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Webster Financial 10-Q 2015

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Ex-32.2
WBS - 06.30.2015 - 10Q

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
_______________________________________________________________________________
FORM 10-Q
_______________________________________________________________________________
þ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2015
 
Commission File Number: 001-31486
_______________________________________________________________________________

WEBSTER FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
 _______________________________________________________________________________
Delaware
 
06-1187536
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
145 Bank Street, Waterbury, Connecticut 06702
(Address and zip code of principal executive offices)
 
(203) 578-2202
(Registrant's telephone number, including area code)
 
 
 
 
 
______________________________________________________________________________

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    þ  Yes    o  No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    þ  Yes    o  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
þ
 
Accelerated filer
o
 
Non-accelerated filer
o
 
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).    o  Yes    þ  No
The number of shares of common stock, par value $.01 per share, outstanding as of July 31, 2015 was 91,922,562.

 



INDEX
 

i


PART I. – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
 
June 30,
2015
 
December 31,
2014
(In thousands, except share data)
(Unaudited)
 
 
Assets:
 
 
 
Cash and due from banks
$
205,650

 
$
261,544

Interest-bearing deposits
142,083

 
132,695

Securities available-for-sale, at fair value
2,837,158

 
2,793,873

Securities held-to-maturity (fair value of $4,114,595 and $3,948,706)
4,064,022

 
3,872,955

Federal Home Loan Bank and Federal Reserve Bank stock
180,290

 
193,290

Loans held for sale
63,535

 
67,952

Loans and leases
14,777,526

 
13,900,025

Allowance for loan and lease losses
(167,860
)
 
(159,264
)
Loans and leases, net
14,609,666

 
13,740,761

Deferred tax asset, net
79,257

 
73,873

Premises and equipment, net
123,828

 
121,933

Goodwill
538,373

 
529,887

Other intangible assets, net
42,535

 
2,666

Cash surrender value of life insurance policies
446,423

 
440,073

Accrued interest receivable and other assets
287,966

 
301,670

Total assets
$
23,620,786

 
$
22,533,172

Liabilities and shareholders' equity:
 
 
 
Deposits:
 
 
 
Non-interest-bearing
$
3,547,356

 
$
3,598,872

Interest-bearing
13,746,910

 
12,052,733

Total deposits
17,294,266

 
15,651,605

Securities sold under agreements to repurchase and other borrowings
1,014,504

 
1,250,756

Federal Home Loan Bank advances
2,509,285

 
2,859,431

Long-term debt
226,297

 
226,237

Accrued expenses and other liabilities
196,739

 
222,328

Total liabilities
21,241,091

 
20,210,357

Shareholders’ equity:
 
 
 
Preferred stock, $.01 par value; Authorized - 3,000,000 shares:
 
 
 
Series A issued and outstanding (28,939 shares at December 31, 2014)

 
28,939

Series E issued and outstanding (5,060 shares)
122,710

 
122,710

Common stock, $.01 par value; Authorized - 200,000,000 shares:
 
 
 
Issued (93,644,633 and 93,623,090 shares)
936

 
936

Paid-in capital
1,124,498

 
1,127,534

Retained earnings
1,260,090

 
1,202,251

Treasury stock, at cost (1,910,786 and 3,241,555 shares)
(67,844
)
 
(103,294
)
Accumulated other comprehensive loss, net of tax
(60,695
)
 
(56,261
)
Total shareholders' equity
2,379,695

 
2,322,815

Total liabilities and shareholders' equity
$
23,620,786

 
$
22,533,172

See accompanying Notes to Condensed Consolidated Financial Statements.

1


WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
 
Three months ended June 30,
 
Six months ended June 30,
(In thousands, except per share data)
2015
 
2014
 
2015
 
2014
Interest Income:
 
 
 
 
 
 
 
Interest and fees on loans and leases
$
135,694

 
$
125,771

 
$
266,417

 
$
249,781

Taxable interest and dividends on securities
46,857

 
47,252

 
94,509

 
96,093

Non-taxable interest on securities
3,987

 
4,259

 
8,014

 
9,010

Loans held for sale
432

 
215

 
942

 
392

Total interest income
186,970

 
177,497

 
369,882

 
355,276

Interest Expense:
 
 
 
 
 
 
 
Deposits
11,533

 
10,851

 
23,075

 
21,495

Securities sold under agreements to repurchase and other borrowings
4,186

 
5,082

 
8,573

 
10,287

Federal Home Loan Bank advances
5,329

 
4,002

 
10,150

 
7,849

Long-term debt
2,411

 
2,440

 
4,809

 
5,222

Total interest expense
23,459

 
22,375

 
46,607

 
44,853

Net interest income
163,511

 
155,122

 
323,275

 
310,423

Provision for loan and lease losses
12,750

 
9,250

 
22,500

 
18,250

Net interest income after provision for loan and lease losses
150,761

 
145,872

 
300,775

 
292,173

Non-interest Income:
 
 
 
 
 
 
 
Deposit service fees
34,493

 
26,302

 
67,118

 
51,014

Loan related fees
5,729

 
4,890

 
11,408

 
9,372

Wealth and investment services
8,784

 
8,829

 
16,673

 
17,667

Mortgage banking activities
2,517

 
513

 
4,078

 
1,288

Increase in cash surrender value of life insurance policies
3,197

 
3,296

 
6,349

 
6,554

Gain on sale of investment securities
486

 

 
529

 
4,336

Impairment loss recognized in earnings

 
(73
)
 

 
(161
)
Other income
4,645

 
3,839

 
11,586

 
7,354

Total non-interest income
59,851

 
47,596

 
117,741

 
97,424

Non-interest Expense:
 
 
 
 
 
 
 
Compensation and benefits
74,043

 
65,711

 
144,907

 
132,082

Occupancy
11,680

 
11,491

 
25,276

 
24,250

Technology and equipment
20,224

 
15,737

 
39,472

 
30,747

Intangible assets amortization
1,843

 
669

 
3,131

 
1,837

Marketing
4,245

 
4,249

 
8,421

 
7,429

Professional and outside services
2,875

 
1,269

 
5,328

 
3,971

Deposit insurance
5,492

 
5,565

 
11,733

 
10,876

Other expense
17,044

 
17,784

 
33,268

 
35,746

Total non-interest expense
137,446

 
122,475

 
271,536

 
246,938

Income before income tax expense
73,166

 
70,993

 
146,980

 
142,659

Income tax expense
20,663

 
23,159

 
44,755

 
44,396

Net income
52,503

 
47,834

 
102,225

 
98,263

Preferred stock dividends
(2,024
)
 
(2,639
)
 
(4,663
)
 
(5,278
)
Net income available to common shareholders
$
50,479

 
$
45,195

 
$
97,562

 
$
92,985

Net income per common share:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
$
0.55

 
$
0.50

 
$
1.07

 
$
1.03

Diluted
0.55

 
0.50

 
1.07

 
1.02

See accompanying Notes to Condensed Consolidated Financial Statements.


2


WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
 
Three months ended June 30,
 
Six months ended June 30,
(In thousands)
2015
 
2014
 
2015
 
2014
Net income
$
52,503

 
$
47,834

 
$
102,225

 
$
98,263

Other comprehensive (loss) income, net of tax:
 
 
 
 
 
 
 
Total available-for-sale and transferred securities
(13,927
)
 
15,751

 
(6,960
)
 
23,873

Total derivative instruments
2,331

 
(2,518
)
 
561

 
(6,244
)
Total defined benefit pension and other postretirement benefit plans
991

 
463

 
1,965

 
925

Other comprehensive (loss) income, net of tax
(10,605
)
 
13,696

 
(4,434
)
 
18,554

Comprehensive income
$
41,898

 
$
61,530

 
$
97,791

 
$
116,817

See accompanying Notes to Condensed Consolidated Financial Statements.


3


WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited)
 
(In thousands, except per share data)
Preferred
Stock
Common
Stock
Paid-In
Capital
Retained
Earnings
Treasury
Stock
Accumulated
Other
Comprehensive
Loss, Net of Tax
Total
Shareholders'
Equity
Balance at December 31, 2014
$
151,649

$
936

$
1,127,534

$
1,202,251

$
(103,294
)
$
(56,261
)
$
2,322,815

Net income



102,225



102,225

Other comprehensive loss, net of tax





(4,434
)
(4,434
)
Dividends on common stock and dividend equivalents declared $0.43 per share


56

(39,051
)


(38,995
)
Dividends on Series A preferred stock $21.25 per share



(615
)


(615
)
Dividends on Series E preferred stock $800.00 per share



(4,048
)


(4,048
)
Common stock issued







Preferred stock conversion
(28,939
)

(3,429
)

32,368



Stock-based compensation, net of tax impact


2,384

(672
)
5,257


6,969

Exercise of stock options


(2,047
)

4,524


2,477

Shares acquired related to employee share-based compensation plans




(4,074
)

(4,074
)
Common stock repurchased




(2,625
)

(2,625
)
Balance at June 30, 2015
$
122,710

$
936

$
1,124,498

$
1,260,090

$
(67,844
)
$
(60,695
)
$
2,379,695

 
 
 
 
 
 
 
 
(In thousands, except per share data)
Preferred
Stock
Common
Stock
Paid-In
Capital
Retained
Earnings
Treasury
Stock
Accumulated
Other
Comprehensive
Loss, Net of Tax
Total
Shareholders'
Equity
Balance at December 31, 2013
$
151,649

$
934

$
1,125,584

$
1,080,488

$
(100,918
)
$
(48,549
)
$
2,209,188

Cumulative effect of change in accounting principle



160



160

Net income



98,263



98,263

Other comprehensive income, net of tax





18,554

18,554

Dividends on common stock and dividend equivalents declared $0.35 per share


23

(31,585
)


(31,562
)
Dividends on Series A preferred stock $42.50 per share



(1,230
)


(1,230
)
Dividends on Series E preferred stock $800.00 per share



(4,048
)


(4,048
)
Common stock issued


436




436

Stock-based compensation, net of tax impact


3,431

1,285

1,530


6,246

Exercise of stock options


(1,174
)

2,726


1,552

Shares acquired related to employee share-based compensation plans




(2,196
)

(2,196
)
Common stock repurchased




(10,741
)

(10,741
)
Balance at June 30, 2014
$
151,649

$
934

$
1,128,300

$
1,143,333

$
(109,599
)
$
(29,995
)
$
2,284,622

See accompanying Notes to Condensed Consolidated Financial Statements.

4


WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 
Six months ended June 30,
(In thousands)
2015
 
2014
Operating Activities:
 
 
 
Net income
$
102,225

 
$
98,263

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for loan and lease losses
22,500

 
18,250

Deferred tax benefit
(1,255
)
 
(2,658
)
Depreciation and amortization
16,872

 
16,330

Amortization of earning assets and funding, premium/discount, net
27,323

 
23,701

Stock-based compensation
5,276

 
5,550

Gain on sale, net of write-down, on foreclosed and repossessed assets
(2
)
 
(834
)
(Gain) loss on sale, net of write-down, on premises and equipment
(315
)
 
364

Impairment loss recognized in earnings

 
161

Gain on the sale of investment securities
(529
)
 
(4,336
)
Increase in cash surrender value of life insurance policies
(6,349
)
 
(6,554
)
Gain from life insurance policies
(220
)
 

Gain, net on sale of loans held for sale
(4,078
)
 
(1,288
)
Proceeds from sale of loans held for sale
208,499

 
122,219

Origination of loans held for sale
(234,252
)
 
(131,835
)
Net increase in accrued interest receivable and other assets
(14,658
)
 
(42,942
)
Net (decrease) increase in accrued expenses and other liabilities
(27,510
)
 
9,308

Net cash provided by operating activities
93,527

 
103,699

Investing Activities:
 
 
 
Net (increase) decrease in interest-bearing deposits
(9,388
)
 
5,054

Purchases of available for sale securities
(449,616
)
 
(52,836
)
Proceeds from maturities and principal payments of available for sale securities
347,637

 
194,468

Proceeds from sales of available for sale securities
63,143

 
21,695

Purchases of held-to-maturity securities
(570,091
)
 
(421,995
)
Proceeds from maturities and principal payments of held-to-maturity securities
364,292

 
290,671

Net proceeds (purchase) of Federal Home Loan Bank stock
13,000

 
(9,717
)
Net increase in loans
(896,287
)
 
(593,115
)
Proceeds from loans not originated for sale
32,915

 

Proceeds from life insurance policies
3,912

 
644

Proceeds from the sale of foreclosed and repossessed assets
6,341

 
5,138

Proceeds from the sale of premises and equipment
650

 

Purchases of premises and equipment
(15,849
)
 
(14,024
)
Acquisition of business, net of cash acquired
1,396,414

 

Net cash provided by (used for) investing activities
287,073

 
(574,017
)
See accompanying Notes to Condensed Consolidated Financial Statements.

5


WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited), continued
 
Six months ended June 30,
(In thousands)
2015
 
2014
Financing Activities:
 
 
 
Net increase in deposits
195,685

 
348,213

Proceeds from Federal Home Loan Bank advances
6,175,000

 
2,715,000

Repayments of Federal Home Loan Bank advances
(6,525,139
)
 
(2,550,085
)
Net (decrease) increase in securities sold under agreements to repurchase and other borrowings
(236,252
)
 
69,597

Issuance of long-term debt

 
150,000

Repayment of long-term debt

 
(150,000
)
Debt issuance costs

 
(1,349
)
Dividends paid to common shareholders
(38,830
)
 
(31,460
)
Dividends paid to preferred shareholders
(4,663
)
 
(5,278
)
Exercise of stock options
2,477

 
1,552

Excess tax benefits from stock-based compensation
1,927

 
930

Common stock issued

 
436

Common stock repurchased
(2,625
)
 
(10,741
)
Shares acquired related to employee share-based compensation plans
(4,074
)
 
(2,196
)
Net cash (used for) provided by financing activities
(436,494
)
 
534,619

Net (decrease) increase in cash and due from banks
(55,894
)
 
64,301

Cash and due from banks at beginning of period
261,544

 
223,616

Cash and due from banks at end of period
$
205,650

 
$
287,917

 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
Interest paid
$
47,219

 
$
52,472

Income taxes paid
58,146

 
40,411

Noncash investing and financing activities:
 
 
 
Transfer of loans and leases to foreclosed properties and repossessed assets
$
4,792

 
$
2,351

Deposits assumed in business acquisition
1,446,899

 

Preferred stock conversion
28,939

 

See accompanying Notes to Condensed Consolidated Financial Statements.

6


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 June 30, 2015, 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). 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 the Condensed Consolidated 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, 2014, included in the Company's Annual Report on Form 10-K filed with the SEC on February 27, 2015.
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 net income, comprehensive income, total assets, total liabilities, total shareholders' equity, net cash provided by operating activities, net cash used for investing activities, and net cash provided by financing activities.
Acquisition
On January 13, 2015 (the "acquisition date”), Webster Bank completed its acquisition of the health savings account business of JPMorgan Chase Bank, N.A. The results of the acquisition have been included in the financial statements from the acquisition date. See Note 2: Acquisition and Note 6: Goodwill and Other Intangible Assets for further information.
Modifications to Significant Accounting Policies
Non-accrual loans. Effective during the first quarter of 2015, residential loans that are more than 90 days past due, fully insured against loss, and in the process of collection, remain accruing loans and are reported as 90 days or more past due and accruing. Previously, these loans were placed on non-accrual when payments were 90 days or more past due. For presentation purposes, previously reported amounts have been reclassified to conform to the current year presentation. The change in accounting policy did not have a material impact on the financial statements.
Other intangible assets. Other intangible assets with finite useful lives are amortized to non-interest expense over their estimated useful lives. Effective during the first quarter of 2015, core deposit intangibles resulting from the health savings account acquisition are amortized on an accelerated basis over their estimated useful lives. Core deposit intangibles existing prior to the health savings account acquisition will continue to be amortized on a straight line basis over their remaining estimated useful lives. Intangible assets relating to customer relationships are amortized on a straight line basis over their estimated useful lives.
Recently Adopted Accounting Standards Updates
ASU No. 2014-01 - Investments - Equity Method and Joint Ventures (Topic 323) - "Accounting for Investments in Qualified Affordable Housing Projects (a consensus of the FASB Emerging Issues Task Force)." The Update requires an entity to disclose information about its investments in qualified affordable housing projects and provides an accounting policy election for it to account for such investments using the proportional amortization method. Under that method, the initial cost of an investment is amortized in proportion to its tax credits and other tax benefits as a component of income tax expense or benefit. The decision to apply the proportionate amortization method is to be applied consistently to all such investments. The Company adopted this Update effective January 1, 2015 and retrospectively applied the effects of its accounting policy decision to use the proportional amortization method, as Webster believes presenting the investment performance net of taxes as a component of income tax expense or benefit better represents the economics of such investments. The change had no material effect on the Company's financial statements.

7


ASU No. 2014-04, Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-40) - "Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure (a consensus of the FASB Emerging Issues Task Force)." The Update clarifies that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (i) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (ii) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar agreement. In addition, the Update requires disclosure of both the amount of foreclosed residential real estate property held by the creditor and the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure in accordance with local requirements of the applicable jurisdiction. The Update was adopted during the first quarter of 2015, by prospective transition, and did not have a material impact on the Company's financial statements.
ASU No. 2014-11 - Transfers and Servicing (Topic 860) - “Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures.” The Update requires two accounting changes: (i) repurchase-to-maturity transactions are to be accounted for as secured borrowings; and (ii) with respect to repurchase financing arrangements, accounting is required for a transfer of a financial asset contemporaneously with a repurchase agreement with the same counterparty, which will result in secured borrowing accounting for the repurchase agreement. Additionally, disclosure requirements have been expanded to include a disaggregation of collateral used for secured borrowings, and contractual maturity disclosure has been expanded to interim periods. The Update was adopted during the first quarter of 2015 and did not have a material impact on the Company's financial statements.
ASU No. 2014-14, Receivables-Troubled Debt Restructurings by Creditors (Subtopic 310-40) - "Classification of Certain Government-Guaranteed Residential Mortgage Loans upon Foreclosure (a consensus of the FASB Emerging Issues Task Force)." The Update has been issued to reduce diversity in practice in the classification of foreclosed residential mortgage loans held by creditors that are fully guaranteed under certain government programs, including the Federal Housing Administration guarantees. A residential mortgage loan would be derecognized, and a separate other receivable would be recognized upon foreclosure if the loan has both of the following characteristics: (i) the loan has a government guarantee that is not separable from the loan before foreclosure entitling the creditor to the full unpaid principal balance of the loan; and (ii) at the time of foreclosure, the creditor has the intent to make a claim on the guarantee and the ability to recover the full unpaid principal balance of the loan through the guarantee. Notably, upon foreclosure, the separate other receivable would be measured based on the current amount of the loan balance expected to be recovered under the guarantee. The Update was adopted during the first quarter of 2015 and did not have a material impact on the Company's financial statements.
Recently Issued Accounting Standards Updates
ASU No. 2014-09 - Revenue from Contracts with Customers (Topic 606). The Update establishes a single comprehensive model for an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled, and will supersede nearly all existing revenue recognition guidance, and clarify and converge revenue recognition principles under US GAAP and IFRS. The update outlines five steps to recognizing revenue: (i) identify the contracts with the customer; (ii) identify the separate performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the separate performance obligations; and (v) recognize revenue when each performance obligation is satisfied. The update requires more comprehensive disclosures, relating to quantitative and qualitative information for amounts, timing, the nature and uncertainty of revenue, and cash flows arising from contracts with customers, which will mainly impact construction and high-tech industries. The most significant potential impact to banking entities relates to less prescriptive derecognition requirements on the sale of owned real estate properties. An entity may elect either a full retrospective or a modified retrospective application. Subsequent to the filing of the Company's Consolidated Financial Statements and Notes thereto for the year ended December 31, 2014, included in its 2014 Form 10-K, the effective date for this Update was changed from annual and interim periods beginning after December 15, 2016 to annual and interim periods beginning after December 15, 2017. As such, the Company has revised its intended adoption of the Update to the first quarter of 2018. Adoption is not anticipated to have a material impact on the Company's financial statements.
ASU No. 2015-02 - Consolidation (Topic 810) - "Amendments to the Consolidation Analysis." The Update affects limited partnerships and similar legal entities, the evaluation of fees paid to a decision maker or a service provider as a variable interest, the effect of fee arrangements and related parties on the primary beneficiary determination, and certain investment funds. The Company intends to adopt the Update during the first quarter of 2016. Adoption is not anticipated to have a material impact on the Company's financial statements.
ASU No. 2015-03 - Interest - Imputation of Interest (Subtopic 835-30) - "Simplifying the Presentation of Debt Issuance Costs." The Update simplifies the presentation of debt issuance costs, by requiring that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this Update. An entity should apply the Update on a retrospective basis. The Company intends to adopt the Update during the first quarter of 2016. Adoption is not anticipated to have a material impact on the Company's financial statements.

8


ASU No. 2015-07 - Fair Value Measurement (Topic 820) - "Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or its Equivalent) (a consensus of the FASB Emerging Issues Task Force)." The Update removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The Update also removes the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient. Rather, those disclosures are limited to investments for which the entity has elected to measure the fair value using that practical expedient An entity should apply the Update on a retrospective basis. The Company intends to adopt the Update during the first quarter of 2016. Adoption is not anticipated to have a material impact on the Company's financial statements.

Note 2: Acquisition
On January 13, 2015, Webster Bank completed its acquisition of the health savings account business of JPMorgan Chase Bank, N.A. As a result of the acquisition, the Company became the leading administrator of health savings accounts on a nationwide basis. The acquisition significantly augments a source of stable, low cost, long duration deposits.
The acquisition date fair value of the net consideration transferred consisted of the following:
(In thousands)
At January 13, 2015
Cash
$
50,485

Contingent consideration (1)
(5,000
)
Total net consideration transferred
$
45,485

(1)
The contingent consideration arrangement entitles the Company to receive a rebate of the purchase price relating to the premium paid for account attrition.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date:
(In thousands)
At January 13, 2015
Cash
$
1,446,898

Intangible assets
43,000

Total identifiable assets acquired
$
1,489,898

 
 
Deposits
$
1,446,899

Contingent liability
6,000

Total liabilities assumed
$
1,452,899

 
 
Net identifiable assets acquired
$
36,999

Goodwill
8,486

Net assets acquired
$
45,485

The fair value of the acquired identifiable intangible assets includes core deposit intangibles and customer relationships. The Company is in the process of completing its analysis of fair value of the assets acquired and liabilities assumed; thus, the measurements of identifiable intangible assets, goodwill, and contingencies are subject to change. Refer to Note 6: Goodwill and Other Intangible Assets for additional information relating to the initial amounts of goodwill and other intangible assets recognized.
The contingent liability represents an obligation that existed at the acquisition date. Accordingly, Webster assumed the liability as part of the transaction and has accounted for it at fair value.
Refer to Note 15: Fair Value Measurements for additional information on the contingent liability and contingent consideration recorded.

9


Note 3: Investment Securities
Summaries of the amortized cost and fair value of Webster’s investment securities are presented below:
 
At June 30, 2015
 
At December 31, 2014
(In thousands)
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
 
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
Available-for-sale:




 
 



U.S. Treasury Bills
$
425

$

$

$
425

 
$
525

$

$

$
525

Agency collateralized mortgage obligations (“agency CMO”)
599,596

8,518

(1,706
)
606,408

 
543,417

8,636

(1,065
)
550,988

Agency mortgage-backed securities (“agency MBS”)
1,030,134

9,670

(17,716
)
1,022,088

 
1,030,724

10,462

(12,668
)
1,028,518

Agency commercial mortgage-backed securities (“agency CMBS”)
94,240

444

(69
)
94,615

 
80,400


(134
)
80,266

Non-agency commercial mortgage-backed securities agency (“non-agency CMBS”)
576,223

14,152

(520
)
589,855

 
534,631

18,885

(123
)
553,393

Collateralized loan obligations ("CLO")
370,810

2,394

(317
)
372,887

 
426,269

482

(1,017
)
425,734

Single issuer trust preferred securities
42,070

162

(3,281
)
38,951

 
41,981


(3,736
)
38,245

Corporate debt securities
105,285

3,203


108,488

 
106,520

3,781


110,301

Equity securities - financial institutions
3,499


(58
)
3,441

 
3,500

2,403


5,903

Securities available-for-sale
$
2,822,282

$
38,543

$
(23,667
)
$
2,837,158

 
$
2,767,967

$
44,649

$
(18,743
)
$
2,793,873

Held-to-maturity:




 
 
 
 
 
Agency CMO
$
432,527

$
6,314

$
(1,406
)
$
437,435

 
$
442,129

$
6,584

$
(739
)
$
447,974

Agency MBS
2,177,299

47,783

(20,744
)
2,204,338

 
2,134,319

57,196

(11,340
)
2,180,175

Agency CMBS
702,632

5,407

(172
)
707,867

 
578,687

1,597

(1,143
)
579,141

Municipal bonds and notes
384,943

10,047

(3,604
)
391,386

 
373,211

15,138

(55
)
388,294

Non-agency CMBS
362,059

8,267

(1,390
)
368,936

 
338,723

9,428

(1,015
)
347,136

Private Label MBS
4,562

71


4,633

 
5,886

100


5,986

Securities held-to-maturity
$
4,064,022

$
77,889

$
(27,316
)
$
4,114,595

 
$
3,872,955

$
90,043

$
(14,292
)
$
3,948,706

Other-Than-Temporary Impairment ("OTTI")
The balance of OTTI included in the amortized cost columns above, at June 30, 2015 and December 31, 2014, is related to previously impaired CLO securities and continues to decline due to calls. To the extent that changes in interest rates, credit movements, and other factors that influence the fair value of investments occur, the Company may be required to record impairment charges for OTTI in future periods.
The following table presents the changes in OTTI related to debt securities:
 
Three months ended June 30,
 
Six months ended June 30,
(In thousands)
2015
 
2014
 
2015
 
2014
Balance of OTTI, beginning of period
$
3,597

 
$
9,665

 
$
3,696

 
$
16,633

Reduction for securities sold or called
(419
)
 

 
(518
)
 
(7,056
)
Additions for OTTI not previously recognized

 
73

 

 
161

Balance of OTTI, end of period
$
3,178

 
$
9,738

 
$
3,178

 
$
9,738






10



Gross Unrealized Losses and Fair Value
The following tables provide information on the gross unrealized losses and fair value of the Company’s investment securities with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment security type and length of time that individual investment securities have been in a continuous unrealized loss position:
 
At June 30, 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
$
147,181

$
(1,118
)
 
$
29,884

$
(588
)
 
12
$
177,065

$
(1,706
)
Agency MBS
305,175

(5,598
)
 
382,346

(12,118
)
 
70
687,521

(17,716
)
Agency CMBS
43,203

(69
)
 


 
2
43,203

(69
)
Non-agency CMBS
145,798

(511
)
 
9,391

(9
)
 
19
155,189

(520
)
CLO
30,940

(317
)
 


 
2
30,940

(317
)
Single issuer trust preferred securities


 
34,588

(3,281
)
 
7
34,588

(3,281
)
Equity securities - financial institutions
3,441

(58
)
 


 
1
3,441

(58
)
Total available-for-sale in an unrealized loss position
$
675,738

$
(7,671
)
 
$
456,209

$
(15,996
)
 
113
$
1,131,947

$
(23,667
)
Held-to-maturity:
 
 
 
 
 
 
 
 
 
Agency CMO
$
98,468

$
(873
)
 
$
22,725

$
(533
)
 
7
$
121,193

$
(1,406
)
Agency MBS
510,143

(6,544
)
 
501,002

(14,200
)
 
69
1,011,145

(20,744
)
Agency CMBS
81,519

(172
)
 


 
5
81,519

(172
)
Municipal bonds and notes
84,091

(3,577
)
 
3,074

(27
)
 
78
87,165

(3,604
)
Non-agency CMBS
100,480

(908
)
 
30,448

(482
)
 
13
130,928

(1,390
)
Total held-to-maturity in an unrealized loss position
$
874,701

$
(12,074
)
 
$
557,249

$
(15,242
)
 
172
$
1,431,950

$
(27,316
)
 
At December 31, 2014
 
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
$
47,217

$
(240
)
 
$
35,968

$
(825
)
 
8
$
83,185

$
(1,065
)
Agency MBS
3,691

(18
)
 
641,355

(12,650
)
 
64
645,046

(12,668
)
Agency CMBS
80,266

(134
)
 


 
4
80,266

(134
)
Non-agency CMBS
24,932

(117
)
 
9,396

(6
)
 
4
34,328

(123
)
CLO
99,221

(1,017
)
 


 
6
99,221

(1,017
)
Single issuer trust preferred securities
4,150

(36
)
 
34,095

(3,700
)
 
8
38,245

(3,736
)
Total available-for-sale in an unrealized loss position
$
259,477

$
(1,562
)
 
$
720,814

$
(17,181
)
 
94
$
980,291

$
(18,743
)
Held-to-maturity:
 
 
 
 
 
 
 
 
 
Agency CMO
$
52,172

$
(187
)
 
$
24,942

$
(552
)
 
6
$
77,114

$
(739
)
Agency MBS
20,791

(86
)
 
608,568

(11,254
)
 
44
629,359

(11,340
)
Agency CMBS
324,394

(1,143
)
 


 
17
324,394

(1,143
)
Municipal bonds and notes
5,341

(23
)
 
3,074

(32
)
 
15
8,415

(55
)
Non-agency CMBS
13,003

(30
)
 
65,913

(985
)
 
7
78,916

(1,015
)
Total held-to-maturity in an unrealized loss position
$
415,701

$
(1,469
)
 
$
702,497

$
(12,823
)
 
89
$
1,118,198

$
(14,292
)

11


Available-for-Sale Impairment Analysis
The following discussion summarizes, by investment security type, the basis for evaluating if investment securities within the Company’s available-for-sale portfolio were other-than-temporarily impaired at June 30, 2015. 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.
Agency CMO. There were unrealized losses of $1.7 million on the Company’s investment in agency CMO at June 30, 2015 compared to $1.1 million at December 31, 2014. Unrealized losses increased due to higher market rates which resulted in lower security prices at June 30, 2015 compared to December 31, 2014. The contractual cash flows for these investments are performing as expected, and there has been no change in the underlying credit quality. The Company does not consider these securities to be other-than-temporarily impaired at June 30, 2015.
Agency MBS. There were unrealized losses of $17.7 million on the Company’s investment in residential mortgage-backed securities issued by government agencies at June 30, 2015 compared to $12.7 million at December 31, 2014. Unrealized losses increased due to higher market rates which resulted in lower security prices at June 30, 2015 compared to December 31, 2014. These investments are issued by a government or a government-sponsored agency and, therefore, are backed by certain government guarantees, either direct or indirect. There has been no change in the credit quality, and the contractual cash flows are performing as expected. The Company does not consider these securities to be other-than-temporarily impaired at June 30, 2015.
Non Agency CMBS. There were unrealized losses of $0.5 million on the Company’s investment in non-agency commercial mortgage-backed securities issued by entities other than government agencies at June 30, 2015 compared to $0.1 million at December 31, 2014. Unrealized losses increased due to higher market rates which resulted in lower security prices at June 30, 2015 compared to December 31, 2014. 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. The Company does not consider these securities to be other-than-temporarily impaired at June 30, 2015.
Single issuer trust preferred securities. There were unrealized losses of $3.3 million on the Company's investment in single issuer trust preferred securities at June 30, 2015 compared to $3.7 million at December 31, 2014. Unrealized losses decreased due to lower market spreads for the asset class which resulted in higher security prices at June 30, 2015 compared to December 31, 2014. 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 does not consider these securities to be other-than-temporarily impaired at June 30, 2015.
Held-to-Maturity Impairment Analysis
The following discussion summarizes, by investment type, the basis for the conclusion that the applicable investment securities within the Company’s held-to-maturity portfolio were not other-than-temporarily impaired at June 30, 2015. Unless otherwise noted under an investment security type, management does not intend to sell these investments and has determined, based upon available evidence, that it is more likely than not that the Company will not be required to sell these securities before the recovery of its amortized cost.
Agency CMO. There were unrealized losses of $1.4 million on the Company’s investment in agency CMO at June 30, 2015 compared to $0.7 million at December 31, 2014. Unrealized losses increased due to higher market rates which resulted in lower security prices on CMO positions purchased during the quarter. The contractual cash flows for these investments are performing as expected, and there has been no change in the underlying credit quality. The Company does not consider these securities to be other-than-temporarily impaired at June 30, 2015.
Agency MBS. There were unrealized losses of $20.7 million on the Company’s investment in residential mortgage-backed securities issued by government agencies at June 30, 2015 compared to $11.3 million at December 31, 2014. Unrealized losses increased due to higher market rates which resulted in lower security prices at June 30, 2015 compared to December 31, 2014. These investments are issued by a government or a government-sponsored agency and, therefore, are backed by certain government guarantees, either direct or indirect. There has been no change in the credit quality, and the contractual cash flows are performing as expected. The Company does not consider these securities to be other-than-temporarily impaired at June 30, 2015.

12


Municipal bonds and notes. There were unrealized losses of $3.6 million on the Company’s investment in municipal bonds and notes at June 30, 2015 compared to $0.1 million at December 31, 2014. Unrealized losses increased due to higher market rates which resulted in lower security prices. The municipal portfolio is primarily comprised of bank qualified bonds, over 99.7% with credit ratings of A or better. In addition, the portfolio is comprised of 89.8% general obligation bonds, 9.7% revenue bonds, and 0.5% other bonds. The Company does not consider these securities to be other-than-temporarily impaired at June 30, 2015.
Non-agency CMBS. There were unrealized losses of $1.4 million on the Company’s investment in non-agency commercial mortgage-backed securities issued by entities other than government agencies at June 30, 2015 compared to $1.0 million unrealized losses at December 31, 2014. Unrealized losses increased due to higher market rates which resulted in lower security prices at June 30, 2015 compared to December 31, 2014. 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. The Company does not consider these securities to be other-than-temporarily impaired at June 30, 2015.
Proceeds from Sales of Available-for-Sale Securities
The following table summarizes proceeds from sales of available-for-sale securities for the periods presented:
 
Three months ended June 30,
 
Six months ended June 30,
(In thousands)
2015
 
2014
 
2015
 
2014
Proceeds from sales of available-for-sale securities
$
34,965

 
$

 
$
34,965

 
$
21,695

Contractual Maturities
The amortized cost and fair value of debt securities at June 30, 2015, by contractual maturity, are set forth below:
 
Available-for-Sale
 
Held-to-Maturity
(In thousands)
Amortized
Cost
Fair
Value
 
Amortized
Cost
Fair
Value
Due in one year or less
$
5,453

$
5,499

 
$
320

$
323

Due after one year through five years
150,278

153,265

 
44,133

45,675

Due after five through ten years
368,929

371,000

 
61,262

63,466

Due after ten years
2,294,123

2,303,953

 
3,958,307

4,005,131

Total debt securities
$
2,818,783

$
2,833,717

 
$
4,064,022

$
4,114,595

For the maturity schedule above, mortgage-backed securities and collateralized loan obligations, which are not due at a single maturity date, have been categorized based on the maturity date of the underlying collateral. Actual principal cash flows may differ from this maturity date presentation because borrowers have the right to prepay obligations with or without prepayment penalties. At June 30, 2015, the Company had a carrying value of $850.8 million in callable securities in its CMBS, CLO, and municipal bond portfolios. The Company considers these factors in the evaluation of its interest rate risk profile. These maturities do not reflect actual duration which is impacted by prepayments.
Securities with a carrying value totaling $2.5 billion and $2.9 billion at June 30, 2015 and December 31, 2014, respectively, were pledged to secure public funds, trust deposits, repurchase agreements, and for other purposes, as required or permitted by law. At June 30, 2015 and December 31, 2014, the Company had no investments in obligations of individual states, counties, or municipalities which exceeded 10% of consolidated shareholders’ equity.


13


Note 4: Loans and Leases
Recorded Investment in Loans and Leases
The following tables summarize the recorded investment in loans and leases:
 
At June 30, 2015
(In thousands)
Residential
Consumer
Commercial
Commercial
Real Estate (1)
Equipment
Financing
Total (2)
Recorded Investment:
 
 
 
 
 
 
Individually evaluated for impairment
$
139,232

$
49,239

$
55,028

$
59,861

$
120

$
303,480

Collectively evaluated for impairment
3,705,458

2,565,530

3,979,149

3,718,593

545,321

14,514,051

Recorded investment in loans and leases
3,844,690

2,614,769

4,034,177

3,778,454

545,441

14,817,531

Less: Accrued interest
11,201

8,330

12,272

8,202


40,005

Loans and leases
$
3,833,489

$
2,606,439

$
4,021,905

$
3,770,252

$
545,441

$
14,777,526

 
At December 31, 2014
(In thousands)
Residential
Consumer
Commercial
Commercial
Real Estate (1)
Equipment
Financing
Total (2)
Recorded Investment:
 
 
 
 
 
 
Individually evaluated for impairment
$
142,435