WEBSTER FINANCIAL CORPORATION 2014 Annual Report
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WEBSTER FINANCIAL CORPORATION 2014 Annual Report Transforming...Expanding... Growing MARCH 2015 Dear Shareholders, we now rank as the second most efficient bank in our peer group. Since 2010, core operating Webster made meaningful strides along the revenue has increased 14% while core operating path to high performance in 2014 by investing expense has increased just over 1%, resulting capital, resources, and energy in growth in a 7 percentage point improvement in the strategies designed to create value for customers efficiency ratio and a 10-plus percentage point and shareholders alike. In this letter, I’ll discuss gain relative to the peer group median. our progress in pursuit of our goal to be a high performing regional bank as measured by While we’ve been holding expenses relatively financial performance, growth in key customer flat in recent years, the underlying components segments, and customer satisfaction. have shifted meaningfully. Investments in automated and self-service solutions, Multi-year strategic investments in people increasingly preferred by customers, have and technology have enabled Webster to enabled a rebalancing of staffing patterns. For adapt rapidly to the fundamentally changed example, in Community Banking, the level of banking environment. We’ve transformed our staffing atb anking centers is 28% lower than Community Banking and Private Banking in 2010, while other customer-facing revenue models, expanded our Commercial Banking producers, including mortgage bankers, business, and dramatically grown our health business bankers, and investment specialists, savings account business - HSA Bank. Our have increased significantly. Additionally, the strategic choices, coupled with comprehensive enterprise risk management team has grown risk management and relentless expense nearly 40% over that period, as we continually control, have led to strong loan growth, higher bolster our risk management organization, revenue, and solid earnings. Our financial invest in new systems, and reinforce the performance as compared to our Proxy Peer compliance aspect of our culture. Group across key metrics sustained its steady improvement. The combination of revenue growth and expense control in today’s stubbornly low In delivering our best financial results since the interest rate climate and rigorous regulatory onset of the Great Recession, Webster achieved environment has made Webster sustainably record net income. Webster now has recorded more competitive while bringing us closer to five consecutive years of revenue growth and achieving our overarching financial goal of positive operating leverage, the only bank in our earning in excess of our estimated 10% cost of peer group to achieve this dual distinction. equity capital (economic profit). Record total core revenue was propelled by Turning to asset quality, favorable credit trends strong loan growth that produced record net drove metrics to levels not seen since 2007. interest income. Commercial Banking again led During 2014, past-due loans dropped 17%, the way with record loan originations and 16% non-performing loans declined 19%, and net loan growth. Though core noninterest income charge-offsd eclined by half. Our provision and was flat year-over-year due to an industrywide allowance for loan losses increased as the loan slowdown in mortgage banking activity, fee portfolio continued to grow, and we reported a income rose in most other categories as Webster net add to the allowance in every quarter. deepened customer relationships. Taken together, these favorable factors drove Contributing importantly to our progress earnings per diluted share 12% higher to $2.08, has been our intense focus on efficiency. We as core return on average shareholders’ equity, achieved a full-year efficiency ratio below 60%, a key metric, held steady at 8.70% amid rising meeting a goal we laid out three years ago, and capital levels. Return on average tangible common equity was 11.90%. Investors have taken note that Webster has group continues to focus on privately held, consistently delivered on its promises. This middle market companies with greater than is reflected in the total market value of our $20 million of annual revenue as well as certain company which recently surpassed $3 billion for industries where we have deep expertise. the first time. Total shareholder return ranked Our primary focus in Community Banking third among the 14 peer group banks in 2014 is on the mass affluent customer gse ment. and ranked first over the past five years. This Given our geographic footprint as well as our outperformance may well reflect the speed with reputation for service, a specialized product which Webster is adapting to change. set and ever-increasing digital capabilities, we are well-positioned to grow our mass affluent Our Strategic Perspective penetration level beyond the current level of Our management system is organized around about 45%. With HSA Bank, our movement the quest for economic profit. Financial up-market to serve large employers and and strategic goals are hard-wired into our insurance carriers has been validated and compensation programs, which are closely accelerated by our recent acquisition. The aligned with shareholder interests. Executive Private Banking team focuses on providing compensation is largely variable, is highly customized solutions and advice to high net performance based, and has a sizable equity worth families who oftentimes have an existing component. A significant portion of short- Webster relationship in Commercial or Business and long-term incentives are tied to return Banking. Across all business units, we value on shareholders’ equity and total shareholder relationship depth and breadth over simple return, including as compared to the peer account acquisition. group. I encourage you to learn more about our executive compensation program by reviewing Webster’s strategic choices in recent years the Compensation Committee’s report in the have made us a stronger, more profitable proxy statement that accompanies this letter. institution that is poised to grow and thrive in an increasingly competitive field. Our balance In pursuing our primary goal of maximizing sheet is well-positioned for a rising interest rate economic profit over time, we rigorously environment, in part due to shifting loan mix evaluate investment opportunities and deploy and deposit mix. As commercial/business loans capital to those businesses that we believe can have grown from 45% to 56% of our portfolio generate sustainable returns above the cost of since 2010, interest rate risk has also been capital. To that end, Commercial Banking has mitigated as a greater percentage of our loans grown pre-provision net revenue (PPNR) at 21% carry floating or periodic interest rates. annually since 2012 and its capital allocation has increased 24% over that same period. HSA On the liability side of the balance sheet, we Bank, the other line of business recording have significantly increased transaction account positive economic profit, has grown PPNR at a balances which has extended the duration of similar rate with its capital allocation up nearly liabilities and reduced the level of anticipated 40%. Because the other two lines of business, pricing volatility in a rising rate environment. Community Banking and Private Banking, Asset sensitivity has increased such that we have not yet achieved positive economic will benefit from a rise in short term rates. Our profit as PPNR has grown at a lower rate, their ample liquidity coverage ratio has benefited cumulative capital allocation has remained from these changes, and our loan-to-deposit essentially flat. ratio is below 90%. Our disciplined approach to allocating capital Product and customer profitability analytics are and resources by business unit will enable an increasingly important management tool, us to achieve above market growth in key helping us make better pricing and marketing customer segments. The Commercial Banking choices. We’re looking to gain competitive advantage through an outsized emphasis on with their colleagues in Private Banking, digital and direct response marketing in lieu of Business Banking, Personal Banking, and HSA traditional marketing activities. Bank to leverage the Commercial Bank’s success and deepen our “share of wallet” by bringing the Sustaining Success in Commercial Banking totality of Webster to the customer. Commercial Banking’s importance to Webster has grown dramatically in recent years. Since Transforming Community Banking 2010, loans have grown at a 12.5% compound Community Banking has made remarkable annual rate to $6.6 billion. All five units of progress in pursuit of its transformative Commercial Banking earned economic profit strategic roadmap. The evolved model again in 2014 through loan growth, validated recognizes the fundamental shift in the pricing discipline, sound risk management, and economics of this business, responds to expense control – all while earning regional and changing customer preferences, harmonizes the national recognition for excellence in client customer experience across multiple channels, satisfaction from Greenwich Associates for the and will ultimately generate economic profit. third consecutive year. The roadmap calls for significant investment in self-service channels, particularly mobile, that We are replicating in contiguous markets consumers and businesses increasingly prefer Commercial Banking’s proven model of for their banking. Customer satisfaction is high, geographic expansion.