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Webster Financial 10-Q 2016

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
10-Q


 
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 March 31, 2016
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 April 29, 2016 was 91,661,145.

 



INDEX
 

i


PART I. – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
 
March 31,
2016
 
December 31,
2015
(In thousands, except share data)
(Unaudited)
 
 
Assets:
 
 
 
Cash and due from banks
$
198,174

 
$
199,693

Interest-bearing deposits
27,805

 
155,907

Securities available-for-sale
3,080,469

 
2,984,631

Securities held-to-maturity (fair value of $4,094,506 and $3,961,534)
4,012,289

 
3,923,052

Federal Home Loan Bank and Federal Reserve Bank stock
188,347

 
188,347

Loans held for sale (valued under fair value option $27,273 and $0)
30,425

 
37,091

Loans and leases
15,858,355

 
15,671,735

Allowance for loan and lease losses
(174,201
)
 
(174,990
)
Loans and leases, net
15,684,154

 
15,496,745

Deferred tax asset, net
81,191

 
101,578

Premises and equipment, net
134,212

 
129,426

Goodwill
538,373

 
538,373

Other intangible assets, net
37,772

 
39,326

Cash surrender value of life insurance policies
506,746

 
503,093

Accrued interest receivable and other assets
415,552

 
345,625

Total assets
$
24,935,509

 
$
24,642,887

Liabilities and shareholders' equity:
 
 
 
Deposits:
 
 
 
Non-interest-bearing
$
3,625,605

 
$
3,713,063

Interest-bearing
15,098,918

 
14,239,715

Total deposits
18,724,523

 
17,952,778

Securities sold under agreements to repurchase and other borrowings
910,149

 
1,151,400

Federal Home Loan Bank advances
2,363,131

 
2,664,139

Long-term debt
225,323

 
225,260

Accrued expenses and other liabilities
274,416

 
233,739

Total liabilities
22,497,542

 
22,227,316

Shareholders’ equity:
 
 
 
Preferred stock, $.01 par value; Authorized - 3,000,000 shares:
 
 
 
Series E issued and outstanding (5,060 shares)
122,710

 
122,710

Common stock, $.01 par value; Authorized - 200,000,000 shares:
 
 
 
Issued (93,651,601 shares)
937

 
937

Paid-in capital
1,125,925

 
1,124,325

Retained earnings
1,342,930

 
1,317,559

Treasury stock, at cost (2,272,448 and 2,090,409 shares)
(84,138
)
 
(71,854
)
Accumulated other comprehensive loss, net of tax
(70,397
)
 
(78,106
)
Total shareholders' equity
2,437,967

 
2,415,571

Total liabilities and shareholders' equity
$
24,935,509

 
$
24,642,887

See accompanying Notes to Condensed Consolidated Financial Statements.

1


WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
 
Three months ended March 31,
(In thousands, except per share data)
2016
 
2015
Interest Income:
 
 
 
Interest and fees on loans and leases
$
149,808

 
$
130,723

Taxable interest and dividends on securities
48,039

 
47,652

Non-taxable interest on securities
4,215

 
4,027

Loans held for sale
273

 
510

Total interest income
202,335

 
182,912

Interest Expense:
 
 
 
Deposits
12,299

 
11,542

Securities sold under agreements to repurchase and other borrowings
4,173

 
4,387

Federal Home Loan Bank advances
7,247

 
4,821

Long-term debt
2,464

 
2,398

Total interest expense
26,183

 
23,148

Net interest income
176,152

 
159,764

Provision for loan and lease losses
15,600

 
9,750

Net interest income after provision for loan and lease losses
160,552

 
150,014

Non-interest Income:
 
 
 
Deposit service fees
36,382

 
32,625

Loan and lease related fees
5,675

 
5,679

Wealth and investment services
7,195

 
7,889

Mortgage banking activities
2,629

 
1,561

Increase in cash surrender value of life insurance policies
3,653

 
3,152

Gain on sale of investment securities, net
320

 
43

Impairment loss on securities recognized in earnings
(149
)
 

Other income
8,319

 
6,941

Total non-interest income
64,024

 
57,890

Non-interest Expense:
 
 
 
Compensation and benefits
80,309

 
70,864

Occupancy
14,253

 
13,596

Technology and equipment
19,235

 
19,248

Intangible assets amortization
1,554

 
1,288

Marketing
4,924

 
4,176

Professional and outside services
2,811

 
2,453

Deposit insurance
6,786

 
6,241

Other expense
21,870

 
16,224

Total non-interest expense
151,742

 
134,090

Income before income tax expense
72,834

 
73,814

Income tax expense
24,217

 
24,092

Net income
48,617

 
49,722

Preferred stock dividends and other
(2,131
)
 
(2,785
)
Earnings applicable to common shareholders
$
46,486

 
$
46,937

Earnings per common share:
 
 
 
 
 
 
 
Basic
$
0.51

 
$
0.52

Diluted
0.51

 
0.52

See accompanying Notes to Condensed Consolidated Financial Statements.


2


WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
 
Three months ended March 31,
(In thousands)
2016
 
2015
Net income
$
48,617

 
$
49,722

Other comprehensive income (loss), net of tax:
 
 
 
Total available-for-sale and transferred securities
7,505

 
6,967

Total derivative instruments
(952
)
 
(1,770
)
Total defined benefit pension and other postretirement benefit plans
1,156

 
974

Other comprehensive income, net of tax
7,709

 
6,171

Comprehensive income
$
56,326

 
$
55,893

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, at cost
Accumulated
Other
Comprehensive
Loss, Net of Tax
Total
Shareholders'
Equity
Balance at December 31, 2015
$
122,710

$
937

$
1,124,325

$
1,317,559

$
(71,854
)
$
(78,106
)
$
2,415,571

Net income



48,617



48,617

Other comprehensive income, net of tax





7,709

7,709

Dividends and dividend equivalents declared on common stock $0.23 per share


32

(21,171
)


(21,139
)
Dividends on Series E preferred stock $400.00 per share



(2,024
)


(2,024
)
Stock-based compensation, net of tax impact


2,138

(51
)
2,638


4,725

Exercise of stock options


(407
)

709


302

Shares acquired related to employee share-based compensation plans




(4,425
)

(4,425
)
Common stock repurchased




(11,206
)

(11,206
)
Common stock warrants repurchased


(163
)



(163
)
Balance at March 31, 2016
$
122,710

$
937

$
1,125,925

$
1,342,930

$
(84,138
)
$
(70,397
)
$
2,437,967

 
 
 
 
 
 
 
 
(In thousands, except per share data)
Preferred
Stock
Common
Stock
Paid-In
Capital
Retained
Earnings
Treasury
Stock, at cost
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



49,722



49,722

Other comprehensive income, net of tax





6,171

6,171

Dividends and dividend equivalents declared on common stock $0.20 per share


25

(18,161
)


(18,136
)
Dividends on Series A preferred stock $21.25 per share



(615
)


(615
)
Dividends on Series E preferred stock $400.00 per share



(2,024
)


(2,024
)
Stock-based compensation, net of tax impact


1,471

(357
)
2,271


3,385

Exercise of stock options


(133
)

394


261

Shares acquired related to employee share-based compensation plans




(3,379
)

(3,379
)
Common stock repurchased




(2,625
)

(2,625
)
Balance at March 31, 2015
$
151,649

$
936

$
1,128,897

$
1,230,816

$
(106,633
)
$
(50,090
)
$
2,355,575

See accompanying Notes to Condensed Consolidated Financial Statements.

4


WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 
Three months ended March 31,
(In thousands)
2016
 
2015
Operating Activities:
 
 
 
Net income
$
48,617

 
$
49,722

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for loan and lease losses
15,600

 
9,750

Deferred tax expense
16,847

 
10,138

Depreciation and amortization
8,921

 
8,099

Amortization of earning assets and funding, premium/discount, net
12,215

 
12,955

Stock-based compensation
2,783

 
2,282

(Gain) loss on sale, net of write-down, on foreclosed and repossessed assets
(378
)
 
536

Loss (gain) on sale, net of write-down, on premises and equipment
288

 
(373
)
Impairment loss recognized in earnings
149

 

Gain on the sale of investment securities, net
(320
)
 
(43
)
Increase in cash surrender value of life insurance policies
(3,653
)
 
(3,152
)
Mortgage banking activities
(2,629
)
 
(1,561
)
Proceeds from sale of loans held for sale
85,161

 
76,895

Origination of loans held for sale
(73,491
)
 
(86,882
)
Net increase in accrued interest receivable and other assets
(72,259
)
 
(38,337
)
Net decrease in accrued expenses and other liabilities
(25,193
)
 
(4,088
)
Net cash provided by operating activities
12,658

 
35,941

Investing Activities:
 
 
 
Net decrease in interest-bearing deposits
128,102

 
13,398

Purchases of available for sale securities
(190,431
)
 
(236,668
)
Proceeds from maturities and principal payments of available for sale securities
125,534

 
137,874

Proceeds from sales of available for sale securities
43,211

 
27,859

Purchases of held-to-maturity securities
(222,906
)
 
(201,182
)
Proceeds from maturities and principal payments of held-to-maturity securities
126,999

 
143,891

Net increase in loans
(215,546
)
 
(380,155
)
Proceeds from sale of loans not originated for sale
8,247

 
32,915

Proceeds from life insurance policies

 
3,912

Proceeds from the sale of foreclosed and repossessed assets
1,983

 
3,399

Proceeds from the sale of premises and equipment

 
650

Purchases of premises and equipment
(12,441
)
 
(8,437
)
Acquisition of business, net cash acquired

 
1,396,414

Net cash (used for) provided by investing activities
(207,248
)
 
933,870

See accompanying Notes to Condensed Consolidated Financial Statements.

5


WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited), continued
 
Three months ended March 31,
(In thousands)
2016
 
2015
Financing Activities:
 
 
 
Net increase in deposits
771,797

 
447,021

Proceeds from Federal Home Loan Bank advances
4,545,000

 
2,800,000

Repayments of Federal Home Loan Bank advances
(4,846,005
)
 
(4,075,070
)
Net decrease in securities sold under agreements to repurchase and other borrowings
(241,251
)
 
(166,879
)
Dividends paid to common shareholders
(20,913
)
 
(18,029
)
Dividends paid to preferred shareholders
(2,024
)
 
(2,639
)
Exercise of stock options
302

 
261

Excess tax benefits from stock-based compensation
1,959

 
1,109

Common stock repurchased
(11,206
)
 
(2,625
)
Shares acquired related to employee share-based compensation plans
(4,425
)
 
(3,379
)
Common stock warrants repurchased
(163
)
 

Net cash provided by (used for) financing activities
193,071

 
(1,020,230
)
Net decrease in cash and due from banks
(1,519
)
 
(50,419
)
Cash and due from banks at beginning of period
199,693

 
213,914

Cash and due from banks at end of period
$
198,174

 
$
163,495

 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
Interest paid
$
28,301

 
$
25,695

Income taxes paid
6,248

 
12,009

Noncash investing and financing activities:
 
 
 
Transfer of loans from portfolio to loans-held-for-sale
$
11,186

 
$

Transfer of loans and leases to foreclosed properties and repossessed assets
1,640

 
2,722

Deposits assumed in business acquisition

 
1,446,899

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 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.

7


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.

8


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.

9


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


10


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
)



11


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.

12


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.

13


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.

14


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



15


 
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