10-K 1 wbs-12312013x10k.htm 10-K WBS-12.31.2013-10K
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
_______________________________________________________________________________
FORM 10-K
_______________________________________________________________________________
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Fiscal Year Ended December 31, 2013
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 (Webster Plaza), Waterbury, Connecticut 06702
(Address and zip code of principal executive offices)
Registrant's telephone number, including area code: (203) 578-2202
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of exchange on which registered
Common Stock, $.01 par value
 
New York Stock Exchange
Depository Shares, Each Representing 1/1000th Interest in a Share of 6.40% Series E Non-Cumulative Perpetual Preferred Stock
 
New York Stock Exchange
Warrants (Expiring November 21, 2018)
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
______________________________________________________________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of 1933. þ  Yes    ¨  No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.  ¨  Yes    þ  No
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    þ  Yes    ¨  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    ¨  No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
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
¨
 
Non-accelerated filer
¨
 
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).    ¨  Yes    þ  No
The aggregate market value of common stock held by non-affiliates of Webster Financial Corporation was approximately $2.3 billion, based on the closing sale price of the common stock on the New York Stock Exchange on June 28, 2013, the last trading day of the registrant's most recently completed second quarter.
The number of shares of common stock, par value $.01 per share, outstanding as of January 31, 2014 was 90,368,684.
Documents Incorporated by Reference
Part III: Portions of the Definitive Proxy Statement for the Annual Meeting of Shareholders to be held on April 24, 2014.

 




INDEX

 
 
Page No.
 
 
 
 
Item 1.
Business
 
 
 
Item 1A.
Risk Factors
 
 
 
Item 1B.
Unresolved Staff Comments
 
 
 
Item 2.
Properties
 
 
 
Item 3.
Legal Proceedings
 
 
 
Item 4.
Mine Safety Disclosures
 
 
 
 
 
 
Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
 
 
Item 6.
Selected Financial Data
 
 
 
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
 
 
 
Item 8.
Financial Statements and Supplementary Data
 
 
 
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 
 
 
Item 9A.
Controls and Procedures
 
 
 
Item 9B.
Other Information
 
 
 
 
 
 
 
Item 10.
Directors, Executive Officers and Corporate Governance
 
 
 
Item 11.
Executive Compensation
 
 
 
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
 
 
Item 13.
Certain Relationships and Related Transactions, and Director Independence
 
 
 
Item 14.
Principal Accountant Fees and Services
 
 
 
 
 
 
 
Item 15.
Exhibits and Financial Statement Schedules
 
 
 
 
 


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PART I
ITEM 1. BUSINESS
Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. For a discussion of forward-looking statements, see the section captioned “Forward-Looking Statements” in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Company Overview
Webster Financial Corporation (collectively, with its consolidated subsidiaries, “Webster”, the “Company”, our company, we or us), is a bank holding company and financial holding company under the Bank Holding Company Act of 1956, as amended, headquartered in Waterbury, Connecticut and incorporated under the laws of Delaware in 1986. At December 31, 2013, Webster Financial Corporation’s principal asset was all of the outstanding capital stock of Webster Bank, National Association (“Webster Bank”). Webster had assets of $20.9 billion and shareholders' equity of $2.2 billion at December 31, 2013. Webster’s common stock is traded on the New York Stock Exchange under the symbol “WBS”.
Webster, through Webster Bank and non-banking financial services subsidiaries, delivers financial services to individuals, families, and businesses primarily from Westchester County, NY to Boston, MA. Webster provides commercial, small business, and consumer banking, mortgage lending, financial planning, and trust and investment services through 169 banking centers, 309 ATMs, telephone banking, mobile banking and its Internet website (www.websterbank.com). Webster Bank provides health savings account trustee and administrative services on a nationwide basis through its HSA Bank division and its Internet website (www.hsabank.com). Webster also offers equipment financing, commercial real estate lending, and asset-based lending.
The core of our company's value proposition is the service quality model that we refer to as the “Type W Personality”, which promises knowledgeable and reliable relationship-based bankers who know their markets and make decisions at the local level. The Company operates with a local market orientation as a community focused, values guided regional bank. Operating objectives include acquiring and developing customer relationships through marketing, onboarding, and cross-sale efforts to fuel organic growth and expanding contiguously. The Company has strategically reconfigured its approach to community banking with the goal of focusing primarily on customer preferences rather than product sets. This process brought together our consumer banking services and products, including deposits, investment services, consumer finance, and distribution planning under the umbrella of the Community Bank.
In 2013, we focused on improving the customer experience by aligning Webster’s delivery channels and capital investment with our customers' shifting preference to utilize electronic and mobile channels to transact more of their banking business. This strategic decision to significantly increase investment in our distribution infrastructure is in response to meeting customers' high expectations for access to convenience while lowering our service delivery costs. In 2012, the Company completed a year-long investment in technology to upgrade its ATMs by implementing customized settings, touch screens, and speech capabilities, in order to provide a best-in-class experience for customers. All 309 ATMs across the four state footprint are now personalized, simpler, faster, and more convenient. Also, for its 261 deposit-taking ATMs, the Company implemented envelope-free and image capture enhancements. As a result of these investments, deposit transactions at self-service channels have increased 33% since 2012 and routine transactions in banking centers have declined 11%.
The Company upgraded its mobile and online banking capabilities during 2013, introducing a completely redesigned online banking experience and adding key features to mobile banking such as Mobile Deposit Capture in the second half of the year. This mobile deposit service has experienced rapid adoption, processing over 85,000 deposits in its first six months. We believe that the shift to electronic infrastructure provides customers with more convenience while giving banking center personnel greater opportunity to build broader, deeper relationships with customers across all lines of business.
Along with mobile and online banking upgrades, Webster invested in high opportunity markets with new banking center locations such as in Greenwich and Storrs, CT as well as upgrading some existing locations to state-of-the-art banking centers with open, welcoming formats, teller automation capabilities and digital displays and tablets that highlight Webster's products and services.
In 2013, a focused shift from transaction-based to relationship-based banking was evident as Webster's overall growth was driven by an increased focus on the customer experience, product enhancements, and an expanded sales force. Webster's Universal Banker training program was completed in 2013. Under this program, branch bankers are trained to assist customers with a wider variety of banking matters and are more focused on financial advisory activities as transactions continue to migrate to Webster's electronic and mobile delivery channels. The success of the continued focus on relationship-based banking is evident in our 2013 Business

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Banking results. Business Banking recorded year-over-year loan growth of 7%, to $1.1 billion. Transaction deposit balances also had year-over-year growth of 4.5% to $1.3 billion, or 75% of total deposits. Additionally, during 2013, Personal Banking increased the loan originator sales force, with an emphasis on jumbo mortgages as a key to building relationships. As a result, Personal Banking loan originations, excluding loans held for sale, were $1.3 billion for the year ended December 31, 2013, a 6.3% increase from the prior year. The increase in loan originations was a direct result of Webster's strategic decision to grow the residential and consumer loan origination platform with an approach that leverages banking centers, the call center, and self-sourced production. The year-over-year increase in originations ran counter to the industry, which saw originations shrink as a result of higher interest rates and regulatory constrictions. The increase in home lending was attributable to all products for both first mortgage and home equity loans. The relationship sales model resulted in significant cross-selling across business lines with nearly 45% of all mortgage clients being referred to other business lines resulting in a 50% increase year-over-year in expanded relationships. Originations of loans held for sale were $687.1 million, a 9.5% decrease from prior year.
The Commercial Bank, which includes middle market, commercial real estate, equipment financing, asset-based lending, and treasury and payment solutions, also grew, generating $2.4 billion in loan originations during the year ended December 31, 2013, a 5.9% increase from the prior year. For 2013, the Commercial Bank grew loans and transaction account balances by 11.7% and 19.8% respectively.  The solid year-over-year growth reflects a number of strategic initiatives leveraging a relationship-based community model.  Specifically Webster deploys local decision making through Regional Presidents and capitalizes on the expertise of its Relationship Managers to offer a compelling value proposition to customers and prospects.  Webster has successfully deployed this model throughout the footprint, most recently expanding to Metro New York where the team has been highly successful at attracting and developing critical market facing talent. The Treasury and Payment Solutions group complements the relationship-based banking offered by the Commercial Bank by combining the cash management services and featuring automated capabilities designed to effectively meet customers’ cash management needs.
The Private Bank continued its momentum while making significant investments for future growth. During 2013, Private Bank deposits grew 11.7%, loans increased by 32.4%, and assets under management, adjusted to reflect the sale of a non-strategic portfolio during the third quarter, increased by 16.5%. The Company also recruited experienced senior leadership talent in the areas of investment management, fiduciary services, and relationship management; developed and implemented an enhanced portfolio management offering; and opened a Private Banking facility in Greenwich, CT.
HSA Bank experienced a 20.8% increase in deposit balances and a 21.4% increase in accounts from the prior year. This growth was primarily driven by increased penetration into larger employer groups and direct relationships with health insurance carriers. New accounts per employer group increased by more than 30%, while new accounts from direct carrier relationships increased by more than 36%. This steady growth is a reflection of a loyal customer base, along with the overall success of HSAs in the insurance and benefits marketplace. In 2014, HSA Bank will focus on delivering an enhanced product offering with cutting edge technology to optimize distribution channels and drive future revenue growth.
Segments
Webster’s operations are managed along three reportable segments that represent its core businesses: Commercial Banking, Community Banking, and Other. Community Banking consists of the Personal Banking and Business Banking operating segments. Other consists of HSA Bank and the Private Banking operating segments. These segments reflect how executive management responsibilities are assigned by the chief operating decision maker for each of the core businesses, the products and services provided, and the type of customer served, and reflect how discrete financial information is currently evaluated. A description of each of the Company’s segments is included in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, and financial results for each of the Company’s segments are included in Note 21 - Segment Reporting in the Notes to Consolidated Financial Statements included elsewhere within this report.
Competition
Webster is subject to strong competition from banks and other financial institutions, including savings and loan associations, finance companies, credit unions, consumer finance companies, and insurance companies. Certain of these competitors are larger financial institutions with substantially greater resources, lending limits, larger branch systems, and a wider array of commercial banking services than Webster. Competition could intensify in the future as a result of industry consolidation, the increasing availability of products and services from non-banks, greater technological developments in the industry, and continued bank regulatory reforms.
Webster faces substantial competition for deposits and loans throughout its market areas. The primary factors in competing for deposits are interest rates, personalized services, the quality and range of financial services, convenience of office locations, automated services, and office hours. Competition for deposits comes primarily from other commercial banks, savings institutions,

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credit unions, mutual funds, and other investment alternatives. The primary factors in competing for commercial and business loans are interest rates, loan origination fees, the quality and range of lending services, and personalized service. Competition for origination of mortgage loans comes primarily from savings institutions, mortgage banking firms, mortgage brokers, other commercial banks, and insurance companies. Factors which affect competition include the general and local economic conditions, current interest rate levels, and volatility in the mortgage markets.
Supervision and Regulation
Webster, Webster Bank, and certain of its non-banking subsidiaries are subject to extensive regulation under federal and state laws. The regulatory framework applicable to bank holding companies and their subsidiary banks is intended to protect depositors, federal deposit insurance funds, consumers, and the banking system as a whole, and not necessarily investors in bank holding companies such as Webster.
Set forth below is a description of the significant elements of the laws and regulations applicable to Webster and its subsidiaries. The description that follows is qualified in its entirety by reference to the full text of the statutes, regulations, and policies that are described. Also, such statutes, regulations, and policies are continually under review by Congress and state legislatures and federal and state regulatory agencies. A change in statutes, regulations, or regulatory policies applicable to Webster and its subsidiaries could have a material effect on the results of the Company.
Regulatory Agencies
Webster is a legal entity separate and distinct from Webster Bank and its other subsidiaries. As a bank holding company and a financial holding company, Webster is regulated under the Bank Holding Company Act of 1956, as amended (“BHC Act”), and is subject to inspection, examination, and supervision by the Federal Reserve Board ("FRB"). Webster is also under the jurisdiction of the United States Securities and Exchange Commission ("SEC") and is subject to the disclosure and regulatory requirements of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, as administered by the SEC. Webster's common stock is listed on the New York Stock Exchange (“NYSE”) under the trading symbol “WBS” and is subject to the rules of the NYSE for listed companies.
Webster Bank is organized as a national banking association under the National Bank Act. It is subject to broad regulation and examination by the Office of the Comptroller of the Currency (“OCC”) as its primary supervisory agency, as well as by the Federal Deposit Insurance Corporation (“FDIC”). As noted below, on July 21, 2011, supervision of compliance with federal consumer financial protection laws for Webster and Webster Bank was transferred to the Bureau of Consumer Financial Protection (“CFPB”). Webster and Webster Bank may also be subject to increased scrutiny and enforcement efforts by state attorneys general in regard to state consumer protection laws. Webster Bank's deposits are insured by the FDIC, subject to FDIC guidelines.
The Company's non-bank subsidiary is also subject to regulation by the FRB and other federal and state agencies. Other non-bank subsidiaries are subject to both federal and state laws and regulations.
Bank Holding Company Regulation
In general, the BHC Act limits the business of bank holding companies to banking, managing or controlling banks, and other activities that the FRB has determined to be so closely related to banking as to be a proper incident thereto. Bank holding companies that are financial holding companies may engage in any activity, or acquire and retain the shares of a company engaged in any activity that is either (i) financial in nature or incidental to such financial activity (as determined by the FRB in consultation with the Secretary of the Treasury) or (ii) complementary to a financial activity, and that does not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally (as solely determined by the FRB). Activities that are financial in nature include securities underwriting and dealing, insurance underwriting, and making merchant banking investments.
If a bank holding company seeks to engage in the broader range of activities that are permitted under the BHC Act for financial holding companies, (i) all of its depository institution subsidiaries, and the holding company must be “well capitalized” and “well managed,” as defined in the FRB's Regulation Y, and (ii) it must file a declaration with the FRB that it elects to be a “financial holding company.”
In order for a financial holding company to commence any activity that is financial in nature, incidental thereto, or complementary to a financial activity, or to acquire a company engaged in any such activity permitted by the BHC Act, each insured depository institution subsidiary of the financial holding company must have received a rating of at least “satisfactory” in its most recent examination under the Community Reinvestment Act ("CRA"). See the section captioned “Community Reinvestment Act and Fair Lending Laws” included elsewhere in this item.

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The BHC Act generally limits acquisitions by bank holding companies that are not qualified as financial holding companies to commercial banks and companies engaged in activities that the FRB has determined to be so closely related to banking as to be a proper incident thereto. Financial holding companies like Webster are also permitted to acquire control of non-depository institution companies engaged in activities that are financial in nature and in activities that are incidental and complementary to financial activities without prior FRB approval. However, the BHC Act, as amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), requires prior written approval from the Federal Reserve or prior written notice to the Federal Reserve before a financial holding company may acquire control of a company with consolidated assets of $10 billion or more.
The BHC Act, the federal Bank Merger Act, and other federal and state statutes regulate acquisitions of commercial banks. The BHC Act requires the prior approval of the FRB for the direct or indirect acquisition of 5% or more of the voting shares of a commercial bank or its parent holding company. Under the Bank Merger Act, the prior approval of the OCC is required for a national bank to merge with another bank or purchase the assets or assume the deposits of another bank. In reviewing applications seeking approval of merger and acquisition transactions, the federal banking agencies will consider, among other things, the competitive effect and public benefits of the transactions, the capital position of the combined organization, the applicant's performance record under the CRA, (see the section captioned “Community Reinvestment Act and Fair Lending Laws” included elsewhere in this item), and the effectiveness of the subject organizations in combating money laundering activities.
Regulatory Reforms
The past three years have resulted in a significant increase in regulation and regulatory oversight for U.S. financial services firms, primarily resulting from the Dodd-Frank Act. The Dodd-Frank Act is extensive, complicated, and comprehensive legislation that impacts practically all aspects of a banking organization and represents a significant overhaul of many aspects of the regulation of the financial services industry. The Dodd-Frank Act implements numerous and far-reaching changes that affect financial companies, including BHCs and banks such as Webster and Webster Bank, by, among other things:
applying the same leverage and risk-based capital requirements that apply to insured depository institutions to most BHCs, savings and loan holding companies, and systemically important nonbank financial companies;
centralizing responsibility for consumer financial protection by creating a new independent agency, the CFPB, with responsibility for implementing, enforcing, and examining compliance with federal consumer financial laws;
requiring any interchange transaction fee charged for a debit transaction be “reasonable” and proportional to the cost incurred by the issuer for the transaction, with new regulations that establish such fee standards, eliminate exclusivity arrangements between issuers and networks for debit card transactions, and limit restrictions on merchant discounting for use of certain payment forms and minimum or maximum amount thresholds as a condition for acceptance of credit cards;
providing for the implementation of certain corporate governance provisions for all public companies concerning executive compensation;
increasing the FDIC’s deposit insurance limits permanently to $250,000 per depositor, per insured bank, for each account ownership category and changing the assessment base as well as increasing the reserve ratio for the Deposit Insurance Fund (“DIF”) to ensure the future strength of the DIF; and
reforming regulation of credit rating agencies.
Many of the provisions of the Dodd-Frank Act are subject to further rulemaking, guidance, and interpretation by the applicable federal banking agencies. Webster will continue to evaluate the impact of any new regulations so promulgated, including changes in regulatory costs and fees, modifications to consumer products or disclosures required by the CFPB, and the requirements of the enhanced supervision provisions, among others. Certain provisions of the Dodd-Frank Act applicable to Webster are discussed herein.
In July 2013, the FRB, the OCC, and the FDIC approved final rules (the “New Capital Rules”) establishing a new comprehensive capital framework for U.S. banking organizations. The New Capital Rules generally implement the Basel Committee on Banking Supervision’s (the “Basel Committee”) December 2010 final capital framework referred to as “Basel III” for strengthening international capital standards. The New Capital Rules substantially revise the risk-based capital requirements applicable to BHCs and their depository institution subsidiaries, including Webster and the Bank, as compared to the current U.S. general risk-based capital rules. The New Capital Rules revise the definitions and the components of regulatory capital, as well as address other issues affecting the numerator in banking institutions’ regulatory capital ratios. The New Capital Rules also address asset risk weights and other matters affecting the denominator in banking institutions’ regulatory capital ratios and replace the existing general risk-weighting approach, which was derived from the Basel Committee’s 1988 “Basel I” capital accords, with a more risk-sensitive approach based, in part, on the “standardized approach” in the Basel Committee’s 2004 “Basel II” capital accords. In addition, the New Capital Rules implement certain provisions of the Dodd-Frank Act, including the requirements of Section 939A to remove references to credit ratings from the federal banking agencies’ rules. The New Capital Rules are effective for

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the Company on January 1, 2015, subject to phase-in periods for certain of their components and other provisions. We are still in the process of assessing the impacts of these complex New Capital Rules; however, we believe we will continue to exceed all estimated well-capitalized regulatory requirements over the course of the phase-in period and on a fully phased-in basis.
In December 2011, the FRB issued a notice of proposed rulemaking on enhanced prudential requirements required by the Dodd-Frank Act. Although most of the enhanced prudential requirements only apply to bank holding companies with more than $50 billion in assets, the proposed rule, as directed by the Dodd-Frank Act, contains certain requirements that apply to bank holding companies with more than $10 billion in assets, including an annual company-run stress test requirement and a requirement to use a risk committee of the Company's board of directors for enterprise-wide risk management practices. Webster meets these requirements.
In October 2012, the FDIC, the OCC, and the FRB issued separate but similar Dodd-Frank Act-mandated final rules requiring covered banks and bank holding companies with more than $10 billion in total consolidated assets to conduct annual company-run stress tests. The final rules require banks with between $10 billion and $50 billion in assets to begin conducting annual stress tests starting with October 2013. A final rule has yet to be issued establishing risk committee requirements.
In June 2011, the FRB approved a final debit card interchange rule pursuant to the Dodd-Frank Act that would cap an issuer's base fee at 21 cents per transaction and allow an additional amount equal to 5 basis points of the transaction's value. The FRB separately issued an interim final rule that also allows a fraud-prevention adjustment of 1 cent per transaction conditioned upon an issuer developing, implementing, and updating reasonably designed fraud-prevention policies and procedures. The FRB also adopted requirements in the final rule that issuers include two unaffiliated networks for routing debit transactions.
In April 2013, the SEC and the Commodity Futures Trading Commission (together, the “Commissions”) jointly issued final rules and guidelines to require certain regulated entities to establish programs to address risks of identity theft. The rules and guidelines implement provisions of the Dodd-Frank Act. These provisions amended Section 615(e) of the Fair Credit Reporting Act and directed the Commissions to adopt rules requiring entities that are subject to the Commissions’ jurisdiction to address identity theft in two ways. First, the rules require financial institutions and creditors to develop and implement a written identity theft prevention program that is designed to detect, prevent, and mitigate identity theft in connection with certain existing accounts or the opening of new accounts. The rules include guidelines to assist entities in the formulation and maintenance of programs that would satisfy the requirements of the rules. Second, the rules establish special requirements for any credit and debit card issuers that are subject to the Commissions’ jurisdiction, to assess the validity of notifications of changes of address under certain circumstances. Webster implemented an ID Theft Prevention Program, approved on April 25, 2013 by its Board of Directors, to address these requirements.
In December 2013, the federal banking agencies jointly adopted final rules implementing Section 619 of the Dodd-Frank Act, commonly known as the Volcker Rule. The Volcker Rule restricts the ability of banking entities, such as Webster, to engage in proprietary trading or to own, sponsor, or have certain relationships with hedge funds or private equity funds, so-called “Covered Funds.” The final rule definition of Covered Funds includes certain investments such as collateralized loan obligation (“CLO”) and collateralized debt obligation (“CDO”) securities. Compliance is generally required by July 21, 2015.
It is difficult to predict at this time what specific impact certain provisions and yet to be finalized implementing rules and regulations will have on the Company, including any regulations promulgated by the CFPB. Financial reform legislation and rules could have adverse implications on the financial industry, the competitive environment, and our ability to conduct business. Management will have to apply resources to ensure compliance with all applicable provisions of the regulatory reform, including the Dodd-Frank Act and any implementing rules, which may increase our costs of operations and adversely impact our earnings.
Dividends
The principal source of Webster's liquidity is dividends from Webster Bank. The prior approval of the OCC is required if the total of all dividends declared by a national bank in any calendar year would exceed the sum of the bank's net income for that year and its undistributed net income for the preceding two calendar years, less any required transfers to surplus. Federal law also prohibits national banks from paying dividends that would be greater than the bank's undivided profits after deducting statutory bad debt in excess of the bank's allowance for loan and lease losses. At December 31, 2013, there was $153.8 million of undistributed net income available for the payment of dividends by Webster Bank to the Company. Webster Bank paid the Company $90.0 million in dividends during the year ended December 31, 2013.
In addition, Webster and Webster Bank are subject to other regulatory policies and requirements relating to the payment of dividends, including requirements to maintain adequate capital above regulatory minimums. The appropriate federal regulatory authority is authorized to determine, under certain circumstances relating to the financial condition of a bank holding company or a bank, that the payment of dividends would be an unsafe or unsound practice and to prohibit payment thereof. The appropriate banking agency authorities have indicated that paying dividends that deplete a bank's capital base to an inadequate level would

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be an unsafe and unsound banking practice and that banking organizations should generally pay dividends only out of current operating earnings.
Federal Reserve System
FRB regulations require depository institutions to maintain reserves against their transaction accounts, primarily interest-bearing and regular checking accounts. Webster Bank's required reserves can be in the form of vault cash and, if vault cash does not fully satisfy the required reserves, in the form of a balance maintained with the Federal Reserve Bank of Boston. FRB regulations currently require that reserves be maintained against aggregate transaction accounts except for transaction accounts which are exempt up to $13.3 million. Transaction accounts greater than $13.3 million up to $89.0 million have a reserve requirement of 3%, and those greater than $89.0 million have a reserve requirement of $2.271 million plus 10% of the amount over $89.0 million. The FRB generally makes annual adjustments to the tiered reserves. Webster Bank is in compliance with these requirements.
As a member of the Federal Reserve System, the Bank is required to hold capital stock of the Federal Reserve Bank of Boston. The required shares may be adjusted up or down based on changes to Webster Bank's common stock and paid-in surplus. Webster Bank was in compliance with these requirements with a total investment in Federal Reserve Bank of Boston stock of $50.7 million at December 31, 2013. Additionally, Webster Bank received $3.0 million in dividends from the Federal Reserve Bank of Boston in 2013.
Federal Home Loan Bank System
The Federal Home Loan Bank System provides a central credit facility for member institutions. The Bank is a member of the Federal Home Loan Bank of Boston (“FHLB”). Webster Bank is required to purchase and hold shares of capital stock in the FHLB in an amount equal to 0.35% of the aggregate principal amount of its unpaid residential mortgage loans and similar obligations at the beginning of each year up to a maximum of $25.0 million. Webster Bank is also required to hold shares of capital stock in the FHLB in amounts that vary from 3.0% to 4.5% of its advances (borrowings), depending on the maturities of the advances. Webster Bank was in compliance with these requirements with a total investment in FHLB stock of $108.2 million, and had approximately $2.1 billion in FHLB advances, at December 31, 2013. Additionally, Webster Bank received $0.4 million in dividends from the FHLB in 2013.
Source of Strength Doctrine
FRB policy, now codified under the Dodd-Frank Act, requires bank holding companies to act as a source of financial strength to their subsidiary banks. As a result, Webster is expected to commit resources to support Webster Bank, including at times when Webster may not be in a financial position to provide such resources. Any capital loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary banks. The Federal bankruptcy code provides that, in the event of a bank holding company's bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to priority of payment.
In addition, under the National Bank Act, if the capital stock of Webster Bank is impaired by losses or otherwise, the OCC is authorized to require payment of the deficiency by assessment upon Webster. If the assessment is not paid within three months, the OCC could order a sale of the Webster Bank stock held by Webster to make good the deficiency.
Capital Adequacy and Prompt Corrective Action
The New Capital Rules: (i) introduce a new capital measure called “Common Equity Tier 1” (“CET1”) and related regulatory capital ratio of CET1 to risk-weighted assets; (ii) specify that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting certain revised requirements; (iii) mandate that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital; and (iv) expand the scope of the deductions from and adjustments to capital as compared to existing regulations. Under the New Capital Rules, for most banking organizations, including Webster, the most common form of Additional Tier 1 capital is non-cumulative perpetual preferred stock, and the most common forms of Tier 2 capital are subordinated notes and a portion of the allocation for loan and lease losses, in each case, subject to the New Capital Rules’ specific requirements.

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Pursuant to the New Capital Rules, the minimum capital ratios as of January 1, 2015 will be as follows:
4.5% CET1 to risk-weighted assets;
6.0% Tier 1 capital (that is, CET1 plus Additional Tier 1 capital) to risk-weighted assets;
8.0% Total capital (that is, Tier 1 capital plus Tier 2 capital) to risk-weighted assets; and
4.0% Tier 1 capital to average consolidated assets as reported on consolidated financial statements (known as the “leverage ratio”).
The New Capital Rules also introduce a new “capital conservation buffer,” composed entirely of CET1, on top of these minimum risk-weighted asset ratios. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum but below the capital conservation buffer will face constraints on dividends, equity, and other capital instrument repurchases and compensation based on the amount of the shortfall. Thus, when fully phased-in on January 1, 2019, the capital standards applicable to Webster will include an additional capital conservation buffer of 2.5% of CET1, effectively resulting in minimum ratios inclusive of the capital conservation buffer of (i) CET1 to risk-weighted assets of at least 7%, (ii) Tier 1 capital to risk-weighted assets of at least 8.5%, and (iii) Total capital to risk-weighted assets of at least 10.5%.
The New Capital Rules provide for a number of deductions from and adjustments to CET1. These include, for example, the requirement that mortgage servicing assets, deferred tax assets arising from temporary differences that could not be realized through net operating loss carrybacks, and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such items, in the aggregate, exceed 15% of CET1.
In addition, under the current general risk-based capital rules, the effects of accumulated other comprehensive income or loss (“AOCI”) items included in shareholders’ equity (for example, marks-to-market of securities held in the available-for-sale portfolio) under U.S. generally accepted accounting principles ("GAAP") are reversed for the purposes of determining regulatory capital ratios. Pursuant to the New Capital Rules, the effects of certain AOCI items are not excluded; however, non-advanced approaches banking organizations, including the Company, may make a one-time permanent election to continue to exclude these items. This election must be made concurrently with the first filing of certain of Webster’s periodic regulatory reports in 2015. The New Capital Rules also preclude certain hybrid securities, such as trust preferred securities, from inclusion in bank holding companies’ Tier 1 capital, subject to phase-out in the case of bank holding companies, such as Webster, that had $15 billion or more in total consolidated assets as of December 31, 2009.
Implementation of the deductions and other adjustments to CET1 will begin on January 1, 2015 and will be phased-in over a 4-year period (beginning at 40% on January 1, 2015 and an additional 20% per year thereafter). The implementation of the capital conservation buffer will begin on January 1, 2016 at the 0.625% level and increase by 0.625% on each subsequent January 1, until it reaches 2.5% on January 1, 2019.
With respect to the Bank, the New Capital Rules revise the “prompt corrective action” (“PCA”) regulations adopted pursuant to Section 38 of the Federal Deposit Insurance Act (“FDIA”), by: (i) introducing a CET1 ratio requirement at each PCA category (other than critically undercapitalized), with the required CET1 ratio being 6.5% for well-capitalized status; (ii) increasing the minimum Tier 1 capital ratio requirement for each category, with the minimum Tier 1 capital ratio for well-capitalized status being 8% (as compared to the current 6%); and (iii) eliminating the current provision that provides that a bank with a composite supervisory rating of 1 may have a 3% leverage ratio and still be adequately capitalized. The New Capital Rules do not change the total risk-based capital requirement for any PCA category.
The New Capital Rules prescribe a new standardized approach for risk weightings that expand the risk-weighting categories from the current four Basel I-derived categories (0%, 20%, 50% and 100%) to a larger and more risk-sensitive number of categories, depending on the nature of the assets, generally ranging from 0% for U.S. government and agency securities, to 600% for certain equity exposures, and resulting in higher risk weights for a variety of asset classes.
Management believes that Webster will be able to comply with the targeted capital ratios upon implementation of the revised requirements, as finalized.
Transactions with Affiliates & Insiders
Under federal law, transactions between depository institutions and their affiliates are governed by Sections 23A and 23B of the Federal Reserve Act (“FRA”). In a holding company context, at a minimum, the parent holding company of a bank, and any companies which are controlled by such parent holding company, are affiliates of the bank. Generally, sections 23A and 23B are intended to protect insured depository institutions from losses arising from transactions with non-insured affiliates by limiting the extent to which a bank or its subsidiaries may engage in covered transactions with any one affiliate and with all affiliates of

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the bank in the aggregate, and requiring that such transactions be on terms that are consistent with safe and sound banking practices.
Further, Section 22(h) of the FRA restricts loans to directors, executive officers, and principal stockholders (“insiders”). Under Section 22(h), loans to insiders and their related interests may not exceed, together with all other outstanding loans to such persons and affiliated entities, the institution's total capital and surplus. Loans to insiders above specified amounts must receive the prior approval of the board of directors. Further, under Section 22(h), loans to directors, executive officers, and principal stockholders must be made on terms substantially the same as offered in comparable transactions to other persons, except that such insiders may receive preferential loans made under a benefit or compensation program that is widely available to the bank's employees and does not give preference to the insider over the employees. Section 22(g) of the FRA places additional limitations on loans to executive officers.
Consumer Protection and Financial Privacy Laws
The Company is subject to a number of federal and state laws designed to protect borrowers and promote lending to various sectors of the economy and population. These laws include the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act, various state law counterparts, and the Consumer Financial Protection Act of 2010, which constitutes part of the Dodd-Frank Act and establishes the CFPB, as described above.
On January 10, 2013, the CFPB issued a final rule implementing the ability-to-repay and qualified mortgage (QM) provisions of the Truth in Lending Act, as amended by the Dodd-Frank Act (the “QM Rule”). The ability-to-repay provision requires creditors to make reasonable, good faith determinations that borrowers are able to repay their mortgages before extending the credit based on a number of factors and consideration of financial information about the borrower from reasonably reliable third-party documents. Under the Dodd-Frank Act and the QM Rule, loans meeting the definition of “qualified mortgage” are entitled to a presumption that the lender satisfied the ability-to-repay requirements. The presumption is a conclusive presumption/safe harbor for prime loans meeting the QM requirements and a rebuttable presumption for higher-priced/subprime loans meeting the QM requirements. The definition of a “qualified mortgage” incorporates the statutory requirements, such as not allowing negative amortization or terms longer than 30 years. The QM Rule also adds an explicit maximum 43% debt-to-income ratio for borrowers if the loan is to meet the QM definition, though some mortgages that meet GSE, FHA, and VA underwriting guidelines may, for a period not to exceed seven years, meet the QM definition without being subject to the 43% debt-to-income limits. The QM Rule became effective on January 10, 2014.
In addition, federal law and certain state laws currently contain client privacy protection provisions. These provisions limit the ability of banks and other financial institutions to disclose non-public information about consumers to affiliated companies and non-affiliated third parties. These rules require disclosure of privacy policies to clients and, in some circumstances, allow consumers to prevent disclosure of certain personal information to affiliates or non-affiliated third parties by means of "opt out" or "opt in" authorizations. Pursuant to the Gramm-Leach-Bliley Act ("GLBA") and certain state laws, companies are required to notify clients of security breaches resulting in unauthorized access to their personal information.
Depositor Preference
The FDIA provides that, in the event of the “liquidation or other resolution” of an insured depository institution, the claims of depositors of the institution, including the claims of the FDIC as subrogee of insured depositors, and certain claims for administrative expenses of the FDIC as a receiver, will have priority over other general unsecured claims against the institution. If an insured depository institution fails, insured and uninsured depositors, along with the FDIC, will have priority in payment ahead of unsecured, non-deposit creditors, including the parent bank holding company, with respect to any extensions of credit they have made to such insured depository institution.
Deposit Insurance
Substantially all of the deposits of Webster Bank are insured up to applicable limits by the DIF of the FDIC and are subject to deposit insurance assessments to maintain the DIF. The FDIC utilizes a risk-based assessment system that imposes insurance premiums based upon a risk matrix that takes into account a bank's capital level and supervisory rating (“CAMELS rating”). The risk matrix utilizes four risk categories which are distinguished by capital levels and supervisory ratings.
In February 2011, the FDIC issued rules to implement changes to the deposit insurance assessment base and risk-based assessments mandated by the Dodd-Frank Act. The base for insurance assessments changed from domestic deposits to consolidated average assets less average tangible equity. Assessment rates are calculated using formulas that take into account the risk of the institution being assessed. The rule was effective April 1, 2011. On September 28, 2011, the FDIC issued notification to insured depository institutions that the transition guidance for reporting certain leveraged and subprime loans on the Call

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Report had been extended from October 1, 2011 to April 1, 2012. On October 9, 2012, the FDIC finalized the definitions of "higher-risk" consumer and C&I loans and securities used under Large Bank Pricing ("LBP") of deposit insurance assessments adopted February 25, 2011 for banks with $10 billion or more of assets. The final rule, among other things, renames leveraged loans “higher-risk C&I loans and securities”; renames subprime consumer loans “higher-risk consumer loans”; clarifies when an asset must be identified as higher risk; and clarifies the way securitizations are identified as higher risk.
The Bank's FDIC deposit insurance assessment expenses totaled $21.1 million, $22.7 million, and $20.9 million for the years ended December 31, 2013, 2012, and 2011, respectively. FDIC insurance expense includes deposit insurance assessments and Financing Corporation (“FICO”) assessments related to outstanding FICO bonds. FICO is a mixed-ownership government corporation established by the Competitive Equality Banking Act of 1987 whose sole purpose was to function as a financing vehicle for the now defunct Federal Savings & Loan Insurance Corporation.
Under the FDIA, the FDIC may terminate deposit insurance upon a finding that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. Webster's management is not aware of any practice, condition, or violation that might lead to the termination of its deposit insurance.
Incentive Compensation
The Dodd-Frank Act requires publicly traded companies to give stockholders a non-binding vote on executive compensation at their first annual meeting taking place six months after the date of enactment and at least every three years thereafter and on so-called “golden parachute” payments in connection with approvals of mergers and acquisitions. The legislation also authorizes the SEC to promulgate rules that would allow stockholders to nominate their own candidates using a company's proxy materials. Additionally, the Dodd-Frank Act directs the federal banking regulators to promulgate rules requiring the reporting of incentive-based compensation and prohibiting excessive incentive-based compensation paid to executives of depository institutions and their holding companies with assets in excess of $1.0 billion, regardless of whether the company is publicly traded or not. In April 2011, the FRB, along with other federal banking supervisors, issued a joint notice of proposed rulemaking implementing those requirements. The Dodd-Frank Act gives the SEC authority to prohibit broker discretionary voting on elections of directors, executive compensation matters, and any other significant matter. At the 2011 Annual Meeting of Shareholders, Webster's shareholders voted on a non-binding, advisory basis to hold a non-binding, advisory vote on the compensation of named executive officers of Webster annually. As a result of the vote, the Board of Directors determined to hold the vote annually.
Community Reinvestment Act and Fair Lending Laws
Webster Bank has a responsibility under the Community Reinvestment Act of 1977 (“CRA”) to help meet the credit needs of its communities, including low and moderate-income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. In connection with its examination, the OCC assesses Webster Bank's record of compliance with the CRA. In addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit discrimination in lending practices on the basis of characteristics specified in those statutes. Webster Bank's failure to comply with the provisions of the CRA could, at a minimum, result in regulatory restrictions on its activities and the activities of Webster. Webster Bank's failure to comply with the Equal Credit Opportunity Act and the Fair Housing Act could result in enforcement actions against it by the OCC, as well as other federal regulatory agencies, including the CFPB and the Department of Justice. The Bank's latest OCC CRA rating was “satisfactory.”
USA PATRIOT Act
Under Title III of the USA PATRIOT Act, all financial institutions are required to take certain measures to identify their customers, prevent money laundering, monitor customer transactions, and report suspicious activity to U.S. law enforcement agencies. Financial institutions also are required to respond to requests for information from federal banking regulatory authorities and law enforcement agencies. Information sharing among financial institutions for the above purposes is encouraged by an exemption granted to complying financial institutions from the privacy provisions of the GLBA and other privacy laws. Financial institutions that hold correspondent accounts for foreign banks or provide private banking services to foreign individuals are required to take measures to avoid dealing with certain foreign individuals or entities, including foreign banks with profiles that raise money laundering concerns, and are prohibited from dealing with foreign “shell banks” and persons from jurisdictions of particular concern. The primary federal banking regulators and the Secretary of the Treasury have adopted regulations to implement several of these provisions. All financial institutions also are required to establish internal anti-money laundering programs. The effectiveness of a financial institution in combating money laundering activities is a factor to be considered in any application submitted by the financial institution under the Bank Merger Act. Webster has in place a Bank Secrecy Act and USA PATRIOT Act compliance program and engages in very few transactions of any kind with foreign financial institutions or foreign persons.

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Office of Foreign Assets Control Regulation
The United States has imposed economic sanctions that affect transactions with designated foreign countries, nationals, and others. These are typically known as the “OFAC” rules based on their administration by the U.S. Treasury Department Office of Foreign Assets Control (“OFAC”). The OFAC-administered sanctions targeting countries take many different forms. Generally, they contain one or more of the following elements: i) restrictions on trade with or investment in a sanctioned country, including prohibitions against direct or indirect imports from and exports to a sanctioned country and prohibitions on “U.S. persons” engaging in financial transactions relating to making investments in, or providing investment-related advice or assistance to, a sanctioned country; and ii) a blocking of assets in which the government or specially designated nationals of the sanctioned country have an interest, by prohibiting transfers of property subject to U.S. jurisdiction (including property in the possession or control of U.S. persons). Blocked assets (property and bank deposits) cannot be paid out, withdrawn, set off, or transferred in any manner without a license from OFAC. Failure to comply with these sanctions could have serious legal and reputational consequences.
Other Legislative Initiatives
From time to time, various legislative and regulatory initiatives are introduced in Congress and state legislatures, as well as by regulatory agencies. Such initiatives may include proposals to expand or contract the powers of bank holding companies and/or depository institutions or proposals to substantially change the financial institution regulatory system. Such legislation could change banking statutes and the operating environment of the Company in substantial and unpredictable ways. If enacted, such legislation could increase or decrease the cost of doing business, limit or expand permissible activities, or affect the competitive balance among banks, savings associations, credit unions, and other financial institutions. The Company cannot predict whether any such legislation will be enacted, and, if enacted, the effect that it or any implementing regulations would have on the financial condition or results of operations of the Company. A change in statutes, regulations, or regulatory policies applicable to Webster or any of its subsidiaries could have a material effect on the business of the Company.
Risk Management Framework
Webster applies an integrated, forward-looking Enterprise Risk Management ("ERM") approach to identifying, assessing and managing risks across the Company. The ERM framework enables the aggregation of risk across the enterprise and ensures the Company has the tools, programs, and processes in place to support informed decision making and anticipate risks before they materialize and to ensure that Webster's risk profile remains consistent with its risk strategy and risk appetite. Webster's risk appetite framework consists of a risk appetite statement supported by board and business-level scorecards for monitoring Webster's risk positions relative to its established risk appetite.
The Risk Committee of the Board of Directors, comprised of independent directors, oversees all Webster's risk-related matters and provides input and guidance as appropriate. Webster's Enterprise Risk Management Committee (“ERMC”), which reports directly to the Risk Committee of the Board, is chaired by Webster's Chief Risk Officer and is comprised of members of Webster's Executive Management Committee and Senior Risk Officers who oversee risk management activities.
The Chief Risk Officer is responsible for oversight of the Company's ERM framework, which includes but is not limited to credit risk, operational risk management, compliance programs, loan workout and recovery activities, and risk policy for administration. The Corporate Treasurer, who reports to the Chief Financial Officer, is responsible for overseeing market, liquidity, and capital risk management activities.
Credit Risk
Webster Bank manages and controls risk in its loan and investment portfolios through established underwriting practices, adherence to standards, and utilization of various portfolio and transaction monitoring tools and processes. Credit policies and underwriting guidelines provide limits on exposure and establish various other standards as deemed necessary and prudent. Additional approval requirements and reporting are implemented to ensure proper identification, rationale, and disclosure of policy exceptions.
Credit Risk Management policies and transaction approvals are managed under the supervision of the Chief Credit Officer, who reports to the Chief Risk Officer, and are independent of the loan production and Treasury areas. The independent credit risk function oversees the underwriting, approval, and portfolio management process; establishes and ensures adherence to credit policies; and manages the collections and problem asset resolution activities.
As part of the Credit Risk Management process, there is a Credit Risk Management Committee ("CRMC") that meets regularly to review key credit risk topics, issues, and policies. Included in the CRMC is a review of Webster's credit risk scorecard, which covers key risk indicators and limits established as part of the Company's risk appetite framework. The CRMC is chaired by the Chief Credit Officer and includes of a group of senior managers responsible for lending as well as senior managers from the Credit

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Risk Management function. Important findings regarding credit quality and trends within the loan and investment portfolios are regularly reported by the Chief Credit Officer to the ERMC, and the Risk Committee of the Board of Directors.
In addition to the Credit Risk Management team, there is an independent Credit Risk Review function that assesses risk ratings and credit underwriting process for all areas of the organization that incur credit risk. The head of Credit Risk Review reports directly to the Risk Committee of the Board and administratively to the Chief Risk Officer. Credit Risk Review findings are reported to the CRMC, ERMC and the Risk Committee of the Board. Corrective measures are monitored and tested to ensure risk issues are mitigated or resolved.
Market Risk
Market risk refers to the risk of loss arising from adverse changes in interest rates, foreign currency exchange rates, commodity prices, and other relevant market rates and prices, such as equity prices. The risk of loss can be assessed from the perspective of adverse changes in fair values, cash flows, and future earnings. Due to the nature of its operations, Webster is primarily exposed to interest rate risk. Accordingly, Webster's interest rate sensitivity is monitored on an ongoing basis by its Asset and Liability Committee (“ALCO”). ALCO's primary goal is to manage interest rate risk to maximize earnings and net economic value in changing interest rate and business environments within Board of Director approved risk appetite limits. ALCO is chaired by Webster's Corporate Treasurer who, as a Senior Risk Officer, regularly reports ALCO findings to the ERMC, the Risk Committee of the Board, and the Board of Directors.
Liquidity Risk
Liquidity risk refers to the ability of Webster Bank to meet a demand for funds by converting assets into cash or cash equivalents and by increasing liabilities at acceptable costs. Liquidity management involves maintaining the ability to meet day-to-day and longer-term cash flow requirements of customers, whether they are depositors wishing to withdraw funds or borrowers requiring funds to meet their credit needs. Liquidity sources include the amount of unencumbered or “free” investment portfolio securities the Company owns.
The Company requires funds for dividends to shareholders, payment of debt obligations, repurchase of shares, potential acquisitions, and for general corporate purposes. Its sources of funds include dividends from Webster Bank, income from investment securities, the issuance of equity, and debt in the capital markets.
Both Webster Bank and the Company maintain a level of liquidity necessary to achieve their business objectives under both normal and stressed conditions. Liquidity risk is monitored and managed by ALCO and reviewed regularly with ERMC, the Risk Committee of the Board, and the Board of Directors.
Capital Risk
Webster needs to maintain adequate capital in both normal and stressed environments to support its business objectives and risk appetite. ALCO monitors regulatory and tangible capital levels according to regulatory requirements and management targets and recommends capital conservation, generation, and/or deployment strategies to the Risk Committee of the Board and the Board of Directors. ALCO also has responsibility for the annual capital plan, contingency planning, and stress testing, which are all reviewed and approved by the Risk Committee of the Board and the Board of Directors at least annually.
Operational Risk
Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. It includes the risks stemming from failure to comply with applicable laws and regulations and associated risks of harm to consumers, reputational damage due to lapse in compliance with industry ethical standards and governance norms, and the lack of required risk identification or mitigation pertaining to business processes and utilized systems of operation.
The Operational Risk function is responsible for establishing processes and tools to identify, manage, and aggregate operational risk across the organization; providing guidance and advice on operational risk matters; and educating the organization on operational risks. Specific programs and functions have been established to manage the risks associated with legal and regulatory requirements, suppliers and other third-parties, information security, business disruption, fraud, models, and new products and services.
Webster has established an Operational Risk Management Committee ("ORMC"), which consists of Senior Risk Officers and senior managers responsible for operational risk management to periodically review the aforementioned programs, key operational risk trends, concerns, and mitigation best practices. The ORMC is co-chaired by the Chief Risk Officer and Director of Operating Risk Management, who is responsible for overseeing Webster's operational risk management framework.

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Internal Audit
Internal Audit provides an independent and objective assessment of the design and execution of internal controls for all major business units and operations throughout Webster, including our management systems, risk governance, and policies and procedures. Internal Audit activities are designed to provide reasonable assurance that resources are safeguarded; that significant financial, managerial and operating information is complete, accurate and reliable; and that employee actions comply with our policies and applicable laws and regulations.
Results of Internal Audit reviews are reported to management and the Audit Committee of the Board. Corrective measures are monitored to ensure risk issues are mitigated or resolved. The General Auditor reports directly to the Audit Committee and administratively to the Chief Executive Officer. The appointment or replacement of the General Auditor is overseen by the Audit Committee.
Additional information on risks and uncertainties and additional factors that could affect the results anticipated in these forward-looking statements or from historical performance can be found in Item 1A and elsewhere within this Form 10-K for the year ended December 31, 2013 and in other reports filed by Webster with the SEC.
Subsidiaries of Webster Financial Corporation
Webster’s direct subsidiaries as of December 31, 2013 included Webster Bank, Fleming, Perry & Cox, Inc., and Webster Licensing, LLC. Webster also owns all of the outstanding common stock of Webster Statutory Trust, an unconsolidated financial vehicle that has issued and may in the future issue trust preferred securities.
Webster Bank's direct subsidiaries include Webster Mortgage Investment Corporation, Webster Business Credit Corporation (“WBCC”), and Webster Capital Finance, Inc. (“WCF”). Webster Bank is the primary source of community banking activity within the consolidated group. Webster Bank provides banking services through 169 banking offices, 309 ATMs, telephone banking, mobile banking, and its Internet websites. Residential mortgage origination activity is conducted through Webster Bank. Webster Mortgage Investment Corporation is a passive investment subsidiary whose primary function is to provide servicing on passive investments, such as residential real estate and commercial mortgage real estate loans transferred from Webster Bank. Various commercial lending products are provided through Webster Bank and its subsidiaries to clients within the region from Westchester County, NY to Boston, MA. WBCC provides asset-based lending services. WCF provides equipment financing for end users of equipment. Additionally, Webster Bank has various other subsidiaries that are not significant to the consolidated group.
Employees
At December 31, 2013, Webster had 2,744 employees, including 2,663 full-time and 81 part-time and other employees. None of the employees were represented by a collective bargaining group. Webster maintains a comprehensive employee benefit program providing, among other benefits, group medical and dental insurance, life insurance, disability insurance, and an employee 401(k) retirement savings plan. Management considers relations with its employees to be good. See Note 19 - Pension and Other Postretirement Benefits in the Notes to Consolidated Financial Statements included elsewhere within this report for additional information on certain benefit programs.
Available Information
Webster makes available free of charge on its websites (www.websterbank.com or www.wbst.com) its Annual Report on Form 10-K, its quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments, if any, to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934 as soon as practicable after it electronically files such material with, or furnishes it to, the SEC. Information on Webster’s website is not incorporated by reference into this report.

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ITEM 1A. RISK FACTORS
Our financial condition and results of operations are subject to various risks inherent in our business. The material risks and uncertainties that management believes affect us are described below. If any of the events or circumstances described in the following risks actually occurs, our business, financial condition or results of operations could suffer. You should consider all of the following risks together with all of the other information in this Annual Report on Form 10-K.
Changes in interest rates and spreads could have an impact on earnings and results of operations which could have a negative impact on the value of our stock.
Our consolidated earnings and financial condition are dependent to a large degree upon net interest income, which is the difference between interest earned from loans and investments and interest paid on deposits and borrowings. The narrowing of interest rate spreads could adversely affect our earnings and financial condition. We cannot predict with certainty or control changes in interest rates. Regional and local economic conditions and the policies of regulatory authorities, including monetary policies of the Federal Reserve Board, affect interest income and interest expense. While we have ongoing policies and procedures designed to manage the risks associated with changes in market interest rates, changes in interest rates still may have an adverse effect on our profitability. For example, high interest rates could affect the amount of loans that we can originate because higher rates could cause customers to apply for fewer mortgages, or cause depositors to shift funds from accounts that have a comparatively lower cost to accounts with a higher cost, or experience customer attrition due to competitor pricing. If the cost of interest-bearing deposits increases at a rate greater than the yields on interest-earning assets increase, net interest income will be negatively affected. Changes in the asset and liability mix may also affect net interest income. Similarly, lower interest rates cause higher yielding assets to prepay and floating or adjustable rate assets to reset to lower rates. If we are not able to reduce our funding costs sufficiently, due to either competitive factors or the maturity schedule of existing liabilities, then our net interest margin will decline.
The possibility of the economy’s return to recessionary conditions and the possibility of further turmoil or volatility in the financial markets would likely have an adverse effect on our business, financial position and results of operations.
The economy in the United States and globally began to recover from severe recessionary conditions in mid-2009 and is currently in the midst of a moderate economic recovery. The sustainability of the moderate recovery is dependent on a number of factors that are not within our control, such as a return to private sector job growth and investment, strengthening of housing sales and construction, continuation of the economic recovery globally, and the timing and impact of changing governmental policies. We continue to face risks resulting from the aftermath of the severe recession generally and the moderate pace of the current recovery. A slowing or failure of the economic recovery would likely aggravate the adverse effects of these difficult economic and market conditions on us and on others in the financial services industry.
In particular, we may face the following risks in connection with the current economic and market environment:
investors may have less confidence in the equity markets in general and in financial services industry stocks in particular, which could place downward pressure on our stock price and resulting market valuation;
economic and market developments may further affect consumer and business confidence levels and may cause declines in credit usage and adverse changes in payment patterns, causing increases in delinquencies and default rates;
our ability to assess the creditworthiness of our customers may be impaired if the models and approaches we use to select, manage, and underwrite our customers become less predictive of future behaviors;
we could suffer decreases in customer desire to do business with us, whether as a result of a decreased demand for loans or other financial products and services or decreased deposits or other investments in accounts with us;
competition in our industry could intensify as a result of the increasing consolidation of financial services companies in connection with current market conditions, or otherwise;
we face increased regulation of our industry, and compliance with such regulation may increase our costs and limit our ability to pursue business opportunities; and
we may be required to pay significantly higher FDIC deposit insurance premiums.
Compliance with the Dodd-Frank Act and other regulatory reforms may increase our costs of operations and adversely impact our earnings and capital ratios.
On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) into law. The Dodd-Frank Act represents a significant overhaul of many aspects of the regulation of the financial services industry. Among other things, the Dodd-Frank Act creates a new federal financial consumer protection agency, increases capital standards, imposes clearing and margining requirements on many derivatives activities, and generally increases oversight and regulation of financial institutions and financial activities. It requires bank holding companies with assets greater than $500 million to be subject to minimum leverage and risk-based capital requirements and phases out the ability of such bank holding companies to count certain securities, such as trust preferred securities, as Tier 1 capital. Regulations implementing certain provisions of the

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Dodd-Frank Act increase minimum levels of required capital, narrow the definition of capital, place greater emphasis on common equity, and modify risk weights for various asset classes for purposes of calculating capital ratios.
In addition to the self-implementing provisions of the statute, the Dodd-Frank Act calls for many administrative rulemakings by various federal agencies to implement various parts of the legislation, some of which have yet to be implemented. We cannot be certain when final rules affecting us will be issued through such rulemakings and what the specific content of such rules will be. The financial reform legislation and any implementing rules that are ultimately issued could have adverse implications on the financial industry, the competitive environment, and our ability to conduct business. We will have to apply resources to ensure that we are in compliance with all applicable provisions of the Dodd-Frank Act and any implementing rules, which may increase our costs of operations and adversely impact our earnings.
On December 10, 2013 Federal banking agencies jointly adopted final regulations to implement Section 619 of the Dodd-Frank Act, commonly known as the Volcker Rule. The Volcker Rule restricts the ability of banking entities to engage in proprietary trading or to invest in, sponsor or have certain relationships with hedge funds or private equity funds, which include certain investments such as CLO and CDO securities in our available for sale portfolio. As a result, we currently expect we will be required to divest such investments in accordance with the conformance period defined in the final regulations. This requirement to divest has resulted in impairments on such assets, and could result in future impairments if the fair value of Covered Funds declines further. See the “Investment Securities Portfolio” section of Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Annual Report on Form 10-K. The final rules also require each regulated entity to establish an internal compliance program that is consistent with the extent to which it engages in activities covered by the Volcker Rule, including for the largest entities (which currently does not include us) making regular reports about those activities to regulators. We are continuing to evaluate the final regulations and further guidance from the regulators regarding compliance with the Volcker Rule.
We are subject to extensive government regulation and supervision, which may interfere with our ability to conduct our business and may negatively impact our financial results.
We, primarily through Webster Bank and certain non-bank subsidiaries, are subject to extensive federal and state regulation and supervision. Banking regulations are primarily intended to protect depositors’ funds, the Federal Deposit Insurance Funds and the banking system as a whole, not shareholders. These regulations affect our lending practices, capital structure, investment practices, dividend policy and growth, among other things. Congress and federal regulatory agencies continually review banking laws, regulations and policies for possible changes. Changes to statutes, regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies, could affect us in substantial and unpredictable ways. Such changes could subject us to additional costs, limit the types of financial services and products we may offer, and/or limit the pricing we may charge on certain banking services, among other things. Failure to comply with laws, regulations or policies could result in sanctions by regulatory agencies, civil money penalties and/or reputation damage, which could have a material adverse effect on our business, financial condition and results of operations. While we have policies and procedures designed to prevent any such violations, there can be no assurance that such violations will not occur. See the section captioned “Supervision and Regulation” in Item 1 of this report for further information.
If all or a significant portion of the unrealized losses in our portfolio of investment securities were determined to be other-than-temporarily impaired, we would recognize a material charge to our earnings and our capital ratios would be adversely impacted.
When the fair value of a security declines, management must assess whether that decline is other-than-temporary. When management reviews whether a decline in fair value is other-than-temporary, it considers numerous factors, many of which involve significant judgment. Generally, market conditions remain strained for certain classes of securities. Accordingly, no assurance can be provided that the amount of the unrealized losses will not increase.
To the extent that any portion of the unrealized losses in our portfolio of investment securities is determined to be other-than-temporarily impaired, we will recognize a charge to our earnings in the quarter during which such determination is made and our capital ratios will be adversely impacted. If any such charge is deemed significant, a rating agency might downgrade our credit rating or put us on a credit watch. A downgrade or a significant reduction in our capital ratios might adversely impact our ability to access the capital markets or might increase our cost of capital. Even if we do not determine that the unrealized losses associated with the investment portfolio require an impairment charge, increases in such unrealized losses adversely impact the tangible common equity ratio, which may adversely impact credit rating agency and investor sentiment. Any such negative perception also may adversely impact our ability to access the capital markets or might increase our cost of capital. See Note 3 - Investment Securities in the Notes to Consolidated Financial Statements included elsewhere within this report for additional information.

14


Our allowance for loan and lease losses may be insufficient.
Our business is subject to periodic fluctuations based on national and local economic conditions. These fluctuations are not predictable, cannot be controlled and may have a material adverse impact on our operations and financial condition. For example, declines in housing activity including declines in building permits, housing starts and home prices, may make it more difficult for our borrowers to sell their homes or refinance their debt. Sales may also slow, which could strain the resources of real estate developers and builders. We may suffer higher loan and lease losses as a result of these factors and the resulting impact on our borrowers. Recent economic uncertainty continues to affect employment levels and impact the ability of our borrowers to service their debt. Bank regulatory agencies also periodically review our allowance for loan and lease losses and may require an increase in the provision for loan and lease losses or the recognition of further loan charge-offs, based on judgments different than those of management. In addition, if charge-offs in future periods exceed the allowance for loan and lease losses, we may need, depending on an analysis of the adequacy of the allowance for loan and lease losses, additional provisions to increase the allowance for loan losses. Any increases in the allowance for loan and lease losses will result in a decrease in net income and, possibly, capital, and may have a material adverse effect on our financial condition and results of operations.
Changes in local economic conditions could adversely affect our business.
A majority of our mortgage loans are secured by real estate in the State of Connecticut. Our success depends in part upon economic conditions in this and our other geographic markets. Adverse changes in such local markets could reduce our growth in loans and deposits, impair our ability to collect our loans, increase problem loans and charges-offs, and otherwise negatively affect our performance and financial condition.
Our stock price can be volatile.
Stock price volatility may negatively impact the price at which our common stock may be sold, and may also negatively impact the timing of any sale. Our stock price can fluctuate widely in response to a variety of factors including, among other things:
actual or anticipated variations in quarterly operating results;
recommendations by securities analysts;
operating and stock price performance of other companies that investors deem comparable to us;
news reports relating to trends, concerns and other issues in the financial services industry;
new technology used, or services offered, by competitors;
perceptions in the marketplace regarding us and/or our competitors;
significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving us or our competitors;
failure to integrate acquisitions or realize anticipated benefits from acquisitions;
additional investments from third parties;
issuance of additional shares of stock;
changes in government regulations; or
geo-political conditions such as acts or threats of terrorism or military conflicts.
General market fluctuations, industry factors and general economic and political conditions and events, such as economic slowdowns or recessions, interest rate changes, credit loss trends or currency fluctuations, could also cause our stock price to decrease regardless of our operating results.
We operate in a highly competitive industry and market area. If we fail to compete effectively, our financial condition and results of operations may be materially adversely affected.
We face substantial competition in all areas of our operations from a variety of different competitors, many of which are larger and may have more financial resources than we do. Such competitors primarily include national, regional, and community banks within the various markets in which we operate. We also face competition from many other types of financial institutions, including, without limitation, savings and loans, credit unions, finance companies, brokerage firms, insurance companies, factoring companies and other financial intermediaries. The financial services industry could become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation. Banks, securities firms and insurance companies can merge under the umbrella of a financial holding company, which can offer virtually any type of financial service, including banking, securities, underwriting, insurance (both agency and underwriting) and merchant banking. Regulations also impose restrictions and/or provide regulatory relief on the basis of asset size providing a potential advantage to smaller banking entities. Technology has lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. Additionally, due to their size, many competitors may be able to achieve economies of scale and, as a result, may offer a broader range of products and services than we, as well as better pricing for those products and services.

15


Our ability to compete successfully depends on a number of factors, including, among other things:
the ability to develop, maintain and build upon long-term customer relationships based on top quality service, high ethical standards and safe, sound assets;
the ability to expand market position;
the scope, relevance and pricing of products and services offered to meet customer needs and demands;
the rate at which we introduce new products and services relative to our competitors;
customer satisfaction with our level of service; and
industry and general economic trends.
Failure to perform in any of these areas could significantly weaken our competitive position, which could adversely affect our growth and profitability, which, in turn, could have a material adverse effect on our financial condition and results of operations.
The unsoundness of other financial institutions could adversely affect us.
Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services companies are interrelated as a result of trading, clearing, counterparty or other relationships. We have exposure to many different industries and counterparties, and we routinely execute transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, mutual and hedge funds, and other institutional clients. As a result, defaults by, or even rumors or questions about, one or more financial services companies, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions. Many of these transactions expose us to credit risk in the event of default of our counterparty or client. In addition, our credit risk may be exacerbated if the collateral held by us cannot be realized or is liquidated at prices not sufficient to recover the full amount of the loan or derivative exposure due us. There is no assurance that any such losses would not materially and adversely affect our business, financial condition or results of operations.
We may not be able to attract and retain skilled people.
Our success depends, in large part, on our ability to attract and retain key people. Competition for the best people in most activities in which we engage can be intense and we may not be able to hire people or to retain them. Currently, we do not have employment agreements with any of our executive officers. The unexpected loss of services of one or more of our key personnel could have a material adverse impact on the business because we would lose the employees’ skills, knowledge of the market, and years of industry experience and may have difficulty promptly finding qualified replacement personnel.
If the goodwill that we have recorded in connection with our acquisitions becomes impaired, it could have a negative impact on our profitability.
Applicable accounting standards require that the purchase method of accounting be used for all business combinations. Under purchase accounting, if the purchase price of an acquired company exceeds the fair value of the acquired company’s net assets, the excess is carried on the acquirer’s balance sheet as goodwill. A significant decline in our expected future cash flows, a continuing period of market disruption, market capitalization to book value deterioration, or slower growth rates may require the Company to record charges in the future related to the impairment of the Company’s goodwill. There can be no assurance that future evaluations of goodwill will not result in findings of impairment and related write-downs. If we were to conclude that a future write-down of goodwill is necessary, the Company would record the appropriate charge, which may have a material adverse effect on our financial condition and results of operations. See Note 7 - Goodwill and Other Intangible Assets in the Notes to Consolidated Financial Statements for further information.
We continually encounter technological change. The failure to understand and adapt to these changes could negatively impact our business.
The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology can increase efficiency and enable financial institutions to better serve customers and to reduce costs. However, some new technologies needed to compete effectively result in incremental operating costs. Our future success depends, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in operations. Many of our competitors, because of their larger size and available capital, have substantially greater resources to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers. Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse impact on our business and, in turn, our financial condition and results of operations.

16


Our controls and procedures may fail or be circumvented, which may result in a material adverse effect on our business.
Management regularly reviews and updates our internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of the controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on our business, results of operations and financial condition.
New lines of business or new products and services may subject us to additional risks. A failure to successfully manage these risks may have a material adverse effect on our business.
From time to time, we may implement new lines of business, offer new products and services within existing lines of business or shift our asset mix. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed. In developing and marketing new lines of business and/or new products and services and/or shifting asset mix, we may invest significant time and resources. Initial timetables for the introduction and development of new lines of business and/or new products or services may not be achieved and price and profitability targets may not prove attainable. External factors, such as compliance with regulations, competitive alternatives, and shifting market preferences, may also impact the successful implementation of a new line of business or a new product or service. Furthermore, any new line of business and/or new product or service could have a significant impact on the effectiveness of our system of internal controls. Failure to successfully manage these risks in the development and implementation of new lines of business or new products or services could have a material adverse effect on our business, results of operations and financial condition.
A failure or breach of our systems, or those of our third party vendors and other service providers, including as a result of cyber attacks, could disrupt our businesses, result in the misuse of confidential or proprietary information, damage our reputation, increase our costs and cause losses.
As a large financial institution, we depend on our ability to process, record, and monitor a large number of customer transactions, and customer, public and regulatory expectations regarding operational and information security have increased over time. Accordingly, our operational systems and infrastructure must continue to be safeguarded and monitored for potential failures, disruptions and breakdowns. Our business, financial, accounting, data processing systems or other operating systems and facilities may stop operating properly or become disabled as a result of a number of factors that may be wholly or partially beyond our control. For example, there could be sudden increases in customer transaction volume; electrical or telecommunications outages; natural disasters; pandemics; events arising from political or social matters, including terrorist acts; and cyber attacks. Although we have business continuity plans and believe we have robust information security procedures and controls in place, disruptions or failures in the physical infrastructure or operating systems that support our businesses and customers, or cyber attacks or security breaches of the networks, systems or devices on which customers’ personal information is stored and that our customers use to access our products and services could result in customer attrition, regulatory fines, penalties or intervention, reputational damage, reimbursement or other compensation costs, and/or additional compliance costs, which could materially adversely affect our results of operations or financial condition.
Third parties with whom we do business or that facilitate our business activities, including exchanges, clearing houses, financial intermediaries or vendors that provide services or security solutions for our operations, could also be sources of operational and information security risk to us, including from breakdowns or failures of their own systems or capacity constraints.
Although to date we have not experienced any material losses relating to cyber attacks or other information security breaches, there can be no assurance that we will not suffer such losses in the future. Our risk and exposure to these matters remains heightened and as a result the continued development and enhancement of our controls, processes and practices designed to protect our systems, computers, software, data and networks from attack, damage or unauthorized access remain a priority for us. As an additional layer of protection, we have purchased network and privacy liability risk insurance coverage which includes digital asset loss, business interruption loss, network security liability, privacy liability, network extortion and data breach coverage. As cyber threats continue to evolve, we may be required to expend significant additional resources to modify our protective measures or to investigate and remediate any information security vulnerabilities.
We may not pay dividends if we are not able to receive dividends from our subsidiary, Webster Bank.
We are a separate and distinct legal entity from our banking and non-banking subsidiaries and depend on the payment of cash dividends from Webster Bank and our existing liquid assets as the principal sources of funds for paying cash dividends on our common stock. Unless we receive dividends from Webster Bank or choose to use our liquid assets, we may not be able to pay dividends. Webster Bank’s ability to pay dividends is subject to its ability to earn net income and to meet certain regulatory requirements. See “Supervision and Regulation—Dividends” for a discussion of regulatory and other restrictions on dividend declarations.

17


We are exposed to risk of environmental liabilities with respect to properties to which we obtain title.
A large portion of our loan portfolio is secured by real estate. In the course of our business, we may foreclose and take title to real estate and could be subject to environmental liabilities with respect to these properties. We may be held liable to a government entity or to third parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination, or may be required to clean up hazardous or toxic substances, or chemical releases at a property. The costs associated with investigation and remediation activities could be substantial. In addition, if we are the owner or former owner of a contaminated site, we may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property. These costs and claims could adversely affect our business, results of operations and prospects.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Webster has no unresolved comments from the SEC staff.
ITEM 2. PROPERTIES
The Company's headquarters is located in Waterbury, CT. This facility, which is owned by the Company, houses the Company's executive and primary administrative offices, as well as the principal banking headquarters of Webster Bank.
At December 31, 2013, Webster Bank had 169 banking centers, as follows:
 
Leased
Owned
Total
Connecticut
78

48

126

Massachusetts
9

13

22

Rhode Island
9

4

13

New York
8


8

Total Banking Centers
104

65

169

Lease expiration dates range from 1 to 74 years with renewal options of 2 to 50 years. For additional information regarding leases and rental payments, see Note 22 - Commitments and Contingencies in the Notes to Consolidated Financial Statements included elsewhere within this report.
The following subsidiaries and divisions maintain the following offices: Webster Private Banking is headquartered in Stamford, Connecticut with offices in Hartford, Connecticut; New Haven, Connecticut; Waterbury, Connecticut; Greenwich, Connecticut; White Plains, New York; and Providence, Rhode Island. Webster Capital Finance is headquartered in Kensington, Connecticut. Webster Business Credit Corporation is headquartered in New York, New York with offices in Boston, Massachusetts; Radnor, Pennsylvania; and Newtown, Connecticut. HSA Bank is headquartered in Sheboygan, Wisconsin with an office in Milwaukee, Wisconsin.
ITEM 3. LEGAL PROCEEDINGS
From time to time, Webster and its subsidiaries are subject to certain legal proceedings and claims in the ordinary course of business. Management presently believes that the ultimate outcome of these proceedings, individually and in the aggregate, will not be material to Webster or its consolidated financial position. Webster establishes reserves for specific legal matters when it determines that the likelihood of an unfavorable outcome is probable and the loss is reasonably estimable. Legal proceedings are subject to inherent uncertainties, and unfavorable rulings could occur that could cause Webster to adjust its litigation reserves or could have, individually or in the aggregate, a material adverse effect on its business, financial condition, or operating results.
ITEM 4. MINE SAFETY DISCLOSURES
None

18



PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Webster's common shares trade on the New York Stock Exchange under the symbol “WBS”.
The following table sets forth, for each quarter of 2013 and 2012, the high and low intra-day sales prices per share of Webster's common stock and the cash dividends declared per share:
2013
High
Low
Cash Dividends Declared
Fourth quarter
$
31.32

$
24.64

$
0.15

Third quarter
28.29

24.53

0.15

Second quarter
25.92

22.04

0.15

First quarter
24.67

20.81

0.10

 
 
 
 
2012
High
Low
Cash Dividends Declared
Fourth quarter
$
24.46

$
19.71

$
0.10

Third quarter
24.98

19.43

0.10

Second quarter
23.11

18.88

0.10

First quarter
23.94

20.15

0.05

On January 28, 2014, Webster’s Board of Directors declared a quarterly dividend of $0.15 per share.
On January 31, 2014, the closing market price of Webster common stock was $30.34; there were 7,390 shareholders of record as determined by Computershare, the Company’s transfer agent and registrar; and there were 90,368,684 common shares outstanding.
Dividends
A primary source of liquidity for Webster Financial Corporation is dividend payments from Webster Bank. The Bank paid the Company $90.0 million in dividends during the year ended December 31, 2013.
The Bank’s ability to make dividend payments to the Company is subject to certain regulatory and other requirements. Under OCC regulations, subject to the Bank meeting applicable regulatory capital requirements before and after payment of dividends, the Bank may declare a dividend, without prior regulatory approval, limited to net income for the current year-to-date as of the declaration date, plus undistributed net income from the preceding two years. At December 31, 2013, Webster Bank was in compliance with all applicable minimum capital requirements, and there was $153.8 million of undistributed net income available for the payment of dividends by the Bank to the Company.
Under the regulations, the OCC may grant specific approval permitting divergence from the requirements, and also has the discretion to prohibit any otherwise permitted capital distribution on general safety and soundness grounds. In addition, the payment of dividends is subject to certain other restrictions, none of which is expected to limit any dividend policy that the Board of Directors may in the future decide to adopt.
If the capital of Webster is diminished by depreciation in the value of its property, or by losses, or otherwise, to an amount less than the aggregate amount of the capital represented by the issued and outstanding stock of all classes having a preference upon the distribution of assets, no dividends may be paid out of net profits until the deficiency in the amount of capital represented by the issued and outstanding stock of all classes having a preference upon the distribution of assets has been repaired. See the “Supervision and Regulation” section contained elsewhere within this report for additional information on dividends.

19


Exchanges of Registered Securities
Registered securities are exchanged as part of employee and director stock compensation plans.

Recent Sale of Unregistered Securities
No unregistered securities were sold by Webster during the year ended December 31, 2013.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The following table provides information with respect to any purchase of shares of Webster common stock made by or on behalf of Webster or any “affiliated purchaser,” as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934, during the three months ended December 31, 2013:
Period
 
Total
Number of
Shares
Purchased
(1)
 
Average Price
Paid Per
Share
 
Maximum
Dollar Amount Available for Repurchase
Under the
Plans or
Programs 
(1)
October 1-31, 2013
 
9,363

 
$
26.54

 
$
50,000,000

November 1-30, 2013
 

 

 
50,000,000

December 1-31, 2013
 
424

 
29.52

 
50,000,000

Total
 
9,787

 
$
26.67

 
$
50,000,000

(1)
The Company's current stock repurchase program, which was announced on December 6, 2012, authorized the Company to repurchase $100 million of common stock. The program will remain in effect until fully utilized or until modified, superseded or terminated. As of December 31, 2013, there was $50 million of repurchase authority remaining. All 9,787 shares repurchased during the three months ended December 31, 2013 were repurchased outside of the repurchase program in the open market to fund equity compensation plans.


20


Performance Graph
The performance graph compares Webster’s cumulative shareholder return on its common stock over the last five fiscal years to the cumulative total return of the Standard & Poor’s 500 Index (“S&P 500 Index”), and the Keefe, Bruyette & Woods Regional Banking Index (“KRX”). KRX is used as the industry index because Webster believes it provides a better comparison and more appropriate benchmark against which to measure stock performance.
Total shareholder return is measured by dividing total dividends (assuming dividend reinvestment) for the measurement period plus share price change for a period by the share price at the beginning of the measurement period. Webster’s cumulative shareholder return over a five-year period is based on an initial investment of $100 on December 31, 2008.
Comparison of Five Year Cumulative Total Return Among Webster, S&P 500 Index, KRX
  
Period Ending
Index
12/31/2008
12/31/2009
12/31/2010
12/31/2011
12/31/2012
12/31/2013
Webster Financial Corporation
$
100

$
87

$
144

$
150

$
154

$
239

S&P 500 Index
$
100

$
126

$
145

$
149

$
172

$
228

KRX
$
100

$
78

$
94

$
89

$
101

$
148


21


ITEM 6. SELECTED FINANCIAL DATA
 
At or for the years ended December 31,
(Dollars in thousands, except per share data)
2013
2012
2011
2010
2009
BALANCE SHEETS
 
 
 
 
 
Total assets
$
20,852,999

$
20,146,765

$
18,714,340

$
18,033,881

$
17,737,070

Loans and leases, net
12,547,203

11,851,567

10,991,917

10,696,532

10,692,253

Investment securities
6,465,652

6,243,689

5,848,491

5,486,229

4,784,912

Goodwill and other intangible assets, net
535,238

540,157

545,577

551,164

556,752

Deposits
14,854,420

14,530,835

13,656,025

13,608,785

13,632,127

Borrowings
3,612,448

3,238,048

2,969,904

2,442,319

1,989,916

Total equity
2,209,188

2,093,530

1,845,774

1,778,879

1,955,907

STATEMENTS OF INCOME
 
 
 
 
 
Interest income
$
687,640

$
693,502

$
699,723

$
708,647

$
746,090

Interest expense
90,912

114,594

135,955

171,376

250,704

Net interest income
596,728

578,908

563,768

537,271

495,386

Provision for loan and lease losses
33,500

21,500

22,500

115,000

303,000

Other non-interest income
197,615

189,411

175,018

185,270

226,682

Net impairment losses on securities recognized in earnings
(7,277
)


(5,838
)
(28,477
)
Net unrealized (loss) gain on securities classified as trading


(1,799
)
12,045


Net gain (loss) on sale of investment securities
712

3,347

3,823

9,748

(13,810
)
Non-interest expense
498,059

501,804

510,976

538,974

507,394

Income (loss) from continuing operations before income tax expense (benefit)
256,219

248,362

207,334

84,522

(130,613
)
Income tax expense (benefit)
76,670

74,665

57,951

12,358

(53,424
)
Income (loss) from continuing operations
179,549

173,697

149,383

72,164

(77,189
)
Income from discontinued operations, net of tax


1,995

94

302

Less: Net (loss) income attributable to non controlling interests


(1
)
3

22

Preferred stock dividends
(10,803
)
(2,460
)
(3,286
)
(18,086
)
(32,863
)
Accretion of preferred stock discount and gain on extinguishment



(6,830
)
23,243

Net income (loss) available to common shareholders
$
168,746

$
171,237

$
148,093

$
47,339

$
(86,529
)
Per Share Data
 
 
 
 
 
Weighted-average common shares—diluted
90,261

91,649

91,688

82,172

63,916

Net income (loss) per common share from continuing operations—basic
$
1.90

$
1.96

$
1.67

$
0.60

$
(1.43
)
Net income (loss) per common share—basic
1.90

1.96

1.69

0.60

(1.42
)
Net income (loss) per common share from continuing operations—diluted
1.86

1.86

1.59

0.57

(2.17
)
Net income (loss) per common share—diluted
1.86

1.86

1.61

0.57

(2.16
)
Dividends declared per common share
0.55

0.35

0.16

0.04

0.04

Book value per common share
22.77

22.75

20.74

19.97

19.43

Tangible book value per common share
16.85

16.42

14.51

13.64

12.33

Key Performance Ratios
 
 
 
 
 
Return on average assets (1)
0.89
%
0.90
%
0.84
%
0.40
%
(0.44
)%
Return on average common shareholders’ equity
8.45

8.97

8.19

3.05

(6.40
)
Return on average tangible common shareholders' equity
11.77

12.80

12.04

5.11

(10.48
)
Net interest margin
3.26

3.32

3.47

3.36

3.14

Efficiency ratio
60.36

62.78

65.13

66.73

66.10

Tangible common equity ratio
7.49

7.15

7.00

6.80

5.63

Non-interest income as a percentage of total revenue
24.25

24.98

23.90

27.25

27.13

Average shareholders’ equity to average assets
10.61

10.06

10.16

10.47

10.68

Dividend payout ratio
28.95

17.86

9.47

6.67

(2.82
)
Asset Quality Ratios
 
 
 
 
 
Allowance for loan and lease losses as a percentage of loans and leases
1.20
%
1.47
%
2.08
%
2.92
%
3.09
 %
Net charge-offs as a percentage of average loans and leases
0.47

0.68

1.00

1.23

1.68

Non-performing loans and leases as a percentage of loans and leases
1.28

1.62

1.68

2.48

3.38

Non-performing assets as a percentage of loans and leases plus OREO
1.35

1.65

1.72

2.73

3.63

(1) Calculated based on net income before preferred dividends.

22


ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated Financial Statements of Webster Financial Corporation and the Notes thereto included elsewhere within this report (collectively, the “Consolidated Financial Statements”).
Forward-Looking Statements
This Annual Report on Form 10-K contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Act”). Forward-looking statements can be identified by words such as “believes”, “anticipates”, “expects”, “intends”, “targeted”, “continue”, “remain”, “will”, “should”, “may”, “plans”, “estimates” and similar references to future periods; however, such words are not the exclusive means of identifying such statements. Examples of forward-looking statements include, but are not limited to: (i) projections of revenues, expenses, income or loss, earnings or loss per share, and other financial items; (ii) statements of plans, objectives and expectations of Webster or its management or Board of Directors; (iii) statements of future economic performance; and (iv) statements of assumptions underlying such statements. Forward-looking statements are based on Webster’s current expectations and assumptions regarding its business, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Webster’s actual results may differ materially from those contemplated by the forward-looking statements, which are neither statements of historical fact nor guarantees or assurances of future performance. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to: (i) local, regional, national and international economic conditions and the impact they may have on us and our customers and our assessment of that impact; (ii) volatility and disruption in national and international financial markets; (iii) government intervention in the U.S. financial system; (iv) changes in the level of non-performing assets and charge-offs; (v) changes in estimates of future reserve requirements based upon the periodic review thereof under relevant regulatory and accounting requirements; (vi) adverse conditions in the securities markets that lead to impairment in the value of securities in our investment portfolio; (vii) inflation, interest rate, securities market and monetary fluctuations; (viii) the timely development and acceptance of new products and services and perceived overall value of these products and services by customers; (ix) changes in consumer spending, borrowings and savings habits; (x) technological changes and cyber-security matters; (xi) the ability to increase market share and control expenses; (xii) changes in the competitive environment among banks, financial holding companies and other financial services providers; (xiii) the effect of changes in laws and regulations (including laws and regulations concerning taxes, banking, securities and insurance) with which we and our subsidiaries must comply, including the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Basel III update to the Basel Accords; (xiv) the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters; (xv) the costs and effects of legal and regulatory developments including the resolution of legal proceedings or regulatory or other governmental inquiries and the results of regulatory examinations or reviews; and (xvi) our success at managing the risks involved in the foregoing items. Any forward-looking statement made by the Company in this Annual Report on Form 10-K speaks only as of the date on which it pursuant to is made. Factors or events that could cause the Company’s actual results to differ may emerge from time to time, and it is not possible for the Company to predict all of them. The Company undertakes no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.
Financial Performance
During 2013, the Company achieved several goals as part of its overall strategy to operate more effectively in a changing regulatory environment. The Company's operating efficiency continued to improve as evidenced by a decrease of 242 basis points in the efficiency ratio, low cost deposits were at record highs, total loan growth continued, credit quality steadily improved, and capital ratios remained strong.
Income from continuing operations, before income tax expense and preferred stock dividends, was $256.2 million for the year ended December 31, 2013, an increase of $7.8 million from $248.4 million for the year ended December 31, 2012. The primary factors which led to this increase are outlined below:
The factors positively impacting income from continuing operations include:
interest expense decreased $23.7 million;
wealth and investment service fees increased $5.3 million;
loan related fees increased $3.8 million;
non-interest expense decreased $3.7 million; and
deposit service fees increased $2.3 million.

23


The factors negatively impacting income from continuing operations include:
provision for loan and lease losses increased $12.0 million;
impairment loss recognized in earnings of $7.3 million in 2013 for investment securities;
income from mortgage banking activities decreased $6.7 million; and
interest income decreased $5.9 million.
The impact of the items outlined above, and the effect from income taxes of $76.7 million and $74.7 million, and preferred stock dividends of $10.8 million and $2.5 million for the years ended December 31, 2013 and 2012, respectively, resulted in net income available to common shareholders of $168.7 million for the year ended December 31, 2013 compared to $171.2 million for the year ended December 31, 2012. Diluted net income available to common shareholders was $1.86 per share for both periods.
Net interest income increased $17.8 million to $596.7 million for the year ended December 31, 2013. Average total interest-earning assets increased by $829.7 million, while the average yield declined by 22 basis points in 2013 compared to 2012. Average total interest-bearing liabilities increased $739.8 million, while the average cost of borrowings declined by 16 basis points in 2013 compared to 2012.
Credit quality improved as evidenced by improvement in asset quality ratios. Net charge-offs to average loans and leases decreased from 0.68% at December 31, 2012 to 0.47% at December 31, 2013, and non-performing loans to total loans, leases and other real estate owned decreased from 1.65% at December 31, 2012 to 1.35% at December 31, 2013. The continued improvement in credit quality in 2013 resulted in a reduction in total past due and non-accrual loans at December 31, 2013 compared to December 31, 2012.
The Company's capital position remains strong, the total risk-based capital ratio was 14.2% at December 31, 2013, well above the requirement of 10.0% to be considered "well capitalized".
On April 22, 2013, the Company increased its quarterly cash dividend to common shareholders to $0.15 per common share, from $0.10 per common share.

24


Table 1: Selected financial highlights:
 
At or for the years ended December 31,
(Dollars in thousands, except per share data)
2013
 
2012
 
2011
Statements of Income:

 

 

Net interest income
$
596,728

 
$
578,908

 
$
563,768

Provision for loan and lease losses
33,500

 
21,500

 
22,500

Total non-interest income
191,050

 
192,758

 
177,042

Total non-interest expense
498,059

 
501,804

 
510,976

Income from continuing operations
179,549

 
173,697

 
149,383

Income from discontinued operations, net of tax

 

 
1,995

Net loss attributable to noncontrolling interests

 

 
(1
)
Net income attributable to Webster Financial Corporation
179,549

 
173,697

 
151,379

Net income available to common shareholders
168,746

 
171,237

 
148,093

Per Share Data:
 
 
 
 
 
Weighted-average common shares - diluted (1)
90,261

 
91,649

 
91,688

Net income from continuing operations per common share - diluted
$
1.86

 
$
1.86

 
$
1.59

Net income available to common shareholders per common share - diluted
1.86

 
1.86

 
1.61

Dividends declared per common share
0.55

 
0.35

 
0.16

Dividends declared per Series A preferred share
85.00

 
85.00

 
85.00

Dividends declared per Series E preferred share
1,648.89

 

 

Dividends declared per subsidiary preferred share

 

 
0.83

Book value per common share
22.77

 
22.75

 
20.74

Tangible book value per common share (3)
16.85

 
16.42

 
14.51

Selected Ratios:
 
 
 
 
 
Return on average assets (2)
0.89
%
 
0.90
%
 
0.84
%
Return on average common shareholders' equity
8.45

 
8.97

 
8.19

Return on average tangible common shareholders' equity (3)
11.77

 
12.80

 
12.04

Net interest margin
3.26

 
3.32

 
3.47

Efficiency ratio (3)
60.36

 
62.78

 
65.13

Tangible common equity ratio (3)
7.49

 
7.15

 
7.00

Tier 1 common equity to risk-weighted assets (3)
11.43

 
10.78

 
11.08

(1)
For the years ended December 31, 2013, 2012, and 2011, the effect of the Series A Preferred Stock on the computation of diluted earnings per share was anti-dilutive; therefore, the effect of this security was not included in the determination of diluted average shares.
(2)
Based on net income before preferred dividend.
(3)
The Company evaluates its business based on certain ratios that utilize tangible equity and Tier 1 common equity, which are non-GAAP financial measures.
The efficiency ratio, which measures the costs expended to generate a dollar of revenue, is calculated excluding foreclosed property expense, amortization of intangibles, gain or loss on securities, and other non-recurring items. Accordingly, this is also a non-GAAP financial measure.
The Company believes the use of these and other non-GAAP financial measures provides additional clarity in assessing the results of the Company. Other companies may define or calculate supplemental financial data differently.

25


See the following reconciliations of the non-GAAP financial measures with financial measures defined by GAAP at or for the years ended December 31, 2013, 2012, and 2011:
(Dollars and shares in thousands, except per share data)


At December 31,
 
2013
2012
2011
Tangible book value per common share (non-GAAP):
 
 
 
Shareholders' equity (GAAP)
$
2,209,188

$
2,093,530

$
1,845,774

Less: Preferred equity (GAAP)
151,649

151,649

28,939

         Goodwill and other intangible assets (GAAP)
535,238

540,157

545,577

Tangible common equity (non-GAAP)
$
1,522,301

$
1,401,724

$
1,271,258

Common shares outstanding
90,367

85,341

87,600

Tangible book value per common share (non-GAAP)
$
16.85

$
16.42

$
14.51

 
 
 
 
 
For the years ended December 31,
 
2013
2012
2011
Return on average tangible common shareholders' equity (non-GAAP):
 
 
 
Net income available to common shareholders (GAAP)
$
168,746

$
171,237

$
148,093

Intangible assets amortization, tax-affected at 35% (GAAP)
3,197

3,523

3,632

Net income adjusted for amortization of intangibles (non-GAAP)
$
171,943

$
174,760

$
151,725

Average shareholders' equity (non-GAAP)
$
2,149,713

$
1,946,580

$
1,846,158

Less: Average preferred stock (non-GAAP)
151,649

38,335

28,942

       Average non controlling interests (non-GAAP)


9,119

       Average goodwill and other intangible assets (non-GAAP)
537,650

542,782

548,340

Average tangible common equity (non-GAAP)
$
1,460,414

$
1,365,463

$
1,259,757

Return on average tangible common shareholders' equity (non-GAAP)
11.77
%
12.80
%
12.04
%
 






 
For the years ended December 31,
 
2013
2012
2011
Efficiency ratio (non-GAAP):
 
 
 
Non-interest expense (GAAP)
$
498,059

$
501,804

$
510,976

Less: Foreclosed property expense (GAAP)
1,338

1,028

3,050

Intangible assets amortization (GAAP)
4,919

5,420

5,588

Other expense (non-GAAP)
4,354

3,762

11,075

Non-interest expense (non-GAAP)
$
487,448

$
491,594

$
491,263

Net interest income (GAAP)
$
596,728

$
578,908

$
563,768

Add back: FTE adjustment (non-GAAP)
13,221

14,751

15,497

Non-interest income (GAAP)
191,050

192,758

177,042

Less: Net gain on sale of investment securities (GAAP)
712

3,347

2,024

Impairment loss recognized in earnings (GAAP)
(7,277
)


Income (non-GAAP)
$
807,564

$
783,070

$
754,283

Efficiency ratio (non-GAAP)
60.36
%
62.78
%
65.13
%

26


(Dollars in thousands)



 
At December 31,
 
2013
2012
2011
Tangible common equity ratio (non-GAAP):
 
 
 
Shareholders' equity (GAAP)
$
2,209,188

$
2,093,530

$
1,845,774

Less: Preferred stock (GAAP)
151,649

151,649

28,939

         Goodwill and other intangible assets (GAAP)
535,238

540,157

545,577

Tangible common shareholders' equity (non-GAAP)
$
1,522,301

$
1,401,724

$
1,271,258

Total Assets (GAAP)
$
20,852,999

$
20,146,765

$
18,714,340

Less: Goodwill and other intangible assets (GAAP)
535,238

540,157

545,577

Tangible assets (non-GAAP)
$
20,317,761

$
19,606,608

$
18,168,763

Tangible common equity ratio (non-GAAP)
7.49
%
7.15
%
7.00
%
 
 
 
 
 
At December 31,
 
2013
2012
2011
Tier 1 common equity to risk-weighted assets (non-GAAP):
 
 
 
Shareholders' equity (GAAP)
$
2,209,188

$
2,093,530

$
1,845,774

Less: Preferred equity (GAAP)
151,649

151,649

28,939

         Goodwill and other intangible assets (GAAP)
535,238

540,157

545,577

Add back: Accumulated other comprehensive loss (GAAP)
(48,549
)
(32,266
)
(60,204
)
DTL related to goodwill and other intangibles (regulatory)
10,145

11,380

7,725

Tier 1 common equity (regulatory)
$
1,580,995

$
1,445,370

$
1,339,187

Risk-weighted assets (regulatory)
$
13,827,533

$
13,409,363

$
12,087,718

Tier 1 common equity to risk-weighted assets (non-GAAP)
11.43
%
10.78
%
11.08
%


27


The following table summarizes the Company's daily average balances, interest, and average yields on Webster's interest-earning assets and interest-bearing liabilities on a fully tax-equivalent basis.
Table 2: Three-year average balance sheet and net interest margin:
 
Years ended December 31,
 
2013
 
2012
 
2011
(Dollars in thousands)
Average
Balance
 
Interest (1)
 
Average
Yields
 
Average
Balance
 
Interest (1)
 
Average
Yields
 
Average
Balance
 
Interest (1)
 
Average
Yields
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans
$
12,235,821

 
$
490,985

 
4.01
%
 
$
11,525,233

 
$
485,666

 
4.21
%
 
$
11,054,100

 
$
486,883

 
4.40
%
Securities (2)
6,268,889

 
204,287

 
3.28

 
6,100,219

 
216,513

 
3.58

 
5,407,867

 
223,568

 
4.16

Federal Home Loan and Federal Reserve Bank stock
158,233

 
3,437

 
2.17

 
143,074

 
3,508

 
2.45

 
143,874

 
3,318

 
2.31

Interest-bearing deposits
21,800

 
84

 
0.39

 
77,265

 
141

 
0.18

 
112,232

 
216

 
0.19

Loans held for sale
63,870

 
2,068

 
3.24

 
73,156

 
2,425

 
3.31

 
28,144

 
1,235

 
4.39

Total interest-earning assets
18,748,613

 
$
700,861

 
3.74
%
 
17,918,947

 
$
708,253

 
3.96
%
 
16,746,217

 
$
715,220

 
4.28
%
Noninterest-earning assets
1,513,906

 
 
 
 
 
1,427,824

 
 
 
 
 
1,335,374

 
 
 
 
Total assets
$
20,262,519

 
 
 
 
 
$
19,346,771

 
 
 
 
 
$
18,081,591

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Demand deposits
$
2,939,324

 
 
 
 
 
$
2,638,025

 
 
 
 
 
$
2,278,419

 
 
 
 
Savings, checking & money market deposits
9,511,386

 
$
18,376

 
0.19
%
 
8,824,581

 
$
21,061

 
0.24
%
 
8,534,333

 
$
33,747

 
0.40
%
Time deposits
2,357,321

 
28,206

 
1.20

 
2,703,414

 
38,525

 
1.43

 
3,031,835

 
47,061

 
1.55

Total deposits
14,808,031

 
46,582

 
0.31

 
14,166,020

 
59,586

 
0.42

 
13,844,587

 
80,808

 
0.58

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Securities sold under agreements to repurchase and other borrowings
1,228,002

 
20,800

 
1.69

 
1,207,623

 
21,034

 
1.74

 
1,053,323

 
16,173

 
1.54

Federal Home Loan Bank advances
1,652,471

 
16,229

 
0.98

 
1,389,999

 
16,943

 
1.22

 
569,987

 
14,352

 
2.52

Long-term debt
233,850

 
7,301

 
3.12

 
418,896

 
17,031

 
4.07

 
565,331

 
24,622

 
4.36

Total borrowings
3,114,323

 
44,330

 
1.42

 
3,016,518

 
55,008

 
1.82

 
2,188,641

 
55,147

 
2.52

Total interest-bearing liabilities
17,922,354

 
$
90,912

 
0.51
%
 
17,182,538

 
$
114,594

 
0.67
%
 
16,033,228

 
$
135,955

 
0.85
%
Noninterest-bearing liabilities
190,452

 
 
 
 
 
217,653

 
 
 
 
 
202,205

 
 
 
 
Total liabilities
18,112,806

 
 
 
 
 
17,400,191

 
 
 
 
 
16,235,433

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Noncontrolling interests

 
 
 
 
 

 
 
 
 
 
9,119

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Preferred Stock
151,649

 
 
 
 
 
38,335

 
 
 
 
 
28,942

 
 
 
 
Common shareholders' equity
1,998,064

 
 
 
 
 
1,908,245

 
 
 
 
 
1,808,097

 
 
 
 
Webster Financial Corp. shareholders' equity
2,149,713

 
 
 
 
 
1,946,580

 
 
 
 
 
1,837,039

 
 
 
 
Total liabilities and equity
$
20,262,519

 
 
 
 
 
$
19,346,771

 
 
 
 
 
$
18,081,591

 
 
 
 
Tax-equivalent net interest income
 
 
609,949

 
 
 
 
 
593,659

 
 
 
 
 
579,265

 
 
Less: tax-equivalent adjustments
 
 
(13,221
)
 
 
 
 
 
(14,751
)
 
 
 
 
 
(15,497
)
 
 
Net interest income
 
 
$
596,728

 
 
 
 
 
$
578,908

 
 
 
 
 
$
563,768

 
 
Net interest margin
 
 
 
 
3.26
%
 
 
 
 
 
3.32
%
 
 
 
 
 
3.47
%
(1)
On a fully tax-equivalent basis.
(2)
Average balances and yields of securities available for sale are based upon the historical amortized cost.

28


Net Interest Income
Net interest income is the difference between interest income on earning assets, such as loans and securities, and interest expense on liabilities, such as deposits and borrowings, which are used to fund those assets. Net interest income is the Company's largest source of revenue, representing 75.7% of total revenue for the year ended December 31, 2013. Net interest margin is the ratio of tax-equivalent net interest income to average earning assets for the period. The level of interest rates and the volume and mix of interest-earning assets and interest-bearing liabilities impact net interest income and net interest margin. Since net interest income is affected by changes in interest rates, loan and deposit pricing strategies, competitive conditions, the volume and mix of interest-earning assets and interest-bearing liabilities, as well as the level of non-performing assets, Webster manages the risk of changes in interest rates on its net interest income through an Asset/Liability Management Committee ("ALCO") and through related interest rate risk monitoring and management policies. Four main tools are used for managing interest rate risk: (i) the size and duration and credit risk of the investment portfolio, (ii) the size and duration of the wholesale funding portfolio, (iii) off-balance sheet interest rate contracts and (iv) the pricing and structure of loans and deposits. ALCO meets at least monthly to make decisions on the investment and funding portfolios based on the economic outlook, the Committee’s interest rate expectations, the risk position and other factors. See the “Asset/Liability Management and Market Risk” section for further discussion of Webster’s interest rate risk position.
The following table describes the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have impacted interest income and interest expense during the periods indicated. Information is provided in each category with respect to the impact attributable to changes in volume (change in volume multiplied by prior rate), changes attributable to rates (change in rates multiplied by prior volume) and the total net change. The change attributable to the combined impact of volume and rate has been allocated proportionately to the change due to volume and the change due to rate. The table below is based upon reported net interest income.
Table 3: Net interest income - rate/volume analysis (not presented on a tax-equivalent basis).
 
Years ended December 31,
2013 vs. 2012
Increase (decrease) due to
 
Years ended December 31,
2012 vs. 2011
Increase (decrease) due to
(In thousands)
Rate
Volume
Total
 
Rate
Volume
Total
Interest on interest-earning assets:
 
 
 
 
 
 
 
Loans and leases
$
(23,819
)
$
29,138

$
5,319

 
$
(21,523
)
$
20,306

$
(1,217
)
Loans held for sale
(55
)
(302
)
(357
)
 
(366
)
1,556

1,190

Investments
(15,118
)
4,294

(10,824
)
 
(29,265
)
23,071

(6,194
)
Total interest income
$
(38,992
)
$
33,130

$
(5,862
)
 
$
(51,154
)
$
44,933

$
(6,221
)
Interest on interest-bearing liabilities:



 



Deposits
$
(15,601
)
$
2,597

$
(13,004
)
 
$
(23,058
)
$
1,836

$
(21,222
)
Borrowings
(12,411
)
1,733

(10,678
)
 
(17,668
)
17,529

(139
)
Total interest expense
$
(28,012
)
$
4,330

$
(23,682
)
 
$
(40,726
)
$
19,365

$
(21,361
)
Net change in net interest income
$
(10,980
)
$
28,800

$
17,820

 
$
(10,428
)
$
25,568

$
15,140

Net interest income totaled $596.7 million for the year ended December 31, 2013 compared to $578.9 million for the year ended December 31, 2012, an increase of $17.8 million. The increase in net interest income during the year ended December 31, 2013 was primarily related to an increase in average interest-earning assets, partially offset by declining reinvestment spreads on earning assets. Average interest-earning assets for the year ended December 31, 2013 increased $829.7 million from the year ended December 31, 2012. The net interest margin decreased 6 basis points to 3.26% during the year ended December 31, 2013 from 3.32% during the year ended December 31, 2012. The decrease in net interest margin is due to a greater decline in the yield of interest-earning assets than the decline in cost of interest-bearing liabilities, primarily due to growth in the average investment portfolio at lower yields and lower yields in the loan portfolio, partially offset by a decline in the cost of deposits and borrowings. The average yield on interest-earning assets decreased 22 basis points to 3.74 during the year ended December 31, 2013 from 3.96% during the year ended December 31, 2012. The average yield on interest-earning assets is primarily impacted by changes in market interest rates as well as changes in the volume and relative mix of interest-earning assets. Market interest rates have remained at historically low levels during the reported periods.
Average loans increased $710.6 million for the year ended December 31, 2013 compared to the year ended December 31, 2012. The loan portfolio yield decreased 20 basis points to 4.01% for the year ended December 31, 2013 and comprised 65.3% of the average interest-earning assets at December 31, 2013, compared to the loan portfolio yield of 4.21% for the year ended December 31, 2012 which comprised 64.3% of the average interest-earning assets at December 31, 2012. The decrease in the

29


yield on the average loan portfolio is due to the repayment of higher yielding loans and the origination of lower yielding loans in a low interest rate environment.
Average securities increased $168.7 million for the year ended December 31, 2013 compared to the year ended December 31, 2012. The yield on investment securities decreased 30 basis points to 3.28% for the year ended December 31, 2013 and comprised 33.4% of average interest-earning assets at December 31, 2013, compared to the yield on investment securities of 3.58% for the year ended December 31, 2012, which comprised 34.0% of the average interest-earning assets at December 31, 2012. The decrease in the yield on securities is due to principal repayments and lower reinvestment rates. The growth in the securities portfolio is part of the Company's strategy to protect earnings in a protracted low rate environment.
Average total deposits increased $642.0 million for the year ended December 31, 2013 compared to the year ended December 31, 2012. The increase is due to a $301.3 million increase in non-interest bearing deposits and a $340.7 million increase in interest-bearing deposits. The average cost of deposits decreased 11 basis points to 0.31% for the year ended December 31, 2013 from 0.42% for the year ended December 31, 2012. The decrease in the average cost of deposits is the result of rate adjustments on certain deposit products and product mix changes as the proportion of higher costing certificates of deposit to total interest-bearing deposits decreased from 23.5% for the year ended December 31, 2012 to 19.9% for the year ended December 31, 2013.
Average total borrowings increased $97.8 million for the year ended December 31, 2013 compared to the year ended December 31, 2012. This increase is due to a $262.5 million increase in average Federal Home Loan Bank ("FHLB") advances, a $20.4 million increase in average securities sold under agreements to repurchase and other borrowings, partially offset by decreases of $185.0 million in average long-term debt. The increase in FHLB advances is due to the replacement of long-term funding with short-term, lower cost. The decrease in average long-term debt is due to the repayment of all the $102.6 million outstanding principal amount of Subordinated Notes on January 15, 2013, and, to a lesser extent, the redemption of $136.1 million of Capital Trust Securities on July 18, 2012.
Provision for Loan and Lease Losses
Management performs a quarterly review of the loan and lease portfolio to determine the adequacy of the allowance for loan and lease losses. At December 31, 2013, the allowance for loan and lease losses totaled $152.6 million, or 1.20% of loans and leases, compared to $177.1 million, or 1.47% of loans and leases, at December 31, 2012.
Several factors are considered when determining the level of the allowance for loan and lease losses, including loan growth, portfolio composition, portfolio risk profile, credit performance, changes in the levels of non-performing loans and leases and changes in the general economic environment. These factors, coupled with net charge-offs during the period, impact the required level of the provision for loan and lease losses. For the year ended December 31, 2013, total net charge-offs were $58.1 million compared to $77.9 million for the year ended December 31, 2012.
The provision for loan and lease losses was $33.5 million for the year ended December 31, 2013 an increase of $12.0 million compared to the year ended December 31, 2012. The increase in the provision includes an increased provision for the commercial real estate portfolio and a reduction in net benefit for the commercial portfolio offset by reduced provisions in the consumer and residential portfolios.
See the "Loans and Leases" through “Allowance for Loan and Lease Losses Methodology” sections for further details.

30


Non-Interest Income
Total non-interest income was $191.1 million for the year ended December 31, 2013, a decrease of $1.7 million from the year ended December 31, 2012. The decrease for the year ended December 31, 2013 is primarily attributable to an impairment loss recognized in earnings, plus declines in mortgage banking activities and gain on sale of investment securities, partially offset by increases in wealth and investment services, cash surrender value of life insurance policies, loan related fees, and deposit service fees.
Table 4: Non-interest income comparison of 2013 to 2012.
 
Years ended December 31,
Increase (decrease)
(Dollars in thousands)
2013
2012
Amount
Percent
Non-Interest Income:
 
 
 
 
Deposit service fees
$
98,968

$
96,633

$
2,335

2.4
 %
Loan related fees
21,860

18,043

3,817

21.2

Wealth and investment services
34,771

29,515

5,256

17.8

Mortgage banking activities
16,359

23,037

(6,678
)
(29.0
)
Increase in cash surrender value of life insurance policies
13,770

11,254

2,516

22.4

Net gain on sale of investment securities
712

3,347

(2,635
)
(78.7
)
Impairment loss recognized in earnings
(7,277
)

(7,277
)
(100.0
)
Other income
11,887

10,929

958

8.8

Total non-interest income
$
191,050

$
192,758

$
(1,708
)
(0.9
)%
Deposit Service Fees. Deposit service fees were $99.0 million for the year ended December 31, 2013, an increase of $2.3 million from the comparable period in 2012 due to an increase in check card interchange fees and monthly service charges primarily related to health savings accounts, and cash management fee growth attributable to the cross sell of new products to existing customers as well as new sales to core commercial government and business banking. The increase is slightly offset by a decline in fees from overdraft activities.
Loan Related Fees. Loan related fees were $21.9 million for the year ended December 31, 2013, an increase of $3.8 million from the comparable period in 2012 primarily due to an increase in loan service fee income, origination fee income, and prepayment penalties.
Wealth and Investment Services. Wealth and investment services income was $34.8 million for the year ended December 31, 2013, an increase of $5.3 million from the comparable period in 2012 primarily due to an increase in income from the Webster Investment Services unit as well as an increase in trust fees from private banking activities. Webster Investment Services income has increased as a result of continued account growth and strong incremental production.
Mortgage Banking Activities. Mortgage banking activities net revenue was $16.4 million for the year ended December 31, 2013, a decrease of $6.7 million from the comparable period in 2012. The decrease is primarily related to a rise in interest rates beginning late in the second quarter of 2013 which contributed to lower volumes of settlements of, and spreads on, loans sold, as well as a lower pipeline of loan applications to be funded. Loans originated for sale were $687.1 million in 2013 compared to $759.1 million in 2012, due in part to an increase in mortgage interest rates.
Increase in Cash Surrender Value of Life Insurance Policies. The increase in cash surrender value of life insurance polices was $13.8 million for the year ended December 31, 2013, an increase of $2.5 million from the comparable period in 2012, due primarily to realizing a full year of earnings on $100 million of additional purchases of life insurance policies in September 2012.
Impairment Loss Recognized in Earnings. The impairment loss recognized in earnings of $7.3 million for the year ended December 31, 2013 represents an other-than-temporary impairment loss on certain CLO and CDO investment securities that are subject to the Volcker Rule.
Other. Other non-interest income was $11.9 million and $10.9 million for the years ended December 31, 2013 and 2012, respectively. The increase of $1.0 million for the year ended December 31, 2013 compared to the year ended December 31, 2012 is primarily due to mark-to-market adjustments on treasury derivatives related to client swap activity and fair value adjustments to the Company's alternative investments having a more favorable impact in 2013 compared to 2012.

31


Non-Interest Expense
Total non-interest expense was $498.1 million for the year ended December 31, 2013, a decrease of $3.7 million from the year ended December 31, 2012. The decrease for the year ended December 31, 2013 is primarily attributable to reductions in technology and equipment, professional and outside services, deposit insurance, occupancy, and marketing.
Table 5: Non-interest expense comparison of 2013 to 2012. 
 
Years ended December 31,
Increase (decrease)
 
2013
2012
Amount
Percent
(Dollars in thousands)
 
 
 
 
Non-Interest Expense:
 
 
 
 
Compensation and benefits
$
264,835

$
264,101

$
734

0.3
 %
Occupancy
48,794

50,131

(1,337
)
(2.7
)
Technology and equipment
60,326

62,210

(1,884
)
(3.0
)
Intangible assets amortization
4,919

5,420

(501
)
(9.2
)
Marketing
15,502

16,827

(1,325
)
(7.9
)
Professional and outside services
9,532

11,348

(1,816
)
(16.0
)
Deposit insurance
21,114

22,749

(1,635
)
(7.2
)
Other expense
73,037

69,018

4,019

5.8

Total non-interest expense
$
498,059

$
501,804

$
(3,745
)
(0.7
)%
Compensation and Benefits. Compensation and benefits expense was $264.8 million for the year ended December 31, 2013 an increase of $0.7 million from the comparable period in 2012. The increase is attributable to additional expense from deferred compensation programs, largely in connection with Webster's share price increase throughout the year, as well as increases in commission expense driven by higher sales of HSA accounts and an increase in investment services sales. The increase was slightly offset by declines in other incentive related and pension expense.
Occupancy. Occupancy expense was $48.8 million for the year ended December 31, 2013, a decrease of $1.3 million from the comparable period in 2012, due to lower depreciation and occupancy related maintenance costs.
Technology and Equipment. Technology and equipment expense was $60.3 million for the year ended December 31, 2013, a decrease of $1.9 million from the comparable period in 2012. The decrease is primarily due to a reduction in depreciation.
Marketing. Marketing expense was $15.5 million for the year ended December 31, 2013, a decrease of $1.3 million from the comparable period in 2012, primarily due to utilizing more cost effective marketing channels.
Professional and outside services. Professional and outside service expense was $9.5 million for the year ended December 31, 2013, a decrease of $1.8 million from the comparable period in 2012, primarily due to lower consulting fees.
Deposit Insurance. Deposit insurance was $21.1 million for the year ended December 31, 2013, a decrease of $1.6 million from the comparable period in 2012. The reduction of underperforming assets supported by an increase in Tier 1 capital during 2013, compared to 2012 levels, resulted in a decrease to the FDIC insurance expense.
Other. Other non-interest expense was $73.0 million for the year ended December 31, 2013, an increase of $4.0 million from the comparable period in 2012, primarily attributable to an increase in check card expenses, service contract costs, and lower net gains from the sale of OREO properties. The increase was slightly offset by a decrease in loan workout costs as asset quality improved.
Income Taxes
Webster recognized income tax expense of $76.7 million in 2013 and $74.7 million in 2012. The effective tax rates were 29.9% and 30.1%, respectively. The decrease in the effective rate principally reflects the benefit recognized in the three months ended September 30, 2013 related to the correction of an immaterial error applicable to prior periods, partially offset by increased state tax expense.
As discussed above and disclosed in Note 1 - Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements contained elsewhere in this report, in the three months ended September 30, 2013, the Company recognized a $1.7

32


million benefit to correct an error applicable to income taxes in prior periods. The error related to the November 2008 to December 2010 period when provisions for non deductible executive compensation associated with the U.S. Treasury's Capital Purchase Program were applicable to Webster and unintentionally overstated. The correction of the error had the effect of reducing the Company's effective tax rate by 0.7 percentage points for the twelve months ended December 31, 2013.
For additional information on Webster's income taxes, including its deferred tax assets and valuation allowance, see Note 8 - Income Taxes in the Notes to Consolidated Financial Statements included elsewhere within this report.
Comparison of 2012 and 2011 Years
For the year ended December 31, 2012, Webster’s net income available to common shareholders was $171.2 million compared to $148.1 million for the year ended December 31, 2011. Net income available to common shareholders per diluted share was $1.86 for the year ended December 31, 2012 compared to $1.61 for the year ended December 31, 2011. The primary factors which led to the increase in net income available to common shareholders in 2012 as compared to 2011 are outlined below.
The factors positively impacting net income available to common shareholders include:
interest expense decreased $21.4 million;
income from mortgage banking activities increased $18.1 million; and
non-interest expense (excluding litigation) decreased $18.7 million.
The factors negatively impacting net income available to common shareholders include:
interest income decreased $6.2 million;
deposit service fees decreased $6.2 million; and
the absence in 2012 of the $9.5 million non-recurring litigation benefit that occurred in 2011.
The impact of the items outlined above, after the effect from income taxes, resulted in income from continuing operations of $173.7 million for the year ended December 31, 2012 as compared to $149.4 million for the year ended December 31, 2011.
A discussion of the significant components of income from continuing operations follows.
Net Interest Income
Net interest income totaled $578.9 million for the year ended December 31, 2012 compared to $563.8 million for the year ended December 31, 2011, an increase of $15.1 million. The increase in net interest income during the year ended December 31, 2012 was primarily related to an increase in average interest-earning assets, partially offset by a decrease in the net interest margin. Average interest-earning assets for the year ended December 31, 2012 increased $1.2 billion from the year ended December 31, 2011. The net interest margin decreased 15 basis points from 3.47% during the year ended December 31, 2011 to 3.32% during the year ended December 31, 2012. The decrease in net interest margin is due to a greater decline in the yield of interest-earning assets than the decline in cost on interest-bearing liabilities, primarily due to growth in the average investment portfolio at lower yields and lower yields in the loan portfolio, partially offset by a decline in the cost of deposits and borrowings. The average yield on interest-earning assets decreased 32 basis points from 4.28% during the year ended December 31, 2011 to 3.96% during the year ended December 31, 2012. The average yield on interest-earning assets is primarily impacted by changes in market interest rates as well as changes in the volume and relative mix of interest-earning assets. Market interest rates have remained at historically low levels during the reported periods.
Average loans increased $471.1 million for the year ended December 31, 2012 as compared to the year ended December 31, 2011. The loan portfolio yield decreased 19 basis points to 4.21% for the year ended December 31, 2012 and comprised 64.3% of the average interest-earning assets at December 31, 2012, compared to the loan portfolio yield of 4.40% for the year ended December 31, 2011 which comprised 66.0% of the average interest-earning assets at December 31, 2011. The decrease in the yield on the average loan portfolio is due to the repayment of higher yielding loans and the origination of lower yielding loans in a low interest rate environment.
The average securities portfolio increased $692.4 million for the year ended December 31, 2012 as compared to the year ended December 31, 2011. The yield on investment securities decreased 58 basis points to 3.58% for the year ended December 31, 2012 and comprised 34.0% of average interest-earning assets at December 31, 2012, compared to the yield on investment securities of 4.16% for the year ended December 31, 2011, which comprised 32.3% of the average interest-earning assets at December 31, 2011. The decrease in the yield on securities is due to principal repayments and lower reinvestment rates. The growth in the securities portfolio is part of the Company's strategy to protect earnings in anticipation of declines in long-term interest rates and a protracted low rate environment.


33


Average deposits increased $321.4 million for the year ended December 31, 2012 as compared to the year ended December 31, 2011. The increase is due to a $359.6 million increase in non-interest bearing deposits, partially offset by a $38.2 million decrease in interest-bearing deposits. The average cost of deposits decreased 16 basis points to 0.42% for the year ended December 31, 2012 from 0.58% for the year ended December 31, 2011. The decrease in the average cost of deposits is the result of decreased pricing offered on certain deposit products and product mix as the proportion of higher costing certificates of deposit to total interest-bearing deposits decreased from 26.2% for the year ended December 31, 2011 to 23.5% for the year ended December 31, 2012.
Average total borrowings increased $827.9 million for the year ended December 31, 2012 as compared to the year ended December 31, 2011. The increase is due to an $820.0 million increase in average Federal Home Loan Bank advances, a $154.3 million increase in securities sold under agreements to repurchase and other short-term borrowings, partially offset by a $146.4 million decrease in average long-term debt. The increase in short-term borrowings is due to the replacement of long-term funding with short-term, lower cost funding in anticipation of declines in long-term interest rates and a protracted low rate environment. The decrease in average long-term debt is due to the redemption at par of all the $136.1 million outstanding principal amount of Webster Capital Trust IV 7.65% fixed to floating-rate trust preferred securities on July 18, 2012, which also resulted in a 29 basis point decrease in the cost of long-term debt.
Provision for Loan and Lease Losses
The provision for loan and lease losses was $21.5 million and $22.5 million for the years ended December 31, 2012 and 2011, respectively, a decrease of $1.0 million for the year ended December 31, 2012 compared to the year ended December 31, 2011. The decrease in the provision includes a reduction in net benefit for the Commercial portfolio offset by reduced provisions in the Residential and Consumer portfolios.
Management performs a quarterly review of the loan portfolio to determine the adequacy of the allowance for loan and lease losses. Several factors influence the amount of the provision, including loan growth, portfolio composition, credit performance, changes in the level of non-performing loans, and net charge-offs and the general economic environment. At December 31, 2012, the allowance for loan and lease losses totaled $177.1 million, or 1.47%, of total loans and leases compared to $233.5 million, or 2.08%, of total loans and leases at December 31, 2011. For the year ended December 31, 2012, total net charge-offs were $77.9 million compared to $110.7 million for the year ended December 31, 2011.
See the "Allowance for Loan and Lease Losses Methodology" section for further details.
Non-Interest Income
Total non-interest income was $192.8 million for the year ended December 31, 2012, an increase of $15.7 million from the year ended December 31, 2011. The increase for the year ended December 31, 2012 is primarily attributable to growth in mortgage banking activities offset partially by lower deposit service fees and loan related fees.
Table 6: Non-interest income comparison of 2012 to 2011.
  
Years ended December 31,
Increase (decrease)
(Dollars in thousands)
2012
2011
Amount
Percent
Non-Interest Income:
 
 
 
 
Deposit service fees
$
96,633

$
102,795

$
(6,162
)
(6.0
)%
Loan related fees
18,043

20,237

(2,194
)
(10.8
)
Wealth and investment services
29,515

26,421

3,094

11.7

Mortgage banking activities
23,037

4,905

18,132

369.7

Increase in cash surrender value of life insurance policies
11,254

10,360

894

8.6

Net loss on trading securities

(1,799
)
1,799

100.0

Net gain on sale of investment securities
3,347

3,823

(476
)
(12.5
)
Other income
10,929

10,300

629

6.1

Total non-interest income
$
192,758

$
177,042

$
15,716

8.9
 %
Deposit Service Fees. Deposit service fees were $96.6 million for the year ended December 31, 2012, a decrease of $6.2 million from the comparable period in 2011, primarily due to the Durbin amendment’s reduction of debit card interchange rates that went into effect during the fourth quarter of 2011, partially offset by an increase in HSA service fees driven by an increase in account volume.

34


Loan Related Fees. Loan related fees were $18.0 million for the year ended December 31, 2012, a decrease of $2.2 million from the comparable period in 2011, due to a decreased volume of amendment fees and increased servicing rights amortization.
Wealth and Investment Services. Wealth and investment services income was $29.5 million for the year ended December 31, 2012, an increase of $3.1 million from the comparable period in 2011, due to an increase in income from Webster Investment Services driven by increased referral activity as a result of the Company's focus on relationship banking, as well as an increase in trust fees at the Private Bank.
Mortgage Banking Activities. Mortgage banking activities net revenue was $23.0 million for the year ended December 31, 2012, an increase of $18.1 million from the comparable period in 2011. The increase for the year ended December 31, 2012 as compared to the year ended December 31, 2011 is primarily due to the doubling of the loan originator sales force and the Company implementing a strategy of selling a higher percentage of conforming fixed-rate loans, combined with favorable pricing in the secondary markets. This increase was partially offset by a negative fair value adjustment on mortgage banking derivatives in the year ended December 31, 2012 as compared to a positive fair value adjustment in the year ended December 31, 2011.
Increase in Cash Surrender Value of Life Insurance Policies. Increase in cash surrender value of life insurance policies was $11.3 million for the year ended December 31, 2012, an increase of $0.9 million from the comparable period in 2011 due primarily to a $100 million of additional purchases of life insurance policies in September 2012.
Other Income. Other non-interest income was $10.9 million and $10.3 million for the years ended December 31, 2012 and 2011, respectively. The increase of $0.6 million for the year ended December 31, 2012 as compared to the year ended December 31, 2011 is primarily due to an increase in positive fair value adjustments on treasury derivatives related to increased client swap activity, partially offset by a net impairment loss of $0.7 million on the Company's investments in private equity funds during the year ended December 31, 2012 as compared to a net gain of $1.6 million for the year ended December 31, 2011 and a $1.0 million write-down on a loan held for sale during the year ended December 31, 2012.
Non-Interest Expense
Total non-interest expense was $501.8 million for the year ended December 31, 2012, a decrease of $9.2 million from the year ended December 31, 2011. The Company continues to remain focused on expense control management.
Table 7: Non-interest expense comparison of 2012 to 2011.
  
Years ended December 31,
Increase (decrease)
(Dollars in thousands)
2012
2011
Amount
Percent
Non-Interest Expense:
 
 
 
 
Compensation and benefits
$
264,101

$
262,647

$
1,454

0.6
 %
Occupancy
50,131

53,866

(3,735
)
(6.9
)
Technology and equipment
62,210

60,721

1,489

2.5

Intangible assets amortization
5,420

5,588

(168
)
(3.0
)
Marketing
16,827

18,456

(1,629
)
(8.8
)
Professional and outside services
11,348

11,203

145

1.3

Deposit insurance
22,749

20,927

1,822

8.7

Litigation

(9,523
)
9,523

(100.0
)
Other expense
69,018

87,091

(18,073
)
(20.8
)
Total non-interest expense
$
501,804

$
510,976

$
(9,172
)
(1.8
)%
Compensation and benefits. Compensation and benefits expense was $264.1 million for the year ended December 31, 2012, an increase of $1.5 million from the comparable period in 2011. The increase is primarily due to an increase in commission expense driven by an increase in loan volumes and an increase in pension expense driven primarily by a decrease in the discount rate to determine the Plan's benefit obligation and earnings rate, partially offset by a decrease in group insurance due to a decrease in claim volume.
Occupancy. Occupancy expense was $50.1 million for the year ended December 31, 2012, a decrease of $3.7 million from the comparable period in 2011, primarily due to the consolidation of 16 branches since the beginning of 2011.
Technology and Equipment. Technology and equipment expense was $62.2 million for the year ended December 31, 2012, an increase of $1.5 million from the comparable period in 2011. The increase is reflective of an increase in technology service

35


contracts related to the Company's data center co-location initiative (i.e. the migration of IT applications to third-party hosted data centers).
Marketing. Marketing expense was $16.8 million for the year ended December 31, 2012, a decrease of $1.6 million from the comparable period in 2011, primarily due to a decrease in advertising campaigns.
Deposit Insurance. Deposit insurance was $22.7 million for the year ended December 31, 2012, an increase of $1.8 million from the comparable period in 2011, due to a higher FDIC assessment base as a result of an increase in average assets.
Other Expense. Other non-interest expense was $69.0 million for the year ended December 31, 2012, a decrease of $18.1 million from the comparable period in 2011 primarily attributable to an increase in gain on sale of foreclosed and repossessed assets in 2012 as compared to write-downs to expedite the sale of OREO inventory in 2011 as well as a decrease in branch and facility optimization costs. The decrease from the comparable periods is partially offset by $0.4 million in expense related to the redemption of Webster Capital Trust IV, $1.1 million in expense related to a tender offer for subordinated notes, and $2.5 million in prepayment penalties related to the prepayment of FHLB advances, all of which occurred during the year ended December 31, 2012.
Income Taxes
Webster recognized income tax expense of $74.7 million in 2012 and $58.0 million in 2011. The effective tax rates were 30.1% and 28.0%, respectively. The increase in the effective rate principally reflects the increased pre-tax income as well as decreased benefits from (i) tax-exempt interest income and (ii) reductions in the Company's deferred tax asset valuation allowance applicable to capital losses.
For more information on Webster's income taxes, including its deferred tax assets and valuation allowance, see Note 8 - Income Taxes in the Notes to Consolidated Financial Statements included elsewhere within this report.
Segment Results
Webster’s operations are organized into three reportable segments that represent its core businesses: Commercial Banking, Community Banking and Other. The Community Banking reportable segment is the aggregation of the Personal Banking and Business Banking operating segments. The Other reportable segment is the aggregation of HSA Bank and the Private Banking operating segments. The factors considered in determining whether individual operating segments could be aggregated include that the operating segments: (i) offer the same products and services, (ii) offer services to the same types of clients, (iii) provide services in the same manner and (iv) operate in the same regulatory environments. These segments reflect how executive management responsibilities are assigned by the chief operating decision maker for each of the core businesses, the products and services provided, and the type of customer served, and they reflect how discrete financial information is currently evaluated. The Company’s Treasury unit and consumer liquidating portfolio are included in the Corporate and Reconciling category along with the amounts required to reconcile profitability metrics to GAAP reported amounts.
At December 31, 2012, Webster's operations were organized into four reportable segments that represented its core businesses: Commercial Banking, Retail Banking, Consumer Finance, and Other. In the first quarter of 2013, Webster reconfigured its organization to better serve its customers as one of its key strategic priorities, resulting in the operating and reportable segments discussed above. One of the action steps taken was to consolidate all mass market consumer related activities into a Personal Bank. This action combined the previous Retail and Consumer Finance segments to better meet our objectives and emphasis on relationship development across units. The 2012 and 2011 segment results have been adjusted for comparability to the 2013 segment presentation.
Webster’s segment results are intended to reflect each segment as if it were a stand-alone business. Webster uses an internal profitability reporting system to generate information by operating segment, which is based on a series of management estimates and allocations regarding funds transfer pricing, the provision for loan and lease losses, non-interest expense, income taxes and equity capital. These estimates and allocations, certain of which are subjective in nature, are continually being reviewed and refined. Changes in estimates and allocations that affect the reported results of any operating segment do not affect the consolidated financial position or results of operations of Webster as a whole. The full profitability measurement reports prepared for each operating segment reflect non-GAAP reporting methodologies. The differences between the full profitability and GAAP measures are reconciled in the Corporate and Reconciling category.

36


The following tables present the results for Webster’s reportable segments for the years ended December 31, 2013, 2012 and 2011 and incorporate the allocation of the provision for loan and lease losses and income tax expense to each of Webster’s reportable segments for the periods then ended.
 Table 8: Segment performance summary of net income (loss) and balance sheet information for the years ended December 31,
(In thousands)
2013
2012(1)
2011(1)
Net income (loss):
 
 
 
Commercial Banking
$
91,097

$
88,659

$
79,460

Community Banking
74,147

64,462

33,861

Other
16,875

12,602

6,377

Total Reportable Segments
182,119

165,723

119,698

Corporate and Reconciling
(2,570
)
7,974

31,681

Net income attributable to Webster Financial Corporation
$
179,549

$
173,697