Annual Reports

 
Quarterly Reports

  • 10-Q (Nov 6, 2017)
  • 10-Q (Aug 4, 2017)
  • 10-Q (May 5, 2017)
  • 10-Q (Nov 7, 2016)
  • 10-Q (Aug 9, 2016)
  • 10-Q (May 9, 2016)

 
8-K

 
Other

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
Document


 
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 ending September 30, 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 October 31, 2016 was 91,726,376.

 



INDEX




i


WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
KEY TO ACRONYMS
Agency CMBS
Agency commercial mortgage-backed securities
Agency CMO
Agency collateralized mortgage obligations
Agency MBS
Agency mortgage-backed securities
ALCO
Asset/Liability Committee
ALLL
Allowance for loan and lease losses
AOCL
Accumulated other comprehensive loss, net of tax
ASC
Accounting Standards Codification
ASU
Accounting Standards Update
Basel III
Capital rules under a global regulatory framework developed by the Basel Committee on Banking Supervision
CCRP
Composite Credit Risk Profile
CDI
Core deposit intangible assets
CET1 capital
Common Equity Tier 1 Capital, defined by Basel III capital rules
CLO
Collateralized loan obligations
CMBS
Non-agency commercial mortgage-backed securities
Dodd-Frank Act
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
FASB
Financial Accounting Standards Board
FDIC
Federal Deposit Insurance Corporation
FHLB
Federal Home Loan Bank
FICO
Fair Isaac Corporation
FINRA
Financial Industry Regulatory Authority
FRB
Federal Reserve Bank
FTP
Funds Transfer Pricing, a matched maturity funding concept
GAAP
U.S. Generally Accepted Accounting Principles
Holding Company
Webster Financial Corporation
HSA Bank
A division of Webster Bank, National Association
ISDA
International Swaps Derivative Association
LBP
Look back period
LEP
Loss emergence period
LIBOR
London Interbank Offered Rate
LPL
LPL Financial Holdings Inc.
NII
Net interest income
OCC
Office of the Comptroller of the Currency
OCI/OCL
Other comprehensive income (loss)
OREO
Other real estate owned
OTTI
Other-than-temporary impairment
PPNR
Pre-tax, pre-provision net revenue
RPA
Risk participation agreement
SEC
United States Securities and Exchange Commission
SIPC
Securities Investor Protection Corporation
TDR
Troubled debt restructuring, defined in ASC 310-40 "Receivables-Troubled Debt Restructurings by Creditors"
VIE
Variable interest entity, defined in ASC 810-10 "Consolidation-Overall"
Webster Bank
Webster Bank, National Association, a wholly-owned subsidiary of Webster Financial Corporation
Webster or the Company
Webster Financial Corporation, collectively with its consolidated subsidiaries


ii


PART I. – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
 
September 30,
2016
 
December 31,
2015
(In thousands, except share data)
(Unaudited)
 
 
Assets:
 
 
 
Cash and due from banks
$
199,989

 
$
199,693

Interest-bearing deposits
21,938

 
155,907

Securities available-for-sale
3,040,111

 
2,984,631

Securities held-to-maturity (fair value of $4,109,943 and $3,961,534)
4,022,332

 
3,923,052

Federal Home Loan Bank and Federal Reserve Bank stock
185,104

 
188,347

Loans held for sale (valued under fair value option $66,400 and $0)
66,578

 
37,091

Loans and leases
16,623,401

 
15,671,735

Allowance for loan and lease losses
(187,925
)
 
(174,990
)
Loans and leases, net
16,435,476

 
15,496,745

Deferred tax asset, net
73,228

 
101,578

Premises and equipment, net
137,067

 
129,426

Goodwill
538,373

 
538,373

Other intangible assets, net
34,756

 
39,326

Cash surrender value of life insurance policies
514,153

 
503,093

Accrued interest receivable and other assets
364,512

 
343,856

Total assets
$
25,633,617

 
$
24,641,118

Liabilities and shareholders' equity:
 
 
 
Deposits:
 
 
 
Non-interest-bearing
$
3,993,750

 
$
3,713,063

Interest-bearing
15,207,158

 
14,239,715

Total deposits
19,200,908

 
17,952,778

Securities sold under agreements to repurchase and other borrowings
800,705

 
1,151,400

Federal Home Loan Bank advances
2,587,983

 
2,664,139

Long-term debt
225,450

 
225,260

Accrued expenses and other liabilities
306,942

 
233,581

Total liabilities
23,121,988

 
22,227,158

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
1,125,377

 
1,124,325

Retained earnings
1,392,500

 
1,315,948

Treasury stock, at cost (2,125,891 and 2,090,409 shares)
(76,742
)
 
(71,854
)
Accumulated other comprehensive loss, net of tax
(53,153
)
 
(78,106
)
Total shareholders' equity
2,511,629

 
2,413,960

Total liabilities and shareholders' equity
$
25,633,617

 
$
24,641,118

See accompanying Notes to Condensed Consolidated Financial Statements.

1


WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
 
Three months ended September 30,
 
Nine months ended September 30,
(In thousands, except per share data)
2016
 
2015
 
2016
 
2015
Interest Income:
 
 
 
 
 
 
 
Interest and fees on loans and leases
$
157,071

 
$
140,520

 
$
459,050

 
$
406,937

Taxable interest and dividends on securities
43,384

 
47,230

 
136,734

 
141,739

Non-taxable interest on securities
4,820

 
3,891

 
13,691

 
11,905

Loans held for sale
440

 
357

 
1,006

 
1,299

Total interest income
205,715

 
191,998

 
610,481

 
561,880

Interest Expense:
 
 
 
 
 
 
 
Deposits
12,594

 
11,480

 
37,267

 
34,555

Securities sold under agreements to repurchase and other borrowings
3,447

 
4,138

 
10,999

 
12,711

Federal Home Loan Bank advances
6,979

 
5,949

 
21,517

 
16,099

Long-term debt
2,498

 
2,421

 
7,444

 
7,230

Total interest expense
25,518

 
23,988

 
77,227

 
70,595

Net interest income
180,197

 
168,010

 
533,254

 
491,285

Provision for loan and lease losses
14,250

 
13,000

 
43,850

 
35,500

Net interest income after provision for loan and lease losses
165,947

 
155,010

 
489,404

 
455,785

Non-interest Income:
 
 
 
 
 
 
 
Deposit service fees
35,734

 
35,164

 
105,553

 
101,382

Loan and lease related fees
10,299

 
8,305

 
23,048

 
19,713

Wealth and investment services
7,593

 
7,761

 
21,992

 
24,434

Mortgage banking activities
3,276

 
1,441

 
8,850

 
5,519

Increase in cash surrender value of life insurance policies
3,743

 
3,288

 
11,060

 
9,637

Gain on sale of investment securities, net

 

 
414

 
529

Impairment loss on securities recognized in earnings

 
(82
)
 
(149
)
 
(82
)
Other income
5,767

 
5,415

 
23,093

 
16,966

Total non-interest income
66,412

 
61,292

 
193,861

 
178,098

Non-interest Expense:
 
 
 
 
 
 
 
Compensation and benefits
83,148

 
73,378

 
243,688

 
218,285

Occupancy
15,004

 
11,987

 
44,099

 
37,263

Technology and equipment
19,753

 
21,419

 
59,067

 
60,979

Intangible assets amortization
1,493

 
1,621

 
4,570

 
4,752

Marketing
4,622

 
4,099

 
14,215

 
12,520

Professional and outside services
4,795

 
2,896

 
11,360

 
8,224

Deposit insurance
6,177

 
6,067

 
19,596

 
17,800

Other expense
21,105

 
18,470

 
64,725

 
51,738

Total non-interest expense
156,097

 
139,937

 
461,320

 
411,561

Income before income tax expense
76,262

 
76,365

 
221,945

 
222,322

Income tax expense
24,445

 
24,995

 
72,478

 
69,405

Net income
51,817

 
51,370

 
149,467

 
152,917

Preferred stock dividends and other
(2,183
)
 
(2,194
)
 
(6,540
)
 
(7,202
)
Earnings applicable to common shareholders
$
49,634

 
$
49,176

 
$
142,927

 
$
145,715

Earnings per common share:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
$
0.54

 
$
0.54

 
$
1.57

 
$
1.61

Diluted
0.54

 
0.53

 
1.56

 
1.60

See accompanying Notes to Condensed Consolidated Financial Statements.


2


WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
 
Three months ended September 30,
 
Nine months ended September 30,
(In thousands)
2016
 
2015
 
2016
 
2015
Net income
$
51,817

 
$
51,370

 
$
149,467

 
$
152,917

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Total available-for-sale and transferred securities
1,218

 
712

 
19,988

 
(6,248
)
Total derivative instruments
2,015

 
(519
)
 
1,589

 
42

Total defined benefit pension and other postretirement benefit plans
1,125

 
983

 
3,376

 
2,948

Other comprehensive income (loss), net of tax
4,358

 
1,176

 
24,953

 
(3,258
)
Comprehensive income
$
56,175

 
$
52,546

 
$
174,420

 
$
149,659

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

$
1,315,948

$
(71,854
)
$
(78,106
)
$
2,413,960

Net income



149,467



149,467

Other comprehensive income, net of tax





24,953

24,953

Dividends and dividend equivalents declared on common stock $0.73 per share


109

(67,088
)


(66,979
)
Dividends on Series E preferred stock $1,200.00 per share



(6,072
)


(6,072
)
Stock-based compensation, net of tax impact


2,413

245

8,031


10,689

Exercise of stock options


(1,307
)

3,679


2,372

Common shares acquired related to stock compensation plan activity




(5,392
)

(5,392
)
Common stock repurchase program




(11,206
)

(11,206
)
Common stock warrants repurchased


(163
)



(163
)
Balance at September 30, 2016
$
122,710

$
937

$
1,125,377

$
1,392,500

$
(76,742
)
$
(53,153
)
$
2,511,629

 
 
 
 
 
 
 
 
(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



152,917



152,917

Other comprehensive loss, net of tax





(3,258
)
(3,258
)
Dividends and dividend equivalents declared on common stock $0.66 per share


87

(60,236
)


(60,149
)
Dividends on Series A preferred stock $21.25 per share



(615
)


(615
)
Dividends on Series E preferred stock $1,200.00 per share



(6,072
)


(6,072
)
Preferred stock conversion
(28,939
)

(3,429
)

32,368



Stock-based compensation, net of tax impact


2,778

(828
)
8,454


10,404

Exercise of stock options


(2,124
)

4,686


2,562

Common shares acquired related to stock compensation plan activity




(4,316
)

(4,316
)
Common stock repurchase program




(12,564
)

(12,564
)
Common stock warrants repurchased


(23
)



(23
)
Balance at September 30, 2015
$
122,710

$
936

$
1,124,823

$
1,287,417

$
(74,666
)
$
(59,519
)
$
2,401,701

See accompanying Notes to Condensed Consolidated Financial Statements.

4


WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 
Nine months ended September 30,
(In thousands)
2016
 
2015
Operating Activities:
 
 
 
Net income
$
149,467

 
$
152,917

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for loan and lease losses
43,850

 
35,500

Deferred tax expense (benefit)
14,425

 
(7,272
)
Depreciation and amortization
27,342

 
25,991

Amortization of earning assets and funding, premiums/discounts, net
42,855

 
41,704

Stock-based compensation
8,558

 
8,283

Gain on sale, net of write-down, on foreclosed and repossessed assets
(744
)
 
(69
)
Gain on sale, net of write-down, on premises and equipment
(713
)
 
(249
)
Impairment loss on securities recognized in earnings
149

 
82

Gain on the sale of investment securities, net
(414
)
 
(529
)
Increase in cash surrender value of life insurance policies
(11,060
)
 
(9,637
)
Mortgage banking activities
(8,850
)
 
(5,519
)
Proceeds from sale of loans held for sale
298,840

 
352,300

Origination of loans held for sale
(320,739
)
 
(351,236
)
Derivative contract assets and liabilities
(73,765
)
 
(33,775
)
Net decrease (increase) in accrued interest receivable and other assets
48,136

 
(23,338
)
Net decrease in accrued expenses and other liabilities
(30,419
)
 
(2,801
)
Net cash provided by operating activities
186,918

 
182,352

Investing Activities:
 
 
 
Net decrease in interest-bearing deposits
133,969

 
113,438

Purchases of available for sale securities
(615,174
)
 
(737,184
)
Proceeds from maturities and principal payments of available for sale securities
430,099

 
452,397

Proceeds from sales of available for sale securities
259,283

 
65,643

Purchases of held-to-maturity securities
(640,218
)
 
(639,699
)
Proceeds from maturities and principal payments of held-to-maturity securities
517,513

 
538,772

Net proceeds of Federal Home Loan Bank stock
3,243

 
9,010

Net increase in loans
(1,010,423
)
 
(1,345,816
)
Proceeds from sale of loans not originated for sale
20,764

 
33,100

Proceeds from life insurance policies

 
3,912

Proceeds from the sale of foreclosed and repossessed assets
6,900

 
7,783

Proceeds from the sale of premises and equipment
1,550

 
650

Purchases of premises and equipment
(31,250
)
 
(26,801
)
Acquisition of business, net cash acquired

 
1,396,414

Net cash used for investing activities
(923,744
)
 
(128,381
)
See accompanying Notes to Condensed Consolidated Financial Statements.

5


WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited), continued
 
Nine months ended September 30,
(In thousands)
2016
 
2015
Financing Activities:
 
 
 
Net increase in deposits
1,248,710

 
484,568

Proceeds from Federal Home Loan Bank advances
14,150,000

 
9,100,000

Repayments of Federal Home Loan Bank advances
(14,226,147
)
 
(9,350,209
)
Net decrease in securities sold under agreements to repurchase and other borrowings
(350,695
)
 
(248,738
)
Dividends paid to common shareholders
(66,648
)
 
(59,890
)
Dividends paid to preferred shareholders
(6,072
)
 
(6,687
)
Exercise of stock options
2,372

 
2,562

Excess tax benefits from stock-based compensation
2,363

 
2,131

Common shares acquired related to stock compensation plan activity
(5,392
)
 
(4,316
)
Common stock repurchase program
(11,206
)
 
(12,564
)
Common stock warrants repurchased
(163
)
 
(23
)
Net cash provided by (used for) financing activities
737,122

 
(93,166
)
Net increase (decrease) in cash and due from banks
296

 
(39,195
)
Cash and due from banks at beginning of period
199,693

 
213,914

Cash and due from banks at end of period
$
199,989

 
$
174,719

 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
Interest paid
$
79,054

 
$
73,283

Income taxes paid
61,639

 
79,564

Noncash investing and financing activities:
 
 
 
Transfer of loans from portfolio to loans-held-for-sale
$
20,547

 
$
186

Transfer of loans and leases to foreclosed properties and repossessed assets
4,917

 
6,582

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 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 September 30, 2016, Webster Financial Corporation's principal asset is all of the outstanding capital stock of 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. HSA Bank, offers and administers health savings accounts, flexible spending accounts, health reimbursement accounts, and commuter benefits on a nationwide basis.
Basis of Presentation
The accounting and reporting policies of the Company that materially affect its financial statements conform with 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
The Company identified an immaterial error relating to the accounting for cash collateral associated with derivative instruments, as previously reported in the Company's March 31, 2016 Form 10-Q quarterly report, filed with the SEC on May 9, 2016. The impact of this previously reported error to the net cash provided by operating activities within the Condensed Consolidated Statements of Cash Flows was a $29.5 million decrease for the nine months ended September 30, 2015.
The Company identified an immaterial error relating to the reporting of certain fee accruals and certain expenses within the Company's HSA Bank segment, as previously reported in the Company's June 30, 2016 Form 10-Q quarterly report, filed with the SEC on August 9, 2016. The impact of this previously reported error to net income within the Condensed Consolidated Statements of Income was a $0.8 million decrease for the nine months ended September 30, 2015.
Significant Accounting Policy Updates
Loans Held For Sale. Effective January 1, 2016, on a loan by loan election, residential mortgage loans that are classified as held for sale are accounted for under either the fair value option method of accounting or the lower of cost or fair value method of accounting with the election being made at the time the asset is first recognized. The Company has elected the fair value option to mitigate accounting mismatches between held for sale derivative commitments and loan valuations. Prior to January 1, 2016, residential mortgage loans that were classified as held for sale were accounted for at the lower of cost or fair value method of accounting and were valued on an individual asset basis. 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.
Accounting 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 Net Asset Value per Share (or its Equivalent) (a consensus of the FASB Emerging Issues Task Force); and
ASU No. 2015-16, Business Combinations (Topic 805) - Simplifying the Accounting for Measurement - Period Adjustments.

7


The adoption of these accounting standards did not have a material impact on the Company's financial statements; however, additional disclosures of VIEs are included in Note 3: Variable Interest Entities. The Company did not identify any additional investments requiring consolidation as a result of ASU No. 2015-02.
Accounting Standards Issued but not yet Adopted
The following table identifies ASUs applicable to the Company that have been issued by the FASB but are not yet effective:
ASU
Description
Effective Date and Financial Statement Impact
ASU No. 2016-16 - Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.
The update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. The Update addresses the following eight issues: Debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle.
The Company intends to adopt the Update for the first quarter of 2019. Adoption is not anticipated to have a material impact on the Company's financial statements.
ASU No. 2016-13 - Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.
Current GAAP requires an "incurred loss" methodology for recognizing credit losses that delays recognition until it is probable a loss has been incurred. Both financial institutions and users of their financial statements expressed concern that current GAAP restricts the ability to record credit losses that are expected, but do not yet meet the "probable" threshold.
The main objective of this Update is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in this Update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to determine credit loss estimates.
The Change from an "incurred loss" method to an "expected loss" method represents a fundamental shift from existing GAAP, and may result in material changes to the Company's accounting for credit losses on financial instruments. The Company is evaluating the effect that this ASU will have on its financial statements and related disclosures. The ASU will be effective for the Company as of January 1, 2020.
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 "Revenue from Contracts with Customers", 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.

8


ASU
Description
Effective Date and Financial Statement Impact
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) and 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 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 September 30, 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
$
985

$

$

$
985

 
$
924

$

$

$
924

Agency CMO
457,768

7,453

(1,491
)
463,730

 
546,168

5,532

(2,946
)
548,754

Agency MBS
992,742

11,051

(2,779
)
1,001,014

 
1,075,941

6,459

(17,291
)
1,065,109

Agency CMBS
481,079

3,435

(106
)
484,408

 
215,670

639

(959
)
215,350

CMBS
465,120

4,794

(1,553
)
468,361

 
574,686

7,485

(2,905
)
579,266

CLO
481,555

3,132

(451
)
484,236

 
431,837

592

(3,270
)
429,159

Single issuer trust preferred securities
42,312

63

(4,264
)
38,111

 
42,168


(4,998
)
37,170

Corporate debt securities
97,149

2,117


99,266

 
104,031

2,290


106,321

Equities - financial services




 
3,499


(921
)
2,578

Securities available-for-sale
$
3,018,710

$
32,045

$
(10,644
)
$
3,040,111

 
$
2,994,924

$
22,997

$
(33,290
)
$
2,984,631

Held-to-maturity:




 
 
 
 
 
Agency CMO
$
371,700

$
4,353

$
(890
)
$
375,163

 
$
407,494

$
3,717

$
(2,058
)
$
409,153

Agency MBS
2,072,481

48,397

(1,544
)
2,119,334

 
2,030,176

38,813

(19,908
)
2,049,081

Agency CMBS
624,403

14,449


638,852

 
686,086

4,253

(325
)
690,014

Municipal bonds and notes
610,690

13,658

(1,682
)
622,666

 
435,905

12,019

(417
)
447,507

CMBS
341,019

10,935

(80
)
351,874

 
360,018

5,046

(2,704
)
362,360

Private Label MBS
2,039

15


2,054

 
3,373

46


3,419

Securities held-to-maturity
$
4,022,332

$
91,807

$
(4,196
)
$
4,109,943

 
$
3,923,052

$
63,894

$
(25,412
)
$
3,961,534

Other-Than-Temporary Impairment
The balance of OTTI, included in the amortized cost columns above, is related to certain CLO positions that were previously considered Covered Funds as defined by Section 619 of the Dodd-Frank Act, commonly known as the Volcker Rule. The Company has taken certain legal measures intended to bring CLO into conformance with the Volcker rule.
To the extent that changes occur in interest rates, credit movements, and other factors that impact fair value and expected recovery of amortized cost of its investment securities, the Company may be required to recognize OTTI in earnings, in future periods.
The following table presents the changes in OTTI:
 
Three months ended September 30,
 
Nine months ended September 30,
(In thousands)
2016
 
2015
 
2016
 
2015
Beginning balance
$
3,437

 
$
3,178

 
$
3,288

 
$
3,696

Reduction for securities sold or called
(30
)
 

 
(30
)
 
(518
)
Additions for OTTI not previously recognized in earnings

 
82

 
149

 
82

Ending balance
$
3,407

 
$
3,260

 
$
3,407

 
$
3,260








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 September 30, 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
$
22,888

$
(337
)
 
$
71,140

$
(1,154
)
 
7
$
94,028

$
(1,491
)
Agency MBS
26,917

(48
)
 
274,866

(2,731
)
 
48
301,783

(2,779
)
Agency CMBS
78,572

(106
)
 


 
6
78,572

(106
)
CMBS
34,741

(382
)
 
126,244

(1,171
)
 
24
160,985

(1,553
)
CLO
9,780

(28
)
 
69,708

(423
)
 
4
79,488

(451
)
Single issuer trust preferred securities


 
33,812

(4,264
)
 
7
33,812

(4,264
)
Equities - financial services


 


 


Total available-for-sale in an unrealized loss position
$
172,898

$
(901
)
 
$
575,770

$
(9,743
)
 
96
$
748,668

$
(10,644
)
Held-to-maturity:
 
 
 
 
 
 
 
 
 
Agency CMO
$
77,555

$
(661
)
 
$
18,814

$
(229
)
 
8
$
96,369

$
(890
)
Agency MBS
86,133

(88
)
 
297,018

(1,456
)
 
30
383,151

(1,544
)
Agency CMBS


 


 


Municipal bonds and notes
106,453

(1,663
)
 
3,359

(19
)
 
45
109,812

(1,682
)
CMBS
27,773

(80
)
 


 
5
27,773

(80
)
Total held-to-maturity in an unrealized loss position
$
297,914

$
(2,492
)
 
$
319,191

$
(1,704
)
 
88
$
617,105

$
(4,196
)
 
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
)
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
)
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 have been impacted by OTTI. Unless otherwise noted for an investment security type, management does not intend to sell these investments and has determined, based upon available evidence, that it is more likely than not that the Company will not be required to sell these securities before the recovery of their amortized cost. As such, based on the following impairment analysis, the Company does not consider these securities, in unrealized loss positions, to exhibit OTTI at September 30, 2016.
Available-for-Sale Securities
Agency CMO. There were unrealized losses of $1.5 million on the Company’s investment in Agency CMO at September 30, 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 September 30, 2016 compared to December 31, 2015. These investments are issued by a government agency 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 $2.8 million on the Company’s investment in Agency MBS at September 30, 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 September 30, 2016 compared to December 31, 2015. These investments are issued by a government agency 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 CMBS. There were unrealized losses of $106 thousand on the Company's investment in commercial mortgage-backed securities issued by government agencies at September 30, 2016, compared to $1.0 million at December 31, 2015. Unrealized losses decreased due to lower market rates which resulted in higher security prices since December 31, 2015.
CMBS. There were unrealized losses of $1.6 million on the Company’s investment in CMBS at September 30, 2016 compared to $2.9 million at December 31, 2015. The portfolio of mainly floating rate CMBS experienced decreased market spreads which resulted in higher market prices and smaller unrealized losses at September 30, 2016 compared to December 31, 2015. Internal and external metrics are considered when evaluating potential OTTI. Internal stress tests are performed on individual bonds to monitor potential losses under stress scenarios. Contractual cash flows for these investments are performing as expected.
CLO. There were unrealized losses of $0.5 million on the Company's investment in CLO at September 30, 2016 compared to $3.3 million at December 31, 2015. Unrealized losses decreased due to lower market spreads for the CLO portfolio at September 30, 2016 compared to December 31, 2015. Contractual cash flows for these investments are performing as expected. The Company has taken certain legal measures intended to bring CLO into conformance with the Volcker rule.
Single Issuer Trust Preferred Securities. There were unrealized losses of $4.3 million on the Company's investment in single issuer trust preferred securities at September 30, 2016 compared to $5.0 million at December 31, 2015. Unrealized losses decreased due to lower market spreads for this asset class, which resulted in higher security prices compared to December 31, 2015. The single issuer trust preferred securities portfolio consists of four floating rate 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.
Held-to-Maturity Securities
Agency CMO. There were unrealized losses of $0.9 million on the Company’s investment in Agency CMO at September 30, 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 September 30, 2016 compared to December 31, 2015. These investments are issued by a government agency 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 $1.5 million on the Company’s investment in Agency MBS at September 30, 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 September 30, 2016 compared to December 31, 2015. These investments are issued by a government agency 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.

12


Municipal Bonds and Notes. There were unrealized losses of $1.7 million on the Company’s investment in municipal bonds and notes at September 30, 2016, compared to $417 thousand at December 31, 2015. Unrealized losses increased due to higher market rates primarily on current year to date purchases. The Company performs periodic credit reviews of the issuers and the securities are currently performing as expected.
CMBS. There were unrealized losses of $80 thousand on the Company’s investment in CMBS at September 30, 2016 compared to $2.7 million at December 31, 2015. Unrealized losses decreased due to lower market rates on mainly seasoned fixed rate conduit transactions, which resulted in higher security prices at September 30, 2016 compared to December 31, 2015. Internal and external metrics are considered when evaluating potential OTTI. Internal stress tests are performed on individual bonds to monitor potential losses under stress scenarios. 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 September 30,
 
Nine months ended September 30,
(In thousands)
2016
 
2015
 
2016
 
2015
Proceeds from sales
$

 
$
2,500

 
$
259,273

 
$
37,465

 
 
 
 
 
 
 
 
Gross realized gains on sales
$

 
$

 
$
2,891

 
$
529

Less: Gross realized losses on sales

 

 
2,477

 

Gain on sale of investment securities, net
$

 
$

 
$
414

 
$
529

Contractual Maturities
The amortized cost and fair value of debt securities by contractual maturity are set forth below:
 
At September 30, 2016
 
 
 
 
 
Available-for-Sale
 
Held-to-Maturity
(In thousands)
Amortized
Cost
Fair
Value
 
Amortized
Cost
Fair
Value
Due in one year or less
$
60,737

$
61,771

 
$
7,988

$
8,034

Due after one year through five years
37,397

38,479

 
19,980

20,376

Due after five through ten years
572,461

575,465

 
36,758

37,932

Due after ten years
2,348,115

2,364,396

 
3,957,606

4,043,601

Total debt securities
$
3,018,710

$
3,040,111

 
$
4,022,332

$
4,109,943

For the maturity schedule above, mortgage-backed securities and CLO, which are not due at a single maturity date, have been categorized based on the maturity date of the underlying collateral. Actual principal cash flows may differ from this maturity date presentation as borrowers have the right to prepay obligations with or without prepayment penalties. At September 30, 2016, the Company had a carrying value of $1.2 billion in callable securities in its CMBS, CLO, and municipal bond portfolios. The Company considers prepayment risk in the evaluation of its interest rate risk profile. These maturities do not reflect actual durations which are impacted by prepayments.
Securities with a carrying value totaling $2.7 billion at September 30, 2016 and $2.6 billion at December 31, 2015 were pledged to secure public funds, trust deposits, repurchase agreements, and for other purposes, as required or permitted by law.
Note 3: Variable Interest Entities
A 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.

13


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 trust as well as make funding decisions related to the trust 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 a VIE for which the Company is not the manager. These securities consist of Agency CMO, Agency MBS, Agency CMBS, CLO and single issuer trust preferred securities. The Company has not provided financial or other support with respect to these investments other than its original investment. For these investments, the Company determined it is not the primary beneficiary due to the relative size of the Company’s investment in comparison to the principal amount of the structured securities issued by the VIE, 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 VIE. 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 VIE.
The Company's tax credit-finance investments had an aggregate carrying value of $23.5 million and $25.9 million at September 30, 2016 and December 31, 2015, respectively.