Subtopic 825-10) - Recognition and Measurement of Financial Assets and Financial Liabilities.
|
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.
|
The Company intends to adopt the Update for the first quarter of 2018 and is in the process of assessing the impact on its financial statements.
|
ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606)
ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606)
|
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 US 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. The most significant potential impact to banking entities 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.
|
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.
|
Note 2:
Investment Securities
A summary of the amortized cost and fair value of investment securities is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2016
|
|
At December 31, 2015
|
(In thousands)
|
Amortized
Cost
|
Unrealized
Gains
|
Unrealized
Losses
|
Fair Value
|
|
Amortized
Cost
|
Unrealized
Gains
|
Unrealized
Losses
|
Fair Value
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
U.S. Treasury Bills
|
$
|
475
|
|
$
|
—
|
|
$
|
—
|
|
$
|
475
|
|
|
$
|
924
|
|
$
|
—
|
|
$
|
—
|
|
$
|
924
|
|
Agency collateralized mortgage obligations (“agency CMO”)
|
511,772
|
|
8,918
|
|
(948
|
)
|
519,742
|
|
|
546,168
|
|
5,532
|
|
(2,946
|
)
|
548,754
|
|
Agency mortgage-backed securities (“agency MBS”)
|
1,069,685
|
|
8,331
|
|
(6,880
|
)
|
1,071,136
|
|
|
1,075,941
|
|
6,459
|
|
(17,291
|
)
|
1,065,109
|
|
Agency commercial mortgage-backed securities (“agency CMBS”)
|
360,217
|
|
4,880
|
|
(80
|
)
|
365,017
|
|
|
215,670
|
|
639
|
|
(959
|
)
|
215,350
|
|
Non-agency commercial mortgage-backed securities agency (“non-agency CMBS”)
|
528,189
|
|
5,518
|
|
(6,882
|
)
|
526,825
|
|
|
574,686
|
|
7,485
|
|
(2,905
|
)
|
579,266
|
|
Collateralized loan obligations ("CLO")
|
464,394
|
|
525
|
|
(3,966
|
)
|
460,953
|
|
|
431,837
|
|
592
|
|
(3,270
|
)
|
429,159
|
|
Single issuer trust preferred securities
|
42,220
|
|
—
|
|
(8,796
|
)
|
33,424
|
|
|
42,168
|
|
—
|
|
(4,998
|
)
|
37,170
|
|
Corporate debt securities
|
98,406
|
|
2,555
|
|
—
|
|
100,961
|
|
|
104,031
|
|
2,290
|
|
—
|
|
106,321
|
|
Equities - financial services
|
3,499
|
|
—
|
|
(1,563
|
)
|
1,936
|
|
|
3,499
|
|
—
|
|
(921
|
)
|
2,578
|
|
Securities available-for-sale
|
$
|
3,078,857
|
|
$
|
30,727
|
|
$
|
(29,115
|
)
|
$
|
3,080,469
|
|
|
$
|
2,994,924
|
|
$
|
22,997
|
|
$
|
(33,290
|
)
|
$
|
2,984,631
|
|
Held-to-maturity:
|
|
|
|
|
|
|
|
|
|
Agency CMO
|
$
|
384,905
|
|
$
|
6,153
|
|
$
|
(425
|
)
|
$
|
390,633
|
|
|
$
|
407,494
|
|
$
|
3,717
|
|
$
|
(2,058
|
)
|
$
|
409,153
|
|
Agency MBS
|
2,086,393
|
|
44,832
|
|
(6,978
|
)
|
2,124,247
|
|
|
2,030,176
|
|
38,813
|
|
(19,908
|
)
|
2,049,081
|
|
Agency CMBS
|
678,969
|
|
15,549
|
|
—
|
|
694,518
|
|
|
686,086
|
|
4,253
|
|
(325
|
)
|
690,014
|
|
Municipal bonds and notes
|
486,777
|
|
13,365
|
|
(142
|
)
|
500,000
|
|
|
435,905
|
|
12,019
|
|
(417
|
)
|
447,507
|
|
Non-agency CMBS
|
372,451
|
|
9,915
|
|
(78
|
)
|
382,288
|
|
|
360,018
|
|
5,046
|
|
(2,704
|
)
|
362,360
|
|
Private Label MBS
|
2,794
|
|
26
|
|
—
|
|
2,820
|
|
|
3,373
|
|
46
|
|
—
|
|
3,419
|
|
Securities held-to-maturity
|
$
|
4,012,289
|
|
$
|
89,840
|
|
$
|
(7,623
|
)
|
$
|
4,094,506
|
|
|
$
|
3,923,052
|
|
$
|
63,894
|
|
$
|
(25,412
|
)
|
$
|
3,961,534
|
|
Other-Than-Temporary Impairment ("OTTI")
The balance of OTTI, included in the amortized cost columns above, is related to certain CLO securities that are considered Covered Funds as defined by Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the "Dodd-Frank Act"), commonly known as the Volcker Rule. Webster continues to record impairment on CLOs, that are not in compliance with the Volcker Rule, if spreads widen or credit deteriorates. At March 31, 2016, Webster had
$132.3 million
of CLOs that are non- compliant and continues to transition the portfolio to conform to the Volcker Rule by July 2017.
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 record a charge for OTTI in future periods.
The following table presents the changes in OTTI:
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
(In thousands)
|
2016
|
|
2015
|
Beginning balance
|
$
|
3,288
|
|
|
$
|
3,696
|
|
Reduction for securities sold or called
|
—
|
|
|
(99
|
)
|
Additions for OTTI not previously recognized
|
149
|
|
|
—
|
|
Ending balance
|
$
|
3,437
|
|
|
$
|
3,597
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2016
|
|
Less Than Twelve Months
|
|
Twelve Months or Longer
|
|
Total
|
(Dollars in thousands)
|
Fair
Value
|
Unrealized
Losses
|
|
Fair
Value
|
Unrealized
Losses
|
|
# of
Holdings
|
Fair
Value
|
Unrealized
Losses
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
Agency CMO
|
$
|
35,571
|
|
$
|
(166
|
)
|
|
$
|
54,475
|
|
$
|
(782
|
)
|
|
4
|
$
|
90,046
|
|
$
|
(948
|
)
|
Agency MBS
|
129,284
|
|
(407
|
)
|
|
502,745
|
|
(6,473
|
)
|
|
72
|
632,029
|
|
(6,880
|
)
|
Agency CMBS
|
40,249
|
|
(80
|
)
|
|
—
|
|
—
|
|
|
2
|
40,249
|
|
(80
|
)
|
Non-agency CMBS
|
258,733
|
|
(6,637
|
)
|
|
24,782
|
|
(245
|
)
|
|
28
|
283,515
|
|
(6,882
|
)
|
CLO
|
250,385
|
|
(3,363
|
)
|
|
15,670
|
|
(603
|
)
|
|
15
|
266,055
|
|
(3,966
|
)
|
Single issuer trust preferred securities
|
3,654
|
|
(568
|
)
|
|
29,770
|
|
(8,228
|
)
|
|
8
|
33,424
|
|
(8,796
|
)
|
Equities - financial services
|
1,936
|
|
(1,563
|
)
|
|
—
|
|
—
|
|
|
1
|
1,936
|
|
(1,563
|
)
|
Total available-for-sale in an unrealized loss position
|
$
|
719,812
|
|
$
|
(12,784
|
)
|
|
$
|
627,442
|
|
$
|
(16,331
|
)
|
|
130
|
$
|
1,347,254
|
|
$
|
(29,115
|
)
|
Held-to-maturity:
|
|
|
|
|
|
|
|
|
|
Agency CMO
|
$
|
—
|
|
$
|
—
|
|
|
$
|
50,476
|
|
$
|
(425
|
)
|
|
3
|
$
|
50,476
|
|
$
|
(425
|
)
|
Agency MBS
|
155,405
|
|
(568
|
)
|
|
625,844
|
|
(6,410
|
)
|
|
58
|
781,249
|
|
(6,978
|
)
|
Agency CMBS
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
—
|
|
—
|
|
Municipal bonds and notes
|
43,220
|
|
(118
|
)
|
|
4,377
|
|
(24
|
)
|
|
32
|
47,597
|
|
(142
|
)
|
Non-agency CMBS
|
24,532
|
|
(72
|
)
|
|
5,265
|
|
(6
|
)
|
|
3
|
29,797
|
|
(78
|
)
|
Total held-to-maturity in an unrealized loss position
|
$
|
223,157
|
|
$
|
(758
|
)
|
|
$
|
685,962
|
|
$
|
(6,865
|
)
|
|
96
|
$
|
909,119
|
|
$
|
(7,623
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2015
|
|
Less Than Twelve Months
|
|
Twelve Months or Longer
|
|
Total
|
(Dollars in thousands)
|
Fair
Value
|
Unrealized
Losses
|
|
Fair
Value
|
Unrealized
Losses
|
|
# of
Holdings
|
Fair
Value
|
Unrealized
Losses
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
Agency CMO
|
$
|
195,369
|
|
$
|
(2,195
|
)
|
|
$
|
26,039
|
|
$
|
(751
|
)
|
|
14
|
$
|
221,408
|
|
$
|
(2,946
|
)
|
Agency MBS
|
481,839
|
|
(6,386
|
)
|
|
351,911
|
|
(10,905
|
)
|
|
84
|
833,750
|
|
(17,291
|
)
|
Agency CMBS
|
124,241
|
|
(959
|
)
|
|
—
|
|
—
|
|
|
7
|
124,241
|
|
(959
|
)
|
Non-agency CMBS
|
276,330
|
|
(2,879
|
)
|
|
19,382
|
|
(26
|
)
|
|
29
|
295,712
|
|
(2,905
|
)
|
CLO
|
211,515
|
|
(2,709
|
)
|
|
15,708
|
|
(561
|
)
|
|
13
|
227,223
|
|
(3,270
|
)
|
Single issuer trust preferred securities
|
4,087
|
|
(128
|
)
|
|
33,083
|
|
(4,870
|
)
|
|
8
|
37,170
|
|
(4,998
|
)
|
Equities - financial services
|
2,578
|
|
(921
|
)
|
|
—
|
|
—
|
|
|
1
|
2,578
|
|
(921
|
)
|
Total available-for-sale in an unrealized loss position
|
$
|
1,295,959
|
|
$
|
(16,177
|
)
|
|
$
|
446,123
|
|
$
|
(17,113
|
)
|
|
156
|
$
|
1,742,082
|
|
$
|
(33,290
|
)
|
Held-to-maturity:
|
|
|
|
|
|
|
|
|
|
Agency CMO
|
$
|
143,364
|
|
$
|
(1,304
|
)
|
|
$
|
27,928
|
|
$
|
(754
|
)
|
|
13
|
$
|
171,292
|
|
$
|
(2,058
|
)
|
Agency MBS
|
551,918
|
|
(7,089
|
)
|
|
470,828
|
|
(12,819
|
)
|
|
87
|
1,022,746
|
|
(19,908
|
)
|
Agency CMBS
|
110,864
|
|
(325
|
)
|
|
—
|
|
—
|
|
|
7
|
110,864
|
|
(325
|
)
|
Municipal bonds and notes
|
29,034
|
|
(130
|
)
|
|
13,829
|
|
(287
|
)
|
|
27
|
42,863
|
|
(417
|
)
|
Non-agency CMBS
|
142,382
|
|
(1,983
|
)
|
|
30,129
|
|
(721
|
)
|
|
18
|
172,511
|
|
(2,704
|
)
|
Total held-to-maturity in an unrealized loss position
|
$
|
977,562
|
|
$
|
(10,831
|
)
|
|
$
|
542,714
|
|
$
|
(14,581
|
)
|
|
152
|
$
|
1,520,276
|
|
$
|
(25,412
|
)
|
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 are other-than-temporarily impaired. 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
March 31, 2016
.
Available-for-Sale Securities
Agency CMO.
There were unrealized losses of
$0.9 million
on the Company’s investment in agency CMO at
March 31, 2016
compared to
$2.9 million
at
December 31, 2015
. Unrealized losses decreased due to lower market rates which resulted in higher security prices at
March 31, 2016
compared to
December 31, 2015
. These investments are issued by a government or a government-sponsored agency and, therefore, are backed by certain government guarantees, either direct or indirect. The contractual cash flows for these investments are performing as expected, and there has been no change in the underlying credit quality.
Agency MBS.
There were unrealized losses of
$6.9 million
on the Company’s investment in agency MBS at
March 31, 2016
compared to
$17.3 million
at
December 31, 2015
. Unrealized losses
decreased
due to lower market rates which resulted in higher security prices at
March 31, 2016
compared to
December 31, 2015
. These investments are issued by a government or a government-sponsored agency and, therefore, are backed by certain government guarantees, either direct or indirect. There has been no change in the underlying credit quality, and the contractual cash flows for these investments are performing as expected.
Non-Agency CMBS.
There were unrealized losses of
$6.9 million
on the Company’s investment in non-agency CMBS at
March 31, 2016
compared to
$2.9 million
at
December 31, 2015
. The portfolio of mainly floating rate non-agency CMBS experienced increased market spreads which resulted in lower market prices and greater unrealized losses at
March 31, 2016
compared to
December 31, 2015
. Internal and external metrics are considered when evaluating potential other-than temporary impairment. Internal stress tests are performed on individual bonds to monitor potential losses under stress scenarios. Contractual cash flows for these investments are performing as expected.
CLO.
There were unrealized losses of
$4.0 million
on the Company's investments in CLOs, that are in compliance with the Volcker Rule, at March 31, 2016 compared to
$3.3 million
at December 31, 2015. Unrealized losses increased due to higher market spreads for the asset class which resulted in lower security prices since December 31, 2015. Contractual cash flows for these investments are performing as expected.
Single issuer trust preferred securities.
There were unrealized losses of
$8.8 million
on the Company's investment in single issuer trust preferred securities at
March 31, 2016
compared to
$5.0 million
at
December 31, 2015
. Unrealized losses
increased
due to higher market spreads for this asset class which resulted in lower security prices compared to
December 31, 2015
. The single issuer portfolio consists of four investments issued by three large capitalization money center financial institutions, which continue to service the debt. The Company performs periodic credit reviews of the issuer to assess the likelihood for ultimate recovery of amortized cost.
Equities - financial services.
There were unrealized losses of
$1.6 million
on the Company’s investment in equities - financial services at
March 31, 2016
compared to
$0.9 million
at
December 31, 2015
. When estimating the recovery period for equity securities in an unrealized loss position, management utilizes analyst forecasts, earnings assumptions and other company-specific financial performance metrics. In addition, this assessment incorporates general market data, industry and sector cycles and related trends to determine a reasonable recovery period. The Company evaluated the near-term prospects of the issuers in relation to the severity and duration of the impairment. The Company determined its holdings of equity securities were not deemed to be other-than-temporarily impaired at both
March 31, 2016
and
December 31, 2015
.
Held-to-Maturity Securities
Agency CMO.
There were unrealized losses of
$0.4 million
on the Company’s investment in agency CMO at
March 31, 2016
compared to
$2.1 million
at
December 31, 2015
. Unrealized losses decreased due to lower market rates which resulted in higher security prices at
March 31, 2016
compared to
December 31, 2015
. These investments are issued by a government or a government-sponsored agency and, therefore, are backed by certain government guarantees, either direct or indirect. The contractual cash flows for these investments are performing as expected, and there has been no change in the underlying credit quality.
Agency MBS.
There were unrealized losses of
$7.0 million
on the Company’s investment in agency MBS at
March 31, 2016
compared to
$19.9 million
at
December 31, 2015
. Unrealized losses
decreased
due to lower market rates which resulted in higher security prices at
March 31, 2016
compared to
December 31, 2015
. These investments are issued by a government or a government-sponsored agency and, therefore, are backed by certain government guarantees, either direct or indirect. There has been no change in the underlying credit quality, and the contractual cash flows are performing as expected.
Non-agency CMBS.
There were unrealized losses of
$0.1 million
on the Company’s investment in non-agency CMBS at
March 31, 2016
compared to
$2.7 million
at
December 31, 2015
. Unrealized losses
decreased
due to lower market rates on mainly seasoned fixed rate conduit deals which resulted in higher security prices at
March 31, 2016
compared to
December 31, 2015
. Internal and external metrics are considered when evaluating potential other-than temporary impairment. Internal stress tests are performed on individual bonds to monitor potential losses under stress scenarios. The contractual cash flows for these investments are performing as expected.
Sales of Available-for Sale Securities
The following table provides information on sales of available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
(In thousands)
|
2016
|
|
2015
|
Proceeds from sales
|
$
|
43,202
|
|
|
$
|
—
|
|
|
|
|
|
Gross realized gains on sales
|
$
|
387
|
|
|
$
|
43
|
|
Less: Gross realized losses on sales
|
67
|
|
|
—
|
|
Gain on sale of investment securities, net
|
$
|
320
|
|
|
$
|
43
|
|
Contractual Maturities
The amortized cost and fair value of debt securities by contractual maturity are set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2016
|
|
|
|
|
|
Available-for-Sale
|
|
Held-to-Maturity
|
(In thousands)
|
Amortized
Cost
|
Fair
Value
|
|
Amortized
Cost
|
Fair
Value
|
Due in one year or less
|
$
|
30,486
|
|
$
|
29,741
|
|
|
$
|
11,268
|
|
$
|
11,395
|
|
Due after one year through five years
|
98,406
|
|
100,961
|
|
|
30,139
|
|
30,924
|
|
Due after five through ten years
|
467,105
|
|
462,725
|
|
|
43,999
|
|
45,599
|
|
Due after ten years
|
2,479,361
|
|
2,485,106
|
|
|
3,926,883
|
|
4,006,588
|
|
Total debt securities
|
$
|
3,075,358
|
|
$
|
3,078,533
|
|
|
$
|
4,012,289
|
|
$
|
4,094,506
|
|
For the maturity schedule above, mortgage-backed securities and CLOs, 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
March 31, 2016
, the Company had a carrying value of
$1.0 billion
in callable securities in its CMBS, CLO, and municipal bond portfolios. The Company considers these factors in the evaluation of its interest rate risk profile. These maturities do not reflect actual duration which is impacted by prepayments.
Securities with a carrying value totaling
$2.4 billion
at
March 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.
Note 3:
Variable Interest Entities
A variable interest entity ("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.
|
The Company has evaluated it's involvement with investments that are considered VIEs. The results of the evaluation are below:
Consolidated
Rabbi Trust.
The Company has established a Rabbi Trust related to a deferred compensation plan offered to certain employees. 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 underlying investments made by the trusts as well as make funding decisions related to the trusts 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 Condensed Consolidated Balance Sheets. Earnings in the Rabbi Trust, including appreciation or depreciation, are reflected as other non-interest income, and changes in the corresponding liability are reflected as compensation and benefits, in the accompanying Condensed Consolidated Statements of Income. The cost and fair value associated with the assets and liabilities of this trust are not significant. Refer to
Note 13:
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 CMOs, MBS, CMBS, CLOs 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 March 31, 2016
and
December 31, 2015
, the aggregate carrying value of the Company's tax credit-finance investments were
$25.0 million
and
$25.9 million
, respectively.
At March 31, 2016
and
December 31, 2015
, unfunded commitments, which are recognized as a component of accrued expenses and other liabilities, were
$16.0 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 Condensed Consolidated Balance Sheets. Interest expense on the junior subordinated debentures is reported as interest expense on long-term debt in the accompanying Condensed 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 March 31, 2016
and
December 31, 2015
, the aggregate carrying value of the Company's other investments in VIEs were
$13.2 million
and
$12.1 million
, respectively, and the total exposure of the Company's other investments, in VIEs, including unfunded commitments were
$18.9 million
and
$19.0 million
, respectively.
For a further description of the Company's accounting policies regarding consolidation of VIEs, refer to Note 1 to the Consolidated Financial Statements for the year ended December 31,
2015
included in its
2015
Form 10-K.
Note 4:
Loans and Leases
The following table summarizes loans and leases:
|
|
|
|
|
|
|
|
|
(In thousands)
|
At March 31, 2016
|
|
At December 31, 2015
|
Residential
|
$
|
4,109,243
|
|
|
$
|
4,061,001
|
|
Consumer
|
2,726,869
|
|
|
2,702,560
|
|
Commercial
|
4,378,760
|
|
|
4,315,999
|
|
Commercial Real Estate
|
4,046,911
|
|
|
3,991,649
|
|
Equipment Financing
|
596,572
|
|
|
600,526
|
|
Loans and leases
(1)
|
$
|
15,858,355
|
|
|
$
|
15,671,735
|
|
|
|
(1)
|
Loans and leases include net deferred fees and net premiums and discounts of
$19.9 million
and
$18.0 million
at
March 31, 2016
and
December 31, 2015
, respectively.
|
At
March 31, 2016
, the Company had pledged
$6.1 billion
of eligible loan collateral to support borrowing capacity at the Federal Home Loan Bank of Boston ("FHLB") and the Federal Reserve Bank of Boston ("FRB").
Loans and Leases Portfolio Aging
The following tables summarize the aging of loans and leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2016
|
(In thousands)
|
30-59 Days
Past Due and
Accruing
|
60-89 Days
Past Due and
Accruing
|
90 or More Days Past Due
and Accruing
|
Non-accrual
|
Total Past Due and Non-accrual
|
Current
|
Total Loans
and Leases
|
Residential
|
$
|
8,100
|
|
$
|
2,375
|
|
$
|
1,354
|
|
$
|
53,805
|
|
$
|
65,634
|
|
$
|
4,043,609
|
|
$
|
4,109,243
|
|
Consumer:
|
|
|
|
|
|
|
|
Home equity
|
6,837
|
|
4,585
|
|
—
|
|
37,534
|
|
48,956
|
|
2,386,085
|
|
2,435,041
|
|
Other consumer
|
1,140
|
|
706
|
|
—
|
|
778
|
|
2,624
|
|
289,204
|
|
291,828
|
|
Commercial:
|
|
|
|
|
|
|
|
Commercial non-mortgage
|
1,461
|
|
5,808
|
|
2,038
|
|
32,482
|
|
41,789
|
|
3,565,387
|
|
3,607,176
|
|
Asset-based
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
771,584
|
|
771,584
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
Commercial real estate
|
19,843
|
|
889
|
|
—
|
|
11,948
|
|
32,680
|
|
3,774,029
|
|
3,806,709
|
|
Commercial construction
|
—
|
|
—
|
|
—
|
|
3,460
|
|
3,460
|
|
236,742
|
|
240,202
|
|
Equipment financing
|
176
|
|
418
|
|
—
|
|
868
|
|
1,462
|
|
595,110
|
|
596,572
|
|
Total
|
$
|
37,557
|
|
$
|
14,781
|
|
$
|
3,392
|
|
$
|
140,875
|
|
$
|
196,605
|
|
$
|
15,661,750
|
|
$
|
15,858,355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2015
|
(In thousands)
|
30-59 Days
Past Due and
Accruing
|
60-89 Days
Past Due and
Accruing
|
90 or More Days Past Due
and Accruing
|
Non-accrual
|
Total Past Due and Non-accrual
|
Current
|
Total Loans
and Leases
|
Residential
|
$
|
10,365
|
|
$
|
4,703
|
|
$
|
2,029
|
|
$
|
54,201
|
|
$
|
71,298
|
|
$
|
3,989,703
|
|
$
|
4,061,001
|
|
Consumer:
|
|
|
|
|
|
|
|
Home equity
|
9,061
|
|
4,242
|
|
—
|
|
37,337
|
|
50,640
|
|
2,402,758
|
|
2,453,398
|
|
Other consumer
|
1,390
|
|
615
|
|
—
|
|
560
|
|
2,565
|
|
246,597
|
|
249,162
|
|
Commercial:
|
|
|
|
|
|
|
|
Commercial non-mortgage
|
768
|
|
3,288
|
|
22
|
|
27,037
|
|
31,115
|
|
3,531,669
|
|
3,562,784
|
|
Asset-based
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
753,215
|
|
753,215
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
Commercial real estate
|
1,624
|
|
625
|
|
—
|
|
16,767
|
|
19,016
|
|
3,673,408
|
|
3,692,424
|
|
Commercial construction
|
—
|
|
—
|
|
—
|
|
3,461
|
|
3,461
|
|
295,764
|
|
299,225
|
|
Equipment financing
|
543
|
|
59
|
|
—
|
|
706
|
|
1,308
|
|
599,218
|
|
600,526
|
|
Total
|
$
|
23,751
|
|
$
|
13,532
|
|
$
|
2,051
|
|
$
|
140,069
|
|
$
|
179,403
|
|
$
|
15,492,332
|
|
$
|
15,671,735
|
|
Interest on non-accrual loans and leases that would have been recorded as additional interest income for the
three months ended March 31, 2016
and
2015
, had the loans and leases been current in accordance with their original terms, totaled
$3.0 million
and
$2.8 million
, respectively.
Allowance for Loan and Lease Losses
The following tables summarize the allowance for loan and lease losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At or for the three months ended March 31, 2016
|
(In thousands)
|
Residential
|
Consumer
|
Commercial
|
Commercial
Real Estate
|
Equipment
Financing
|
Total
|
Allowance for loan and lease losses:
|
|
|
|
|
|
|
Balance, beginning of period
|
$
|
25,876
|
|
$
|
42,052
|
|
$
|
66,686
|
|
$
|
34,889
|
|
$
|
5,487
|
|
$
|
174,990
|
|
Provision (benefit) charged to expense
|
2,327
|
|
2,791
|
|
10,536
|
|
(119
|
)
|
65
|
|
15,600
|
|
Charge-offs
|
(1,594
|
)
|
(4,421
|
)
|
(11,208
|
)
|
(1,526
|
)
|
(151
|
)
|
(18,900
|
)
|
Recoveries
|
721
|
|
1,214
|
|
457
|
|
74
|
|
45
|
|
2,511
|
|
Balance, end of period
|
$
|
27,330
|
|
$
|
41,636
|
|
$
|
66,471
|
|
$
|
33,318
|
|
$
|
5,446
|
|
$
|
174,201
|
|
Individually evaluated for impairment
|
$
|
10,044
|
|
$
|
3,037
|
|
$
|
3,235
|
|
$
|
2,022
|
|
$
|
42
|
|
$
|
18,380
|
|
Collectively evaluated for impairment
|
$
|
17,286
|
|
$
|
38,599
|
|
$
|
63,236
|
|
$
|
31,296
|
|
$
|
5,404
|
|
$
|
155,821
|
|
|
|
|
|
|
|
|
Loan and lease balances:
|
|
|
|
|
|
|
Individually evaluated for impairment
|
$
|
130,133
|
|
$
|
48,096
|
|
$
|
64,847
|
|
$
|
35,619
|
|
$
|
1,012
|
|
$
|
279,707
|
|
Collectively evaluated for impairment
|
3,979,110
|
|
2,678,773
|
|
4,313,913
|
|
4,011,292
|
|
595,560
|
|
15,578,648
|
|
Loans and leases
|
$
|
4,109,243
|
|
$
|
2,726,869
|
|
$
|
4,378,760
|
|
$
|
4,046,911
|
|
$
|
596,572
|
|
$
|
15,858,355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At or for the three months ended March 31, 2015
|
(In thousands)
|
Residential
|
Consumer
|
Commercial
|
Commercial
Real Estate
|
Equipment
Financing
|
Total
|
Allowance for loan and lease losses:
|
|
|
|
|
|
|
Balance, beginning of period
|
$
|
25,452
|
|
$
|
43,518
|
|
$
|
52,114
|
|
$
|
32,102
|
|
$
|
6,078
|
|
$
|
159,264
|
|
Provision (benefit) charged to expense
|
4,144
|
|
2,232
|
|
2,754
|
|
1,398
|
|
(778
|
)
|
9,750
|
|
Charge-offs
|
(1,955
|
)
|
(4,296
|
)
|
(255
|
)
|
(3,153
|
)
|
(15
|
)
|
(9,674
|
)
|
Recoveries
|
108
|
|
1,162
|
|
1,015
|
|
202
|
|
143
|
|
2,630
|
|
Balance, end of period
|
$
|
27,749
|
|
$
|
42,616
|
|
$
|
55,628
|
|
$
|
30,549
|
|
$
|
5,428
|
|
$
|
161,970
|
|
Individually evaluated for impairment
|
$
|
14,350
|
|
$
|
4,255
|
|
$
|
4,939
|
|
$
|
3,668
|
|
$
|
28
|
|
$
|
27,240
|
|
Collectively evaluated for impairment
|
$
|
13,399
|
|
$
|
38,361
|
|
$
|
50,689
|
|
$
|
26,881
|
|
$
|
5,400
|
|
$
|
134,730
|
|
|
|
|
|
|
|
|
Loan and lease balances:
|
|
|
|
|
|
|
Individually evaluated for impairment
|
$
|
140,362
|
|
$
|
50,719
|
|
$
|
49,311
|
|
$
|
72,850
|
|
$
|
631
|
|
$
|
313,873
|
|
Collectively evaluated for impairment
|
3,453,910
|
|
2,518,718
|
|
3,850,499
|
|
3,590,221
|
|
543,005
|
|
13,956,353
|
|
Loans and leases
|
$
|
3,594,272
|
|
$
|
2,569,437
|
|
$
|
3,899,810
|
|
$
|
3,663,071
|
|
$
|
543,636
|
|
$
|
14,270,226
|
|
Impaired Loans and Leases
The following tables summarize impaired loans and leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2016
|
(In thousands)
|
Unpaid
Principal
Balance
|
Total
Recorded
Investment
(1)
|
Recorded
Investment
No Allowance
|
Recorded
Investment
With Allowance
|
Related
Valuation
Allowance
|
Residential
|
$
|
143,159
|
|
$
|
130,133
|
|
$
|
22,191
|
|
$
|
107,942
|
|
$
|
10,044
|
|
Consumer
|
53,210
|
|
48,096
|
|
24,806
|
|
23,290
|
|
3,037
|
|
Commercial
|
83,347
|
|
64,847
|
|
38,119
|
|
26,728
|
|
3,235
|
|
Commercial real estate:
|
|
|
|
|
|
Commercial real estate
|
31,686
|
|
29,657
|
|
14,687
|
|
14,970
|
|
2,019
|
|
Commercial construction
|
7,010
|
|
5,962
|
|
5,940
|
|
22
|
|
3
|
|
Equipment financing
|
1,307
|
|
1,012
|
|
—
|
|
1,012
|
|
42
|
|
Total
|
$
|
319,719
|
|
$
|
279,707
|
|
$
|
105,743
|
|
$
|
173,964
|
|
$
|
18,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2015
|
(In thousands)
|
Unpaid
Principal
Balance
|
Total
Recorded
Investment
(1)
|
Recorded
Investment
No Allowance
|
Recorded
Investment
With Allowance
|
Related
Valuation
Allowance
|
Residential
|
$
|
148,144
|
|
$
|
134,448
|
|
$
|
23,024
|
|
$
|
111,424
|
|
$
|
10,364
|
|
Consumer
|
56,680
|
|
48,425
|
|
25,130
|
|
23,295
|
|
3,477
|
|
Commercial
|
67,116
|
|
56,581
|
|
31,600
|
|
24,981
|
|
5,197
|
|
Commercial real estate:
|
|
|
|
|
|
Commercial real estate
|
36,980
|
|
33,333
|
|
9,204
|
|
24,129
|
|
3,160
|
|
Commercial construction
|
7,010
|
|
5,962
|
|
5,939
|
|
23
|
|
3
|
|
Equipment financing
|
612
|
|
422
|
|
328
|
|
94
|
|
3
|
|
Total
|
$
|
316,542
|
|
$
|
279,171
|
|
$
|
95,225
|
|
$
|
183,946
|
|
$
|
22,204
|
|
The following table summarizes the average recorded investment and interest income recognized for impaired loans and leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
2016
|
|
2015
|
(In thousands)
|
Average
Recorded
Investment
|
Accrued
Interest
Income
|
Cash Basis Interest Income
|
|
Average
Recorded
Investment
|
Accrued
Interest
Income
|
Cash Basis Interest Income
|
Residential
|
$
|
132,291
|
|
$
|
1,115
|
|
$
|
317
|
|
|
$
|
141,625
|
|
$
|
1,059
|
|
$
|
256
|
|
Consumer
|
48,261
|
|
349
|
|
259
|
|
|
50,604
|
|
361
|
|
282
|
|
Commercial
|
60,714
|
|
472
|
|
—
|
|
|
43,037
|
|
427
|
|
—
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
Commercial real estate
|
31,495
|
|
148
|
|
—
|
|
|
81,637
|
|
530
|
|
—
|
|
Commercial construction
|
5,962
|
|
35
|
|
—
|
|
|
6,171
|
|
33
|
|
—
|
|
Equipment financing
|
717
|
|
1
|
|
—
|
|
|
632
|
|
11
|
|
—
|
|
Total
|
$
|
279,440
|
|
$
|
2,120
|
|
$
|
576
|
|
|
$
|
323,706
|
|
$
|
2,421
|
|
$
|
538
|
|
Credit Quality Indicators.
To measure credit risk for the commercial, commercial real estate, and equipment financing portfolios, the Company employs a dual grade credit risk grading system for estimating the probability of borrower default and the loss given default. The credit risk grade system assigns a rating to each borrower and to the facility, which together form a Composite Credit Risk Profile (“CCRP”). The credit risk grade system categorizes borrowers by common financial characteristics that measure the credit strength of borrowers and facilities by common structural characteristics. The CCRP has 10 grades, with each grade corresponding to a progressively greater risk of default. Grades 1 through 6 are considered pass ratings, and 7 through 10 are criticized as defined by the regulatory agencies. Risk ratings, assigned to differentiate risk within the portfolio, are reviewed on an ongoing basis and revised to reflect changes in the borrowers’ current financial positions and outlooks, risk profiles, and the related collateral and structural positions. Loan officers review updated financial information on at least an annual basis for all pass rated loans to assess the accuracy of the risk grade. Criticized loans undergo more frequent reviews and enhanced monitoring.
A “Special Mention” (7) credit has the potential weakness that, if left uncorrected, may result in deterioration of the repayment prospects for the asset. “Substandard” (8) assets have a well defined weakness that jeopardizes the full repayment of the debt. An asset rated “Doubtful” (9) has all of the same weaknesses as a substandard credit with the added characteristic that the weakness makes collection or liquidation in full, given current facts, conditions, and values, improbable. Assets classified as “Loss” (10) in accordance with regulatory guidelines are considered uncollectible and charged off.
The following table summarizes commercial, commercial real estate and equipment financing loans and leases segregated by risk rating exposure:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
Commercial Real Estate
|
|
Equipment Financing
|
(In thousands)
|
At March 31,
2016
|
|
At December 31,
2015
|
|
At March 31,
2016
|
|
At December 31,
2015
|
|
At March 31,
2016
|
|
At December 31,
2015
|
(1) - (6) Pass
|
$
|
4,060,128
|
|
|
$
|
4,023,255
|
|
|
$
|
3,897,741
|
|
|
$
|
3,857,019
|
|
|
$
|
574,782
|
|
|
$
|
586,445
|
|
(7) Special Mention
|
101,340
|
|
|
70,904
|
|
|
36,700
|
|
|
55,030
|
|
|
8,234
|
|
|
1,628
|
|
(8) Substandard
|
216,098
|
|
|
220,389
|
|
|
112,165
|
|
|
79,289
|
|
|
13,556
|
|
|
12,453
|
|
(9) Doubtful
|
1,194
|
|
|
1,451
|
|
|
305
|
|
|
311
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
4,378,760
|
|
|
$
|
4,315,999
|
|
|
$
|
4,046,911
|
|
|
$
|
3,991,649
|
|
|
$
|
596,572
|
|
|
$
|
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 ("TDRs")
The following table summarizes information for TDRs:
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
At March 31, 2016
|
|
At December 31, 2015
|
Accrual status
|
$
|
172,036
|
|
|
$
|
171,784
|
|
Non-accrual status
|
85,624
|
|
|
100,906
|
|
Total recorded investment of TDRs
(1)
|
$
|
257,660
|
|
|
$
|
272,690
|
|
Accruing TDRs performing under modified terms more than one year
|
55.2
|
%
|
|
55.0
|
%
|
Specific reserves for TDRs included in the balance of allowance for loan and lease losses
|
$
|
16,123
|
|
|
$
|
21,405
|
|
Additional funds committed to borrowers in TDR status
|
1,700
|
|
|
1,133
|
|
(1) Total recorded investment of TDRs excludes
$1.0 million
and
$1.1 million
of accrued interest receivable at
March 31, 2016
and
December 31, 2015
, respectively.
In the
three months ended March 31, 2016
and
2015
, Webster charged off
$11.6 million
and
$3.9 million
, respectively, for the portion of TDRs deemed to be uncollectible.
TDRs may be modified by means of extended maturity, below market adjusted interest rates, a combination of rate and maturity, or other means, including covenant modifications, forbearance, loans discharged under Chapter 7 bankruptcy, or other concessions.
The following table provides information on the type of concession for loans and leases modified as TDRs:
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
2016
|
|
2015
|
|
Number of
Loans and
Leases
|
Post-
Modification
Recorded
Investment
(1)
|
|
Number of
Loans and
Leases
|
Post-
Modification
Recorded
Investment
(1)
|
(Dollars in thousands)
|
Residential:
|
|
|
|
|
|
Extended Maturity
|
5
|
$
|
664
|
|
|
9
|
$
|
1,345
|
|
Adjusted Interest Rate
|
1
|
236
|
|
|
—
|
—
|
|
Maturity/Rate Combined
|
—
|
—
|
|
|
10
|
1,668
|
|
Other
(2)
|
7
|
1,415
|
|
|
3
|
536
|
|
Consumer:
|
|
|
|
|
|
Extended Maturity
|
1
|
99
|
|
|
4
|
499
|
|
Adjusted Interest Rate
|
—
|
—
|
|
|
—
|
—
|
|
Maturity/Rate Combined
|
4
|
300
|
|
|
8
|
444
|
|
Other
(2)
|
7
|
338
|
|
|
21
|
1,332
|
|
Commercial:
|
|
|
|
|
|
Extended Maturity
|
9
|
14,649
|
|
|
1
|
33
|
|
Adjusted Interest Rate
|
—
|
—
|
|
|
—
|
—
|
|
Maturity/Rate Combined
|
1
|
4
|
|
|
2
|
132
|
|
Other
(2)
|
4
|
310
|
|
|
—
|
—
|
|
Commercial real estate:
|
|
|
|
|
|
Extended Maturity
|
—
|
—
|
|
|
—
|
—
|
|
Maturity/Rate Combined
|
1
|
44
|
|
|
—
|
—
|
|
Other
(2)
|
1
|
509
|
|
|
—
|
—
|
|
Equipment Financing
|
|
|
|
|
|
Extended Maturity
|
1
|
4
|
|
|
—
|
—
|
|
Total TDRs
|
42
|
$
|
18,572
|
|
|
58
|
$
|
5,989
|
|
(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:
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
2016
|
|
2015
|
(Dollars in thousands)
|
Number of
Loans and
Leases
|
Recorded
Investment
|
|
Number of
Loans and
Leases
|
Recorded
Investment
|
Residential
|
3
|
$
|
699
|
|
|
3
|
$
|
642
|
|
Consumer
|
2
|
90
|
|
|
2
|
251
|
|
Commercial
|
9
|
12,587
|
|
|
2
|
6,317
|
|
Commercial real estate
|
1
|
405
|
|
|
1
|
10,930
|
|
Total
|
15
|
$
|
13,781
|
|
|
8
|
$
|
18,140
|
|
The recorded investment of TDRs in commercial, commercial real estate, and equipment financing segregated by risk rating exposure is as follows:
|
|
|
|
|
|
|
|
|
(In thousands)
|
At March 31, 2016
|
|
At December 31, 2015
|
(1) - (6) Pass
|
$
|
12,197
|
|
|
$
|
12,970
|
|
(7) Special Mention
|
2,959
|
|
|
2,999
|
|
(8) Substandard
|
64,008
|
|
|
72,132
|
|
(9) Doubtful
|
268
|
|
|
1,717
|
|
Total
|
$
|
79,432
|
|
|
$
|
89,818
|
|
Note 5:
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 Condensed 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 also may 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 Condensed Consolidated Statements of Income.
The following table provides a summary of activity in the reserve for loan repurchases:
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
(In thousands)
|
2016
|
|
2015
|
Beginning balance
|
$
|
1,192
|
|
|
$
|
1,059
|
|
Provision charged to expense
|
25
|
|
|
23
|
|
Repurchased loans and settlements charged off
|
(98
|
)
|
|
—
|
|
Ending balance
|
$
|
1,119
|
|
|
$
|
1,082
|
|
The following table provides information for mortgage banking activities:
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
(In thousands)
|
2016
|
|
2015
|
Residential mortgage loans held for sale:
|
|
|
|
Proceeds from sale
|
$
|
85,161
|
|
|
$
|
76,895
|
|
Net gain on sale
|
1,605
|
|
|
1,561
|
|
Fair value option adjustment
|
1,024
|
|
|
—
|
|
Loans sold with servicing rights retained
|
79,360
|
|
|
69,265
|
|
The Company has retained servicing rights on residential mortgage loans totaling
$2.5 billion
at both
March 31, 2016
and
December 31, 2015
.
Loan servicing fees, net of mortgage servicing rights amortization, were
$0.3 million
and
$0.4 million
for the
three months ended March 31, 2016
and
2015
, respectively, and are included as a component of loan related fees in the accompanying Condensed Consolidated Statements of Income.
See
Note 13:
Fair Value Measurements
for a further discussion on the fair value of loans held for sale and mortgage servicing assets.
Additionally, loans not originated for sale were sold at cost, for cash proceeds of
$8.2 million
for certain commercial loans and
$32.9 million
for certain consumer loans for the
three months ended March 31, 2016
and
2015
, respectively.
Note 6:
Goodwill and Other Intangible Assets
There was no change in the carrying amounts for goodwill during the period. See the "Segment Results" section in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations for goodwill allocated by reportable segment.
The gross carrying amount and accumulated amortization of core deposit intangibles ("CDI") and customer relationships included in reportable segments are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2016
|
|
At December 31, 2015
|
(In thousands)
|
Gross Carrying
Amount
|
Accumulated
Amortization
|
Net Carrying
Amount
|
|
Gross Carrying
Amount
|
Accumulated
Amortization
|
Net Carrying
Amount
|
Community Banking CDI
|
$
|
49,420
|
|
$
|
(48,658
|
)
|
$
|
762
|
|
|
$
|
49,420
|
|
$
|
(48,277
|
)
|
$
|
1,143
|
|
HSA Bank:
|
|
|
|
|
|
|
|
CDI
|
22,000
|
|
(4,038
|
)
|
17,962
|
|
|
22,000
|
|
(3,269
|
)
|
18,731
|
|
Customer relationships
|
21,000
|
|
(1,952
|
)
|
19,048
|
|
|
21,000
|
|
(1,548
|
)
|
19,452
|
|
Total HSA Bank
|
43,000
|
|
(5,990
|
)
|
37,010
|
|
|
43,000
|
|
(4,817
|
)
|
38,183
|
|
Total other intangible assets
|
$
|
92,420
|
|
$
|
(54,648
|
)
|
$
|
37,772
|
|
|
$
|
92,420
|
|
$
|
(53,094
|
)
|
$
|
39,326
|
|
As of
March 31, 2016
, the remaining estimated aggregate future amortization expense for intangible assets is as follows:
|
|
|
|
|
(In thousands)
|
|
Remainder of 2016
|
$
|
4,098
|
|
2017
|
4,062
|
|
2018
|
3,847
|
|
2019
|
3,847
|
|
2020
|
3,847
|
|
Thereafter
|
18,071
|
|
Note 7:
Deposits
A summary of deposits by type follows:
|
|
|
|
|
|
|
|
|
(In thousands)
|
At March 31,
2016
|
|
At December 31,
2015
|
Non-interest-bearing:
|
|
|
|
Demand
|
$
|
3,625,605
|
|
|
$
|
3,713,063
|
|
Interest-bearing:
|
|
|
|
Checking
|
2,421,692
|
|
|
2,369,971
|
|
Health savings accounts
|
4,084,190
|
|
|
3,802,313
|
|
Money market
|
2,319,588
|
|
|
1,933,460
|
|
Savings
|
4,244,383
|
|
|
4,047,817
|
|
Time deposits
|
2,029,065
|
|
|
2,086,154
|
|
Total interest-bearing
|
15,098,918
|
|
|
14,239,715
|
|
Total deposits
|
$
|
18,724,523
|
|
|
$
|
17,952,778
|
|
|
|
|
|
Time deposits and interest-bearing checking, included in above balances, obtained through brokers
|
$
|
840,617
|
|
|
$
|
910,304
|
|
Time deposits, included in above balance, that meet or exceed the Federal Deposit Insurance Corporation limit
|
505,665
|
|
|
542,206
|
|
Demand deposit overdrafts reclassified as loan balances
|
1,925
|
|
|
1,356
|
|
The scheduled maturities of time deposits are as follows:
|
|
|
|
|
(In thousands)
|
At March 31, 2016
|
Remainder of 2016
|
$
|
760,077
|
|
2017
|
373,241
|
|
2018
|
260,971
|
|
2019
|
437,059
|
|
2020
|
171,163
|
|
Thereafter
|
26,554
|
|
Total time deposits
|
$
|
2,029,065
|
|
Note 8:
Borrowings
The following table summarizes securities sold under agreements to repurchase and other borrowings:
|
|
|
|
|
|
|
|
|
(In thousands)
|
At March 31,
2016
|
|
At December 31,
2015
|
Securities sold under agreements to repurchase:
|
|
|
|
Original maturity of one year or less
|
$
|
288,149
|
|
|
$
|
334,400
|
|
Original maturity of greater than one year, non-callable
|
400,000
|
|
|
500,000
|
|
Total securities sold under agreements to repurchase
|
688,149
|
|
|
834,400
|
|
Fed funds purchased
|
222,000
|
|
|
317,000
|
|
Securities sold under agreements to repurchase and other borrowings
|
$
|
910,149
|
|
|
$
|
1,151,400
|
|
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 agreement 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 maturing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2016
|
|
At December 31, 2015
|
(Dollars in thousands)
|
Total
Outstanding
|
Weighted-
Average Contractual Coupon Rate
|
|
Total
Outstanding
|
Weighted-
Average Contractual Coupon Rate
|
Within 1 year
|
$
|
1,700,000
|
|
0.53
|
%
|
|
$
|
2,025,934
|
|
0.55
|
%
|
After 1 but within 2 years
|
50,500
|
|
1.10
|
|
|
500
|
|
5.66
|
|
After 2 but within 3 years
|
175,000
|
|
1.45
|
|
|
200,000
|
|
1.36
|
|
After 3 but within 4 years
|
153,026
|
|
1.68
|
|
|
103,026
|
|
1.54
|
|
After 4 but within 5 years
|
125,000
|
|
1.83
|
|
|
175,000
|
|
1.77
|
|
After 5 years
|
159,584
|
|
1.62
|
|
|
159,655
|
|
1.60
|
|
|
2,363,110
|
|
0.83
|
%
|
|
2,664,115
|
|
0.79
|
%
|
Premiums on advances
|
21
|
|
|
|
24
|
|
|
Federal Home Loan Bank advances
|
$
|
2,363,131
|
|
|
|
$
|
2,664,139
|
|
|
At
March 31, 2016
, Webster Bank had pledged loans with an aggregate carrying value of
$5.6 billion
as collateral for borrowings, with a remaining borrowing capacity from the FHLB of approximately
$1.4 billion
. At
December 31, 2015
, Webster Bank had pledged loans and securities with an aggregate carrying value of
$5.7 billion
as collateral for borrowings, with a remaining borrowing capacity from the FHLB of approximately
$1.2 billion
. In addition, at
March 31, 2016
and
December 31, 2015
, Webster Bank had an unused line of credit of approximately
$5.0 million
. At
March 31, 2016
and
December 31, 2015
, Webster Bank was in compliance with FHLB collateral requirements.
The following table summarizes long-term debt:
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
At March 31,
2016
|
|
At December 31,
2015
|
4.375%
|
Senior fixed-rate notes due February 15, 2024
|
$
|
150,000
|
|
|
$
|
150,000
|
|
Junior subordinated debt Webster Statutory Trust I floating-rate notes due September 17, 2033
(1)
|
77,320
|
|
|
77,320
|
|
Total notes and subordinated debt
|
227,320
|
|
|
227,320
|
|
Discount on senior fixed-rate notes
|
(934
|
)
|
|
(964
|
)
|
Debt issuance cost on senior fixed-rate notes
(2)
|
(1,063
|
)
|
|
(1,096
|
)
|
Long-term debt
|
$
|
225,323
|
|
|
$
|
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
3.59%
at
March 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 Condensed Consolidated Balance Sheets.
|
Note 9:
Accumulated Other Comprehensive Loss, Net of Tax
The following tables summarize the changes in accumulated other comprehensive (loss) income, net of tax by component:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2016
|
(In thousands)
|
Available For Sale and Transferred Securities
|
Derivative Instruments
|
Defined Benefit Pension and Other Postretirement Benefit Plans
|
Total
|
Beginning balance
|
$
|
(6,407
|
)
|
$
|
(22,980
|
)
|
$
|
(48,719
|
)
|
$
|
(78,106
|
)
|
Other comprehensive income (loss) before reclassifications
|
7,614
|
|
(2,452
|
)
|
201
|
|
5,363
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
(109
|
)
|
1,500
|
|
955
|
|
2,346
|
|
Net current-period other comprehensive income (loss), net of tax
|
7,505
|
|
(952
|
)
|
1,156
|
|
7,709
|
|
Ending balance
|
$
|
1,098
|
|
$
|
(23,932
|
)
|
$
|
(47,563
|
)
|
$
|
(70,397
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2015
|
(In thousands)
|
Available For Sale and Transferred Securities
|
Derivative Instruments
|
Defined Benefit Pension and Other Postretirement Benefit Plans
|
Total
|
Beginning balance
|
$
|
16,421
|
|
$
|
(25,530
|
)
|
$
|
(47,152
|
)
|
$
|
(56,261
|
)
|
Other comprehensive income (loss) before reclassifications
|
6,994
|
|
(3,096
|
)
|
536
|
|
4,434
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
(27
|
)
|
1,326
|
|
438
|
|
1,737
|
|
Net current-period other comprehensive income (loss), net of tax
|
6,967
|
|
(1,770
|
)
|
974
|
|
6,171
|
|
Ending balance
|
$
|
23,388
|
|
$
|
(27,300
|
)
|
$
|
(46,178
|
)
|
$
|
(50,090
|
)
|
The following table provides information for the items reclassified from accumulated other comprehensive loss, net of tax:
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Three months ended March 31,
|
Associated Line Item in the Condensed Consolidated Statements of Income
|
Accumulated Other Comprehensive Loss Components
|
2016
|
|
2015
|
|
|
|
|
|
Available-for-sale and transferred securities:
|
|
|
|
|
Unrealized gains (losses) on investment securities
|
$
|
320
|
|
|
$
|
43
|
|
Gain on sale of investment securities, net
|
Unrealized gains (losses) on investment securities
|
(149
|
)
|
|
—
|
|
Impairment loss recognized in earnings
|
Tax expense
|
(62
|
)
|
|
(16
|
)
|
Income tax expense
|
Net of tax
|
$
|
109
|
|
|
$
|
27
|
|
|
Derivative instruments:
|
|
|
|
|
Cash flow hedges
|
$
|
(2,365
|
)
|
|
$
|
(2,090
|
)
|
Total interest expense
|
Tax benefit
|
865
|
|
|
764
|
|
Income tax expense
|
Net of tax
|
$
|
(1,500
|
)
|
|
$
|
(1,326
|
)
|
|
Defined benefit pension and other postretirement benefit plans:
|
|
|
|
|
Amortization of net loss
|
$
|
(1,502
|
)
|
|
$
|
(672
|
)
|
Compensation and benefits
|
Prior service costs
|
(4
|
)
|
|
(18
|
)
|
Compensation and benefits
|
Tax benefit
|
551
|
|
|
252
|
|
Income tax expense
|
Net of tax
|
$
|
(955
|
)
|
|
$
|
(438
|
)
|
|
Note 10:
Regulatory Matters
Capital Requirements
Webster is subject to regulatory capital requirements administered by the Federal Reserve, while Webster Bank is subject to regulatory capital requirements administered by the Office of the Comptroller of the Currency ("OCC"). Regulatory authorities can initiate certain mandatory actions if Webster or Webster Bank fail to meet minimum capital requirements, which could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, both Webster 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: Common Equity Tier 1 capital ("CET1 capital"), additional Tier 1 capital, and Tier 2 capital. CET1 capital includes common shareholders' equity, less deductions for goodwill, other intangibles, and certain deferred tax liabilities. Webster's common shareholders' equity, for purposes of CET1 capital, excludes accumulated other comprehensive 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, N.A.:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Requirements
|
|
Actual
|
|
Minimum
|
|
Well Capitalized
|
(Dollars in thousands)
|
Amount
|
Ratio
|
|
Amount
|
Ratio
|
|
Amount
|
Ratio
|
At March 31, 2016
|
|
|
|
|
|
|
|
|
Webster Financial Corporation
|
|
|
|
|
|
|
|
|
Common equity tier 1 risk-based capital
|
$
|
1,833,063
|
|
10.6
|
%
|
|
$
|
776,014
|
|
4.5
|
%
|
|
$
|
1,120,909
|
|
6.5
|
%
|
Total risk-based capital
|
2,209,420
|
|
12.8
|
|
|
1,379,580
|
|
8.0
|
|
|
1,724,475
|
|
10.0
|
|
Tier 1 risk-based capital
|
1,955,773
|
|
11.3
|
|
|
1,034,685
|
|
6.0
|
|
|
1,379,580
|
|
8.0
|
|
Tier 1 leverage capital
|
1,955,773
|
|
8.1
|
|
|
969,807
|
|
4.0
|
|
|
1,212,259
|
|
5.0
|
|
Webster Bank, N.A.
|
|
|
|
|
|
|
|
|
Common equity tier 1 risk-based capital
|
$
|
1,891,446
|
|
11.0
|
%
|
|
$
|
774,468
|
|
4.5
|
%
|
|
$
|
1,118,677
|
|
6.5
|
%
|
Total risk-based capital
|
2,067,773
|
|
12.0
|
|
|
1,376,833
|
|
8.0
|
|
|
1,721,041
|
|
10.0
|
|
Tier 1 risk-based capital
|
1,891,446
|
|
11.0
|
|
|
1,032,625
|
|
6.0
|
|
|
1,376,833
|
|
8.0
|
|
Tier 1 leverage capital
|
1,891,446
|
|
7.8
|
|
|
968,838
|
|
4.0
|
|
|
1,211,047
|
|
5.0
|
|
At December 31, 2015
|
|
|
|
|
|
|
|
|
Webster Financial Corporation
|
|
|
|
|
|
|
|
|
Common equity tier 1 risk-based capital
|
$
|
1,825,717
|
|
10.7
|
%
|
|
$
|
766,928
|
|
4.5
|
%
|
|
$
|
1,107,785
|
|
6.5
|
%
|
Total risk-based capital
|
2,201,928
|
|
12.9
|
|
|
1,363,427
|
|
8.0
|
|
|
1,704,284
|
|
10.0
|
|
Tier 1 risk-based capital
|
1,966,829
|
|
11.5
|
|
|
1,022,570
|
|
6.0
|
|
|
1,363,427
|
|
8.0
|
|
Tier 1 leverage capital
|
1,966,829
|
|
8.2
|
|
|
954,403
|
|
4.0
|
|
|
1,193,004
|
|
5.0
|
|
Webster Bank, N.A.
|
|
|
|
|
|
|
|
|
Common equity tier 1 risk-based capital
|
$
|
1,870,852
|
|
11.0
|
%
|
|
$
|
765,232
|
|
4.5
|
%
|
|
$
|
1,105,335
|
|
6.5
|
%
|
Total risk-based capital
|
2,047,961
|
|
12.0
|
|
|
1,360,412
|
|
8.0
|
|
|
1,700,515
|
|
10.0
|
|
Tier 1 risk-based capital
|
1,870,852
|
|
11.0
|
|
|
1,020,309
|
|
6.0
|
|
|
1,360,412
|
|
8.0
|
|
Tier 1 leverage capital
|
1,870,852
|
|
7.9
|
|
|
953,371
|
|
4.0
|
|
|
1,191,714
|
|
5.0
|
|
Dividend Restrictions
In the ordinary course of business, Webster is dependent upon dividends from Webster Bank to provide funds for its cash requirements, including payments of dividends to shareholders. Banking regulations may limit the amount of dividends that may be paid. Approval by regulatory authorities is required if the effect of dividends declared would cause the regulatory capital of Webster Bank to fall below specified minimum levels, or if dividends declared exceed the net income for that year combined with the undistributed net income for the preceding two years. In addition, the OCC has discretion to prohibit any otherwise permitted capital distribution on general safety and soundness grounds. Dividends paid by Webster Bank to Webster totaled
$30 million
during the
three months ended March 31, 2016
as compared to
$20 million
during the
three months ended March 31,
2015
.
Cash Restrictions
Webster Bank is required by FRB regulations to hold cash reserve balances on hand or with the Federal Reserve Banks. Pursuant to this requirement, the Bank held
$73.2 million
and
$109.4 million
at
March 31, 2016
and
December 31, 2015
, respectively.
Note 11:
Earnings Per Common Share
Reconciliation of the calculation of basic and diluted earnings per common share follows:
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
(In thousands, except per share data)
|
2016
|
|
2015
|
Earnings for basic and diluted earnings per common share:
|
|
|
|
Net income
|
$
|
48,617
|
|
|
$
|
49,722
|
|
Less: Preferred stock dividends
|
2,024
|
|
|
2,639
|
|
Net income available to common shareholders
|
46,593
|
|
|
47,083
|
|
Less: Earnings applicable to participating securities
|
107
|
|
|
146
|
|
Earnings applicable to common shareholders
|
$
|
46,486
|
|
|
$
|
46,937
|
|
|
|
|
|
Shares:
|
|
|
|
Weighted-average common shares outstanding - basic
|
91,328
|
|
|
90,251
|
|
Effect of dilutive securities:
|
|
|
|
Stock options and restricted stock
|
452
|
|
|
540
|
|
Warrants
|
29
|
|
|
50
|
|
Weighted-average common shares outstanding - diluted
|
91,809
|
|
|
90,841
|
|
|
|
|
|
Earnings per common share:
|
|
|
|
Basic
|
$
|
0.51
|
|
|
$
|
0.52
|
|
Diluted
|
0.51
|
|
|
0.52
|
|
Potential common shares excluded from the effect of dilutive securities because they would have been anti-dilutive, are as follows:
|
|
|
|
|
|
|
|
Three months ended March 31,
|
(In thousands)
|
2016
|
|
2015
|
Stock options (shares with exercise price greater than market price)
|
213
|
|
|
344
|
|
Restricted stock (due to performance conditions on non-participating shares)
|
129
|
|
|
143
|
|
Basic weighted-average common shares outstanding includes the effect of
1.1 million
common shares issued from treasury stock on June 1, 2015, representing the conversion of the Series A Preferred Stock. Prior to conversion, the Series A Preferred Stock was considered to be anti-dilutive. Refer to
Note 15:
Share-Based Plans
for further information relating to potential common shares excluded from the effect of dilutive securities.
Note 12:
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.
The effective portion of the change in the fair value of derivatives which are designated, and that qualify, as cash flow hedges is recorded as accumulated other comprehensive loss ("AOCL") and is reclassified into earnings in the subsequent periods that the hedged forecasted transaction affects earnings. During the
three months ended March 31, 2016
, 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. During the
three months ended March 31, 2016
and
2015
, the Company recorded no ineffectiveness and immaterial amounts of ineffectiveness in earnings, respectively, 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
March 31, 2016
and
December 31, 2015
. As a result, there was
no
impact to interest expense during the periods presented.
Additional derivative instruments include interest rate swap and cap contracts 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 which is recorded in other non-interest income.
The Company enters into Risk Participation Agreements ("RPA") 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. The RPA guarantee is recorded on the balance sheet at fair value, with changes in fair value recognized each period in other non-interest income.
Other derivatives include foreign currency forward contracts related to lending arrangements and a VISA equity swap transaction, neither of which are designated for hedge accounting.
Fair Value of Derivative Instruments
The following table presents the notional amounts and fair values of derivative positions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2016
|
|
At December 31, 2015
|
|
Asset Derivatives
|
|
Liability Derivatives
|
|
Asset Derivatives
|
|
Liability Derivatives
|
(In thousands)
|
Notional
Amounts
|
Fair
Value
|
|
Notional
Amounts
|
Fair
Value
|
|
Notional
Amounts
|
Fair
Value
|
|
Notional
Amounts
|
Fair
Value
|
Designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
Positions subject to a master netting agreement
(1)
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate derivatives
|
$
|
150,000
|
|
$
|
1,136
|
|
|
$
|
150,000
|
|
$
|
3,868
|
|
|
$
|
200,000
|
|
$
|
2,507
|
|
|
$
|
100,000
|
|
$
|
1,359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
Positions subject to a master netting agreement
(1)
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate derivatives
|
503,342
|
|
265
|
|
|
2,083,293
|
|
81,486
|
|
|
989,695
|
|
2,255
|
|
|
1,543,479
|
|
40,302
|
|
Other
|
1,102
|
|
53
|
|
|
13,849
|
|
405
|
|
|
8,237
|
|
183
|
|
|
4,561
|
|
66
|
|
Positions not subject to a master netting agreement
(2)
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate derivatives
|
2,130,842
|
|
103,133
|
|
|
455,818
|
|
126
|
|
|
2,050,460
|
|
58,304
|
|
|
482,738
|
|
571
|
|
RPA-In
|
—
|
|
—
|
|
|
97,026
|
|
343
|
|
|
—
|
|
—
|
|
|
92,985
|
|
245
|
|
RPA-Out
|
55,635
|
|
262
|
|
|
—
|
|
—
|
|
|
41,798
|
|
153
|
|
|
—
|
|
—
|
|
Other
|
—
|
|
—
|
|
|
60
|
|
9
|
|
|
—
|
|
—
|
|
|
60
|
|
9
|
|
Total not designated as hedging instruments
|
2,690,921
|
|
103,713
|
|
|
2,650,046
|
|
82,369
|
|
|
3,090,190
|
|
60,895
|
|
|
2,123,823
|
|
41,193
|
|
Gross derivative instruments, before netting
|
$
|
2,840,921
|
|
104,849
|
|
|
$
|
2,800,046
|
|
86,237
|
|
|
$
|
3,290,190
|
|
63,402
|
|
|
$
|
2,223,823
|
|
42,552
|
|
Less: Legally enforceable master netting agreements
|
|
1,454
|
|
|
|
1,454
|
|
|
|
4,945
|
|
|
|
4,945
|
|
Less: Cash collateral posted
|
|
—
|
|
|
|
78,078
|
|
|
|
—
|
|
|
|
31,330
|
|
Total derivative instruments, after netting
|
|
$
|
103,395
|
|
|
|
$
|
6,705
|
|
|
|
$
|
58,457
|
|
|
|
$
|
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 condensed consolidated balance sheets.
|
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 Condensed Consolidated Statements of Income as follows:
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
(In thousands)
|
2016
|
|
2015
|
Interest rate derivatives
|
$
|
2,333
|
|
|
$
|
2,637
|
|
RPA
|
(86
|
)
|
|
(76
|
)
|
Other
|
(513
|
)
|
|
(42
|
)
|
Total impact on non-interest income
|
$
|
1,734
|
|
|
$
|
2,519
|
|
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
$2.0 million
will be reclassified from AOCL as an increase to interest expense.
Webster records gains and losses related to swap terminations to AOCL. These balances are subsequently amortized into interest expense over the respective terms of the hedged debt instruments. At
March 31, 2016
, the remaining unamortized loss on the termination of cash flow hedges is
$26.7 million
. Over the next twelve months, the Company estimates that
$7.8 million
will be reclassified from AOCL as an increase to interest expense.
Additional information about cash flow hedge activity impacting AOCL, and the related amounts reclassified to interest expense is provided in
Note 9:
Accumulated Other Comprehensive Loss, Net of Tax
. Information about the valuation methods used to measure fair value is provided in
Note 13:
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 Condensed 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2016
|
|
At December 31, 2015
|
(In thousands)
|
Gross
Amount
|
Amount
Offset
|
Net
Amount
(1) (2)
|
|
Gross
Amount
|
Amount
Offset
|
Net
Amount
(1) (2)
|
Derivative instrument assets
|
|
|
|
|
|
|
|
Hedged Accounting Positions
|
$
|
1,136
|
|
$
|
(1,136
|
)
|
$
|
—
|
|
|
$
|
2,507
|
|
$
|
(2,507
|
)
|
$
|
—
|
|
Non-Hedged Accounting Positions
|
318
|
|
(318
|
)
|
—
|
|
|
2,438
|
|
(2,438
|
)
|
—
|
|
Total
|
$
|
1,454
|
|
$
|
(1,454
|
)
|
$
|
—
|
|
|
$
|
4,945
|
|
$
|
(4,945
|
)
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Derivative instrument liabilities
|
|
|
|
|
|
|
|
Hedged Accounting Positions
|
$
|
3,868
|
|
$
|
(3,868
|
)
|
$
|
—
|
|
|
$
|
1,359
|
|
$
|
(1,359
|
)
|
$
|
—
|
|
Non-Hedged Accounting Positions
|
81,891
|
|
(75,664
|
)
|
6,227
|
|
|
40,369
|
|
(34,916
|
)
|
5,453
|
|
Total
|
$
|
85,759
|
|
$
|
(79,532
|
)
|
$
|
6,227
|
|
|
$
|
41,728
|
|
$
|
(36,275
|
)
|
$
|
5,453
|
|
(1) Net amount is net of
$78.1 million
and
$31.3 million
of cash collateral at
March 31, 2016
and
December 31, 2015
, respectively, as presented in the accompanying Condensed Consolidated Balance Sheets.
(2) Net amount excludes
$24.2 million
and
$20.2 million
of initial margin requirements posted at the derivative clearing organization ("DCO") at
March 31, 2016
and
December 31, 2015
, respectively. Initial margin is recorded as a component of accrued interest receivable and other assets in the accompanying Condensed Consolidated Balance Sheets
Counterparty Credit Risk
Derivative contracts involve the risk of dealing with both bank customers and institutional derivative counterparties and their ability to meet contractual terms. The Company has International Swap Derivative Association ("ISDA") Master agreements, including a Credit Support Annex ("CSA"), with all derivative counterparties. The ISDA Master agreements provide that on each payment date, all amounts otherwise owing the same currency under the same transaction are netted so that only a single amount is owed in that currency. The ISDA provides, if the parties so elect, for such netting of amounts in the same currency among all transactions identified as being subject to such election that have common payment dates and booking offices. Under the CSA, daily net exposure in excess of a negotiated threshold is secured by posted cash collateral. The Company has negotiated a zero threshold with the majority of its approved financial institution counterparties. In accordance with Webster policies, institutional counterparties must be analyzed and approved through the Company’s credit approval process.
The Company’s credit exposure on interest rate derivatives with non-dealer counterparties is limited to the net favorable value, including accrued interest, 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
$102.3 million
in net margin collateral posted with financial counterparties at
March 31, 2016
, comprised of
$24.2 million
in initial margin and
$78.1 million
in variation margin collateral posted to financial counterparties or DCO. 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
$103.1 million
at
March 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
$21.0 million
at
March 31, 2016
. The credit exposure is mitigated as transactions with customers are generally secured by the same collateral of the underlying transactions being hedged.
Mortgage Banking Derivatives
Forward sales of mortgage loans and MBS are utilized by Webster in its efforts to manage risk of loss associated with its mortgage loan commitments and mortgage loans held for sale. Prior to closing and funding certain single-family residential mortgage loans, interest rate lock commitments are generally extended to the borrowers. During the period from commitment date to closing date, Webster is subject to the risk that market rates of interest may change. If market rates rise, investors generally will pay less to purchase such loans causing a reduction in the anticipated gain on sale of the loans and possibly resulting in a loss. In an effort to mitigate such risk, forward delivery sales commitments are established under which Webster agrees to deliver whole mortgage loans to various investors or issue MBS. At
March 31, 2016
, outstanding rate locks totaled approximately
$83.6 million
, and the outstanding commitments to sell residential mortgage loans totaled approximately
$82.2 million
. Forward sales, which include mandatory forward commitments of approximately
$81.0 million
at
March 31, 2016
, establish the price to be received upon the sale of the related mortgage loan, thereby mitigating certain interest rate risk. There is, however, still certain execution risk specifically related to Webster’s ability to close and deliver to its investors the mortgage loans it has committed to sell. The interest rate locked loan commitments and forward sales commitments are recorded at fair value, with changes in fair value recorded as non-interest income in the accompanying Condensed Consolidated Statements of Income. Refer to
Note 13:
Fair Value Measurements
for information relating to the fair value of interest rate locked loan commitments and forward sales commitments.
Note 13:
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 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 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. Available-for-Sale investment securities which include agency CMO, agency MBS, agency CMBS, non-agency 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.
Mortgage Banking Derivatives.
Mortgage-backed securities are utilized by the Company in its efforts to manage risk of loss associated with its mortgage loan commitments and mortgage loans held for sale. Prior to closing and funding certain single-family residential mortgage loans, an interest rate lock commitment is generally extended to the borrower. During the period from commitment date to closing date, the Company is subject to the risk that market rates of interest may change. If market rates rise, investors generally will pay less to purchase such loans resulting in a reduction in the gain on sale of the loans or, possibly, a loss. In an effort to mitigate such risk, forward delivery sales commitments are established, under which the Company agrees to deliver whole mortgage loans to various investors or issue mortgage-backed securities. The fair value of mortgage banking derivatives is determined based on current market prices for similar assets in the secondary market and, therefore, classified within Level 2 of the fair value hierarchy.
Investments Held in Rabbi Trust.
Investments held in 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 along with the total deferred compensation obligations and includes them in other assets and other liabilities, respectively, in the accompanying Condensed Consolidated Balance Sheets. Earnings in the Rabbi Trust, including appreciation or depreciation, are reflected as other non-interest income, and changes in the corresponding liability are reflected as compensation and benefits in the accompanying Condensed Consolidated Statements of Income. The cost basis of the investments held in the Rabbi Trust is
$3.6 million
as of
March 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
$5.8 million
in unfunded commitments remaining for its alternative investments as of
March 31, 2016
. See the Investment Securities Portfolio section of Item 2. 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 820. 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.
Contingent Consideration.
The contingent consideration arrangement entitles the Company to receive a rebate of the purchase price relating to the premium paid, for account attrition that occurs during the eighteen-month period beginning on the acquisition date of January 13, 2015. In periods subsequent to the initial valuation the fair value is adjusted for measurable attrition milestones. This valuation is based on contractual obligation and is reliant upon assumptions that require significant management judgment or estimation, and as such could be subject to calculation error or litigation. Therefore, the contingent consideration is classified within Level 3 of the fair value hierarchy.
Contingent Liability.
The liability valuation is based upon unobservable inputs. Therefore, the contingent liability is classified within Level 3 of the fair value hierarchy. The fair value of the contingency represents the estimated price to transfer the liability between market participants at the measurement date under current market conditions.
Summaries of the fair values of assets and liabilities measured at fair value on a recurring basis are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2016
|
(In thousands)
|
Level 1
|
Level 2
|
Level 3
|
Total
|
Financial assets held at fair value:
|
|
|
|
|
U.S. Treasury Bills
|
$
|
475
|
|
$
|
—
|
|
$
|
—
|
|
$
|
475
|
|
Agency CMO
|
—
|
|
519,742
|
|
—
|
|
519,742
|
|
Agency MBS
|
—
|
|
1,071,136
|
|
—
|
|
1,071,136
|
|
Agency CMBS
|
—
|
|
365,017
|
|
—
|
|
365,017
|
|
CMBS
|
—
|
|
526,825
|
|
—
|
|
526,825
|
|
CLO
|
—
|
|
460,953
|
|
—
|
|
460,953
|
|
Single issuer trust preferred securities
|
—
|
|
33,424
|
|
—
|
|
33,424
|
|
Corporate debt securities
|
—
|
|
100,961
|
|
—
|
|
100,961
|
|
Equity securities
|
1,936
|
|
—
|
|
—
|
|
1,936
|
|
Total available-for-sale investment securities
|
2,411
|
|
3,078,058
|
|
—
|
|
3,080,469
|
|
Gross derivative instruments, before netting
(1)
|
53
|
|
104,796
|
|
—
|
|
104,849
|
|
Mortgage banking derivatives
|
—
|
|
1,273
|
|
—
|
|
1,273
|
|
Investments held in Rabbi Trust
|
5,068
|
|
—
|
|
—
|
|
5,068
|
|
Alternative investments
|
—
|
|
—
|
|
4,491
|
|
4,491
|
|
Originated loans held for sale
(2)
|
—
|
|
27,273
|
|
—
|
|
27,273
|
|
Contingent consideration
|
—
|
|
—
|
|
7,655
|
|
7,655
|
|
Total financial assets held at fair value
|
$
|
7,532
|
|
$
|
3,211,400
|
|
$
|
12,146
|
|
$
|
3,231,078
|
|
Financial liabilities held at fair value:
|
|
|
|
|
Gross derivative instruments, before netting
(1)
|
$
|
405
|
|
$
|
85,832
|
|
$
|
—
|
|
$
|
86,237
|
|
Mortgage banking derivatives
|
—
|
|
655
|
|
—
|
|
655
|
|
Contingent liability
|
—
|
|
—
|
|
6,000
|
|
6,000
|
|
Total financial liabilities held at fair value
|
$
|
405
|
|
$
|
86,487
|
|
$
|
6,000
|
|
$
|
92,892
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2015
|
(In thousands)
|
Level 1
|
Level 2
|
Level 3
|
Total
|
Financial assets held at fair value:
|
|
|
|
|
U.S. Treasury Bills
|
$
|
924
|
|
$
|
—
|
|
$
|
—
|
|
$
|
924
|
|
Agency CMO
|
—
|
|
548,754
|
|
—
|
|
548,754
|
|
Agency MBS
|
—
|
|
1,065,109
|
|
—
|
|
1,065,109
|
|
Agency CMBS
|
—
|
|
215,350
|
|
—
|
|
215,350
|
|
CMBS
|
—
|
|
579,266
|
|
—
|
|
579,266
|
|
CLO
|
—
|
|
429,159
|
|
—
|
|
429,159
|
|
Single issuer trust preferred securities
|
—
|
|
37,170
|
|
—
|
|
37,170
|
|
Corporate debt securities
|
—
|
|
106,321
|
|
—
|
|
106,321
|
|
Equity securities
|
2,578
|
|
—
|
|
—
|
|
2,578
|
|
Total available-for-sale investment securities
|
3,502
|
|
2,981,129
|
|
—
|
|
2,984,631
|
|
Gross derivative instruments, before netting
(1)
|
183
|
|
63,219
|
|
—
|
|
63,402
|
|
Mortgage banking derivatives
|
—
|
|
819
|
|
—
|
|
819
|
|
Investments held in Rabbi Trust
|
5,372
|
|
—
|
|
—
|
|
5,372
|
|
Alternative investments
|
—
|
|
—
|
|
3,471
|
|
3,471
|
|
Originated loans held for sale
|
—
|
|
—
|
|
—
|
|
—
|
|
Contingent Consideration
|
—
|
|
—
|
|
5,331
|
|
5,331
|
|
Total financial assets held at fair value
|
$
|
9,057
|
|
$
|
3,045,167
|
|
$
|
8,802
|
|
$
|
3,063,026
|
|
Financial liabilities held at fair value:
|
|
|
|
|
Gross derivative instruments, before netting
(1)
|
$
|
66
|
|
$
|
42,486
|
|
$
|
—
|
|
$
|
42,552
|
|
Mortgage banking derivatives
|
—
|
|
—
|
|
—
|
|
—
|
|
Contingent liability
|
—
|
|
—
|
|
6,000
|
|
6,000
|
|
Total financial liabilities held at fair value
|
$
|
66
|
|
$
|
42,486
|
|
$
|
6,000
|
|
$
|
48,552
|
|
(1) Asset and liability amounts are prior to the impact of netting derivative assets and derivative liabilities of
$1,454
and
$4,945
, and liability amounts are also prior to offsetting cash collateral paid to the same derivative counterparties of
$78,078
and
$31,330
, at
March 31, 2016
and
December 31, 2015
, respectively, when a legally enforceable master netting agreement exists.
(2) Loans held for sale accounted for under the fair value option of ASC 820 at
March 31, 2016
. The Company made this policy election on loans originated for sale. See
Note 1:
Summary of Significant Accounting Policies
.
The following table presents the changes in Level 3 assets and liabilities that are measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Alternative Investments
|
Contingent Consideration
|
Total Financial Assets
|
|
Contingent Liability
|
Balance at January1, 2016
|
$
|
3,471
|
|
$
|
5,331
|
|
$
|
8,802
|
|
|
$
|
6,000
|
|
Unrealized (loss) gain included in net income
|
(1
|
)
|
2,324
|
|
2,323
|
|
|
—
|
|
Purchases/capital funding
|
1,021
|
|
—
|
|
1,021
|
|
|
—
|
|
Balance at March 31, 2016
|
$
|
4,491
|
|
$
|
7,655
|
|
$
|
12,146
|
|
|
$
|
6,000
|
|
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 ("OREO") and Repossessed Assets.
The total book value of OREO and repossessed assets was
$5.1 million
at
March 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. Changes in fair value are included as a component of other non-interest income in the accompanying Condensed 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.
The following table presents the changes in fair value for mortgage servicing assets:
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
(In thousands)
|
2016
|
|
2015
|
Beginning balance
|
$
|
33,568
|
|
|
$
|
28,690
|
|
Originations of servicing assets
|
1,913
|
|
|
1,463
|
|
Changes in fair value:
|
|
|
|
Due to payoffs/paydowns
|
(1,575
|
)
|
|
(736
|
)
|
Due to market changes
|
190
|
|
|
(1,516
|
)
|
Ending balance
|
$
|
34,096
|
|
|
$
|
27,901
|
|
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
March 31, 2016
:
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Asset
|
Fair Value
|
Valuation Methodology
|
Unobservable Inputs
|
Range of Inputs
|
Collateral dependent impaired loans and leases
|
$
|
10,202
|
|
Real Estate Appraisals
|
Discount for appraisal type
|
zero
|
-
|
15%
|
|
|
|
Discount for costs to sell
|
6%
|
-
|
20%
|
Other real estate owned
|
$
|
420
|
|
Real Estate Appraisals
|
Discount for appraisal type
|
20%
|
|
|
|
Discount for costs to sell
|
8%
|
Mortgage servicing assets
|
$
|
34,096
|
|
Discounted cash flow
|
Constant prepayment rate
|
7.9%
|
-
|
35.2%
|
|
|
|
Discount rates
|
1.3%
|
-
|
2.8%
|
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, non-agency CMBS, Municipal, 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.
The estimated fair values of selected financial instruments are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2016
|
|
At December 31, 2015
|
(In thousands)
|
Carrying
Amount
|
|
Fair
Value
|
|
Carrying
Amount
|
|
Fair
Value
|
Financial Assets:
|
|
|
|
|
|
|
|
Level 2
|
|
|
|
|
|
|
|
Held-to-maturity investment securities
|
$
|
4,012,289
|
|
|
$
|
4,094,506
|
|
|
$
|
3,923,052
|
|
|
$
|
3,961,534
|
|
Loans held for sale
(1)
|
3,152
|
|
|
3,152
|
|
|
37,091
|
|
|
37,457
|
|
Level 3
|
|
|
|
|
|
|
|
Loans and leases, net
|
15,684,154
|
|
|
15,740,120
|
|
|
15,496,745
|
|
|
15,543,892
|
|
Mortgage servicing assets
|
21,026
|
|
|
34,096
|
|
|
20,698
|
|
|
33,568
|
|
Alternative investments
|
12,909
|
|
|
13,936
|
|
|
12,900
|
|
|
14,294
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
Level 2
|
|
|
|
|
|
|
|
Deposit liabilities, other than time deposits
|
$
|
16,695,458
|
|
|
$
|
16,695,458
|
|
|
$
|
15,866,624
|
|
|
$
|
15,866,624
|
|
Time deposits
|
2,029,065
|
|
|
2,051,672
|
|
|
2,086,154
|
|
|
2,095,357
|
|
Securities sold under agreements to repurchase and other borrowings
|
910,149
|
|
|
925,890
|
|
|
1,151,400
|
|
|
1,163,974
|
|
FHLB advances
(2)
|
2,363,131
|
|
|
2,350,887
|
|
|
2,664,139
|
|
|
2,647,872
|
|
Long-term debt
(2)
|
225,323
|
|
|
218,944
|
|
|
226,356
|
|
|
218,143
|
|
(1) Loans held for sale accounted for at the lower of cost or market includes commercial loans at
March 31, 2016
and both commercial and residential loans at
December 31, 2015
.
(2) The following adjustments to the carrying amount are not included for determination of fair value, see
Note 8:
Borrowings
:
•
FHLB advances - unamortized premiums on advances
•
Long-term debt - unamortized discount and debt issuance cost on senior fixed-rate notes
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.
Note 14:
Retirement Benefit Plans
Defined benefit pension and other postretirement benefits
The following table summarizes the components of net periodic benefit cost (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
2016
|
|
2015
|
(In thousands)
|
Webster Pension
|
Webster
SERP
|
Other Postretirement Benefits
|
|
Webster Pension
|
Webster
SERP
|
Other Postretirement Benefits
|
Service cost
|
$
|
12
|
|
$
|
—
|
|
$
|
—
|
|
|
$
|
10
|
|
$
|
—
|
|
$
|
—
|
|
Interest cost on benefit obligations
|
2,098
|
|
97
|
|
31
|
|
|
1,989
|
|
86
|
|
31
|
|
Expected return on plan assets
|
(2,565
|
)
|
—
|
|
—
|
|
|
(2,963
|
)
|
—
|
|
—
|
|
Amortization of prior service cost
|
—
|
|
—
|
|
4
|
|
|
—
|
|
—
|
|
18
|
|
Recognized net loss
|
1,690
|
|
130
|
|
9
|
|
|
1,427
|
|
80
|
|
12
|
|
Net periodic benefit cost
|
$
|
1,235
|
|
$
|
227
|
|
$
|
44
|
|
|
$
|
463
|
|
$
|
166
|
|
$
|
61
|
|
The Webster Bank Pension Plan and the Supplemental Pension Plan were frozen effective December 31, 2007. No additional benefits have been accrued since that time. Additional contributions to the Webster Bank Pension Plan will be made as deemed appropriate by management in conjunction with information provided by the Plan’s actuarial firm.
Note 15:
Share-Based Plans
Stock compensation plans
Webster maintains stock compensation plans (collectively, the "Plans"), under which non-qualified stock options, incentive stock options, restricted stock, restricted stock units, or stock appreciation rights may be granted to employees and directors. The Company believes these share awards better align the interests of its employees with those of its shareholders. Stock 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 following table provides a summary of stock compensation expense recognized in the accompanying Condensed Consolidated Statements of Income:
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
(In thousands)
|
2016
|
|
2015
|
Stock options
|
$
|
43
|
|
|
$
|
164
|
|
Restricted stock
|
2,740
|
|
|
2,118
|
|
Total stock compensation expense
|
$
|
2,783
|
|
|
$
|
2,282
|
|
At
March 31, 2016
there was
$20.1 million
of unrecognized stock compensation expense for restricted stock expected to be recognized over a weighted-average period of
2.2 years
.
The following table provides a summary of the activity under the Plans for the
three months ended March 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock Awards Outstanding
|
|
Stock Options Outstanding
|
|
Time-Based
|
|
Performance-Based
|
|
|
Number of
Shares
|
Weighted-Average
Grant Date
Fair Value
|
|
Number of
Units
|
Weighted-Average
Grant Date
Fair Value
|
|
Number of
Shares
|
Weighted-Average
Grant Date
Fair Value
|
|
Number of
Shares
|
Weighted-Average
Exercise Price
|
Outstanding, at January1, 2016
|
236,146
|
|
$
|
32.58
|
|
|
2,088
|
|
$
|
34.45
|
|
|
115,721
|
|
$
|
34.14
|
|
|
1,527,074
|
|
$
|
23.92
|
|
Granted
|
194,754
|
|
33.02
|
|
|
12,946
|
|
32.89
|
|
|
150,392
|
|
32.75
|
|
|
—
|
|
—
|
|
Exercised options
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
22,499
|
|
13.36
|
|
Vested restricted stock awards
(1)
|
54,413
|
|
30.65
|
|
|
3,166
|
|
33.92
|
|
|
28,359
|
|
33.77
|
|
|
—
|
|
—
|
|
Forfeited
|
1,204
|
|
30.04
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
Outstanding and exercisable, at March 31, 2016
|
375,283
|
|
$
|
33.09
|
|
|
11,868
|
|
$
|
32.89
|
|
|
237,754
|
|
$
|
33.30
|
|
|
1,504,575
|
|
$
|
24.08
|
|
|
|
(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 Plans limit the number of time-based awards that may be granted to an eligible individual in a calendar year to
100,000
shares. Compensation expense is recorded over the vesting period based on a 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
to
150%
. Performance-based shares granted in
2016
vest, based
50%
upon Webster's ranking for total shareholder return versus Webster's compensation peer group companies and
50%
upon Webster's average of return on equity 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.
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
10
years. All awarded options have vested. There were
1,362,567
non-qualified stock options and
142,008
incentive stock options outstanding at
March 31, 2016
.
Note 16:
Segment Reporting
Webster’s operations are organized into
four
reportable segments that represent its core businesses – Commercial Banking, Community Banking, HSA Bank, and Private Banking. Community Banking includes the operating segments of Webster's Personal Banking and Business Banking. These segments reflect how executive management responsibilities are assigned by each of the core businesses, the products and services provided, and the type of customer served and reflect how discrete financial information is currently evaluated by the chief operating decision maker. 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.
The Company uses a matched maturity funding concept, called funds transfer pricing (“FTP”), to allocate interest income and interest expense to each business while also transferring the primary interest rate risk exposures to the Corporate and Reconciling category. The allocation process considers the specific interest rate risk and liquidity risk of financial instruments and other assets and liabilities in each line of business. The matched maturity funding concept considers the origination date and the earlier of the maturity date or the repricing date of a financial instrument to assign an FTP rate for loans and deposits originated each day. Loans are assigned an FTP rate for funds used and deposits are assigned an FTP rate for funds provided. This process is executed by the Company’s Financial Planning and Analysis division and is overseen by the Company’s Asset/Liability Committee.
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 the results for Webster’s reportable segments and the Corporate and Reconciling category, which incorporates the allocation of the provision for loan and lease losses and income tax expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2016
|
(In thousands)
|
Commercial
Banking
|
Community
Banking
|
HSA
Bank
|
Private
Banking
|
Corporate and
Reconciling
|
Consolidated
Total
|
Net interest income (loss)
|
$
|
65,422
|
|
$
|
90,056
|
|
$
|
19,919
|
|
$
|
2,873
|
|
$
|
(2,118
|
)
|
$
|
176,152
|
|
Provision (benefit) for loan and lease losses
|
10,248
|
|
6,244
|
|
—
|
|
29
|
|
(921
|
)
|
15,600
|
|
Net interest income (loss) after provision for loan and lease losses
|
55,174
|
|
83,812
|
|
19,919
|
|
2,844
|
|
(1,197
|
)
|
160,552
|
|
Non-interest income
|
8,783
|
|
26,640
|
|
21,605
|
|
2,365
|
|
4,631
|
|
64,024
|
|
Non-interest expense
|
28,689
|
|
90,876
|
|
23,554
|
|
5,371
|
|
3,252
|
|
151,742
|
|
Income (loss) before income tax expense
|
35,268
|
|
19,576
|
|
17,970
|
|
(162
|
)
|
182
|
|
72,834
|
|
Income tax expense (benefit)
|
11,727
|
|
6,509
|
|
5,975
|
|
(54
|
)
|
60
|
|
24,217
|
|
Net income (loss)
|
$
|
23,541
|
|
$
|
13,067
|
|
$
|
11,995
|
|
$
|
(108
|
)
|
$
|
122
|
|
$
|
48,617
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2015
|
(In thousands)
|
Commercial
Banking
|
Community
Banking
|
HSA
Bank
|
Private
Banking
|
Corporate and
Reconciling
|
Consolidated
Total
|
Net interest income (loss)
|
$
|
61,578
|
|
$
|
84,239
|
|
$
|
16,465
|
|
$
|
2,395
|
|
$
|
(4,913
|
)
|
$
|
159,764
|
|
Provision (benefit) for loan and lease losses
|
3,374
|
|
6,421
|
|
—
|
|
(57
|
)
|
12
|
|
9,750
|
|
Net interest income after provision for loan and lease losses
|
58,204
|
|
77,818
|
|
16,465
|
|
2,452
|
|
(4,925
|
)
|
150,014
|
|
Non-interest income
|
9,525
|
|
25,540
|
|
15,151
|
|
2,326
|
|
5,348
|
|
57,890
|
|
Non-interest expense
|
26,469
|
|
81,690
|
|
18,958
|
|
4,879
|
|
2,094
|
|
134,090
|
|
Income (loss) before income tax expense
|
41,260
|
|
21,668
|
|
12,658
|
|
(101
|
)
|
(1,671
|
)
|
73,814
|
|
Income tax expense (benefit)
|
13,467
|
|
7,073
|
|
4,131
|
|
(33
|
)
|
(546
|
)
|
24,092
|
|
Net income (loss)
|
$
|
27,793
|
|
$
|
14,595
|
|
$
|
8,527
|
|
$
|
(68
|
)
|
$
|
(1,125
|
)
|
$
|
49,722
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
(In thousands)
|
Commercial
Banking
|
Community
Banking
|
HSA
Bank
|
Private
Banking
|
Corporate and
Reconciling
|
Consolidated
Total
|
At March 31, 2016
|
$
|
7,641,618
|
|
$
|
8,471,644
|
|
$
|
102,106
|
|
$
|
504,911
|
|
$
|
8,215,230
|
|
$
|
24,935,509
|
|
At December 31, 2015
|
7,505,513
|
|
8,441,950
|
|
95,815
|
|
493,571
|
|
8,106,038
|
|
24,642,887
|
|
Note 17:
Commitments and Contingencies
Credit-Related Financial Instruments
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)
|
At March 31, 2016
|
|
At December 31, 2015
|
Commitments to extend credit
|
$
|
5,050,534
|
|
|
$
|
4,851,994
|
|
Standby letter of credit
|
124,150
|
|
|
133,294
|
|
Commercial letter of credit
|
47,762
|
|
|
45,742
|
|
Total credit-related financial instruments with off-balance sheet risk
|
$
|
5,222,446
|
|
|
$
|
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.
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 Condensed Consolidated Balance Sheets.
The following table provides a summary of activity in the reserve for unfunded credit commitments:
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
(In thousands)
|
2016
|
|
2015
|
Beginning balance
|
$
|
2,119
|
|
|
$
|
5,151
|
|
Provision (benefit)
|
7
|
|
|
(2,831
|
)
|
Ending balance
|
$
|
2,126
|
|
|
$
|
2,320
|
|
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 an accrual for litigation and claims when a loss contingency is considered probable and the related amount is reasonably estimable. This accrual is 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 accrual, Webster believes that at
March 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.