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WEBSTER FINANCIAL CORP - Quarter Report: 2019 March (Form 10-Q)

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
_______________________________________________________________________________
FORM 10-Q
_______________________________________________________________________________
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ending March 31, 2019
Commission File Number: 001-31486
_______________________________________________________________________________

WEBSTER FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
 _______________________________________________________________________________
Delaware
 
06-1187536
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)

145 Bank Street, Waterbury, Connecticut 06702
(Address and zip code of principal executive offices)

(203) 578-2202
(Registrant's telephone number, including area code)
______________________________________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of Exchange on which registered
Common Stock, $.01 par value
WBS
New York Stock Exchange
Depository Shares, each representing 1/1000th interest in a share of 5.25% Series F Non-Cumulative Perpetual Preferred Stock
WBS-F
New York Stock Exchange
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.      Yes      No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).   Yes      No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
Accelerated filer
 
Non-accelerated filer
 
Smaller reporting company
Emerging growth company
 
 
 
 
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transaction period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).      Yes      No
The number of shares of common stock, par value $.01 per share, outstanding as of April 30, 2019 was 92,142,999.

 



INDEX
 
 
Page No.
 
 
 
Forward-Looking Statements
Key to Acronyms and Terms
 
 
 
 
 
 
 
Item 1.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 




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Table of Contents

WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
FOWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. 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. References to the "Company," " Webster," "we," "our," or "us" mean Webster Financial Corporation and its consolidated subsidiaries.
Examples of forward-looking statements include, but are not limited to:
projections of revenues, expenses, income or loss, earnings or loss per share, and other financial items;
statements of plans, objectives and expectations of Webster or its management or Board of Directors;
statements of future economic performance; and
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 our actual results to differ from those discussed in any forward-looking statements include, but are not limited to:
our ability to successfully execute our business plan and manage our risks;
local, regional, national and international economic conditions and the impact they may have on us and our customers;
volatility and disruption in national and international financial markets;
changes in the level of non-performing assets and charge-offs;
changes in estimates of future reserve requirements based upon the periodic review thereof under relevant regulatory and accounting requirements;
adverse conditions in the securities markets that lead to impairment in the value of our investment securities;
inflation, changes in interest rates, and monetary fluctuations;
the timely development and acceptance of new products and services and the perceived value of those products and services by customers;
changes in deposit flows, consumer spending, borrowings, and savings habits;
our ability to implement new technologies and maintain secure and reliable technology systems;
performance by our counterparties and vendors;
the ability to increase market share and control expenses;
changes in the competitive environment among banks, financial holding companies, and other financial services providers;
changes in laws and regulations (including those concerning taxes, banking, securities, insurance, and healthcare) with which we and our subsidiaries must comply;
the effect of changes in accounting policies and practices applicable to us; and
legal and regulatory developments including the resolution of legal proceedings or regulatory or other governmental inquiries and the results of regulatory examinations or reviews.
All forward-looking statements in this Quarterly Report on Form 10-Q speak only as of the date they are 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.



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Table of Contents

WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
KEY TO ACRONYMS AND TERMS
Agency CMBS
Agency commercial mortgage-backed securities
Agency CMO
Agency collateralized mortgage obligations
Agency MBS
Agency mortgage-backed securities
ALCO
Asset/Liability Committee
ALLL
Allowance for loan and lease losses
AOCL
Accumulated other comprehensive loss, net of tax
ASC
Accounting Standards Codification
ASU or the Update
Accounting Standards Update
Basel III
Capital rules under a global regulatory framework developed by the Basel Committee on Banking Supervision
CET1 capital
Common Equity Tier 1 Capital, defined by Basel III capital rules
CLO
Collateralized loan obligation securities
CMBS
Non-agency commercial mortgage-backed securities
CME
Chicago Mercantile Exchange
Dodd-Frank Act
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
FASB
Financial Accounting Standards Board
FDIC
Federal Deposit Insurance Corporation
FHLB
Federal Home Loan Bank
FICO
Fair Isaac Corporation
FRB
Federal Reserve Bank
FTP
Funds Transfer Pricing, a matched maturity funding concept
GAAP
U.S. Generally Accepted Accounting Principles
Holding Company
Webster Financial Corporation
HSA Bank
A division of Webster Bank, National Association
LEP
Loss emergence period
LGD
Loss given default
LPL
LPL Financial Holdings Inc.
NAV
Net asset value
NII
Net interest income
OCC
Office of the Comptroller of the Currency
OCI/OCL
Other comprehensive income (loss)
OREO
Other real estate owned
OTTI
Other-than-temporary impairment
PD
Probability of default
PPNR
Pre-tax, pre-provision net revenue
ROU asset
Right-of-use asset
RPA
Risk participation agreement
SEC
United States Securities and Exchange Commission
SERP
Supplemental defined benefit retirement plan
Tax Act
Tax Cuts and Jobs Act of 2017
TDR
Troubled debt restructuring, defined in ASC 310-40 "Receivables-Troubled Debt Restructurings by Creditors"
VIE
Variable interest entity, defined in ASC 810-10 "Consolidation-Overall"
Webster Bank
Webster Bank, National Association, a wholly-owned subsidiary of Webster Financial Corporation
Webster or the Company
Webster Financial Corporation, collectively with its consolidated subsidiaries

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Table of Contents

PART I. – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
 
March 31,
2019
 
December 31,
2018
(In thousands, except share data)
(Unaudited)
 
 
Assets:
 
 
 
Cash and due from banks (includes restricted cash)
$
167,587

 
$
260,422

Interest-bearing deposits
53,072

 
69,077

Investment securities available-for-sale, at fair value
2,977,316

 
2,898,730

Investment securities held-to-maturity (fair value of $4,433,377 and $4,209,121)
4,480,160

 
4,325,420

Federal Home Loan Bank and Federal Reserve Bank stock
106,674

 
149,286

Loans held for sale (valued under fair value option $20,615 and $7,908)
20,615

 
11,869

Loans and leases
18,814,290

 
18,465,489

Allowance for loan and lease losses
(211,389
)
 
(212,353
)
Loans and leases, net
18,602,901

 
18,253,136

Deferred tax assets, net
76,576

 
96,516

Premises and equipment, net
279,580

 
124,850

Goodwill
538,373

 
538,373

Other intangible assets, net
24,803

 
25,764

Cash surrender value of life insurance policies
546,094

 
543,616

Accrued interest receivable and other assets
364,378

 
313,256

Total assets
$
28,238,129

 
$
27,610,315

Liabilities and shareholders' equity:
 
 
 
Deposits:
 
 
 
Non-interest-bearing
$
4,224,144

 
$
4,162,446

Interest-bearing
18,526,784

 
17,696,399

Total deposits
22,750,928

 
21,858,845

Securities sold under agreements to repurchase and other borrowings
688,065

 
581,874

Federal Home Loan Bank advances
951,730

 
1,826,808

Long-term debt
524,303

 
226,021

Accrued expenses and other liabilities
356,848

 
230,252

Total liabilities
25,271,874

 
24,723,800

Shareholders’ equity:
 
 
 
Preferred stock, $.01 par value; Authorized - 3,000,000 shares:
 
 
 
Series F issued and outstanding (6,000 shares)
145,037

 
145,037

Common stock, $.01 par value; Authorized - 200,000,000 shares:
 
 
 
Issued (93,686,311 shares)
937

 
937

Paid-in capital
1,113,107

 
1,114,394

Retained earnings
1,895,870

 
1,828,303

Treasury stock, at cost (1,613,308 and 1,508,456 shares)
(86,855
)
 
(71,504
)
Accumulated other comprehensive loss, net of tax
(101,841
)
 
(130,652
)
Total shareholders' equity
2,966,255

 
2,886,515

Total liabilities and shareholders' equity
$
28,238,129

 
$
27,610,315

See accompanying Notes to Condensed Consolidated Financial Statements.

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Table of Contents

WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
 
Three months ended March 31,
(In thousands, except per share data)
2019
 
2018
Interest Income:
 
 
 
Interest and fees on loans and leases
$
228,764

 
$
193,220

Taxable interest and dividends on investments
51,876

 
47,288

Non-taxable interest on investment securities
5,402

 
5,271

Loans held for sale
148

 
142

Total interest income
286,190

 
245,921

Interest Expense:
 
 
 
Deposits
31,020

 
18,156

Securities sold under agreements to repurchase and other borrowings
2,752

 
3,640

Federal Home Loan Bank advances
7,785

 
7,281

Long-term debt
3,082

 
2,676

Total interest expense
44,639

 
31,753

Net interest income
241,551

 
214,168

Provision for loan and lease losses
8,600

 
11,000

Net interest income after provision for loan and lease losses
232,951

 
203,168

Non-interest Income:
 
 
 
Deposit service fees
43,024

 
40,451

Loan and lease related fees
7,819

 
6,996

Wealth and investment services
7,651

 
7,870

Mortgage banking activities
764

 
1,144

Increase in cash surrender value of life insurance policies
3,584

 
3,572

Other income
5,770

 
8,714

Total non-interest income
68,612

 
68,747

Non-interest Expense:
 
 
 
Compensation and benefits
97,785

 
94,765

Occupancy
14,696

 
15,145

Technology and equipment
25,697

 
23,862

Intangible assets amortization
962

 
962

Marketing
3,328

 
3,552

Professional and outside services
6,048

 
4,788

Deposit insurance
4,430

 
6,717

Other expense
22,740

 
21,824

Total non-interest expense
175,686

 
171,615

Income before income tax expense
125,877

 
100,300

Income tax expense
26,141

 
20,075

Net income
99,736

 
80,225

Preferred stock dividends and other
(2,187
)
 
(2,142
)
Earnings applicable to common shareholders
$
97,549

 
$
78,083

 
 
 
 
Earnings per common share:
 
 
 
Basic
$
1.06

 
$
0.85

Diluted
1.06

 
0.85

See accompanying Notes to Condensed Consolidated Financial Statements.


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WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
 
 
Three months ended March 31,
(In thousands)
 
2019
 
2018
Net income
 
$
99,736

 
$
80,225

Other comprehensive income (loss), net of tax:
 
 
 
 
Investment securities available-for-sale
 
27,559

 
(27,424
)
Derivative instruments
 
196

 
2,522

Defined benefit pension and other postretirement benefit plans
 
1,056

 
954

Other comprehensive income (loss), net of tax
 
28,811

 
(23,948
)
Comprehensive income
 
$
128,547

 
$
56,277

See accompanying Notes to Condensed Consolidated Financial Statements.


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WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited)
(In thousands, except per share data)
Preferred
Stock
Common
Stock
Paid-In
Capital
Retained
Earnings
Treasury
Stock, at cost
Accumulated
Other
Comprehensive
Loss, Net of Tax
Total
Shareholders'
Equity
Balance at December 31, 2018
$
145,037

$
937

$
1,114,394

$
1,828,303

$
(71,504
)
$
(130,652
)
$
2,886,515

Cumulative effect of changes in accounting principles



(515
)


(515
)
Net income



99,736



99,736

Other comprehensive income, net of tax





28,811

28,811

Common stock dividends/equivalents $0.33 per share



(30,589
)


(30,589
)
Series F preferred stock dividends $328.125 per share



(1,969
)


(1,969
)
Stock-based compensation



904

2,072


2,976

Exercise of stock options


(1,287
)

1,691


404

Common shares acquired from stock compensation plan activity




(6,111
)

(6,111
)
Common stock repurchase program




(13,003
)

(13,003
)
Balance at March 31, 2019
$
145,037

$
937

$
1,113,107

$
1,895,870

$
(86,855
)
$
(101,841
)
$
2,966,255

 
 
 
 
 
 
 
 
(In thousands, except per share data)
Preferred
Stock
Common
Stock
Paid-In
Capital
Retained
Earnings
Treasury
Stock, at cost
Accumulated
Other
Comprehensive
Loss, Net of Tax
Total
Shareholders'
Equity
Balance at December 31, 2017
$
145,056

$
937

$
1,122,164

$
1,595,762

$
(70,430
)
$
(91,531
)
$
2,701,958

Cumulative effect of changes in accounting principles



(1,362
)


(1,362
)
Net income



80,225



80,225

Other comprehensive loss, net of tax





(23,948
)
(23,948
)
Common stock dividends/equivalents $0.26 per share


43

(24,111
)


(24,068
)
Series F preferred stock dividends $328.125 per share



(1,969
)


(1,969
)
Dividends accrued on Series F preferred stock



22



22

Stock-based compensation


(1,541
)
957

3,919


3,335

Exercise of stock options


(144
)

434


290

Common shares acquired from stock compensation plan activity




(6,164
)

(6,164
)
Common stock repurchase program




(12,158
)

(12,158
)
Series F preferred stock issuance adjustment
(19
)





(19
)
Balance at March 31, 2018
$
145,037

$
937

$
1,120,522

$
1,649,524

$
(84,399
)
$
(115,479
)
$
2,716,142

See accompanying Notes to Condensed Consolidated Financial Statements.

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WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 
Three months ended March 31,
(In thousands)
2019
 
2018
Operating Activities:
 
 
 
Net income
$
99,736

 
$
80,225

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for loan and lease losses
8,600

 
11,000

Deferred tax expense
9,939

 
1,286

Depreciation and amortization
9,636

 
9,489

Amortization of premium/discount on earning assets and funding, net
10,604

 
13,390

Stock-based compensation
2,976

 
3,335

Gain on sale, net of write-down, on foreclosed and repossessed assets
(457
)
 
(89
)
Loss on sale, net of write-down, on premises and equipment
446

 
57

Increase in cash surrender value of life insurance policies
(3,584
)
 
(3,572
)
Gain from life insurance policies
(64
)
 

Mortgage banking activities
(764
)
 
(1,144
)
Proceeds from sale of loans held for sale
20,613

 
44,806

Origination of loans held for sale
(33,168
)
 
(43,131
)
Net increase in right-of-use lease assets
(654
)
 

Net (increase) decrease in derivative contract assets net of liabilities
(45,896
)
 
11,744

Net increase in accrued interest receivable and other assets
(23,004
)
 
(10,484
)
Net (decrease) increase in accrued expenses and other liabilities
(11,625
)
 
15,355

Net cash provided by operating activities
43,334

 
132,267

Investing Activities:
 
 
 
Purchases of available for sale investment securities
(126,717
)
 
(251,920
)
Proceeds from maturities and principal payments of available for sale investment securities
81,858

 
111,231

Purchases of held-to-maturity investment securities
(269,670
)
 
(64,281
)
Proceeds from maturities and principal payments of held-to-maturity investment securities
108,732

 
133,692

Net proceeds from Federal Home Loan Bank stock
42,612

 
26,238

Alternative investments capital call, net
(700
)
 
(364
)
Net increase in loans
(361,881
)
 
(289,165
)
Proceeds from loans not originated for sale
4,395

 
34

Proceeds from life insurance policies
2,270

 

Proceeds from the sale of foreclosed and repossessed assets
5,561

 
1,948

Additions to premises and equipment
(5,963
)
 
(5,780
)
Net cash used for investing activities (1)
(519,503
)
 
(338,367
)
 
 
 
 
See accompanying Notes to Condensed Consolidated Financial Statements.
 
 
 
 

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WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited), continued
 
 
Three months ended March 31,
(In thousands)
2019
 
2018
Financing Activities:
 
 
 
Net increase in deposits
890,903

 
391,087

Proceeds from Federal Home Loan Bank advances
1,400,000

 
1,525,000

Repayments of Federal Home Loan Bank advances
(2,275,078
)
 
(2,000,075
)
Net increase in securities sold under agreements to repurchase and other borrowings
106,191

 
288,030

Issuance of long-term debt
300,000

 

Debt issuance costs
(3,642
)
 

Dividends paid to common shareholders
(30,366
)
 
(23,901
)
Dividends paid to preferred shareholders
(1,969
)
 
(1,969
)
Exercise of stock options
404

 
290

Common stock repurchase program
(13,003
)
 
(12,158
)
Common shares purchased related to stock compensation plan activity
(6,111
)
 
(6,164
)
Net cash provided by financing activities
367,329

 
160,140

Net increase (decrease) in cash and due from banks and interest-bearing deposits (1)
(108,840
)
 
(45,960
)
Cash and due from banks and interest-bearing deposits at beginning of period (1)
329,499

 
256,786

Cash and due from banks and interest-bearing deposits at end of period (1)
$
220,659

 
$
210,826

 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
Interest paid
$
43,372

 
$
33,986

Income taxes paid
4,274

 
3,313

Noncash investing and financing activities:
 
 
 
Transfer of loans and leases to foreclosed properties and repossessed assets
$
3,735

 
$
1,626

Transfer of loans from loans and leases to loans-held-for-sale
436

 
35

Right-of-use lease assets recorded
157,234

 

Lessee operating lease liabilities recorded
178,208

 

(1)
The Condensed Consolidated Statements of Cash Flows have been revised to present an aggregated total change in cash and due from banks and interest-bearing deposits. Previously, cash flows from interest-bearing deposits was presented in Net cash used for investing activities. As a result of this revision, cash flows from interest-bearing deposits have been excluded from Net cash used for investing activities.
See accompanying Notes to Condensed Consolidated Financial Statements.

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Note 1: Summary of Significant Accounting Policies
Nature of Operations
Webster Financial Corporation (the Holding Company) is a bank holding company and financial holding company under the Bank Holding Company Act, incorporated under the laws of Delaware in 1986 and headquartered in Waterbury, Connecticut. At March 31, 2019, the Holding Company's principal asset is all of the outstanding capital stock of Webster Bank, National Association (Webster Bank).
Webster delivers financial services to individuals, families, and businesses primarily within its regional footprint from New York to Massachusetts. Webster provides business and consumer banking, mortgage lending, financial planning, trust, and investment services through banking offices, ATMs, mobile banking, and its internet website (www.websterbank.com or www.wbst.com). Webster also offers equipment financing, commercial real estate lending, and asset-based lending primarily across the Northeast. On a nationwide basis, through its HSA Bank division, Webster Bank offers and administers health savings accounts, flexible spending accounts, health reimbursement accounts, and commuter benefits.
Basis of Presentation
The accounting and reporting policies of the Company that materially affect its financial statements conform with U.S. Generally Accepted Accounting Principles (GAAP). The accompanying unaudited Condensed Consolidated Financial Statements of the Company have been prepared in conformity with the instructions for Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all the information and notes required by GAAP for complete financial statements and should be read in conjunction with the Company's Consolidated Financial Statements, and Notes thereto, for the year ended December 31, 2018, included in the Company's Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (SEC) on March 1, 2019.
Certain prior period amounts have been reclassified to conform to the current year's presentation. These reclassifications had an immaterial effect on the Company's consolidated financial statements.
Use of Estimates
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts of assets and liabilities as of the date of the financial statements as well as income and expense during the period. Actual results could differ from those estimates. Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for the full year or any future period.
Accounting Standards Adopted During 2019
Effective January 1, 2019, the following new Accounting Standards Updates (ASU or Update) were adopted by the Company:
ASU No. 2018-16, Derivatives and Hedging (Topic 815) - Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes.
The Update permits the use of the OIS rate based on SOFR as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815 in addition to the interest rates on direct U.S. Treasury obligations, the LIBOR swap rate, the OIS rate based on the Fed Funds Effective Rate, and the Securities Industry and Financial Markets Association Municipal Swap Rate.
The Company adopted the Update during the first quarter of 2019 on a prospective basis. The adoption of this guidance did not have a material effect on the Company's consolidated financial statements.
ASU No. 2017-12, Derivatives and Hedging (Topic 815) - Targeted Improvements to Accounting for Hedging Activities.
The purpose of the Update is to better align a company’s risk management and financial reporting for hedging activities with the economic objectives of those activities. The Update expands an entity's ability to hedge non-financial and financial risk components and reduce complexity in hedges of interest rate risk. The guidance eliminates the requirement to separately measure and report hedge ineffectiveness, and generally requires the entire change in fair value of a hedging instrument to be presented in the same income statement line in which the earnings effect of the hedged item is reported.
The Company adopted the Update during the first quarter of 2019 on a modified retrospective basis. The adoption of this guidance did not have a material effect on the Company's consolidated financial statements. The Company has provided enhanced disclosures in Note 13 - Derivative Financial Instruments as a result of adopting this Update.

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ASU No. 2016-02, Leases (Topic 842) and subsequent ASUs issued to amend this Topic.
The Updates introduce a lessee model that requires substantially all leases to be recorded as assets and liabilities on the balance sheet and requires expanded quantitative and qualitative disclosures regarding key information about leasing arrangements. The lessor model remains substantially the same with targeted improvements that do not materially impact the Company.
The Company adopted the Updates during the first quarter of 2019 using the new transition method option that allows the use of effective date, January 1, 2019, as the date of initial application of the new lease accounting standard and to recognize a cumulative-effect adjustment to the opening balance of retained earnings upon adoption. The Company elected the transition relief package of practical expedients which forgoes the requirement to reassess the existence of leases in existing contracts, their lease classification and the accounting treatment of their initial direct costs. As a practical expedient, the Company has also made a policy election to not separate non-lease components from lease components for its real estate leases and instead account for each separate lease components and non-lease components associated with that lease component as a single lease component. The Company will separately account for the lease and non-lease components in its equipment leases. The Company determines whether a contract contains a lease based on whether a contract, or a part of a contract, conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The discount rate used is either the rate implicit in the lease, or when a rate cannot be readily determined an incremental borrowing rate. The incremental borrowing rate is the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar term and amount equal to the lease payments, in a similar economic environment.
As a result of adopting this Update, the Company recognized $157.2 million of right-of-use asset (ROU) and $178.2 million of lease liability, as of January 1, 2019. The Company also recorded a $0.5 million cumulative-effect adjustment directly to retained earnings as of January 1, 2019 for abandoned leased properties and the remaining deferred gains on sale-leaseback transactions which occurred prior to the date of adoption. See Note 9: Leasing for further information.
Accounting Standards Issued But Not Yet Adopted
The following list identifies ASUs applicable to the Company that have been issued by the Financial Accounting Standards Board (FASB) but are not yet effective:
ASU No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40) - Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract
The Update aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The updated guidance also requires an entity to amortize the capitalized implementation costs as an expense over the term of the hosting arrangement and to present in the same income statement line item as the fees associated with the hosting arrangement.
The Update is effective for the Company on January 1, 2020. Early adoption is permitted, although the Company does not intend to early adopt. The Company will apply the amendments in this update prospectively to all implementation costs incurred after the date of adoption. The Company does not expect this Update to have a material impact on its consolidated financial statements.
ASU No. 2018-14, Compensation-Retirement Benefits - Defined Benefit Plan - General (Subtopic 715-20) - Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans  
The Update modifies the disclosure requirements for employers that sponsor defined benefit pension plans and other postretirement plans.
The updated guidance will be effective for the Company on January 1, 2021. The Company does not expect this Update to have a material impact on its consolidated financial statements.
ASU No. 2018-13, Fair Value Measurement (Topic 820) - Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement
The Update modifies the disclosure requirements on fair value measurements. The updated guidance will no longer require entities to disclose the amount and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy. However, it will require public companies to disclose changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 measurements.
The Update is effective for the Company on January 1, 2020, and earlier adoption is permitted. The Company does not expect this Update to have a material impact on its consolidated financial statements.

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ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment.
The Update simplifies quantitative goodwill impairment testing by requiring entities to compare the fair value of a reporting unit with its carrying amount and recognize an impairment charge for any amount by which the carrying amount exceeds the reporting unit's fair value, to the extent that the loss recognized does not exceed the amount of goodwill allocated to that reporting unit.
This changes current guidance by eliminating the second step of the goodwill impairment analysis which involves calculating the implied fair value of goodwill determined in the same manner as the amount of goodwill recognized in a business combination upon acquisition. Entities will still have the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary.
The Update must be applied prospectively and is effective for the Company on January 1, 2020. Early adoption is permitted. The Company does not expect this new guidance to have a material impact on its consolidated financial statements.
ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments and subsequent ASUs issued to clarify this Topic.
Current GAAP requires an incurred loss methodology for recognizing credit losses. This approach requires recognition of credit losses when it is probable a loss has been incurred. The main objective of this Update is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in this Update will replace today's incurred loss approach with a new credit loss methodology known as the Current Expected Credit Loss (CECL) model which requires earlier recognition of credit losses using a lifetime credit loss measurement approach for financial assets carried at amortized cost. The CECL model requires consideration of a broader range of reasonable and supportable information to determine credit loss estimates.
The change from an incurred loss method to an expected loss method represents a fundamental shift from existing GAAP and may result in a material increase to the Company's accounting for credit losses on financial instruments. To prepare for implementation of the new standard the Company has established a project lead and has empowered a cross functional steering committee comprised of members from different disciplines including Credit, Accounting, Finance, IT, and Treasury as well as specific working groups to focus on key components of the development process. Through these working groups, the Company has begun to evaluate the effect that this Update, including the subsequent ASUs issued to clarify this Topic, will have on its financial statements and related disclosures. An implementation project plan has been created and is made up of targeted work streams focused on credit models, data management, treasury, and accounting. These work streams are collectively assessing required resources, use of existing and new models, and data availability. The Company expects that the new credit models will include additional assumptions used to calculate credit losses over the estimated life of the financial assets and will include the impact of forecasted macroeconomic conditions. The Company contracted with system solution providers and is in the process of implementing the selected solutions. During 2019, the Company is focused on model validations as well as the development of processes and related controls. The Company expects to begin parallel runs by mid-2019.
These Updates are effective for the Company on January 1, 2020. The adoption of these Updates is expected to increase the Company's allowance for loan and lease losses (ALLL). The magnitude of the increase will depend on the composition, characteristics, and credit quality of our loan and securities portfolios as well as the economic conditions in effect at the adoption date.

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Note 2: Variable Interest Entities
The Company has an investment interest in the following entities that meet the definition of a variable interest entity (VIE).
Consolidated
Rabbi Trust. The Company established a Rabbi Trust to meet the obligations due under its Deferred Compensation Plan for Directors and Officers and to mitigate the expense volatility of the aforementioned plan. The funding of the Rabbi Trust and the discontinuation of the Deferred Compensation Plan for Directors and Officers occurred during 2012.
Invested assets in the Rabbi Trust primarily consist of mutual funds that invest in equity and fixed income securities. The Company is considered the primary beneficiary of the Rabbi Trust as it has the power to direct the activities of the Rabbi Trust that significantly affect the VIE's economic performance and it has the obligation to absorb losses of the VIE that could potentially be significant to the VIE.
The Company consolidates the invested assets of the trust along with the total deferred compensation obligations and includes them in accrued interest receivable and other assets, and accrued expenses and other liabilities, respectively, in the accompanying Condensed Consolidated Balance Sheets. Earnings in the Rabbi Trust, including appreciation or depreciation, are reflected as other non-interest income, and changes in the corresponding liability are reflected as compensation and benefits, in the accompanying Condensed Consolidated Statements of Income. See Note 14: Fair Value Measurements for additional information.
Non-Consolidated
Securitized Investments. The Company, through normal investment activities, makes passive investments in securities issued by VIEs for which Webster is not the manager. The investment securities consist of Agency CMO, Agency MBS, Agency CMBS, CMBS, and CLO. The Company has not provided financial or other support with respect to these investment securities other than its original investment. For these investment securities, the Company determined it is not the primary beneficiary due to the relative size of its investment in comparison to the principal amount of the structured securities issued by the VIEs, the level of credit subordination which reduces the Company’s obligation to absorb losses or right to receive benefits and its inability to direct the activities that most significantly impact the economic performance of the VIEs. The Company’s maximum exposure to loss is limited to the amount of its investment in the VIEs. See Note 3: Investment Securities for additional information.
Tax Credit - Finance Investments. The Company makes non-marketable equity investments in entities that finance affordable housing and other community development projects and provide a return primarily through the realization of tax benefits. In most instances the investments require the funding of capital commitments in the future. While the Company's investment in an entity may exceed 50% of its outstanding equity interests, the entity is not consolidated as Webster is not involved in its management. For these investments, the Company determined it is not the primary beneficiary due to its inability to direct the activities that most significantly impact the economic performance of the VIEs. The Company applies the proportional amortization method to account for its investments in qualified affordable housing projects.
At March 31, 2019 and December 31, 2018, the aggregate carrying value of the Company's tax credit-finance investments was $38.8 million and $29.1 million, respectively, which represents the Company's maximum exposure to loss. At March 31, 2019 and December 31, 2018, unfunded commitments have been recognized, totaling $15.0 million and $10.4 million, respectively, and are included in accrued expenses and other liabilities in the accompanying Condensed Consolidated Balance Sheets.
Webster Statutory Trust. The Company owns all the outstanding common stock of Webster Statutory Trust, a financial vehicle that has issued, and in the future may issue, trust preferred securities. The trust is a VIE in which the Company is not the primary beneficiary. The trust's only assets are junior subordinated debentures issued by the Company, which were acquired by the trust using the proceeds from the issuance of the trust preferred securities and common stock. The junior subordinated debentures are included in long-term debt in the accompanying Condensed Consolidated Balance Sheets, and the related interest expense is reported as interest expense on long-term debt in the accompanying Condensed Consolidated Statements of Income.
Other Non-Marketable Investments. The Company invests in various alternative investments in which it holds a variable interest. These investments are non-public entities which cannot be redeemed since the Company’s investment is distributed as the underlying equity is liquidated. For these investments, the Company has determined it is not the primary beneficiary due to its inability to direct the activities that most significantly impact the economic performance of the VIEs.
At March 31, 2019 and December 31, 2018, the aggregate carrying value of the Company's other investments in VIEs was $18.1 million and $17.6 million, respectively, and the total exposure of the Company's other investments in VIEs, including unfunded commitments, was $31.2 million and $31.0 million, respectively. Refer to Note 14: Fair Value Measurements for additional information.
The Company's equity interests in Tax Credit-Finance Investments, Webster Statutory Trust, and Other Non-Marketable Investments are included in accrued interest receivable and other assets in the accompanying Condensed Consolidated Balance Sheets. For a description of the Company's accounting policy regarding the consolidation of VIEs, refer to Note 1 to the Consolidated Financial Statements included in its Form 10-K, for the year ended December 31, 2018.

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Note 3: Investment Securities
A summary of the amortized cost and fair value of investment securities is presented below:
 
At March 31, 2019
 
At December 31, 2018
(In thousands)
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair Value
 
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair Value
Available-for-sale:




 
 



U.S. Treasury Bills
$
7,595

$

$

$
7,595

 
$
7,549

$
1

$

$
7,550

Agency CMO
226,104

704

(2,814
)
223,994

 
238,968

412

(4,457
)
234,923

Agency MBS
1,603,023

7,876

(25,501
)
1,585,398

 
1,521,534

1,631

(42,076
)
1,481,089

Agency CMBS
598,442


(33,943
)
564,499

 
608,167


(41,930
)
566,237

CMBS
432,933

500

(1,132
)
432,301

 
447,897

645

(2,961
)
445,581

CLO
112,116

89

(581
)
111,624

 
114,641

94

(1,964
)
112,771

Corporate debt
55,678

5

(3,778
)
51,905

 
55,860


(5,281
)
50,579

Available-for-sale
$
3,035,891

$
9,174

$
(67,749
)
$
2,977,316

 
$
2,994,616

$
2,783

$
(98,669
)
$
2,898,730

Held-to-maturity:




 
 
 
 
 
Agency CMO
$
200,568

$
432

$
(3,419
)
$
197,581

 
$
208,113

$
287

$
(5,255
)
$
203,145

Agency MBS
2,614,590

15,623

(48,352
)
2,581,861

 
2,517,823

8,250

(79,701
)
2,446,372

Agency CMBS
704,653

902

(19,366
)
686,189

 
667,500

53

(22,572
)
644,981

Municipal bonds and notes
753,589

11,564

(4,248
)
760,905

 
715,041

2,907

(18,285
)
699,663

CMBS
206,760

765

(684
)
206,841

 
216,943

405

(2,388
)
214,960

Held-to-maturity
$
4,480,160

$
29,286

$
(76,069
)
$
4,433,377

 
$
4,325,420

$
11,902

$
(128,201
)
$
4,209,121


Other-Than-Temporary Impairment
The amount in the amortized cost columns in the table above includes other-than-temporary impairment (OTTI) related to certain CLO positions that were previously considered Covered Funds as defined by Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act), commonly known as the Volcker Rule. The Company has taken measures to bring its CLO positions into conformance with the Volcker Rule.
The balance of OTTI at March 31, 2019 and 2018 was $0.8 million and $1.4 million, respectively. There were no changes in the OTTI balance during the three months ended March 31, 2019 and 2018.
 
 
 
 

To the extent that changes occur in interest rates, credit movements, or other factors that impact fair value and expected recovery of amortized cost of its investment securities, the Company may, in future periods, be required to recognize OTTI in earnings.

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Fair Value and Unrealized Losses
The following tables provide information on fair value and unrealized losses for the individual investment securities with an unrealized loss, aggregated by classification and length of time that the individual investment securities have been in a continuous unrealized loss position:
 
At March 31, 2019
 
Less Than Twelve Months
 
Twelve Months or Longer
 
Total
(Dollars in thousands)
Fair
Value
Unrealized
Losses
 
Fair
Value
Unrealized
Losses
 
# of
Holdings
Fair
Value
Unrealized
Losses
Available-for-sale:
 
 
 
 
 
 
 
 
 
Agency CMO
$
4,054

$

 
$
154,220

$
(2,814
)
 
26
$
158,274

$
(2,814
)
Agency MBS
904

(2
)
 
964,147

(25,499
)
 
149
965,051

(25,501
)
Agency CMBS


 
564,500

(33,943
)
 
37
564,500

(33,943
)
CMBS
315,706

(1,123
)
 
4,318

(9
)
 
33
320,024

(1,132
)
CLO
45,573

(197
)
 
56,051

(384
)
 
6
101,624

(581
)
Corporate debt
16,418

(1,065
)
 
15,339

(2,713
)
 
7
31,757

(3,778
)
Available-for-sale in an unrealized loss position
$
382,655

$
(2,387
)
 
$
1,758,575

$
(65,362
)
 
258
$
2,141,230

$
(67,749
)
Held-to-maturity:
 
 
 
 
 
 
 
 
 
Agency CMO
$
83

$

 
$
165,631

$
(3,419
)
 
22
$
165,714

$
(3,419
)
Agency MBS


 
1,897,381

(48,352
)
 
246
1,897,381

(48,352
)
Agency CMBS


 
626,484

(19,366
)
 
56
626,484

(19,366
)
Municipal bonds and notes
554


 
240,123

(4,248
)
 
86
240,677

(4,248
)
CMBS
2,697


 
115,886

(684
)
 
17
118,583

(684
)
Held-to-maturity in an unrealized loss position
$
3,334

$

 
$
3,045,505

$
(76,069
)
 
427
$
3,048,839

$
(76,069
)
 
At December 31, 2018
 
Less Than Twelve Months
 
Twelve Months or Longer
 
Total
(Dollars in thousands)
Fair
Value
Unrealized
Losses
 
Fair
Value
Unrealized
Losses
 
# of
Holdings
Fair
Value
Unrealized
Losses
Available-for-sale:
 
 
 
 
 
 
 
 
 
Agency CMO
$
15,524

$
(72
)
 
$
180,641

$
(4,385
)
 
36
$
196,165

$
(4,457
)
Agency MBS
321,678

(2,078
)
 
975,084

(39,998
)
 
184
1,296,762

(42,076
)
Agency CMBS


 
566,237

(41,930
)
 
37
566,237

(41,930
)
CMBS
343,457

(2,937
)
 
5,193

(24
)
 
39
348,650

(2,961
)
CLO
83,305

(1,695
)
 
14,873

(269
)
 
5
98,178

(1,964
)
Corporate debt
35,990

(1,820
)
 
14,589

(3,461
)
 
8
50,579

(5,281
)
Available-for-sale in an unrealized loss position
$
799,954

$
(8,602
)
 
$
1,756,617

$
(90,067
)
 
309
$
2,556,571

$
(98,669
)
Held-to-maturity:
 
 
 
 
 
 
 
 
 
Agency CMO
$
691

$
(1
)
 
$
182,396

$
(5,254
)
 
25
$
183,087

$
(5,255
)
Agency MBS
288,635

(1,916
)
 
1,892,951

(77,785
)
 
272
2,181,586

(79,701
)
Agency CMBS


 
635,284

(22,572
)
 
56
635,284

(22,572
)
Municipal bonds and notes
68,351

(882
)
 
414,776

(17,403
)
 
223
483,127

(18,285
)
CMBS
24,881

(270
)
 
132,464

(2,118
)
 
20
157,345

(2,388
)
Held-to-maturity in an unrealized loss position
$
382,558

$
(3,069
)
 
$
3,257,871

$
(125,132
)
 
596
$
3,640,429

$
(128,201
)


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Impairment Analysis
The following impairment analysis summarizes the basis for evaluating if investment securities within the Company’s available-for-sale and held-to-maturity portfolios are other-than-temporarily impaired as of March 31, 2019. Unless otherwise noted for an investment security type, management does not intend to sell these investment securities and has determined, based upon available evidence, that it is more likely than not that the Company will not be required to sell these investment securities before the recovery of their amortized cost. As such, based on the following impairment analysis, the Company does not consider any of these investment securities, in unrealized loss positions, to be other-than-temporarily impaired at March 31, 2019.
Available-for-Sale Securities
Agency CMO. There were unrealized losses of $2.8 million on the Company’s investment in Agency CMO securities issued by government agencies at March 31, 2019, compared to $4.5 million at December 31, 2018. Unrealized losses decreased due to lower market rates while principal balances decreased for this asset class since December 31, 2018. These investments are issued by a government or government sponsored agency and therefore, are backed by certain government guarantees, either direct or implicit. There has been no change in the credit quality, and the contractual cash flows are performing as expected.
Agency MBS. There were unrealized losses of $25.5 million on the Company’s investment in Agency MBS securities issued by government agencies at March 31, 2019, compared to $42.1 million at December 31, 2018. Unrealized losses decreased due to lower market rates while principal balances increased for this asset class since December 31, 2018. These investments are issued by a government or government sponsored agency and therefore, are backed by certain government guarantees, either direct or implicit. There has been no change in the credit quality, and the contractual cash flows are performing as expected.
Agency CMBS. There were unrealized losses of $33.9 million on the Company's investment in Agency Commercial Mortgage-Backed Securities (CMBS) issued by government agencies at March 31, 2019, compared to $41.9 million at December 31, 2018. Unrealized losses decreased due to lower market rates while principal balances decreased for this asset class since December 31, 2018. These investments are issued by a government or government sponsored agency and therefore, are backed by certain government guarantees, either direct or implicit. There has been no change in the credit quality, and the contractual cash flows are performing as expected.
CMBS. There were unrealized losses of $1.1 million on the Company’s investment in CMBS at March 31, 2019, compared to $3.0 million at December 31, 2018. Unrealized losses decreased due to reduced market spreads while balances were essentially unchanged for the portfolio of mainly floating rate CMBS at March 31, 2019 compared to December 31, 2018. Internal stress tests are performed on individual bonds to monitor potential losses under stress scenarios. Contractual cash flows for the bonds continue to perform as expected.
CLO. There were unrealized losses of $0.6 million on the Company’s investments in CLO at March 31, 2019 compared to $2.0 million unrealized losses at December 31, 2018. Unrealized losses decreased due to reduced market spreads while principal balances were essentially unchanged from December 31, 2018. Internal stress tests are performed on individual bonds to monitor potential losses under stress scenarios. Contractual cash flows for the bonds continue to perform as expected.
Corporate debt. There were unrealized losses of $3.8 million on the Company's corporate debt portfolio at March 31, 2019, compared to $5.3 million at December 31, 2018. Unrealized losses decreased due to reduced market spreads and rates while balances were essentially unchanged since December 31, 2018. The Company performs periodic credit reviews of the issuer to assess the likelihood for ultimate recovery of amortized cost. Contractual cash flows for the bonds continue to perform as expected.
Held-to-Maturity Securities
Agency CMO. There were unrealized losses of $3.4 million on the Company’s investment in Agency CMO securities issued by government agencies at March 31, 2019, compared to $5.3 million at December 31, 2018. Unrealized losses decreased due to lower market rates while principal balances decreased since December 31, 2018. These investments are issued by a government or government sponsored agency and therefore, are backed by certain government guarantees, either direct or implicit. There has been no change in the credit quality, and the contractual cash flows are performing as expected.
Agency MBS. There were unrealized losses of $48.4 million on the Company’s investment Agency MBS securities issued by government agencies at March 31, 2019, compared to $79.7 million at December 31, 2018. Unrealized losses decreased due to lower market rates while principal balances increased for this asset class since December 31, 2018. These investments are issued by a government or government sponsored agency and therefore, are backed by certain government guarantees, either direct or implicit. There has been no change in the credit quality, and the contractual cash flows are performing as expected.

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Agency CMBS. There were unrealized losses of $19.4 million on the Company’s investment in Agency Commercial Mortgage-Backed Securities (CMBS) issued by government agencies at March 31, 2019, compared to $22.6 million at December 31, 2018. Unrealized losses decreased due to lower market rates while principal balances increased since December 31, 2018. These investments are issued by a government or government sponsored agency and therefore, are backed by certain government guarantees, either direct or implicit. There has been no change in the credit quality, and the contractual cash flows are performing as expected.
Municipal bonds and notes. There were unrealized losses of $4.2 million on the Company’s investment in municipal bonds and notes at March 31, 2019, compared to $18.3 million at December 31, 2018. Unrealized losses decreased due to lower market rates while principal balances increased since December 31, 2018. The Company performs periodic credit reviews of the issuers and the securities are currently performing as expected.
CMBS. There were unrealized losses of $0.7 million on the Company’s investment in CMBS at March 31, 2019, compared to $2.4 million unrealized losses at December 31, 2018. Unrealized losses decreased due to lower market rates on mainly seasoned fixed rate conduit transactions while principal balances were essentially unchanged since December 31, 2018. Internal stress tests are performed on individual bonds to monitor potential losses under stress scenarios. There has been no change in the credit quality, and the contractual cash flows are performing as expected.
Sales of Available-for Sale Investment Securities
 

There were no sales during the three months ended March 31, 2019 and 2018.
Contractual Maturities
The amortized cost and fair value of debt securities by contractual maturity are set forth below:
 
At March 31, 2019
 
Available-for-Sale
 
Held-to-Maturity
(In thousands)
Amortized
Cost
Fair
Value
 
Amortized
Cost
Fair
Value
Due in one year or less
$
27,737

$
27,742

 
$
7,089

$
7,110

Due after one year through five years
17,000

17,008

 
3,759

3,784

Due after five through ten years
271,751

271,115

 
73,799

75,040

Due after ten years
2,719,403

2,661,451

 
4,395,513

4,347,443

Total debt securities
$
3,035,891

$
2,977,316

 
$
4,480,160

$
4,433,377


For the maturity schedule above, mortgage-backed securities and CLO, which are not due at a single maturity date, have been categorized based on the maturity date of the underlying collateral. Actual principal cash flows may differ from this maturity date presentation as borrowers have the right to prepay obligations with or without prepayment penalties.
At March 31, 2019, the Company had a carrying value of $1.6 billion in callable debt securities in its CMBS, CLO, and municipal bond portfolios. The Company considers prepayment risk in the evaluation of its interest rate risk profile. These maturities may change due to calls and prepayments.
Investment securities with a carrying value totaling $2.3 billion at March 31, 2019 and $2.2 billion December 31, 2018 were pledged to secure public funds, trust deposits, repurchase agreements, and for other purposes, as required or permitted by law.

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Table of Contents

Note 4: Loans and Leases
The following table summarizes loans and leases:
(In thousands)
At March 31,
2019
 
At December 31, 2018
Residential
$
4,631,787

 
$
4,416,637

Consumer
2,339,736

 
2,396,704

Commercial
6,356,571

 
6,216,606

Commercial Real Estate
4,991,825

 
4,927,145

Equipment Financing
494,371

 
508,397

Loans and leases (1) (2)
$
18,814,290

 
$
18,465,489


(1)
Includes net deferred fees and net premiums/discounts of $6.3 million and $13.9 million at March 31, 2019 and December 31, 2018, respectively.
(2)
At March 31, 2019 the Company had pledged $7.0 billion of eligible loans as collateral to support borrowing capacity at the Federal Home Loan Bank (FHLB) of Boston and the Federal Reserve Bank (FRB) of Boston.
The equipment financing portfolio includes net investment in leases of $150.5 million at March 31, 2019. Total undiscounted cash flows to be received from the Company's net investment in leases are $162.7 million at March 31, 2019 and are primarily due within the next five years. The Company's lessor portfolio has recognized interest income of $1.4 million for the three months ended March 31, 2019.
Loans and Leases Aging
The following tables summarize the aging of loans and leases:
 
At March 31, 2019
(In thousands)
30-59 Days
Past Due and
Accruing
60-89 Days
Past Due and
Accruing
90 or More Days Past Due
and Accruing
Non-accrual
Total Past Due and Non-accrual
Current
Total Loans
and Leases
Residential
$
8,166

$
4,737

$

$
49,382

$
62,285

$
4,569,502

$
4,631,787

Consumer:
 
 
 
 
 
 
 
Home equity
8,724

4,765


33,705

47,194

2,066,174

2,113,368

Other consumer
2,016

709


1,578

4,303

222,065

226,368

Commercial:
 
 
 
 
 
 
 
Commercial non-mortgage
15,858

104


61,638

77,600

5,239,338

5,316,938

Asset-based



218

218

1,039,415

1,039,633

Commercial real estate:
 
 
 
 
 
 
 
Commercial real estate
2,085

208


7,459

9,752

4,778,597

4,788,349

Commercial construction





203,476

203,476

Equipment financing
2,778

334


4,951

8,063

486,308

494,371

Total
$
39,627

$
10,857

$

$
158,931

$
209,415

$
18,604,875

$
18,814,290

 
At December 31, 2018
(In thousands)
30-59 Days
Past Due and
Accruing
60-89 Days
Past Due and
Accruing
90 or More Days Past Due
and Accruing
Non-accrual
Total Past Due and Non-accrual
Current
Total Loans
and Leases
Residential
$
8,513

$
4,301

$

$
49,188

$
62,002

$
4,354,635

$
4,416,637

Consumer:
 
 
 
 
 
 
 
Home equity
9,250

5,385


33,495

48,130

2,121,049

2,169,179

Other consumer
1,774

957


1,494

4,225

223,300

227,525

Commercial:
 
 
 
 
 
 
 
Commercial non-mortgage
1,011

702

104

55,810

57,627

5,189,808

5,247,435

Asset-based



224

224

968,947

969,171

Commercial real estate:
 
 
 
 
 
 
 
Commercial real estate
1,275

245


8,242

9,762

4,698,552

4,708,314

Commercial construction





218,831

218,831

Equipment financing
510

405


6,314

7,229

501,168

508,397

Total
$
22,333

$
11,995

$
104

$
154,767

$
189,199

$
18,276,290

$
18,465,489


15

Table of Contents

Interest on non-accrual loans and leases that would have been recorded as additional interest income had the loans and leases been current in accordance with the original terms totaled $3.0 million and $2.1 million for the three months ended March 31, 2019 and 2018, respectively.
Allowance for Loan and Lease Losses
The following tables summarize the activity in, as well as the loan and lease balances that were evaluated for, the ALLL:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
At or for the three months ended March 31, 2019
(In thousands)
Residential
Consumer
Commercial
Commercial
Real Estate
Equipment
Financing
Total
ALLL:
 
 
 
 
 
 
Balance, beginning of period
$
19,599

$
28,681

$
98,793

$
60,151

$
5,129

$
212,353

Provision (benefit) charged to expense
887

(277
)
8,227

(291
)
54

8,600

Charge-offs
(251
)
(3,972
)
(7,633
)
(973
)
(204
)
(13,033
)
Recoveries
178

2,487

787

6

11

3,469

Balance, end of period
$
20,413

$
26,919

$
100,174

$
58,893

$
4,990

$
211,389

Individually evaluated for impairment
$
4,167

$
1,376

$
7,162

$
906

$
194

$
13,805

Collectively evaluated for impairment
$
16,246

$
25,543

$
93,012

$
57,987

$
4,796

$
197,584

 
 
 
 
 
 
 
Loan and lease balances:
 
 
 
 
 
 
Individually evaluated for impairment
$
102,321

$
38,852

$
115,989

$
12,261

$
4,953

$
274,376

Collectively evaluated for impairment
4,529,466

2,300,884

6,240,582

4,979,564

489,418

18,539,914

Loans and leases
$
4,631,787

$
2,339,736

$
6,356,571

$
4,991,825

$
494,371

$
18,814,290

 
At or for the three months ended March 31, 2018
(In thousands)
Residential
Consumer
Commercial
Commercial
Real Estate
Equipment
Financing
Total
ALLL:
 
 
 
 
 
 
Balance, beginning of period
$
19,058

$
36,190

$
89,533

$
49,407

$
5,806

$
199,994

(Benefit) provision charged to expense
251

1,680

7,420

2,104

(455
)
11,000

Charge-offs
(917
)
(5,074
)
(1,497
)
(77
)
(45
)
(7,610
)
Recoveries
385

1,443

117

2

18

1,965

Balance, end of period
$
18,777

$
34,239

$
95,573

$
51,436

$
5,324

$
205,349

Individually evaluated for impairment
$
4,574

$
1,579

$
11,166

$
257

$
21

$
17,597

Collectively evaluated for impairment
$
14,203

$
32,660

$
84,407

$
51,179

$
5,303

$
187,752

 
 
 
 
 
 
 
Loan and lease balances:
 
 
 
 
 
 
Individually evaluated for impairment
$
111,937

$
42,587

$
76,573

$
10,928

$
6,455

$
248,480

Collectively evaluated for impairment
4,347,925

2,479,793

5,682,551

4,533,903

512,923

17,557,095

Loans and leases
$
4,459,862

$
2,522,380

$
5,759,124

$
4,544,831

$
519,378

$
17,805,575



16

Table of Contents

Impaired Loans and Leases
The following tables summarize impaired loans and leases:
 
At March 31, 2019
(In thousands)
Unpaid
Principal
Balance
Total
Recorded
Investment
Recorded
Investment
No Allowance
Recorded
Investment
With Allowance
Related
Valuation
Allowance
Residential
$
111,562

$
102,321

$
64,958

$
37,363

$
4,167

Consumer - home equity
42,277

38,852

30,227

8,625

1,376

Commercial non-mortgage
141,046

115,771

87,057

28,714

7,156

Asset-based
544

218


218

6

Commercial real estate
15,784

12,261

3,779

8,482

906

Equipment financing
4,948

4,953

930

4,023

194

Total
$
316,161

$
274,376

$
186,951

$
87,425

$
13,805

 
At December 31, 2018
(In thousands)
Unpaid
Principal
Balance
Total
Recorded
Investment
Recorded
Investment
No Allowance
Recorded
Investment
With Allowance
Related
Valuation
Allowance
Residential
$
113,575

$
103,531

$
64,899

$
38,632

$
4,286

Consumer - home equity
44,654

39,144

30,576

8,568

1,383

Commercial non-mortgage
120,165

99,287

65,724

33,563

7,818

Asset-based
550

225


225

6

Commercial real estate
13,355

10,828

2,125

8,703

1,661

Equipment financing
6,368

6,315

2,946

3,369

196

Total
$
298,667

$
259,330

$
166,270

$
93,060

$
15,350


The following table summarizes the average recorded investment and interest income recognized for impaired loans and leases:
 
Three months ended March 31,
 
2019
 
2018
(In thousands)
Average
Recorded
Investment
Accrued
Interest
Income
Cash Basis Interest Income
 
Average
Recorded
Investment
Accrued
Interest
Income
Cash Basis Interest Income
Residential
$
102,926

$
908

$
264

 
$
113,116

$
981

$
253

Consumer - home equity
38,998

269

280

 
44,011

294

250

Commercial non-mortgage
107,529

920


 
73,461

539


Asset based
222



 
1,061



Commercial real estate
11,544

73


 
11,077

96


Equipment financing
5,634



 
4,890

36


Total
$
266,853

$
2,170

$
544

 
$
247,616

$
1,946

$
503



17

Table of Contents

Credit Quality Indicators. To measure credit risk for the commercial, commercial real estate, and equipment financing portfolios, the Company employs a dual grade credit risk grading system for estimating the probability of default (PD) and the loss given default (LGD). The credit risk grade system assigns a rating to each borrower and to the facility, which together form a Composite Credit Risk Profile. The credit risk grade system categorizes borrowers by common financial characteristics that measure the credit strength of borrowers and facilities by common structural characteristics. The Composite Credit Risk Profile has ten grades, with each grade corresponding to a progressively greater risk of default. Grades (1) - (6) are considered pass ratings, and (7) - (10) are considered criticized, as defined by the regulatory agencies. Risk ratings, assigned to differentiate risk within the portfolio, are reviewed on an ongoing basis and revised to reflect changes in a borrower's current financial position and outlook, risk profile, and the related collateral and structural position. Loan officers review updated financial information on at least an annual basis for all pass rated loans to assess the accuracy of the risk grade. Criticized loans undergo more frequent reviews and enhanced monitoring.
A (7) Special Mention credit has the potential weakness that, if left uncorrected, may result in deterioration of the repayment prospects for the asset. An (8) Substandard asset has a well defined weakness that jeopardizes the full repayment of the debt. An asset rated (9) Doubtful has all of the same weaknesses as a substandard credit with the added characteristic that the weakness makes collection or liquidation in full, given current facts, conditions, and values, improbable. Assets classified as (10) Loss, in accordance with regulatory guidelines, are considered uncollectible and charged off.
The following table summarizes commercial, commercial real estate and equipment financing loans and leases segregated by risk rating exposure:
 
Commercial
 
Commercial Real Estate
 
Equipment Financing
(In thousands)
At March 31,
2019
 
At December 31,
2018
 
At March 31,
2019
 
At December 31,
2018
 
At March 31,
2019
 
At December 31,
2018
(1) - (6) Pass
$
5,991,939

 
$
5,781,138

 
$
4,830,898

 
$
4,773,298

 
$
481,423

 
$
494,585

(7) Special Mention
128,160

 
206,351

 
82,531

 
75,338

 
2,415

 
1,303

(8) Substandard
230,122

 
222,405

 
78,396

 
78,509

 
10,533

 
12,509

(9) Doubtful
6,350

 
6,712

 

 

 

 

Total
$
6,356,571

 
$
6,216,606

 
$
4,991,825

 
$
4,927,145

 
$
494,371

 
$
508,397


For residential and consumer loans, the primary credit quality indicator that the Company considers is past due status. Other factors, such as, updated Fair Isaac Corporation (FICO) scores, employment status, collateral, geography, loans discharged in bankruptcy, and the status of first lien position loans on second lien position loans, may also be evaluated as credit quality indicators. On an ongoing basis for portfolio monitoring purposes, the Company estimates the current value of property secured as collateral for home equity and residential first mortgage lending products. The estimate is based on home price indices compiled by the S&P/Case-Shiller Home Price Indices. The real estate price data is applied to the loan portfolios taking into account the age of the most recent valuation and geographic area.
Troubled Debt Restructurings
The following table summarizes information for troubled debt restructurings (TDRs):
(Dollars in thousands)
At March 31,
2019
 
At December 31, 2018
Accrual status
$
149,076

 
$
138,479

Non-accrual status
101,333

 
91,935

Total recorded investment of TDRs
$
250,409

 
$
230,414

 
 
 
 
Specific reserves for TDRs included in the balance of ALLL
$
13,381

 
$
11,930

Additional funds committed to borrowers in TDR status
5,118

 
3,893


For the portion of TDRs deemed to be uncollectible, Webster charged off $1.4 million, and $0.7 million for the three months ended March 31, 2019 and 2018, respectively.

18

Table of Contents

The following table provides information on the type of concession for loans and leases modified as TDRs:
 
Three months ended March 31,
 
2019
 
2018
 
Number of
Loans and
Leases
Post-
Modification
Recorded
Investment
(1)
 
Number of
Loans and
Leases
Post-
Modification
Recorded
Investment
(1)
(Dollars in thousands)
Residential
 
 
 
 
 
Extended Maturity
1
$
519

 
$

Maturity/Rate Combined
5
451

 

Other (2)
2
261

 
5
757

Consumer - home equity
 
 
 
 
 
Extended Maturity
2
145

 
2
193

Maturity/Rate Combined

 
2
113

Other (2)
13
754

 
11
778

Commercial non - mortgage
 
 
 
 
 
Extended Maturity
2
124

 
3
85

Maturity/Rate Combined
1
25

 

Other (2)
15
22,027

 
2
4,684

Commercial real estate
 
 
 
 
 
Extended Maturity

 
1
45

Other (2)
2
2,636

 

Total TDRs
43
$
26,942

 
26
$
6,655


(1)
Post-modification balances approximate pre-modification balances. The aggregate amount of charge-offs as a result of the restructurings was not significant.
(2)
Other includes covenant modifications, forbearance, loans discharged under Chapter 7 bankruptcy, or other concessions.
There were no significant amounts of loans and leases modified as TDRs within the previous 12 months and for which there was a payment default for the three months ended March 31, 2019 and 2018, respectively.
 

The recorded investment of TDRs in commercial, commercial real estate, and equipment financing segregated by risk rating exposure is as follows:
(In thousands)
At March 31, 2019
 
At December 31, 2018
(1) - (6) Pass
$
20,765

 
$
13,165

(7) Special Mention
78

 
84

(8) Substandard
82,043

 
67,880

(9) Doubtful
6,350

 
6,610

Total
$
109,236

 
$
87,739



19

Table of Contents

Note 5: Transfers of Financial Assets
The Company sells financial assets in the normal course of business, primarily residential mortgage loans sold to government-sponsored enterprises through established programs and securitizations. Gains and losses from initial measurement and subsequent changes in fair value are recognized in earnings. The gain or loss on residential mortgage loans sold and the related origination fee income, as well as fair value adjustments to loans held-for-sale are included as mortgage banking activities in the accompanying Condensed Consolidated Statements of Income.
The Company may be required to repurchase a loan in the event of certain breaches of the representations and warranties, or in the event of default of the borrower within 90 days of sale, as provided for in the sale agreements. A reserve for loan repurchases provides for estimated losses pertaining to the potential repurchase of loans associated with the Company’s mortgage banking activities. The reserve reflects loan repurchase requests received by the Company for which management evaluates the identity of counterparty, the vintage of the loans sold, the amount of open repurchase requests, specific loss estimates for each open request, the current level of loan losses in similar vintages held in the residential loan portfolio, and estimated recoveries on the underlying collateral. The reserve also reflects management’s expectation of losses from loan repurchase requests for which the Company has not yet been notified, as the performance of loans sold and the quality of the servicing provided by the acquirer also may impact potential future requests. The provision recorded at the time of the loan sale is netted from the gain or loss recorded in mortgage banking activities, while any incremental provision, post loan sale, is recorded in other non-interest expense in the accompanying Condensed Consolidated Statements of Income.
The following table provides a summary of activity in the reserve for loan repurchases:
 
Three months ended March 31,
(In thousands)
2019
 
2018
Beginning balance
$
674

 
$
872

Provision (benefit) charged to expense
7

 
(203
)
Repurchased loans and settlements charged off
(5
)
 
(5
)
Ending balance
$
676

 
$
664


The following table provides information for mortgage banking activities:
 
Three months ended March 31,
(In thousands)
2019
 
2018
Residential mortgage loans held for sale:
 
 
 
Proceeds from sale
$
20,613

 
$
44,806

Loans sold with servicing rights retained
17,348

 
39,904

 
 
 
 
Net gain on sale
158

 
1,083

Ancillary fees
261

 
410

Fair value option adjustment
345

 
(349
)

Additionally, loans not originated for sale were sold approximately at carrying value for cash proceeds of $4.0 million for certain residential loans for the three months ended March 31, 2019, and $436 thousand and $34 thousand for certain commercial loans for the three months ended March 31, 2019 and 2018, respectively.
The Company has retained servicing rights on residential mortgage loans totaling $2.5 billion at both March 31, 2019 and December 31, 2018.
The following table presents the changes in carrying value for mortgage servicing assets:
 
Three months ended March 31,
(In thousands)
2019
 
2018
Beginning balance
$
21,215

 
$
25,139

Additions
462

 
1,412

Amortization
(1,892
)
 
(2,148
)
Ending balance
$
19,785

 
$
24,403


The mortgage servicing assets are recorded at fair value upon transfer, and thereafter are carried at the lower of cost or fair value. Loan servicing fees, net of mortgage servicing rights amortization, were $0.4 million and $0.3 million for the three months ended March 31, 2019 and 2018, respectively, and are included as a component of loan related fees in the accompanying Condensed Consolidated Statements of Income.
See Note 14: Fair Value Measurements for additional fair value information on loans held for sale and mortgage servicing assets.

20

Table of Contents

Note 6: Goodwill and Other Intangible Assets
Goodwill and other intangible assets by reportable segment consisted of the following:
 
At March 31, 2019
 
At December 31, 2018
(In thousands)
Gross Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
 
Gross Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
Goodwill:
 
 
 
 
 
 
 
Community Banking
 
 
$
516,560

 
 
 
$
516,560

HSA Bank
 
 
21,813

 
 
 
21,813

Total goodwill
 
 
$
538,373

 
 
 
$
538,373

 
 
 
 
 
 
 
 
Other intangible assets:
 
 
 
 
 
 
 
HSA Bank - Core deposits
$
22,000

$
(11,399
)
$
10,601

 
$
22,000

$
(10,842
)
$
11,158

HSA Bank - Customer relationships
21,000

(6,798
)
14,202

 
21,000

(6,394
)
14,606

Total other intangible assets
$
43,000

$
(18,197
)
$
24,803

 
$
43,000

$
(17,236
)
$
25,764


As of March 31, 2019, the remaining estimated aggregate future amortization expense for intangible assets is as follows:
(In thousands)
 
Remainder of 2019
$
2,885

2020
3,847

2021
3,847

2022
3,847

2023
3,847

Thereafter
6,530


Note 7: Deposits
A summary of deposits by type follows:
(In thousands)
At March 31,
2019

At December 31,
2018
Non-interest-bearing:
 
 
 
Demand
$
4,224,144

 
$
4,162,446

Interest-bearing:
 
 
 
Health savings accounts
6,209,213

 
5,740,601

Checking
2,560,975

 
2,518,472

Money market
2,299,229

 
2,100,084

Savings
4,102,740

 
4,140,696

Time deposits
3,354,627

 
3,196,546

Total interest-bearing
18,526,784

 
$
17,696,399

Total deposits
$
22,750,928

 
$
21,858,845

 
 
 
 
Time deposits and interest-bearing checking, included in above balances, obtained through brokers
$
758,472

 
$
869,003

Time deposits, included in above balance, that exceed the FDIC limit
669,476

 
555,949

Deposit overdrafts reclassified as loan balances
1,065

 
2,245


The scheduled maturities of time deposits are as follows:
(In thousands)
At March 31,
2019
Remainder of 2019
$
2,304,523

2020
705,479

2021
259,584

2022
51,785

2023
29,443

Thereafter
3,813

Total time deposits
$
3,354,627



21

Table of Contents

Note 8: Borrowings
Total borrowings of $2.2 billion at March 31, 2019 and $2.6 billion at December 31, 2018 are described in detail below.
The following table summarizes securities sold under agreements to repurchase and other borrowings:
 
At March 31,
2019
 
At December 31,
2018
(In thousands)
Amount
Rate
 
Amount
Rate
Securities sold under agreements to repurchase (1):
 
 
 
 
 
Original maturity of one year or less
$
168,065

0.65
%
 
$
236,874

0.35
%
Original maturity of greater than one year, non-callable


 


Total securities sold under agreements to repurchase
168,065

0.65

 
236,874

0.35

Fed funds purchased
520,000

2.50

 
345,000

2.52

Securities sold under agreements to repurchase and other borrowings
$
688,065

2.05

 
$
581,874

1.64


(1)
The Company has right of offset with respect to all repurchase agreement assets and liabilities. However, securities sold under agreements to repurchase represents the gross amount for these transactions, as only liabilities are outstanding for the periods presented.
Repurchase agreements are used as a source of borrowed funds and are collateralized by U.S. Government agency mortgage-backed securities. Repurchase agreement counterparties are limited to primary dealers in government securities and commercial or municipal customers through Webster’s Treasury Unit.
The following table provides information for FHLB advances:
 
At March 31,
2019
 
At December 31,
2018
(Dollars in thousands)
Amount
Weighted-
Average Contractual Coupon Rate
 
Amount
Weighted-
Average Contractual Coupon Rate
Maturing within 1 year
$
578,026

2.46
%
 
$
1,403,026

2.55
%
After 1 but within 2 years
165,000

1.77

 
215,000

1.73

After 2 but within 3 years
200,000

3.16

 
200,000

3.16

After 3 but within 4 years
145


 
150


After 4 but within 5 years
239

2.95

 
242

2.95

After 5 years
8,320

2.65

 
8,390

2.65

FHLB advances and overall rate
$
951,730

2.49

 
$
1,826,808

2.52

 
 
 
 
 
 
Aggregate carrying value of assets pledged as collateral
$
6,514,053

 
 
$
6,689,761

 
Remaining borrowing capacity
3,204,370

 
 
2,568,664

 

Webster Bank is in compliance with FHLB collateral requirements for the periods presented. Eligible collateral, primarily certain residential and commercial real estate loans, has been pledged to secure FHLB advances.
The following table summarizes long-term debt:
(Dollars in thousands)
At March 31,
2019
 
At December 31,
2018
4.375%
Senior fixed-rate notes due February 15, 2024
150,000

 
150,000

4.100%
Senior fixed-rate notes due March 25, 2029 (1)
301,628

 

Junior subordinated debt Webster Statutory Trust I floating-rate notes due September 17, 2033 (2)
77,320

 
77,320

Total notes and subordinated debt
528,948

 
227,320

Discount on senior fixed-rate notes
(1,576
)
 
(608
)
Debt issuance cost on senior fixed-rate notes
(3,069
)
 
(691
)
Long-term debt
$
524,303

 
$
226,021

(1)
In March 2019, the Company completed a $300.0 million senior fixed-rate notes issuance. The fixed interest rate on a $150.0 million portion of this issuance has been swapped to a variable rate and designated in a fair value hedging relationship. The $1.6 million basis adjustment included in the carrying value reflects the changes in the benchmark rate.
(2)
The interest rate on Webster Statutory Trust I floating-rate notes, which varies quarterly based on 3-month London Interbank Offered Rate plus 2.95%, was 5.56% at March 31, 2019 and 5.74% at December 31, 2018.

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Table of Contents

Note 9: Leasing
The Company, as lessee, primarily leases office space, banking centers, and certain other assets. These leases are generally classified as operating leases, however, an insignificant amount of the leases are classified as finance leases. The Company's operating leases generally have lease terms for periods of 5 to 20 years with various renewal options. The Company, by policy, does not include renewal options for leases as part of its ROU assets and lease liabilities unless they are deemed reasonably certain to exercise. The Company does not have any material sub-lease agreements.
During the quarter ended March 31, 2019, the Company began recognizing operating leases on its balance sheet by recording a lease liability representing the Company’s legal obligation to make lease payments, and a ROU asset representing its legal right to use the leased office space, banking centers and certain other assets.
The following table summarizes information related to the Company’s ROU assets and lease liability:
 
At March 31, 2019
(In thousands)
Operating Leases
 
Balance Sheet Line Item Location
ROU asset
$
157,962

 
Premises and equipment, net

Lease liability
179,501

 
Accrued expenses and other liabilities


Operating lease expense is comprised of operating lease costs and variable lease costs, net of sublease income. The pattern and measurement of expense recognition of these costs was not significantly impacted by ASU 2016-02 and subsequent ASUs issued to amend Topic 842.
Variable lease payments are defined as payments made for the right to use an asset that vary because of changes in facts or circumstances occurring after the commencement date, other than the passage of time. Variable lease payments that are dependent on an index or a rate are initially measured using the index or rate at the commencement date and are included in the measurement of a lease liability. Variable lease payments that are not dependent on an index or a rate, or changes in variable payments based on an index or rate after the commencement date, are excluded from the measurement of a lease liability and recognized in the period incurred. All variable lease payments are included within variable lease costs presented below.
The components of operating lease cost and other related information are as follows:
(In thousands)
Three months ended March 31, 2019
Lease Cost:
 
Operating lease costs
$
7,385

Variable lease costs
1,253

Sublease income
(140
)
Total operating lease cost
$
8,498

Other Information:
 
Cash paid for amounts included in the measurement of lease liabilities - operating cash flows from operating leases
$
7,673

Right-of-use assets obtained in exchange for new operating lease liabilities
6,638

Weighted-average remaining lease term-operating leases at March 31, 2019
8.2

Weighted-average discount rate-operating leases at March 31, 2019
3.44
 %

The undiscounted scheduled maturities reconciled to total operating lease liabilities are as follows:
(In thousands)
At March 31, 2019
Remainder of 2019
$
21,282

2020
30,890

2021
29,318

2022
25,105

2023
21,771

Thereafter
81,818

Total lease liability payments
210,184

Lease liabilities
179,501

Present value adjustment
$
30,683


See Note 4: Loans and Leases for information relating to leases included within the equipment financing portfolio in which the Company is lessor.

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Note 10: Accumulated Other Comprehensive Loss, Net of Tax
The following tables summarize the changes in accumulated other comprehensive loss, net of tax (AOCL) by component:
 
Three months ended March 31, 2019
(In thousands)
Securities Available For Sale
Derivative Instruments
Defined Benefit Pension and Other Postretirement Benefit Plans
Total
Beginning balance
$
(71,374
)
$
(9,313
)
$
(49,965
)
$
(130,652
)
  Other comprehensive income (loss) (OCI (OCL)) before reclassifications
27,559

(839
)

26,720

  Amounts reclassified from AOCL

1,035

1,056

2,091

Net current-period OCI
27,559

196

1,056

28,811

Ending balance
$
(43,815
)
$
(9,117
)
$
(48,909
)
$
(101,841
)
 
Three months ended March 31, 2018
(In thousands)
Securities Available For Sale
Derivative Instruments
Defined Benefit Pension and Other Postretirement Benefit Plans
Total
Beginning balance
$
(27,947
)
$
(15,016
)
$
(48,568
)
$
(91,531
)
  (OCL)/OCI before reclassifications
(27,424
)
1,129


(26,295
)
  Amounts reclassified from AOCL

1,393

954

2,347

Net current-period (OCL)/OCI
(27,424
)
2,522

954

(23,948
)
Ending balance
$
(55,371
)
$
(12,494
)
$
(47,614
)
$
(115,479
)

The following tables provide information for the items reclassified from AOCL:
(In thousands)
Three months ended March 31,
Associated Line Item in the Condensed Consolidated Statements of Income
AOCL Components
2019
 
2018
 
 
 
 
 
Derivative instruments:
 
 
 
 
Cash flow hedges
$
(1,391
)
 
$
(1,871
)
Interest expense
Tax benefit
356

 
478

Income tax expense
Net of tax
$
(1,035
)
 
$
(1,393
)
 
Defined benefit pension and other postretirement benefit plans:
 
 
 
 
Amortization of net loss
$
(1,430
)
 
$
(1,285
)
(1) 
Tax benefit
374

 
331

Income tax expense
Net of tax
$
(1,056
)
 
$
(954
)
 

(1) These AOCL components are included in the computation of net periodic benefit cost, see Note 15 - Retirement Benefit Plans for further details.

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Table of Contents

Note 11: Regulatory Matters
Capital Requirements
Webster Financial Corporation is subject to regulatory capital requirements administered by the Federal Reserve System, while Webster Bank is subject to regulatory capital requirements administered by the Office of the Comptroller of the Currency (OCC). Regulatory authorities can initiate certain mandatory actions if Webster Financial Corporation or Webster Bank fail to meet minimum capital requirements, which could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, both Webster Financial Corporation and Webster Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. These quantitative measures require minimum amounts and ratios to ensure capital adequacy.
Basel III total risk-based capital is comprised of three categories: CET1 capital, additional Tier 1 capital, and Tier 2 capital. CET1 capital includes common shareholders' equity, less deductions for goodwill, other intangibles, and certain deferred tax adjustments. Common shareholders' equity, for purposes of CET1 capital, excludes AOCL components as permitted by the opt-out election taken by Webster upon adoption of Basel III. Tier 1 capital is comprised of CET1 capital plus perpetual preferred stock, while Tier 2 capital includes qualifying subordinated debt and qualifying allowance for credit losses, that together equal total capital.
The following table provides information on the capital ratios for Webster Financial Corporation and Webster Bank:
 
At March 31, 2019
 
Actual
 
Minimum Requirement
 
Well Capitalized
(Dollars in thousands)
Amount
Ratio
 
Amount
Ratio
 
Amount
Ratio
Webster Financial Corporation
 
 
 
 
 
 
 
 
CET1 risk-based capital
$
2,337,162

11.46
%
 
$
917,798

4.5
%
 
$
1,325,708

6.5
%
Total risk-based capital
2,773,419

13.60

 
1,631,640

8.0

 
2,039,551

10.0

Tier 1 risk-based capital
2,482,199

12.17

 
1,223,730

6.0

 
1,631,640

8.0

Tier 1 leverage capital
2,482,199

9.09

 
1,091,878

4.0

 
1,364,847

5.0

Webster Bank
 
 
 
 
 
 
 
 
CET1 risk-based capital
$
2,496,047

12.24
%
 
$
917,468

4.5
%
 
$
1,325,232

6.5
%
Total risk-based capital
2,709,947

13.29

 
1,631,054

8.0

 
2,038,818

10.0

Tier 1 risk-based capital
2,496,047

12.24

 
1,223,291

6.0

 
1,631,054

8.0

Tier 1 leverage capital
2,496,047

9.15

 
1,091,347

4.0

 
1,364,184

5.0


 
At December 31, 2018
 
Actual
 
Minimum Requirement
 
Well Capitalized
(Dollars in thousands)
Amount
Ratio
 
Amount
Ratio
 
Amount
Ratio
Webster Financial Corporation
 
 
 
 
 
 
 
 
CET1 risk-based capital
$
2,284,978

11.44
%
 
$
898,972

4.5
%
 
$
1,298,514

6.5
%
Total risk-based capital
2,722,194

13.63

 
1,598,172

8.0

 
1,997,715

10.0

Tier 1 risk-based capital
2,430,015

12.16

 
1,198,629

6.0

 
1,598,172

8.0

Tier 1 leverage capital
2,430,015

9.02

 
1,077,303

4.0

 
1,346,628

5.0

Webster Bank
 
 
 
 
 
 
 
 
CET1 risk-based capital
$
2,170,566

10.87
%
 
$
898,317

4.5
%
 
$
1,297,569

6.5
%
Total risk-based capital
2,385,425

11.95

 
1,597,008

8.0

 
1,996,260

10.0

Tier 1 risk-based capital
2,170,566

10.87

 
1,197,756

6.0

 
1,597,008

8.0

Tier 1 leverage capital
2,170,566

8.06

 
1,076,712

4.0

 
1,345,889

5.0


Dividend Restrictions
Webster Financial Corporation is dependent upon dividends from Webster Bank to provide funds for its cash requirements, including payments of dividends to shareholders. Banking regulations may limit the amount of dividends that may be paid. Approval by regulatory authorities is required if the effect of dividends declared would cause the regulatory capital of Webster Bank to fall below specified minimum levels, or if dividends declared exceed the net income for that year combined with the undistributed net income for the preceding two years. In addition, the OCC has discretion to prohibit any otherwise permitted capital distribution on general safety and soundness grounds. Dividends paid by Webster Bank to Webster Financial Corporation totaled $80 million during the three months ended March 31, 2019 compared to $100 million during the three months ended March 31, 2018.
Cash Restrictions
Webster Bank is required by Federal Reserve System regulations to hold cash reserve balances on hand or with a Federal Reserve Bank. Pursuant to this requirement, it held $84.8 million at March 31, 2019 and $81.2 million at December 31, 2018. These restricted cash amounts are included in cash and due from banks, in the accompanying Condensed Consolidated Balance Sheets.

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Table of Contents

Note 12: Earnings Per Common Share
Reconciliation of the calculation of basic and diluted earnings per common share follows:
 
Three Months Ended March 31,
(In thousands, except per share data)
2019
 
2018
Earnings for basic and diluted earnings per common share:
 
 
 
Net income
$
99,736

 
$
80,225

Less: Preferred stock dividends
1,969

 
1,947

Net income available to common shareholders
97,767

 
78,278

Less: Earnings applicable to participating securities
218

 
195

Earnings applicable to common shareholders
$
97,549

 
$
78,083

 
 
 
 
Shares:
 
 
 
Weighted-average common shares outstanding - basic
91,962

 
91,921

Effect of dilutive securities:
 
 
 
Stock options and restricted stock
263

 
327

Warrants

 
6

Weighted-average common shares outstanding - diluted
92,225

 
92,254

 
 
 
 
Earnings per common share:
 
 
 
Basic
$
1.06

 
$
0.85

Diluted
1.06

 
0.85


Potential common shares from non-participating restricted stock, of 91 thousand and 72 thousand for the three months ended March 31, 2019 and 2018, respectively, are excluded from the effect of dilutive securities because, due to performance conditions, they would have been anti-dilutive.
 


26

Table of Contents

Note 13: Derivative Financial Instruments
Risk Management Objective of Using Derivatives
Webster manages economic risks, such as interest rate, liquidity, and credit risks by managing the amount, sources, and duration of its debt funding in conjunction with the use of interest rate derivative financial instruments. Webster enters into interest rate derivatives to mitigate the exposure related to business activities that result in the future receipt or payment of, both known and uncertain, cash amounts that are impacted by interest rates. The primary objective for using interest rate derivatives is to add stability to interest expense by managing exposure to interest rate movements. To accomplish this objective, Webster uses interest rate swaps and interest rate caps as part of its interest rate risk management strategy.
Interest rate swaps and interest rate caps designated as cash flow hedges are designed to manage the risk associated with a forecasted event or an uncertain variable-rate cash flow. Forward-settle interest rate swaps protect the Company against adverse fluctuations in interest rates by reducing its exposure to variability in cash flows relating to interest payments on forecasted debt issuances. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. Interest rate caps designated as cash flow hedges involve the receipt of variable amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for payment of an up-front premium.
Cash flow hedges are used to regulate the variable cash flows associated with existing variable-rate debt and forecasted issuances of debt. Derivative instruments designated as cash flow hedges are recorded on the balance sheet at fair value. Changes in fair value of the derivatives which are designated as cash flow hedges, and that qualify for hedge accounting, are recorded to AOCL and are reclassified into earnings in the subsequent periods that the hedged forecasted transaction affects earnings.
Fair value hedges are used for certain fixed-rate obligations which can be exposed to a change in fair value attributable to changes in benchmark interest rates. An interest rate swap which involves the receipt of fixed-rate amounts from a counterparty in exchange for Webster making variable-rate payments over the life of the agreement, without the exchange of the underlying notional amount, is typically utilized. For a qualifying derivative designated as a fair value hedge, the gain or loss on the derivative, as well as the gain or loss on the risk hedged, is recognized in interest expense in the accompanying Condensed Consolidated Statements of Income.
Additionally, in order to address certain other risk management matters, the Company also utilizes derivative instruments that do not qualify for hedge accounting. These derivative instruments, which are recorded on the balance sheet at fair value, with changes in fair value recognized each period as other non-interest income in the accompanying Condensed Consolidated Statements of Income, are described in the following paragraphs.
Interest rate swap and cap contracts are sold to commercial and other customers who wish to modify loan interest rate sensitivity. These contracts are offset with dealer counterparty transactions structured with matching terms, which results in minimal impact on earnings, except for fee income earned in such transactions. All contracts eligible for clearing are cleared through Chicago Mercantile Exchange (CME). In accordance with its amended rulebook, CME legally characterizes variation margin payments made to and received from CME as settlement of derivatives rather than as collateral against derivatives.
Risk participation agreements (RPAs) are entered into as financial guarantees of performance on interest rate swap derivatives. The purchased (asset) or sold (liability) guarantee allows the Company to participate-in (fee received) or participate-out (fee paid) the risk associated with certain derivative positions executed with the borrower by the lead bank in a loan syndication.
Other derivatives include foreign currency forward contracts related to lending arrangements and customer hedging activity, a VISA equity swap transaction, and mortgage banking derivatives such as mortgage-backed securities related to residential loan commitments and loans held for sale. Mortgage banking derivatives are utilized by Webster in its efforts to manage risk of loss associated with its mortgage loan commitments and mortgage loans held for sale. Prior to closing and funding certain single-family residential mortgage loans interest rate lock commitments are generally extended to the borrowers. During the period from commitment date to closing date, Webster is subject to the risk that market rates of interest may change. If market rates rise, investors generally will pay less to purchase such loans causing a reduction in the anticipated gain on sale of the loans, or possibly resulting in a loss. In an effort to mitigate such risk, forward delivery sales commitments are established under which Webster agrees to deliver whole mortgage loans to various investors or issue mortgage-backed securities. Mandatory forward commitments establish the price to be received upon the sale of the related mortgage loan, thereby mitigating certain interest rate risk. There is, however, still certain execution risk specifically related to Webster’s ability to close and deliver to its investors the mortgage loans it has committed to sell.

27

Table of Contents

The following table presents the notional amounts and fair value of derivative positions:
 
At March 31, 2019
 
At December 31, 2018

Asset Derivatives
 
Liability Derivatives
 
Asset Derivatives
 
Liability Derivatives
(In thousands)
Notional
Amounts
Fair
Value
 
Notional
Amounts
Fair
Value
 
Notional
Amounts
Fair
Value
 
Notional
Amounts
Fair
Value
Designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
Positions subject to a master netting agreement (1)
 
 
 
 
 
 
 
 
 
 
 
Interest rate derivatives (2)
$
475,000

$
1,920

 
$

$

 
$
325,000

$
3,050

 
$

$

Not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
Positions subject to a master netting agreement (1)
 
 
 
 
 
 
 
 
 
 
 
Interest rate derivatives (2)
2,211,262

3,951

 
1,911,298

3,511

 
2,767,518

6,570

 
1,276,109

2,012

Mortgage banking derivatives (3)
23,712

276

 
38,300

459

 
13,599

226

 
17,000

293

Other
37,578

296

 
19,073

539

 
11,952

308

 
43,097

553

Positions not subject to a master netting agreement (4)
 
 
 
 
 
 
 
 
 
 
 
Interest rate derivatives
2,286,717

65,122

 
1,835,850

18,025

 
1,668,012

35,635

 
2,367,876

36,017

RPAs
64,554

48

 
93,749

99

 
64,974

39

 
96,296

81

Other
7,019

529

 
1,072

49

 
8,506

450

 
1,208

54

Total not designated as hedging instruments
4,630,842

70,222

 
3,899,342

22,682

 
4,534,561

43,228

 
3,801,586

39,010

Gross derivative instruments, before netting
$
5,105,842

72,142

 
$
3,899,342

22,682

 
$
4,859,561

46,278

 
$
3,801,586

39,010

Less: Legally enforceable master netting agreements
 
3,629

 
 
3,629

 
 
2,495

 
 
2,495

Less: Cash collateral posted/received
 
930

 
 
514

 
 
4,936

 
 

Total derivative instruments, after netting
 
$
67,583

 
 
$
18,539

 
 
$
38,847

 
 
$
36,515

(1)
The Company has elected to report derivative positions subject to a legally enforceable master netting agreement on a net basis, net of cash collateral. Refer to the Offsetting Derivatives section of this footnote for additional information.
(2)
Balances related to CME are presented as a single unit of account. Notional amounts of interest rate swaps cleared through CME include $1.5 billion and $1.9 billion for asset derivatives and $1.6 billion and $1.1 billion for liability derivatives at March 31, 2019 and December 31, 2018, respectively. The related fair values approximate zero.
(3)
Notional amounts include mandatory forward commitments of $38.0 million, while notional amounts do not include approved floating rate commitments of $7.3 million, at March 31, 2019.
(4)
Fair value of assets are included in accrued interest receivable and other assets, while, fair value of liabilities are included in accrued expenses and other liabilities, in the accompanying Condensed Consolidated Balance Sheets.
The following table presents the change in fair value for derivatives designated as fair value hedges as well as the offsetting change in fair value on the hedged item, and the effect on the income statement for derivatives designated as cash flow hedges:
 
 
Three months ended March 31,
(In thousands)
Recognized In
2019
 
2018
Fair value hedges:
 
 
 
 
Recognized on derivatives
Interest expense
$
1,628

 
$

Recognized on hedged items
Interest expense
(1,628
)
 

Net recognized on fair value hedges
 

 

Cash flow hedges:
 
 
 
 
Interest rate derivatives
Interest expense
953

 
1,823

Additional information related to fair value hedges:
Balance Sheet Line Item in Which Hedged Item is Located
Carrying Amount of Hedged Item
 
Cumulative Amount of Fair Value Hedging Adjustment Included in Carrying Amount
(In thousands)
2019
 
2018
 
2019
 
2018
Long-term debt
$
151,628

 
$

 
$
1,628

 
$



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Table of Contents

The following table presents the effect on the income statement for derivatives not designated as hedging instruments:
 
 
Three months ended March 31,
(In thousands)
Recognized In
2019
 
2018
Interest rate derivatives
Other non-interest income
$
1,051

 
$
3,791

RPAs
Other non-interest income
5

 
10

Mortgage banking derivatives
Mortgage banking activities
(408
)
 
65

Other
Other non-interest income
510

 
(600
)
Total not designated as hedging instruments
 
$
1,158

 
$
3,266


Amounts for the change in the fair value of derivatives qualifying for cash flow hedge accounting treatment are recorded to AOCL and reclassified to interest expense as interest payments are made on Webster's variable-rate debt. Over the next twelve months, an estimated $0.6 million will be reclassified from AOCL as a reduction to interest expense. Amounts for gains and losses related to hedge terminations are also recorded to AOCL and subsequently amortized into interest expense over the respective terms of the hedged debt instruments. Over the next twelve months, an estimated $3.6 million will be reclassified from AOCL as an increase to interest expense. At March 31, 2019, the remaining unamortized loss on the termination of cash flow hedges is $7.7 million.
Additional information about cash flow hedge activity impacting AOCL, and the related amounts reclassified to interest expense is provided in Note 10: Accumulated Other Comprehensive Loss, Net of Tax. Information about the valuation methods used to measure the fair value of derivatives is provided in Note 14: Fair Value Measurements.
Offsetting Derivatives
Non-cleared derivatives subject to a legally enforceable master netting agreement are reported on a net basis, net of cash collateral. Cash collateral received, in the amount of $930 thousand, is included in cash and due from banks and is considered restricted in nature. Net gain positions are recorded as assets and are included in accrued interest receivable and other assets, while, net loss positions are recorded as liabilities and are included in accrued expenses and other liabilities, in the accompanying Condensed Consolidated Balance Sheets.
The following table presents the transition from a gross basis to net basis, due to the application of counterparty netting agreements:
 
At March 31, 2019
 
At December 31, 2018
(In thousands)
Gross
Amount
Relationship Offset
Cash Collateral Offset
Net
Amount
 
Gross
Amount
Relationship Offset
Cash Collateral Offset
Net
Amount
Derivative instrument gains:
 
 
 
 
 
 
 
 
 
Hedge accounting
$
1,920

$
337

$
54

$
1,529

 
$
3,050

$
88

$
567

$
2,395

Non-hedge accounting
4,523

3,292

876

355

 
6,878

2,407

4,369

102

Total assets
$
6,443

$
3,629

$
930

$
1,884

 
$
9,928

$
2,495

$
4,936

$
2,497

 
 
 
 
 
 
 
 
 
 
Derivative instrument losses:
 
 
 
 
 
 
 
 
 
Hedge accounting
$

$

$

$

 
$

$

$

$

Non-hedge accounting
4,446

3,629

514

303

 
2,566

2,495


71

Total liabilities
$
4,446

$
3,629

$
514

$
303

 
$
2,566

$
2,495

$

$
71


Derivative Exposure
Use of derivative contracts may expose Webster Bank to counterparty credit risk. The Company has International Swaps and Derivatives Association Master Agreements, including a Credit Support Annex, with all derivative counterparties. In accordance with counterparty credit agreements and derivative clearing rules, cash or securities are posted or received on a daily basis to offset counterparty derivative exposure. Remaining exposure is collateralized by securities received. In the event of default and if the collateral is not returned, the exposure would be offset by terminating the transaction.
The Company had approximately $53.9 million in net margin collateral posted with financial counterparties or the derivative clearing organization at March 31, 2019, which is primarily comprised of $39.3 million in initial margin posted at CME and $14.4 million in CME margin posted.
The Company regularly evaluates the credit risk of its derivative customers, taking into account the likelihood of default, net exposures, and remaining contractual life, among other related factors. Credit risk exposure is mitigated as transactions with customers are generally secured by the same collateral of the underlying transactions being hedged. The net current credit exposure relating to interest rate derivatives with Webster Bank customers was $65.1 million at March 31, 2019. In addition, the Company monitors potential future exposure, representing its best estimate of exposure to remaining contractual maturity. The potential future exposure relating to interest rate derivatives with Webster Bank customers totaled $35.7 million at March 31, 2019.

29

Table of Contents

Note 14: Fair Value Measurements
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined using quoted market prices. However, in many instances, quoted market prices are not available. In such instances, fair values are determined using appropriate valuation techniques. Various assumptions and observable inputs must be relied upon in applying these techniques. Accordingly, categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. As such, the fair value estimates may not be realized in an immediate transfer of the respective asset or liability.
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the entire holdings or any part of a particular financial instrument. Fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These factors are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Fair Value Hierarchy
The three levels within the fair value hierarchy are as follows:
Level 1: Valuation is based upon unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
Level 2: Fair value is calculated using significant inputs other than quoted market prices that are directly or indirectly observable for the asset or liability. The valuation may rely on quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in inactive markets, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit ratings,) or inputs that are derived principally or corroborated by market data, by correlation, or other means.
Level 3: Inputs for determining the fair value of the respective assets or liabilities are not observable. Level 3 valuations are reliant upon pricing models and techniques that require significant management judgment or estimation.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Available-for-Sale Investment Securities. When quoted prices are available in an active market, the Company classifies available-for-sale investment securities within Level 1 of the valuation hierarchy. U.S. Treasury Bills are classified within Level 1 of the fair value hierarchy.
When quoted market prices are not available, the Company employs an independent pricing service that utilizes matrix pricing to calculate fair value. Such fair value measurements consider observable data such as dealer quotes, market spreads, cash flows, yield curves, live trading levels, trade execution data, market consensus prepayments speeds, credit information, and respective terms and conditions for debt instruments. Management maintains procedures to monitor the pricing service's assumptions and establishes processes to challenge the pricing service's valuations that appear unusual or unexpected. Available-for-Sale investment securities which include Agency CMO, Agency MBS, Agency CMBS, CMBS, CLO, and corporate debt, are classified within Level 2 of the fair value hierarchy.
Derivative Instruments. Foreign exchange contracts are valued based on unadjusted quoted prices in active markets and classified within Level 1 of the fair value hierarchy.
All other derivative instruments are valued using third-party valuation software, which considers the present value of cash flows discounted using observable forward rate assumptions. The resulting fair values are validated against valuations performed by independent third parties and are classified within Level 2 of the fair value hierarchy. In determining if any fair value adjustment related to credit risk is required, Webster evaluates the credit risk of its counterparties by considering factors such as the likelihood of default by the counterparties, its net exposures, the remaining contractual life, as well as the amount of collateral securing the position. The change in value of derivative assets and liabilities attributable to credit risk was not significant during the reported periods.
Webster reviews its counterparty exposure on a regular basis, and, when necessary, appropriate business actions are taken to mitigate the exposure. When determining fair value, Webster applies the portfolio exception with respect to measuring counterparty credit risk for all of its derivative transactions subject to a master netting arrangement. The CME rulebook legally characterizes variation margin payments for over-the-counter derivatives as settlements rather than collateral, which impacts Webster's counterparty relationship with CME, resulting in the fair value of the instrument including cash collateral to be represented as a single unit of account.

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Table of Contents

Mortgage Banking Derivatives. Forward sales of mortgage loans and mortgage-backed securities are utilized by the Company in its efforts to manage risk of loss associated with its mortgage loan commitments and mortgage loans held for sale. Prior to closing and funding certain single-family residential mortgage loans, an interest rate lock commitment is generally extended to the borrower. During the period from commitment date to closing date, the Company is subject to the risk that market rates of interest may change. If market rates rise, investors generally will pay less to purchase such loans resulting in a reduction in the gain on sale of the loans or, possibly, a loss. In an effort to mitigate such risk, forward delivery sales commitments are established, under which the Company agrees to deliver whole mortgage loans to various investors or issue mortgage-backed securities. The fair value of mortgage banking derivatives is determined based on current market prices for similar assets in the secondary market and, therefore, classified within Level 2 of the fair value hierarchy.
Originated Loans Held For Sale. Residential mortgage loans typically are classified as held for sale upon origination based on management's intent to sell such loans. The Company generally records residential mortgage loans held for sale under the fair value option of Accounting Standards Codification (ASC) Topic 825 "Financial Instruments." The fair value of residential mortgage loans held for sale is based on quoted market prices of similar loans sold in conjunction with securitization transactions. Accordingly, such loans are classified within Level 2 of the fair value hierarchy.
The following table presents the fair value, unpaid principal balance, and accrual status, of assets accounted for under the fair value option:
 
At March 31, 2019
 
At December 31, 2018
(In thousands)
Fair Value
 
Unpaid Principal Balance
 
Difference
 
Fair Value
 
Unpaid Principal Balance
 
Difference
Originated loans held for sale
$
20,615

 
$
20,010

 
$
605

 
$
7,908

 
$
8,227

 
$
(319
)
Electing to measure originated loans held for sale at fair value reduces certain timing differences and better matches changes in the value of these assets with changes in the value of the derivatives used as an economic hedge on these assets.
Investments Held in Rabbi Trust. Investments held in the Rabbi Trust primarily include mutual funds that invest in equity and fixed income securities. Shares of mutual funds are valued based on net asset value, which represents quoted market prices for the underlying shares held in the mutual funds. Therefore, investments held in the Rabbi Trust are classified within Level 1 of the fair value hierarchy. Webster has elected to measure the investments held in the Rabbi Trust at fair value. The cost basis of the investments held in the Rabbi Trust is $1.8 million at March 31, 2019.
Alternative Investments. Equity investments have a readily determinable fair value when quoted prices are available in an active market. The Company classifies alternative investments with a readily determinable fair value within Level 1 of the fair value hierarchy.
Equity investments that do not have a readily available fair value may qualify for net asset value (NAV) measurement based on specific requirements. The Company's alternative investments accounted for at NAV consist of investments in non-public entities that generally cannot be redeemed since the Company’s investments are distributed as the underlying equity is liquidated. Alternative investments recorded at NAV are not classified within the fair value hierarchy. At March 31, 2019, these alternative investments had a remaining unfunded commitment of $2.7 million.

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Summaries of the fair values of assets and liabilities measured at fair value on a recurring basis are as follows:
 
At March 31, 2019
(In thousands)
Level 1
Level 2
Level 3
NAV
Total
Financial assets held at fair value:
 
 
 
 
 
U.S. Treasury Bills
$
7,595

$

$

$

$
7,595

Agency CMO

223,994



223,994

Agency MBS

1,585,398



1,585,398

Agency CMBS

564,499



564,499

CMBS

432,301



432,301

CLO

111,624



111,624

Corporate debt

51,905



51,905

Total available-for-sale investment securities
7,595

2,969,721



2,977,316

Gross derivative instruments, before netting (1)
825

71,317



72,142

Originated loans held for sale

20,615



20,615

Investments held in Rabbi Trust
4,602




4,602

Alternative investments



2,534

2,534

Total financial assets held at fair value
$
13,022

$
3,061,653

$

$
2,534

$
3,077,209

Financial liabilities held at fair value:
 
 
 
 
 
Gross derivative instruments, before netting (1)
$
588

$
22,094

$

$

$
22,682

 
At December 31, 2018
(In thousands)
Level 1
Level 2
Level 3
NAV
Total
Financial assets held at fair value:
 
 
 
 
 
U.S. Treasury Bills
$
7,550

$

$

$

$
7,550

Agency CMO

234,923



234,923

Agency MBS

1,481,089



1,481,089

Agency CMBS

566,237



566,237

CMBS

445,581



445,581

CLO

112,771



112,771

Corporate debt

50,579



50,579

Total available-for-sale investment securities
7,550

2,891,180



2,898,730

Gross derivative instruments, before netting (1)
758

45,520



46,278

Originated loans held for sale

7,908



7,908

Investments held in Rabbi Trust
4,307




4,307

Alternative investments



2,563

2,563

Total financial assets held at fair value
$
12,615

$
2,944,608

$

$
2,563

$
2,959,786

Financial liabilities held at fair value:
 
 
 
 
 
Gross derivative instruments, before netting (1)
$
588

$
38,422

$

$

$
39,010

(1)
For information relating to the impact of netting derivative assets and derivative liabilities as well as the impact from offsetting cash collateral paid to the same derivative counterparties see Note 13: Derivative Financial Instruments.


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Assets Measured at Fair Value on a Non-Recurring Basis
Certain assets are measured at fair value on a non-recurring basis; that is, the assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances, for example, when there is evidence of impairment. At March 31, 2019, no significant assets classified within Level 3 were identified and measured under this basis. The following is a description of valuation methodologies used for assets measured at fair value on a non-recurring basis.
Alternative Investments. The measurement alternative has been elected for alternative investments without readily determinable fair values that do not qualify for the NAV practical expedient. The measurement alternative requires investments to be accounted for at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. These alternative investments are investments in non-public entities that generally cannot be redeemed since the investment is distributed as the underlying equity is liquidated. Accordingly, these alternative investments are classified within Level 2 of the fair value hierarchy. The carrying amount of these alternative investments was $5.4 million at March 31, 2019. No reduction for impairments, or adjustments due to observable price changes, was identified during the three months ended March 31, 2019.
Transferred Loans Held For Sale. Certain loans are transferred to loans held for sale once a decision has been made to sell such loans. These loans are accounted for at the lower of cost or market and are considered to be recognized at fair value when they are recorded at below cost. This activity primarily consists of commercial loans with observable inputs and is classified within Level 2. On the occasion that these loans should include adjustments for changes in loan characteristics using unobservable inputs, the loans would be classified within Level 3.
Collateral Dependent Impaired Loans and Leases. Impaired loans and leases for which repayment is expected to be provided solely by the value of the underlying collateral are considered collateral dependent and are valued based on the estimated fair value of such collateral using customized discounting criteria. As such, collateral dependent impaired loans and leases are classified within Level 3 of the fair value hierarchy.
Other Real Estate Owned and Repossessed Assets. The total book value of other real estate owned (OREO) and repossessed assets was $5.5 million at March 31, 2019. OREO and repossessed assets are accounted for at the lower of cost or fair value and are considered to be recognized at fair value when they are recorded at below cost. The fair value of OREO is based on independent appraisals or internal valuation methods, less estimated selling costs. The valuation may consider available pricing guides, auction results, and price opinions. Certain assets require assumptions about factors that are not observable in an active market in the determination of fair value; as such, OREO and repossessed assets are classified within Level 3 of the fair value hierarchy.
At March 31, 2019, there were no significant assets measured at fair value on a non-recurring basis.
Fair Value of Financial Instruments and Servicing Assets
The Company is required to disclose the estimated fair value of, financial instruments, both assets and liabilities, for which it is practicable to estimate fair value, as well as servicing assets. The following is a description of valuation methodologies used for those assets and liabilities.
Cash, Due from Banks, and Interest-bearing Deposits. The carrying amount of cash, due from banks, and interest-bearing deposits is used to approximate fair value, given the short time frame to maturity and, as such, these assets do not present unanticipated credit concerns. Cash, due from banks, and interest-bearing deposits are classified within Level 1 of the fair value hierarchy.
Held-to-Maturity Investment Securities. When quoted market prices are not available, the Company employs an independent pricing service that utilizes matrix pricing to calculate fair value. Such fair value measurements consider observable data such as dealer quotes, market spreads, cash flows, yield curves, live trading levels, trade execution data, market consensus prepayments speeds, credit information, and respective terms and conditions for debt instruments. Management maintains procedures to monitor the pricing service's results and establishes processes to challenge their valuations, or methodology, that appear unusual or unexpected. Held-to-Maturity investment securities, which include Agency CMO, Agency MBS, Agency CMBS, CMBS, and municipal bonds and notes, are classified within Level 2 of the fair value hierarchy.
Loans and Leases, net. The estimated fair value of loans and leases held for investment is calculated using a discounted cash flow method, using future prepayments and market interest rates inclusive of an illiquidity premium for comparable loans and leases. The associated cash flows are adjusted for credit and other potential losses. Fair value for impaired loans and leases is estimated using the net present value of the expected cash flows. Loans and leases are classified within Level 3 of the fair value hierarchy.
Deposit Liabilities. The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. Deposit liabilities are classified within Level 2 of the fair value hierarchy.
Time Deposits. The fair value of a fixed-maturity certificate of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. Time deposits are classified within Level 2 of the fair value hierarchy.

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Table of Contents

Securities Sold Under Agreements to Repurchase and Other Borrowings. The carrying value is an estimate of fair value for those securities sold under agreements to repurchase and other borrowings that mature within 90 days. Fair value of all other borrowings is estimated using discounted cash flow analysis based on current market rates adjusted, as appropriate, for associated credit risks. Securities sold under agreements to repurchase and other borrowings are classified within Level 2 of the fair value hierarchy.
Federal Home Loan Bank Advances and Long-Term Debt. The fair value of FHLB advances and long-term debt is estimated using a discounted cash flow technique. Discount rates are matched with the time period of the expected cash flow and are adjusted, as appropriate, to reflect credit risk. FHLB advances and long-term debt are classified within Level 2 of the fair value hierarchy.
Mortgage Servicing Assets. Mortgage servicing assets are accounted for at cost and subsequently measured under the amortization method. Mortgage servicing assets are subject to impairment testing and considered to be recognized at fair value when they are recorded at below cost. Amortization, and impairment charges, if any, are included as a component of other non-interest income in the accompanying Condensed Consolidated Statements of Income. Fair value is calculated as the present value of estimated future net servicing income and relies on market based assumptions for loan prepayment speeds, servicing costs, discount rates, and other economic factors; as such, the primary risk inherent in valuing mortgage servicing assets is the impact of fluctuating interest rates on the servicing revenue stream. Mortgage servicing assets are classified within Level 3 of the fair value hierarchy.
The estimated fair values of selected financial instruments and servicing assets are as follows:
 
At March 31, 2019
 
At December 31, 2018
(In thousands)
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
Assets:
 
 
 
 
 
 
 
Level 2
 
 
 
 
 
 
 
Held-to-maturity investment securities
$
4,480,160

 
$
4,433,377

 
$
4,325,420

 
$
4,209,121

Level 3
 
 
 
 
 
 
 
Loans and leases, net
18,602,901

 
18,608,221

 
18,253,136

 
18,155,798

Mortgage servicing assets
19,785

 
38,258

 
21,215

 
45,478

Liabilities:
 
 
 
 
 
 
 
Level 2
 
 
 
 
 
 
 
Deposit liabilities
$
19,396,301

 
$
19,396,301

 
$
18,662,299

 
$
18,662,299

Time deposits
3,354,627

 
3,343,754

 
3,196,546

 
3,175,948

Securities sold under agreements to repurchase and other borrowings
688,065

 
688,065

 
581,874

 
581,874

FHLB advances
951,730

 
953,539

 
1,826,808

 
1,826,381

Long-term debt (1)
524,303

 
527,495

 
226,021

 
229,306

(1)
Adjustments to the carrying amount of long-term debt for unamortized discount and debt issuance cost on senior fixed-rate notes are not included for determination of fair value, see Note 8: Borrowings.
Note 15: Retirement Benefit Plans
Defined benefit pension and other postretirement benefits
The following table summarizes the components of net periodic benefit cost:
 
 
 
 
 
 
 
 

 
Three months ended March 31,
 
2019
 
2018
(In thousands)
Pension Plan
SERP
Other Benefits
 
Pension Plan
SERP
Other Benefits
Interest cost on benefit obligations
$
1,978

$
16

$
21

 
$
1,785

$
187

$
20

Expected return on plan assets
(2,815
)


 
(3,180
)


Recognized net loss
1,430

4

(4
)
 
1,160

125


Net periodic benefit cost
$
593

$
20

$
17

 
$
(235
)
$
312

$
20


The components of net periodic benefit cost, other than the service cost component, are included as a component of other expense reflected in non-interest expense in the accompanying Condensed Consolidated Statements of Income.

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Note 16: Segment Reporting
Webster’s operations are organized into three reportable segments that represent its primary businesses - Commercial Banking, HSA Bank, and Community Banking. These three segments reflect how executive management responsibilities are assigned, the primary businesses, the products and services provided, the type of customer served, and how discrete financial information is currently evaluated. Certain corporate treasury activities of the Company, along with the amounts required to reconcile profitability metrics to amounts reported in accordance with GAAP, are included in the Corporate and Reconciling category.
Description of Segment Reporting Methodology
Webster’s reportable 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, 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 periodically 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, which are prepared for each operating segment, reflect non-GAAP reporting methodologies. The differences between full profitability and GAAP results are reconciled in the Corporate and Reconciling category.
Webster allocates interest income and interest expense to each business, while also transferring the primary interest rate risk exposures to the Corporate and Reconciling category, using a matched maturity funding concept called Funds Transfer Pricing (FTP). The allocation process considers the specific interest rate risk and liquidity risk of financial instruments and other assets and liabilities in each line of business. The matched maturity funding concept considers the origination date and the earlier of the maturity date or the repricing date of a financial instrument to assign an FTP rate for loans and deposits originated each day. Loans are assigned an FTP rate for funds used and deposits are assigned an FTP rate for funds provided. This process is executed by the Company’s Financial Planning and Analysis division and is overseen by the Company's Asset/Liability Committee (ALCO).
Webster allocates the provision for loan and lease losses to each segment based on management’s estimate of the inherent loss content in each of the specific loan and lease portfolios.
Webster allocates a majority of non-interest expense to each reportable segment using a full-absorption costing process. Costs, including corporate overhead, are analyzed, pooled by process, and assigned to the appropriate reportable segment.
The following table presents total assets for Webster's reportable segments and the Corporate and Reconciling category:
(In thousands)
Commercial
Banking
HSA
Bank
Community
Banking
Corporate and
Reconciling
Consolidated
Total
At March 31, 2019
$
10,685,011

$
86,686

$
8,981,264

$
8,485,168

$
28,238,129

At December 31, 2018
10,477,050

70,826

8,727,335

8,335,104

27,610,315


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Table of Contents

The following tables present the operating results, including all appropriate allocations, for Webster’s reportable segments and the Corporate and Reconciling category:
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended March 31, 2019
(In thousands)
Commercial
Banking
HSA
Bank
Community
Banking
Corporate and
Reconciling
Consolidated
Total
Net interest income (expense)
$
90,510

$
41,741

$
101,360

$
7,940

$
241,551

Provision for loan and lease losses
6,894


1,706


8,600

Net interest income (expense) after provision for loan and lease losses
83,616

41,741

99,654

7,940

232,951

Non-interest income
14,011

25,577

25,382

3,642

68,612

Non-interest expense
44,618

33,522

95,075

2,471

175,686

Income (loss) before income tax expense
53,009

33,796

29,961

9,111

125,877

Income tax expense (benefit)
13,040

8,787

5,962

(1,648
)
26,141

Net income
$
39,969

$
25,009

$
23,999

$
10,759

$
99,736

 
Three months ended March 31, 2018
(In thousands)
Commercial
Banking
HSA
Bank
Community
Banking
Corporate and
Reconciling
Consolidated
Total
Net interest income (expense)
$
84,651

$
32,924

$
98,928

$
(2,335
)
$
214,168

Provision (benefit) for loan and lease losses
7,178


3,822


11,000

Net interest income (expense) after provision for loan and lease losses
77,473

32,924

95,106

(2,335
)
203,168

Non-interest income
15,316

22,669

25,195

5,567

68,747

Non-interest expense
41,245

31,515

96,829

2,026

171,615

Income (loss) before income tax expense
51,544

24,078

23,472

1,206

100,300

Income tax expense (benefit)
12,680

6,260

4,671

(3,536
)
20,075

Net income (loss)
$
38,864

$
17,818

$
18,801

$
4,742

$
80,225



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Table of Contents

Note 17: Revenue from Contracts with Customers
The following tables present the disaggregation by operating segment and major revenue stream, with disaggregated revenue reconciled to segment revenue as presented in Note 16: Segment Reporting:
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended March 31, 2019
(In thousands)
Commercial
Banking
HSA
Bank
Community
Banking
Corporate and
Reconciling
Consolidated
Total
Major Revenue Streams
 
 
 
 
 
Deposit service fees
$
3,036

$
24,528

$
15,365

$
95

$
43,024

Wealth and investment services
2,484


5,175

(8
)
7,651

Other income

1,049

501


1,550

Revenue from contracts with customers
5,520

25,577

21,041

87

52,225

Non-interest income within the scope of other GAAP topics
8,491


4,341

3,555

16,387

Total non-interest income
$
14,011

$
25,577

$
25,382

$
3,642

$
68,612

 
Three months ended March 31, 2018
(In thousands)
Commercial
Banking
HSA
Bank
Community
Banking
Corporate and
Reconciling
Consolidated
Total
Major Revenue Streams
 
 
 
 
 
Deposit service fees
$
3,222

$
21,812

$
15,309

$
108

$
40,451

Wealth and investment services
2,539


5,339

(8
)
7,870

Other income

857

493


1,350

Revenue from contracts with customers
5,761

22,669

21,141

100

49,671

Non-interest income within the scope of other GAAP topics
9,555


4,054

5,467

19,076

Total non-interest income
$
15,316

$
22,669

$
25,195

$
5,567

$
68,747


A description of deposit service fees and wealth and investment services are provided below:
Deposit service fees, predominately consist of fees earned from deposit accounts and interchange revenue. Fees earned from deposit accounts relate to event-driven services and periodic account maintenance activities. Webster's obligations for event-driven services are satisfied at the time the service is delivered, while the obligations for maintenance services is satisfied monthly. Interchange fees are assessed as the performance obligation is satisfied, which is at the point in time the card transaction is authorized.
Wealth and investment services, consists of fees earned from investment and securities-related services, trust and other related services. Obligations for wealth and investment services are generally satisfied over time through a time-based measurement of progress, but certain obligations may be satisfied at points in time for activities that are transactional in nature.
Revenue from contracts with customers did not generate significant contract assets and liabilities.

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Table of Contents

Note 18: Commitments and Contingencies
Credit-Related Financial Instruments
The Company offers credit-related financial instruments in the normal course of business to meet certain financing needs of its customers, that involve off-balance sheet risk. These transactions may include an unused commitment to extend credit, standby letter of credit, or commercial letter of credit. Such transactions involve, to varying degrees, elements of credit risk.
Commitments to Extend Credit. The Company makes commitments under various terms to lend funds to customers at a future point in time. These commitments include revolving credit arrangements, term loan commitments, and short-term borrowing agreements. Most of these loans have fixed expiration dates or other termination clauses where a fee may be required. Since commitments routinely expire without being funded, or after required availability of collateral occurs, the total commitment amount does not necessarily represent future liquidity requirements.
Standby Letter of Credit. A standby letter of credit commits the Company to make payments on behalf of customers if certain specified future events occur. The Company has recourse against the customer for any amount required to be paid to a third party under a standby letter of credit, which is often part of a larger credit agreement under which security is provided. Historically, a large percentage of standby letters of credit expire without being funded. The contractual amount of a standby letter of credit represents the maximum amount of potential future payments the Company could be required to make, and is the Company's maximum credit risk.
Commercial Letter of Credit. A commercial letter of credit is issued to facilitate either domestic or foreign trade arrangements for customers. As a general rule, drafts are committed to be drawn when the goods underlying the transaction are in transit. Similar to a standby letter of credit, a commercial letter of credit is often secured by an underlying security agreement including the assets or inventory to which they relate.
The following table summarizes the outstanding amounts of credit-related financial instruments with off-balance sheet risk:
(In thousands)
At March 31, 2019
 
At December 31, 2018
Commitments to extend credit
$
5,757,123

 
$
5,840,585

Standby letter of credit
189,031

 
189,040

Commercial letter of credit
11,070

 
21,181

Total credit-related financial instruments with off-balance sheet risk
$
5,957,224

 
$
6,050,806


These commitments subject the Company to potential exposure in excess of the amounts recorded in the financial statements, and therefore, management maintains a specific reserve for unfunded credit commitments. This reserve is reported as a component of accrued expenses and other liabilities in the accompanying Condensed Consolidated Balance Sheets.
The following table provides a summary of activity in the reserve for unfunded credit commitments:
 
 
Three months ended March 31,
(In thousands)
 
2019
 
2018
Beginning balance
 
$
2,506

 
$
2,362

Provision charged to expense
 
5

 
(68
)
Ending balance
 
$
2,511

 
$
2,294


Note 19: Subsequent Events
The Company has evaluated events from the date of the Condensed Consolidated Financial Statements and accompanying Notes thereto, March 31, 2019, through the issuance of this Quarterly Report on Form 10-Q and determined that no significant events were identified requiring recognition or disclosure.

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Table of Contents

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company’s Consolidated Financial Statements and Notes thereto, for the year ended December 31, 2018, included in the Company's Annual Report on Form 10-K, filed with the SEC on March 1, 2019, and in conjunction with the Condensed Consolidated Financial Statements and Notes thereto included in Item 1 of this report. Operating results for the three months ended March 31, 2019 are not necessarily indicative of the results for the full year ending December 31, 2019, or any future period.
Results of Operations
Selected financial highlights are presented in the following table:
 
At or for the three months ended March 31,
(In thousands, except per share and ratio data)
2019
 
2018
Earnings:
 
 
 
Net interest income
$
241,551

 
$
214,168

Provision for loan and lease losses
8,600

 
11,000

Total non-interest income
68,612

 
68,747

Total non-interest expense
175,686

 
171,615

Net income
99,736

 
80,225

Earnings applicable to common shareholders
97,549

 
78,083

Share Data:
 
 
 
Weighted-average common shares outstanding - diluted
92,225

 
92,254

Diluted earnings per common share
$
1.06

 
$
0.85

Dividends and dividend equivalents declared per common share
0.33

 
0.26

Dividends declared per Series F preferred share
328.13

 
328.13

Book value per common share
30.62

 
27.94

Tangible book value per common share (non-GAAP)
24.51

 
21.78

Selected Ratios:
 
 
 
Net interest margin
3.74
%
 
3.44
%
Return on average assets (annualized basis)
1.44

 
1.20

Return on average common shareholders' equity (annualized basis)
14.01

 
12.15

CET1 risk-based capital
11.46

 
10.99

Tangible common equity ratio (non-GAAP)
8.16

 
7.65

Return on average tangible common shareholders' equity (annualized basis) (non-GAAP)
17.70

 
15.73

Efficiency ratio (non-GAAP)
55.93

 
59.76

Providing the non-GAAP financial measures identified in the preceding table provides investors with information useful in understanding the Company's financial performance, performance trends and financial position. These measures are used by management for internal planning and forecasting purposes, as well as by securities analysts, investors and other interested parties to compare peer company operating performance. Management believes that the presentation, together with the accompanying reconciliations provides a complete understanding of the factors and trends affecting the Company's business and allows investors to view its performance in a similar manner. These non-GAAP financial measures should not be considered a substitute for GAAP basis measures and results. Because non-GAAP financial measures are not standardized, it may not be possible to compare these measures with other companies that present measures having the same or similar names.

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The following tables reconcile the non-GAAP financial measures with financial measures defined by GAAP:
 
At March 31,
(Dollars and shares in thousands, except per share data)
2019
 
2018
Tangible book value per common share (non-GAAP):
 
 
 
Shareholders' equity (GAAP)
$
2,966,255

 
$
2,716,142

Less: Preferred stock (GAAP)
145,037

 
145,037

         Goodwill and other intangible assets (GAAP)
563,176

 
567,023

Tangible common shareholders' equity (non-GAAP)
$
2,258,042

 
$
2,004,082

Common shares outstanding
92,125

 
92,016

Tangible book value per common share (non-GAAP)
$
24.51

 
$
21.78

 
 
 
 
Tangible common equity ratio (non-GAAP):
 
 
 
Tangible common shareholders' equity (non-GAAP)
$
2,258,042

 
$
2,004,082

Total assets (GAAP)
$
28,238,129

 
$
26,752,147

Less: Goodwill and other intangible assets (GAAP)
563,176

 
567,023

Tangible assets (non-GAAP)
$
27,674,953

 
$
26,185,124

Tangible common equity ratio (non-GAAP)
8.16
%
 
7.65
%
 
Three months ended March 31,
(Dollars in thousands)
2019
 
2018
Return on average tangible common shareholders' equity (non-GAAP):
 
 
 
Net income (GAAP)
$
99,736

 
$
80,225

Less: Preferred stock dividends (GAAP)
1,969

 
1,947

Add: Intangible assets amortization, tax-affected (GAAP)
760

 
760

Income adjusted for preferred stock dividends and intangible assets amortization (non-GAAP)
$
98,527

 
$
79,038

Income adjusted for preferred stock dividends and intangible assets amortization, annualized basis (non-GAAP)
$
394,108

 
$
316,152

Average shareholders' equity (non-GAAP)
$
2,935,653

 
$
2,722,591

Less: Average preferred stock (non-GAAP)
145,037

 
145,161

 Average goodwill and other intangible assets (non-GAAP)
563,646

 
567,547

Average tangible common shareholders' equity (non-GAAP)
$
2,226,970

 
$
2,009,883

Return on average tangible common shareholders' equity (non-GAAP)
17.70
%
 
15.73
%
 
 
 
 
Efficiency ratio (non-GAAP):
 
 
 
Non-interest expense (GAAP)
$
175,686

 
$
171,615

Less: Foreclosed property activity (GAAP)
(253
)
 
85

Intangible assets amortization (GAAP)
962

 
962

Other expense (non-GAAP) (1)
7

 

Non-interest expense (non-GAAP)
$
174,970

 
$
170,568

Net interest income (GAAP)
$
241,551

 
$
214,168

Add: Tax-equivalent adjustment (non-GAAP)
2,338

 
2,230

 Non-interest income (GAAP)
68,612

 
68,747

 Other income (non-GAAP) (1)
342

 
295

Income (non-GAAP)
$
312,843

 
$
285,440

Efficiency ratio (non-GAAP)
55.93
%
 
59.76
%
(1)
Other expense includes facility optimization, while other income includes low income housing tax credits.
Financial Performance
For the three months ended March 31, 2019, net income of $99.7 million increased $19.5 million, or 24.3%, from the three months ended March 31, 2018 due to improved performance across all businesses driven by increased net interest margin and stable credit quality. The increase in net interest margin coupled with flat non-interest income and an insignificant increase in non-interest expense resulted in a further reduction of the efficiency ratio to 55.9%.
The impact of the items outlined above, coupled with the effect of in income tax expense of $26.1 million and $20.1 million for the three months ended March 31, 2019 and 2018, resulted to net income of $99.7 million and diluted earnings per share of $1.06 for the three months ended March 31, 2019 compared to net income of $80.2 million and diluted earnings per share of $0.85 for the three months ended March 31, 2018.

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The following table summarizes daily average balances, interest, yield/rate, and net interest margin on a fully tax-equivalent basis:
 
Three months ended March 31,
 
2019
 
2018
(Dollars in thousands)
Average
Balance
Interest
Yield/ Rate
 
Average
Balance
Interest
Yield/ Rate
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Interest-earning assets:
 
 
 
 
 
 
 
Loans and leases
$
18,509,174

$
229,385

4.96
%
 
$
17,754,773

$
193,864

4.37
%
Investment Securities
7,308,946

56,954

3.09

 
7,158,505

52,489

2.91

FHLB and FRB stock
113,016

1,712

6.14

 
133,241

1,455

4.43

Interest-bearing deposits
55,372

329

2.37

 
52,711

201

1.52

Securities
7,477,334

58,995

3.13

 
7,344,457

54,145

2.93

Loans held for sale
13,451

148

4.40

 
16,330

142

3.49

Total interest-earning assets
25,999,959

$
288,528

4.43
%
 
25,115,560

$
248,151

3.95
%
Non-interest-earning assets
1,795,430

 
 
 
1,641,721

 
 
Total Assets
$
27,795,389

 
 
 
$
26,757,281

 
 
 
 
 
 
 
 
 
 
Liabilities and Shareholders' Equity
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
Demand deposits
$
4,191,870

$

%
 
$
4,163,364

$

%
Health savings accounts
6,140,062

2,949

0.19

 
5,427,000

2,624

0.20

Interest-bearing checking, money market and savings
8,958,522

12,793

0.58

 
9,342,743

7,713

0.33

Time deposits
3,244,714

15,278

1.91

 
2,459,145

7,819

1.29

Total deposits
22,535,168

31,020

0.56

 
21,392,252

18,156

0.34

 
 
 
 
 
 
 
 
Securities sold under agreements to repurchase and other borrowings
597,107

2,752

1.84

 
875,829

3,640

1.66

FHLB advances
1,119,035

7,785

2.78

 
1,311,832

7,281

2.22

Long-term debt
249,169

3,082

4.95

 
225,799

2,676

4.74

Total borrowings
1,965,311

13,619

2.77

 
2,413,460

13,597

2.25

Total interest-bearing liabilities
24,500,479

$
44,639

0.74
%
 
23,805,712

$
31,753

0.54
%
Non-interest-bearing liabilities
359,257

 
 
 
228,978

 
 
Total liabilities
24,859,736

 
 
 
24,034,690

 
 
 
 
 
 
 
 
 
 
Preferred stock
145,037

 
 
 
145,161

 
 
Common shareholders' equity
2,790,616

 
 
 
2,577,430

 
 
Total shareholders' equity
2,935,653

 
 
 
2,722,591

 
 
Total Liabilities and Shareholders' Equity
$
27,795,389

 
 
 
$
26,757,281

 
 
Tax-equivalent net interest income
 
$
243,889

 
 
 
$
216,398

 
Less: Tax-equivalent adjustments
 
(2,338
)
 
 
 
(2,230
)
 
Net interest income
 
$
241,551

 
 
 
$
214,168

 
Net interest margin
 
 
3.74
%
 
 
 
3.44
%
 

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Net interest income and net interest margin are impacted by the level of interest rates, mix of assets earning and liabilities paying those interest rates, and the volume of interest-earning assets and interest-bearing liabilities. These conditions are influenced by changes in economic conditions that impact interest rate policy, competitive conditions that impact loan and deposit pricing strategies, as well as the extent of interest lost to non-performing assets.
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 77.9% of total revenue for the three months ended March 31, 2019.
Net interest margin is the ratio of tax-equivalent net interest income to average earning assets for the period.
Webster manages the risk of changes in interest rates on net interest income and net interest margin through ALCO and through related interest rate risk monitoring and management policies. ALCO meets at least monthly to make decisions on the investment securities and funding portfolios based on the economic outlook, its interest rate expectations, the portfolio risk position, and other factors.
Four main tools are used for managing interest rate risk:
the size, duration, and credit risk of the investment securities portfolio;
the size and duration of the wholesale funding portfolio;
interest rate contracts; and
the pricing and structure of loans and deposits.
The federal funds rate target range was 1.25-1.50% at December 31, 2017 compared to 2.25-2.50% at both December 31, 2018 and March 31, 2019. See the "Asset/Liability Management and Market Risk" section for further discussion of Webster's interest rate risk position.
Net Interest Income
Net interest income totaled $241.6 million for the three months ended March 31, 2019 compared to $214.2 million for the three months ended March 31, 2018, an increase of $27.4 million.
Net interest margin increased 30 basis points to 3.74% for the three months ended March 31, 2019 from 3.44% for the three months ended March 31, 2018. On a fully tax-equivalent basis, net interest income increased $27.5 million when compared to the same period in 2018. The increase for the three months ended March 31, 2019 was primarily the result of strong loan growth at increased yields, partially offset by an increase in the cost of deposits other than health savings account deposits.
Changes in Net Interest Income
The following table presents the components of the change in net interest income attributable to changes in rate and volume, and reflects net interest income on a fully tax-equivalent basis:
 
Three months ended March 31,
 
2019 vs. 2018
Increase (decrease) due to
(In thousands)
Rate (1)
Volume
Total
Interest on interest-earning assets:
 
 
 
Loans and leases
$
26,358

$
9,164

$
35,522

Loans held for sale
31

(26
)
5

Securities (2)
4,025

825

4,850

Total interest income
$
30,414

$
9,963

$
40,377

Interest on interest-bearing liabilities:
 
 
 
Deposits
$
10,701

$
2,163

$
12,864

Borrowings
2,076

(2,054
)
22

Total interest expense
$
12,777

$
109

$
12,886

Net change in net interest income
$
17,637

$
9,854

$
27,491

(1)
The change attributable to mix, a combined impact of rate and volume, is included with the change due to rate.
(2)
Securities include: Investment securities, FHLB and FRB stock, and Interest-bearing deposits.

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Table of Contents

Average loans and leases for the three months ended March 31, 2019 increased $0.8 billion compared to the average for the three months ended March 31, 2018. The loan and lease portfolio comprised 71.2% of the average interest-earning assets at March 31, 2019 compared to 70.7% of the average interest-earning assets at March 31, 2018. The loan and lease portfolio yield increased 59 basis points to 4.96% for the three months ended March 31, 2019 compared to 4.37% for the three months ended March 31, 2018. The increase in the yield on the average loan and lease portfolio is primarily due to the impact of variable-rate loans resetting higher and growth in commercial loans with higher yields.
Average securities for the three months ended March 31, 2019 increased $132.9 million compared to the average for the three months ended March 31, 2018. The securities portfolio comprised 28.8% of the average interest-earning assets at March 31, 2019 compared to 29.2% of the average interest-earning assets at March 31, 2018. The securities portfolio yield increased 20 basis points to 3.13% for the three months ended March 31, 2019 compared to 2.93% for the three months ended March 31, 2018. The increase in yield on the securities portfolio is primarily due to increased yield on variable-rate securities and higher yield from newly purchased securities.
Average total deposits for the three months ended March 31, 2019 increased $1.1 billion compared to the average for the three months ended March 31, 2018. The increase is due to growth in health savings accounts and time deposits which was slightly offset by lower balances for other interest-bearing deposits. The average cost of deposits increased 22 basis points to 0.56% for the three months ended March 31, 2019 from 0.34% for the three months ended March 31, 2018. The average cost of deposits increased due to selected deposit product rate increases and a change in mix from increased certificate of deposit accounts. Higher cost time deposits, increased to 17.7% for the three months ended March 31, 2019 from 14.3% for the three months ended March 31, 2018, as a percentage to total interest-bearing deposits.
Average total borrowings for the three months ended March 31, 2019 decreased $448.1 million compared to the average for the three months ended March 31, 2018. Average securities sold under agreements to repurchase and other borrowings decreased $278.7 million, and average FHLB advances decreased $192.8 million. The average cost of borrowings increased 52 basis points to 2.77% for the three months ended March 31, 2019 from 2.25% for the three months ended March 31, 2018. The increase in the average cost of borrowings was largely a result of changes in the federal funds rate.
The Company completed an underwritten public offering of $300 million senior fixed-rate notes on March 25, 2019. The debt did not have a significant impact on the average balance or cost of borrowings for the three months ended March 31, 2019 given the timing of its issuance. See "Sources of Funds and Liquidity" section for further discussion of the notes issued.
Cash flow hedges, including outstanding hedges and terminated forward starting hedges, impacted the average cost of funding as follows:
 
Three months ended March 31,
(In thousands)
2019
2018
Interest rate swaps on FHLB advances
$
799

$
1,630

Interest rate swaps on senior fixed-rate notes
76

76

Interest rate swaps on brokered/certificates of deposits
78

117

Net increase to interest expense on borrowings
$
953

$
1,823

Provision for Loan and Lease Losses
The provision for loan and lease losses was $8.6 million for the three months ended March 31, 2019, which decreased $2.4 million compared to the three months ended March 31, 2018. The decrease in provision for loan and lease losses was primarily due to stable asset quality. Total net charge-offs was $9.6 million and $5.6 million for the three months ended March 31, 2019 and 2018, respectively.
See the sections captioned "Loans and Leases" through "Allowance for Loan and Lease Losses Methodology" contained elsewhere in the report for further details.

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Table of Contents

Non-Interest Income
 
Three months ended March 31,
 
 
 
 
Increase (decrease)
(Dollars in thousands)
2019
2018
 
Amount
Percent
Deposit service fees
$
43,024

$
40,451

 
$
2,573

6.4
 %
Loan related fees
7,819

6,996

 
823

11.8

Wealth and investment services
7,651

7,870

 
(219
)
(2.8
)
Mortgage banking activities
764

1,144

 
(380
)
(33.2
)
Increase in cash surrender value of life insurance policies
3,584

3,572

 
12

0.3

Other income
5,770

8,714

 
(2,944
)
(33.8
)
Total non-interest income
$
68,612

$
68,747

 
$
(135
)
(0.2
)
Comparison to Prior Year Quarter
Total non-interest income was $68.6 million for the three months ended March 31, 2019, a decrease of $0.1 million from the three months ended March 31, 2018. The decrease was primarily attributable to lower other income offset by higher deposit service fees.
Deposit service fees totaled $43.0 million for the three months ended March 31, 2019, compared to $40.5 million for the three months ended March 31, 2018. The increase was a result of higher checking account service charges and check card interchange attributable to health savings account growth.
Other income totaled $5.8 million for the three months ended March 31, 2019, compared to $8.7 million for the three months ended March 31, 2018. The decrease was primarily due to lower client interest rate hedging activities and related income.

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Table of Contents

Non-Interest Expense
 
Three months ended March 31,
 
 
 
 
Increase (decrease)
(Dollars in thousands)

2019
2018
 
Amount
Percent
Compensation and benefits
$
97,785

$
94,765

 
$
3,020

3.2
 %
Occupancy
14,696

15,145

 
(449
)
(3.0
)
Technology and equipment
25,697

23,862

 
1,835

7.7

Intangible assets amortization
962

962

 


Marketing
3,328

3,552

 
(224
)
(6.3
)
Professional and outside services
6,048

4,788

 
1,260

26.3

Deposit insurance
4,430

6,717

 
(2,287
)
(34.0
)
Other expense
22,740

21,824

 
916

4.2

Total non-interest expense
$
175,686

$
171,615

 
$
4,071

2.4

Comparison to Prior Year Quarter
Total non-interest expense was $175.7 million for the three months ended March 31, 2019, an increase of $4.1 million, from the three months ended March 31, 2018. The increase was primarily attributable to increases in compensation and benefits, technology and equipment, and professional and outside services, offset by lower deposit insurance.
Compensation and benefits totaled $97.8 million for the three months ended March 31, 2019, compared to $94.8 million for the three months ended March 31, 2018. The increase was primarily due to additional hires, annual merit increases and other benefit costs.
Technology and equipment totaled $25.7 million for the three months ended March 31, 2019, compared to $23.9 million for the three months ended March 31, 2018. The increase was due to higher service contracts to support strategic infrastructure projects.
Professional and outside services totaled $6.0 million for the three months ended March 31, 2019, compared to $4.8 million for the three months ended March 31, 2018. The increase was primarily due to increased consulting fees for strategic projects.
Deposit insurance totaled $4.4 million for the three months ended March 31, 2019, compared to $6.7 million for the three months ended March 31, 2018. The decrease is primarily due to the discontinuance of the FDIC surcharge during the fourth quarter of 2018.
Income Taxes
Webster recognized income tax expense of $26.1 million reflecting an effective tax rate of 20.8% for the three months ended March 31, 2019, compared to $20.1 million reflecting an effective tax rate of 20.0% for the three months ended March 31, 2018.
The increases in both tax expense and the effective tax rate for the three months ended March 31, 2019 as compared to the same period for 2018 principally reflect the higher level of pre-tax income during the 2019 period.
For additional information on Webster's income taxes, including its deferred tax assets, see Note 8 - Income Taxes in the Notes to Consolidated Financial Statements contained in Webster's 2018 Form 10-K.

45

Table of Contents

Segment Reporting
Webster’s operations are organized into three reportable segments that represent its primary businesses - Commercial Banking, HSA Bank, and Community Banking. These three segments reflect how executive management responsibilities are assigned, the primary businesses, the products and services provided, the type of customer served, and how discrete financial information is currently evaluated. Certain corporate treasury activities of the Company, along with adjustments required to reconcile profitability metrics to amounts reported in accordance with GAAP, are included in the Corporate and Reconciling category.
Commercial Banking is comprised of Commercial Banking and Private Banking operating segments.
Commercial Banking provides commercial and industrial lending and leasing, commercial real estate lending, and treasury and payment solutions. Specifically, Webster Bank deploys lending through middle market, commercial real estate, equipment financing, asset-based lending and specialty lending units. These groups utilize a relationship approach model throughout its footprint when providing lending, deposit, and cash management services to middle market companies. In addition, Commercial Banking serves as a referral source to the other lines of business.
Private Banking provides local, full relationship banking that serves high net worth clients, not-for-profit organizations, and business clients for asset management, financial planning services, trust services, loan products, and deposit products. These client relationships generate fee revenue on assets under management or administration, while a majority of the relationships also include lending and/or deposit accounts which provide net interest income and other ancillary fees.
HSA Bank offers a comprehensive consumer directed healthcare solution that includes, health savings accounts, health reimbursement accounts, flexible spending accounts, and other financial solutions. Health savings accounts are used in conjunction with high deductible health plans in order to facilitate tax advantages for account holders with respect to health care spending and savings, in accordance with applicable laws. Health savings accounts are offered through employers for the benefit of their employees or directly to individual consumers and are distributed nationwide directly as well as through national and regional insurance carriers, benefit consultants and financial advisors.
HSA Bank deposits provide long duration low-cost funding that is used to minimize the Company’s use of wholesale funding in support of the Company’s loan growth. In addition, non-interest revenue is generated predominantly through service fees and interchange income.
Community Banking is comprised of Personal Banking and Business Banking operating segments.
Through a distribution network, consisting of 157 banking centers and 315 ATMs, a customer care center, and a full range of web and mobile-based banking services, it serves consumer and business customers primarily throughout southern New England and into Westchester County, New York.
Personal Banking offers consumer deposit and fee-based services, residential mortgages, home equity lines/loans, unsecured consumer loans, and credit card products. In addition, investment and securities-related services, including brokerage and investment advice is offered through a strategic partnership with LPL Financial Holdings Inc. (LPL), a broker dealer registered with the SEC, a registered investment advisor under federal and applicable state laws, a member of the Financial Industry Regulatory Authority, and a member of the Securities Investor Protection Corporation. Webster Bank has employees located throughout its banking center network, who, through LPL, are registered representatives.
Business Banking offers credit, deposit, and cash flow management products to businesses and professional service firms with annual revenues of up to $25 million. This group builds broad customer relationships through business bankers and business certified banking center managers, supported by a team of customer care center bankers and industry and product specialists.
Description of Segment Reporting Methodology
Webster’s reportable 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, 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 periodically 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, which are prepared for each operating segment, reflect non-GAAP reporting methodologies. The differences between full profitability and GAAP results are reconciled in the Corporate and Reconciling category.

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Table of Contents

Webster allocates interest income and interest expense to each business, while also transferring the primary interest rate risk exposures to the Corporate and Reconciling category, using a matched maturity funding concept called FTP. The allocation process considers the specific interest rate risk and liquidity risk of financial instruments and other assets and liabilities in each line of business. The matched maturity funding concept considers the origination date and the earlier of the maturity date or the repricing date of a financial instrument to assign an FTP rate for loans and deposits originated each day. Loans are assigned an FTP rate for funds used and deposits are assigned an FTP rate for funds provided. This process is executed by the Company’s Financial Planning and Analysis division and is overseen by the Company's ALCO.
Webster allocates the provision for loan and lease losses to each segment based on management’s estimate of the inherent loss content in each of the specific loan and lease portfolios.
Webster allocates a majority of non-interest expense to each reportable segment using a full-absorption costing process. Costs, including corporate overhead, are analyzed, pooled by process, and assigned to the appropriate reportable segment.
The following tables present net income, selected balance sheet information, and assets under administration/management for Webster’s reportable segments and the Corporate and Reconciling category for the periods presented:
 
Three months ended March 31,
(In thousands)
2019
 
2018
Net income:
 
 
 
Commercial Banking
$
39,969

 
$
38,864

HSA Bank
25,009

 
17,818

Community Banking
23,999

 
18,801

Corporate and Reconciling
10,759

 
4,742

Consolidated Total
$
99,736

 
$
80,225

 
At March 31, 2019
(In thousands)
Commercial
Banking
HSA
Bank
Community Banking
Corporate and
Reconciling
Consolidated Total
Total assets
$
10,685,011

$
86,686

$
8,981,264

$
8,485,168

$
28,238,129

Loans and leases
10,630,622

60

8,183,608


18,814,290

Goodwill

21,813

516,560


538,373

Deposits
4,190,781

6,209,213

12,270,981

79,953

22,750,928

Not included in above amounts:
 
 
 
 
 
Assets under administration/management
2,068,145

1,702,509

3,487,099


7,257,753

 
 
 
 
 
 
 
At December 31, 2018
(In thousands)
Commercial
Banking
HSA
Bank
Community Banking
Corporate and
Reconciling
Consolidated Total
Total assets
$
10,477,050

$
70,826

$
8,727,335

$
8,335,104

$
27,610,315

Loans and leases
10,437,319

55

8,028,115


18,465,489

Goodwill

21,813

516,560


538,373

Deposits
4,030,554

5,740,601

11,856,652

231,038

21,858,845

Not included in above amounts:
 
 
 
 
 
Assets under administration/management
1,930,199

1,460,204

3,391,946


6,782,349

Commercial Banking
Operating Results:
 
Three months ended March 31,
(In thousands)
2019
 
2018
Net interest income
$
90,510

 
$
84,651

Provision for loan and lease losses
6,894

 
7,178

Net interest income after provision
83,616

 
77,473

Non-interest income
14,011

 
15,316

Non-interest expense
44,618

 
41,245

Income before income taxes
53,009

 
51,544

Income tax expense
13,040

 
12,680

Net income
$
39,969

 
$
38,864

Comparison to Prior Year Quarter
Net income increased $1.1 million for the three months ended March 31, 2019 as compared to the same period in 2018. Net interest income increased $5.9 million, primarily due to loan growth and higher deposit margins. The provision for loan and lease losses decreased $0.3 million. Non-interest income decreased $1.3 million primarily due to lower client interest rate hedging activity as compared to the same period in the prior year. Non-interest expense increased $3.4 million, primarily due to strategic hires and investments in product enhancements and infrastructure.
Selected Balance Sheet Information:
(In thousands)
At March 31,
2019
 
At December 31,
2018
Total assets
$
10,685,011

 
$
10,477,050

Loans and leases
10,630,622

 
10,437,319

Deposits
4,190,781

 
4,030,554

Not include in above amounts:
 
 
 
Assets under administration/management
2,068,145

 
1,930,199

Loans and leases increased $193.3 million at March 31, 2019 compared to December 31, 2018. Loan originations in the three months ended March 31, 2019 and 2018 were $862.6 million and $846.9 million, respectively.
Deposits increased $160.2 million at March 31, 2019 compared to December 31, 2018. The increase was primarily due to new commercial clients and existing clients maintaining higher balances, which offset the seasonal decrease in municipal deposits.
Through Private Banking, Commercial Banking held approximately $465.9 million, and $422.5 million, in assets under administration at March 31, 2019 and December 31, 2018, respectively. In addition Commercial Banking held $1.6 billion, in assets under management, at March 31, 2019 and $1.5 billion at December 31, 2018.

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HSA Bank
Operating Results:
 
Three months ended March 31,
(In thousands)
2019
 
2018
Net interest income
$
41,741

 
$
32,924

Non-interest income
25,577

 
22,669

Non-interest expense
33,522

 
31,515

Income before income taxes
33,796

 
24,078

Income tax expense
8,787

 
6,260

Net income
$
25,009

 
$
17,818

Comparison to Prior Year Quarter
Net income increased $7.2 million for the three months ended March 31, 2019 as compared to the same period in 2018. Net interest income increased $8.8 million, primarily due to growth in deposits and improved deposit spreads. Non-interest income increased $2.9 million due to increased account growth. Non-interest expense increased $2.0 million primarily due to account growth and expanded distribution.
Selected Balance Sheet Information and Assets Under Administration:
(In thousands)
At March 31,
2019
 
At December 31,
2018
Total assets
$
86,686

 
$
70,826

Deposits
6,209,213

 
5,740,601

Not included in above amounts:
 
 
 
Assets under administration
1,702,509

 
1,460,204

Deposits increased $468.6 million at March 31, 2019 compared to December 31, 2018, due to an increase in new accounts as well as organic growth in existing account balances.
Additionally, HSA Bank held $1.7 billion in assets under administration through linked brokerage accounts at March 31, 2019, compared to $1.5 billion at December 31, 2018. The $242.3 million increase in linked brokerage balances is driven primarily by account growth, continued net contributions by account holders and appreciation in market value of investments.
At March 31, 2019, there were $7.9 billion in total footings, comprised of $6.2 billion in deposit balances and $1.7 billion in assets under administration.

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Community Banking
Operating Results:
 
Three months ended March 31,
(In thousands)
2019
 
2018
Net interest income
$
101,360

 
$
98,928

Provision for loan and lease losses
1,706

 
3,822

Net interest income after provision
99,654

 
95,106

Non-interest income
25,382

 
25,195

Non-interest expense
95,075

 
96,829

Income before income taxes
29,961

 
23,472

Income tax expense
5,962

 
4,671

Net income
$
23,999

 
$
18,801

Comparison to Prior Year Quarter
Net income increased $5.2 million for the three months ended March 31, 2019 as compared to the same period in 2018. Net interest income increased $2.4 million, primarily due to growth in loan and deposit balances as well as improved interest rate spreads on deposits. The provision for loan and lease losses decreased $2.1 million primarily due to stable asset quality and a decrease in the balance of Home Equity loans. Non-interest income increased $0.2 million resulting from overall growth in loan and deposit related fees, coupled with gains from SBA loan and asset sales, which offset lower mortgage production related fees from mortgage banking activities and lower fees from investment services. Non-interest expense decreased $1.8 million primarily due to a decrease in occupancy related expenses and lower direct marketing costs, offset by higher compensation expenses coupled with investments in technology and risk management.
Selected Balance Sheet Information and Assets Under Administration:
(In thousands)
At March 31,
2019
 
At December 31,
2018
Total assets
$
8,981,264

 
$
8,727,335

Loans
8,183,608

 
8,028,115

Deposits
12,270,981

 
11,856,652

Not included in above amounts:
 
 
 
Assets under administration
3,487,099

 
3,391,946

Loans increased $155.5 million at March 31, 2019 compared to December 31, 2018. The increase is primarily due to a $242.2 million residential portfolio purchase which closed at the end of March 2019. These balances offset net attrition resulting from continued net prepayments in the home equity portfolios.
Loan originations in the three months ended March 31, 2019 and 2018 were $302.3 million and $307.0 million, respectively. The $4.6 million decrease in originations was driven by a decrease in originations of residential mortgages and business banking loans, partially offset by an increase in originations of home equity and other consumer loans.
Deposits increased $414.3 million at March 31, 2019 compared to December 31, 2018, due to growth in time deposits and seasonally higher balances in cyclical business and consumer transaction accounts offset by a net decline in savings and money market accounts.
Additionally, at March 31, 2019 and December 31, 2018, Webster Bank's investment services division held $3.5 billion and $3.4 billion, respectively, of assets under administration in its strategic partnership with LPL.

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Table of Contents

Financial Condition
Webster had total assets of $28.2 billion at March 31, 2019 and $27.6 billion at December 31, 2018 as:
loans and leases, $18.6 billion, net of ALLL of $211.4 million, at March 31, 2019 increased $350 million compared to loans and leases of $18.3 billion, net of ALLL of $212.4 million, at December 31, 2018, while;
total deposits, $22.8 billion at March 31, 2019 increased $0.9 billion compared to total deposits of $21.9 billion at December 31, 2018, the result of the 4.7% increase in interest bearing deposits is primarily due to growth in health savings accounts and time deposits.
At March 31, 2019, total shareholders' equity of $3.0 billion increased $79.7 million compared to total shareholders' equity of $2.9 billion at December 31, 2018. Changes in shareholders' equity for the three months ended March 31, 2019 include:
an increase of $99.7 million in net income;
an increase of $3.0 million related to share-based award activity, partially offset by;
a reduction of $19.1 million for purchases of treasury stock at cost, and;
reductions of $30.6 million in common dividends and $2.0 million in preferred dividends.
The quarterly cash dividend to shareholders was increased to $0.40 per common share effective April 22, 2018. See the selected financial highlights under the "Results of Operations" section and Note 11: Regulatory Matters in the Notes to Condensed Consolidated Financial Statements contained elsewhere in this report for information on regulatory capital levels and ratios.
Investment Securities
Webster Bank's investment securities are managed within regulatory guidelines and corporate policy, which include limitations on aspects such as concentrations in and type of investments as well as minimum risk ratings per type of security. The OCC may establish additional individual limits on a certain type of investment if the concentration in such investment presents a safety and soundness concern. In addition to Webster Bank, the Holding Company also may directly hold investment securities from time-to-time. At March 31, 2019, the Company had no holdings in obligations of individual states, counties, or municipalities which exceeded 10% of consolidated shareholders’ equity.
Webster maintains, through its Corporate Treasury function, investment securities that are primarily used to provide a source of liquidity for operating needs, to generate interest income, and as a means to manage interest-rate risk. Investment securities are classified into two major categories, available-for-sale and held-to-maturity. Available-for-sale currently consists of U.S Treasury Bills, Agency CMO, Agency MBS, Agency CMBS, CMBS, CLO, and corporate debt. Held-to-maturity currently consists of Agency CMO, Agency MBS, Agency CMBS, municipal bonds and notes, CMBS.
The carrying value of investment securities totaled $7.5 billion at March 31, 2019 and $7.2 billion at December 31, 2018.
Available-for-sale investment securities increased by $78.6 million, primarily due to principal purchase activity for Agency MBS more than offsetting principal paydowns throughout the portfolio. The tax-equivalent yield in the portfolio was 3.08% for the three months ended March 31, 2019 compared to 2.81% for the three months ended March 31, 2018.
Held-to-maturity investment securities increased by $154.7 million, primarily due to principal purchase activity for Agency MBS and, to a lesser extent, Agency CMBS and municipal bonds and notes more than offsetting principal paydowns throughout the portfolio. The tax-equivalent yield in the portfolio was 3.09% for the three months ended March 31, 2019 compared to 2.98% for the three months ended March 31, 2018.
The Company held $5.2 billion in investment securities that are in an unrealized loss position at March 31, 2019. Approximately $0.4 billion of this total has been in an unrealized loss position for less than twelve months, while the remainder, $4.8 billion, has been in an unrealized loss position for twelve months or longer.
The Company held $6.2 billion in investment securities that were in an unrealized loss position at December 31, 2018. Approximately $1.2 billion of this total had been in an unrealized loss position for less than twelve months, while the remainder, $5.0 billion, had been in an unrealized loss position for twelve months or longer.
The benchmark 10-year U.S. Treasury rate decreased to 2.41% at March 31, 2019 from 2.69% at December 31, 2018.
These investment securities were evaluated by management and were determined not to be other than temporarily impaired, at March 31, 2019 and December 31, 2018. The Company does not have an intent to sell these investment securities, and it is more likely than not that it will not have to sell these securities before the recovery of their cost basis. To the extent that credit movements and other related factors influence the fair value of its investments, the Company may be required to record impairment charges for OTTI in future periods. The total unrealized loss was $143.8 million at March 31, 2019.

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Table of Contents

The following table summarizes the amortized cost and fair value of investment securities:
 
At March 31, 2019
 
At December 31, 2018
(In thousands)
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
 
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
Available-for-sale:
 
 
 
 
 
 
 
 
 
U.S. Treasury Bills
$
7,595

$

$

$
7,595

 
$
7,549

$
1

$

$
7,550

Agency CMO
226,104

704

(2,814
)
223,994

 
238,968

412

(4,457
)
234,923

Agency MBS
1,603,023

7,876

(25,501
)
1,585,398

 
1,521,534

1,631

(42,076
)
1,481,089

Agency CMBS
598,442


(33,943
)
564,499

 
608,167


(41,930
)
566,237

CMBS
432,933

500

(1,132
)
432,301

 
447,897

645

(2,961
)
445,581

CLO
112,116

89

(581
)
111,624

 
114,641

94

(1,964
)
112,771

Single issuer-trust preferred




 




Corporate debt
55,678

5

(3,778
)
51,905

 
55,860


(5,281
)
50,579

Available-for-sale
$
3,035,891

$
9,174

$
(67,749
)
$
2,977,316

 
$
2,994,616

$
2,783

$
(98,669
)
$
2,898,730

Held-to-maturity:
 
 
 
 
 
 
 
 
 
Agency CMO
$
200,568

$
432

$
(3,419
)
$
197,581

 
$
208,113

$
287

$
(5,255
)
$
203,145

Agency MBS
2,614,590

15,623

(48,352
)
2,581,861

 
2,517,823

8,250

(79,701
)
2,446,372

Agency CMBS
704,653

902

(19,366
)
686,189

 
667,500

53

(22,572
)
644,981

Municipal bonds and notes
753,589

11,564

(4,248
)
760,905

 
715,041

2,907

(18,285
)
699,663

CMBS
206,760

765

(684
)
206,841

 
216,943

405

(2,388
)
214,960

Private Label MBS




 




Held-to-maturity
$
4,480,160

$
29,286

$
(76,069
)
$
4,433,377

 
$
4,325,420

$
11,902

$
(128,201
)
$
4,209,121

Webster Bank has the ability to use its investment securities, as well as interest-rate financial instruments within internal policy guidelines, to hedge and manage interest-rate risk as part of its asset/liability strategy. See Note 13: Derivative Financial Instruments in the Notes to Condensed Consolidated Financial Statements contained elsewhere in this report for additional information concerning derivative financial instruments.

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Table of Contents

Loans and Leases
The following table provides the composition of loans and leases:
 
At March 31, 2019
 
At December 31, 2018
(Dollars in thousands)
Amount
%
 
Amount
%
Residential
$
4,612,311

24.5

 
$
4,389,866

23.8

Consumer:
 
 
 
 
 
Home equity
2,098,141

11.2

 
2,153,911

11.7

Other consumer
226,084

1.2

 
227,257

1.2

Total consumer
2,324,225

12.4

 
2,381,168

12.9

Commercial:
 
 
 
 
 
Commercial non-mortgage
5,339,118

28.4

 
5,269,557

28.5

Asset-based
1,042,377

5.5

 
971,876

5.3

Total commercial
6,381,495

33.9

 
6,241,433

33.8

Commercial real estate:
 
 
 
 
 
Commercial real estate
4,800,233

25.5

 
4,715,949

25.5

Commercial construction
199,394

1.1

 
218,816

1.2

Total commercial real estate
4,999,627

26.6

 
4,934,765

26.7

Equipment financing
490,378

2.6

 
504,351

2.7

Unamortized premiums (discounts)
8,076


 
14,809

0.1

Deferred fees
(1,822
)

 
(903
)

Total loans and leases
$
18,814,290

100.0

 
$
18,465,489

100.0

Total residential loans were $4.6 billion at March 31, 2019, a increase of $222.4 million from December 31, 2018. The net increase is a result of a $242.2 million purchase of residential loans, net of discount, during the first quarter of 2019.
Total consumer loans were $2.3 billion at March 31, 2019, a decrease of $56.9 million from December 31, 2018. The net decrease is primarily due to continued net principal paydowns within the home equity lines and auto loan portfolios exceeding originations.
Total commercial loans were $6.4 billion at March 31, 2019, an increase of $140.1 million from December 31, 2018. The net increase primarily related to originations of $548.7 million, partially offset by payments and payoffs.
Total commercial real estate loans were $5.0 billion at March 31, 2019, an increase of $64.9 million from December 31, 2018. The increase is a result of originations of $361.1 million, partially offset by payments and payoffs.
Equipment financing loans and leases were $490.4 million at March 31, 2019, a decrease of $14.0 million from December 31, 2018. The net decrease was primarily related to amortization and higher prepayments, partially offset by originations of $36.6 million.
Asset Quality
Management maintains asset quality within established risk tolerance levels through its underwriting standards, servicing, and management of loan and lease performance. Loans and leases, particularly where a heightened risk of loss has been identified, are regularly monitored to mitigate further deterioration which could potentially impact key measures of asset quality in future periods. Past due loans and leases, non-performing assets, and credit loss levels are considered to be key measures of asset quality.
The following table provides key asset quality ratios:
 
At March 31,
2019
 
At December 31, 2018
Non-performing loans and leases as a percentage of loans and leases
0.84
%
 
0.84
%
Non-performing assets as a percentage of loans and leases plus OREO
0.87

 
0.87

Non-performing assets as a percentage of total assets
0.58

 
0.59

ALLL as a percentage of non-performing loans and leases
133.01

 
137.22

ALLL as a percentage of loans and leases
1.12

 
1.15

Net charge-offs as a percentage of average loans and leases (1)
0.21

 
0.16

Ratio of ALLL to net charge-offs (1)
5.53x

 
7.16x

(1)
Calculated for the March 31, 2019 period based on the year-to-date net charge-offs, annualized.

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Table of Contents

Potential Problem Loans and Leases
Potential problem loans and leases are defined by management as certain loans and leases that, for:
commercial, commercial real estate, and equipment financing are performing loans and leases classified as Substandard and have a well-defined weakness that could jeopardize the full repayment of the debt; and
residential and consumer are performing loans 60-89 days past due and accruing.
Potential problem loans and leases exclude past due 90 days or more and accruing, non-accrual, and TDR classifications.
Management monitors potential problem loans and leases due to a higher degree of risk associated them. The current expectation of probable losses is included in the ALLL, however management cannot predict whether these potential problem loans and leases ultimately will become non-performing or result in a loss. The Company had potential problem loans and leases of $222.2 million at March 31, 2019 compared to $226.9 million at December 31, 2018.
Past Due Loans and Leases
The following table provides information regarding loans and leases past due 30 days or more and accruing income:
 
At March 31, 2019
 
At December 31, 2018
(Dollars in thousands)
Amount
% (1)
 
Amount
% (1)
Residential
$
12,865

0.28
 
$
12,789

0.29
Consumer:
 
 
 
 
 
Home equity
13,451

0.64
 
14,595

0.68
Other consumer
2,723

1.20
 
2,729

1.20
Commercial non-mortgage
16,040

0.30
 
1,700

0.03
Commercial real estate
2,283

0.05
 
1,514

0.03
Equipment financing
3,112

0.63
 
915

0.18
Loans and leases past due 30-89 days
50,474

0.27
 
34,242

0.19
Commercial non-mortgage

 
104

Loans and leases past due 90 days and accruing

 
104

Total
50,474

0.27
 
34,346

0.19
Deferred costs and unamortized premiums (discounts), net
10

 
 
86

 
Total loans and leases past due 30 days or more and accruing income
$
50,484

 
 
$
34,432

 
(1)
Represents the principal balance of loans and leases past due 30 days or more and accruing income as a percentage of the outstanding principal balance within the comparable loan and lease category.
The balance of loans and leases past due 30 days or more and accruing income increased $16.1 million at March 31, 2019 compared to December 31, 2018. The increase is primarily due to one commercial loan in the amount of $14.3 million which was brought back into current status in early April. The ratio of loans and leases past due 30 days or more and accruing income as a percentage of loans and leases increased to 0.27% at March 31, 2019 as compared to 0.19% at December 31, 2018.

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Table of Contents

Non-performing Assets
The following table provides information regarding non-performing assets:
 
At March 31, 2019
 
At December 31, 2018
(Dollars in thousands)
Amount (1)
% (2)
 
Amount (1)
% (2)
Residential
$
49,267

1.07
 
$
49,069

1.12
Consumer:
 
 
 
 
 
Home equity
33,667

1.60
 
33,456

1.55
Other consumer
1,578

0.70
 
1,493

0.66
Total consumer
35,245

1.52
 
34,949

1.47
Commercial:
 
 
 
 
 
Commercial non-mortgage
61,803

1.16
 
55,951

1.06
Asset-based loans
218

0.02
 
224

0.02
Total commercial
62,021

0.97
 
56,175

0.90
Commercial real estate:
 
 
 
 
 
Commercial real estate
7,449

0.16
 
8,243

0.17
Commercial construction

 

Total commercial real estate
7,449

0.15
 
8,243

0.17
Equipment financing
4,951

1.01
 
6,314

1.25
Total non-accrual loans and leases
158,933

0.85
 
154,750

0.84
Deferred costs and unamortized premiums (discounts), net
(2
)
 
 
17

 
Total recorded investment in non-accrual loans and leases (3)
$
158,931

 
 
$
154,767

 
 
 
 
 
 
 
Total non-accrual loans and leases
$
158,933

 
 
$
154,750

 
Foreclosed and repossessed assets:
 
 
 
 
 
Residential and consumer
4,637

 
 
6,460

 
Equipment financing
861

 
 
407

 
Total foreclosed and repossessed assets
5,498

 
 
6,867

 
Total non-performing assets
$
164,431

 
 
$
161,617

 
(1)
Balances by class exclude the impact of net deferred costs and unamortized premiums.
(2)
Represents the principal balance of non-accrual loans and leases as a percentage of the outstanding principal balance within the comparable loan and lease category.
(3)
Includes non-accrual TDRs of $101.3 million at March 31, 2019 and $91.9 million at December 31, 2018.
Non-performing assets increased $2.8 million at March 31, 2019 compared to December 31, 2018. The increase in non-performing assets at March 31, 2019 is primarily due to the commercial non-mortgage portfolio. Overall non-performing assets as a percentage of total assets was 0.58% at March 31, 2019 as compared to 0.59% at December 31, 2018.
The following table provides detail of non-performing loan and lease activity:
 
Three months ended March 31,
(In thousands)
2019
 
2018
Beginning balance
$
154,750

 
$
126,582

Additions
31,422

 
28,845

Paydowns/draws
(12,998
)
 
(13,664
)
Charge-offs
(10,496
)
 
(5,966
)
Other reductions
(3,745
)
 
(1,538
)
Ending balance
$
158,933

 
$
134,259


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Table of Contents

Impaired Loans and Leases
Loans and leases are considered impaired when, based on current information and events, it is probable the Company will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. Impairment is evaluated on a pooled basis for smaller-balance homogeneous residential, consumer loans and small business loans. Commercial, commercial real estate, and equipment financing loans and leases over a specific dollar amount and all TDR are evaluated individually for impairment.
At March 31, 2019, there were 1,485 impaired loans and leases with a recorded investment balance of $274.4 million, which included loans and leases of $87.4 million with an impairment allowance of $13.8 million. This compares to 1,501 impaired loans and leases with a recorded investment balance of $259.3 million, which included loans and leases of $93.1 million, with an impairment allowance of $15.4 million at December 31, 2018. For additional information, see Note 4: Loans and Leases in the Notes to Condensed Consolidated Financial Statements contained elsewhere in this report.
Troubled Debt Restructurings
A modified loan is considered a TDR when two conditions are met: (i) the borrower is experiencing financial difficulties; and (ii) the modification constitutes a concession. Modified terms are dependent upon the financial position and needs of the individual borrower. The Company considers all aspects of the restructuring in determining whether a concession has been granted, including the debtor's ability to access market rate funds. In general, a concession exists when the modified terms of the loan are more attractive to the borrower than standard market terms. Common modifications include material changes in covenants, pricing, and forbearance. Loans for which the borrower has been discharged under Chapter 7 bankruptcy are considered collateral dependent TDRs and thus, impaired at the date of discharge and charged down to the fair value of collateral less cost to sell.
The Company’s policy is to place consumer loan TDRs, except those that were performing prior to TDR status, on non-accrual status for a minimum period of six months. Commercial TDRs are evaluated on a case-by-case basis for determination of accrual status. Loans qualify for return to accrual status once they have demonstrated performance with the restructured terms of the loan agreement for a minimum of six months. Initially, all TDRs are reported as impaired. Generally, a TDR is classified as an impaired loan and reported as a TDR for the remaining life of the loan. Impaired and TDR classification may be removed if the borrower demonstrates compliance with the modified terms for a minimum of six months and through one fiscal year-end, and the restructuring agreement specifies a market rate of interest equal to that which would be provided to a borrower with similar credit at the time of restructuring. In the limited circumstance that a loan is removed from TDR classification, it is the Company’s policy to continue to base its measure of loan impairment on the contractual terms specified by the loan agreement.
The following tables provide information for TDRs:
 
Three months ended March 31,
(In thousands)
2019
 
2018
Beginning balance
$
230,414

 
$
221,404

Additions
26,333

 
6,593

Paydowns/draws
(4,550
)
 
(7,053
)
Charge-offs
(1,432
)
 
(725
)
Transfers to OREO
(356
)
 
(681
)
Ending balance
$
250,409

 
$
219,538

(In thousands)
At March 31,
2019
 
At December 31,
2018
Accrual status
$
149,076

 
$
138,479

Non-accrual status
101,333

 
91,935

Total recorded investment of TDRs
$
250,409

 
$
230,414

 
 
 
 
Specific reserves for TDRs included in the balance of ALLL
$
13,381

 
$
11,930

Additional funds committed to borrowers in TDR status
5,118

 
3,893

Overall, TDR balances increased $20.0 million at March 31, 2019 compared to December 31, 2018, primarily due to $22.0 in new commercial TDR's, while the specific reserves for TDRs increased from year end, reflective of management’s current assessment of reserve requirements.

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Table of Contents

Allowance for Loan and Lease Losses Methodology
The ALLL policy is considered a critical accounting policy. Executive management reviews and advises on the adequacy of the ALLL reserve, which is maintained at a level deemed sufficient by management to cover probable losses inherent within the loan and lease portfolios.
The quarterly process for estimating probable losses is based on predictive models, to measure the current risk profile of loan portfolio and combines other quantitative and qualitative factors together with the impairment reserve to determine the overall reserve requirement. Management's judgment and assumptions influence loss estimates and ALLL balances. Quantitative and qualitative factors that management considers include factors such as the nature and volume of portfolio growth, national and regional economic conditions and trends, other internal performance metrics, and how each of these factors is expected to impact near term loss trends. While actual future conditions and realized losses may vary significantly from assumptions, management believes the ALLL is adequate at March 31, 2019.
The Company’s methodology for assessing an appropriate level of the ALLL includes three key elements:
Impaired loans and leases are either analyzed on an individual or pooled basis and assessed for specific reserves measured based on the present value of expected future cash flows discounted at the effective interest rate of the loan or lease, except that as a practical expedient, impairment may be measured based on a loan or lease's observable market price, or the fair value of the collateral, if the loan or lease is collateral dependent. A loan or lease is collateral dependent if the repayment of the loan or lease is expected to be provided solely by the underlying collateral. The Company considers the pertinent facts and circumstances for each impaired loan or lease when selecting the appropriate method to measure impairment and evaluates, on a quarterly basis, each selection to ensure its continued appropriateness.
Loans and leases that are not considered impaired and have similar risk characteristics, are segmented into homogeneous pools and modeled using quantitative methods. The Company's loss estimate for its commercial portfolios utilizes an expected loss methodology that is based on probability of default (PD) and LGD models. The PD and LGD models are based on borrower and facility risk ratings assigned to each loan and are updated throughout the year as a borrower's financial condition changes. PD and LGD models are derived using the Company's portfolio specific historic data and are refreshed annually. Residential and consumer portfolio loss estimates are based on roll rate models that utilize the Company's historic delinquency and default data. For each segmentation the loss estimates incorporate a loss emergence period (LEP) model which represents an amount of time between when a loss event first occurs to when it is charged-off. An LEP is determined for each loan type based on the Company's historical experience and is reassessed at least annually.
The Company also considers qualitative factors, consistent with interagency regulatory guidance, that are not explicitly factored in the quantitative models but that can have an incremental or regressive impact on losses incurred in the current loan and lease portfolio.
Commercial loans are underwritten after evaluating and understanding the borrower’s ability to operate and service its debt. Underwriting standards are designed to focus on and support the promotion of relationships rather than transactional banking. Once it is determined that the borrower’s management possesses sound ethics and solid business acumen, the Company examines current and projected cash flows to determine the ability of the borrower to repay obligations as agreed. Commercial and industrial loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. Management regularly monitors the cash flows of borrowers as results may not be as expected, and the collateral securing these loans may fluctuate in value. Most commercial and industrial loans are secured by the assets being financed and may incorporate personal guarantees of the principals.
Commercial real estate loans are subject to underwriting standards and processes similar to commercial and industrial loans, in addition to those specific to real estate loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Repayment of these loans is largely dependent on the successful operation of the property securing the loan, the market in which the property is located, and the tenants of the property securing the loan. The properties securing the Company’s commercial real estate portfolio are diverse in terms of type and geographic location, which reduces the Company's exposure to adverse economic events that may affect a particular market. Management monitors and evaluates commercial real estate loans based on collateral, geography, and risk grade criteria. Commercial real estate loans may be adversely affected by conditions in the real estate markets or in the general economy. The Company also utilizes third-party experts to provide insight and guidance about economic conditions and trends affecting its commercial real estate loan portfolio.
Commercial construction loans have unique risk characteristics and are provided to experienced developers/sponsors with strong track records of successful completion and sound financial condition and are underwritten utilizing feasibility studies, independent appraisals, sensitivity analysis of absorption and lease rates, and financial analysis of the developers and property owners. Commercial construction loans are generally based upon estimates of costs and value associated with the complete project. Estimates may be subject to change as the construction project proceeds. In addition, these loans often include partial or full completion guarantees. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property, or an interim loan commitment from the Company until permanent financing is obtained. Management closely monitors these loans with on-site inspections by third-party professionals and the Company's internal staff.

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Policies and procedures are in place to manage consumer loan risk and are developed and modified, as needed. Policies and procedures, coupled with relatively small loan amounts, and predominately collateralized structures spread across many individual borrowers, minimize risk. Trend and outlook reports are reviewed by management on a regular basis. Underwriting factors for mortgage and home equity loans include the borrower’s FICO score, the loan amount relative to property value, and the borrower’s debt to income level and are also influenced by regulatory requirements. Additionally, Webster Bank originates both qualified mortgage and non-qualified mortgage loans as defined by the Consumer Financial Protection Bureau rules.
At March 31, 2019 the ALLL was $211.4 million compared to $212.4 million at December 31, 2018. The decrease of $1.0 million in the reserve at March 31, 2019 compared to December 31, 2018 is primarily due to stable asset quality coupled with a reduction in the impairment reserve of $1.5 million. The ALLL reserve remains adequate to cover inherent losses in the loan and lease portfolios. ALLL as a percentage of loans and leases, also known as the reserve coverage, decreased to 1.12% at March 31, 2019 from 1.15% at December 31, 2018, reflecting an updated assessment of inherent losses and impaired reserves. ALLL as a percentage of non-performing loans and leases decreased to 133.01% at March 31, 2019 from 137.22% at December 31, 2018.
The following table provides an allocation of the ALLL by portfolio segment:
 
At March 31, 2019
 
At December 31, 2018
(Dollars in thousands)
Amount
% (1)
 
Amount
% (1)
Residential
$
20,413

0.44
 
$
19,599

0.44
Consumer
26,919

1.15
 
28,681

1.20
Commercial
100,174

1.58
 
98,793

1.59
Commercial real estate
58,893

1.18
 
60,151

1.22
Equipment financing
4,990

1.01
 
5,129

1.01
Total ALLL
$
211,389

1.12
 
$
212,353

1.15
(1)
Percentage represents allocated ALLL to total loans and leases within the comparable category. The allocation of a portion of the ALLL to one category of loans and leases does not preclude its availability to absorb losses in other categories.
The following table provides detail of activity in the ALLL:
 
At or for the three months ended March 31,
(In thousands)
2019
 
2018
Beginning balance
$
212,353

 
$
199,994

Provision
8,600

 
11,000

Charge-offs:
 
 
 
Residential
(251
)
 
(917
)
Consumer
(3,972
)
 
(5,074
)
Commercial
(7,633
)
 
(1,497
)
Commercial real estate
(973
)
 
(77
)
Equipment financing
(204
)
 
(45
)
Total charge-offs
(13,033
)
 
(7,610
)
Recoveries:
 
 
 
Residential
178

 
385

Consumer
2,487

 
1,443

Commercial
787

 
117

Commercial real estate
6

 
2

Equipment financing
11

 
18

Total recoveries
3,469

 
1,965

Net charge-offs
(9,564
)
 
(5,645
)
Ending balance
$
211,389

 
$
205,349


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The following table provides a summary of net charge-offs (recoveries) to average loans and leases by category:
 
Three months ended March 31,
 
2019
 
2018
(Dollars in thousands)
Amount
% (1)
 
Amount
% (1)
Residential
$
73

0.01
 
$
532

0.05
Consumer
1,485

0.25
 
3,631

0.57
Commercial
6,846

0.43
 
1,380

0.10
Commercial real estate
967

0.08
 
75

0.01
Equipment financing
193

0.16
 
27

0.02
Net charge-offs
$
9,564

0.21
 
$
5,645

0.13
(1)
Net charge-offs (recoveries) to average loans and leases, percentage calculated based on period-to-date activity, annualized.
Net charge-offs increased $3.9 million for the three months ended March 31, 2019 as compared to the same periods in 2018. The increase is due primarily to a single credit in the commercial portfolio with a charge off of $6.0 million, partly offset by a decrease in consumer charge-offs. To assist management with its review, reports related to loan production, loan quality, concentrations of credit, loan delinquencies, non-performing loans, and potential problem loans are generated by loan reporting systems.

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Sources of Funds and Liquidity
Sources of Funds. The primary source of Webster Bank’s cash flow for use in lending and meeting its general operational needs is deposits. Operating activities, such as loan and mortgage-backed securities repayments, and other investment securities sale proceeds and maturities, also provide cash flow. While scheduled loan and securities repayments are a relatively stable source of funds, loan and securities prepayments and deposit inflows are influenced by prevailing interest rates and local economic conditions and are inherently uncertain. Additional sources of funds are provided by FHLB advances or other borrowings.
Federal Home Loan Bank and Federal Reserve Bank Stock. Webster Bank is a member of the FHLB System, which consists of eleven district Federal Home Loan Banks, each subject to the supervision and regulation of the Federal Housing Finance Agency. An activity-based FHLB capital stock investment is required in order for Webster Bank to access advances and other extensions of credit for sources of funds and liquidity purposes. The FHLB capital stock investment is restricted in that there is no market for it, and it can only be redeemed by the FHLB. Webster Bank held $56.0 million of FHLB capital stock at March 31, 2019 compared to $98.6 million at December 31, 2018, for its membership and for outstanding advances and other extensions of credit. On March 4, 2019, the FHLB paid a cash dividend equal to an annual yield of 6.17%.
Additionally, Webster Bank is required to hold FRB of Boston stock equal to 6% of its capital and surplus of which 50% is paid. The remaining 50% is subject to call when deemed necessary by the Federal Reserve System. The FRB capital stock investment is restricted in that there is no market for it, and it can only be redeemed by the FRB. At both March 31, 2019 and December 31, 2018, Webster Bank held $50.7 million of FRB capital stock. The semi-annual dividend payment from the FRB is calculated as the lesser of 6% or the yield on the 10-year Treasury note auctioned at the last auction held prior to the payment of the dividend.
Deposits. Webster Bank offers a wide variety of deposit products for checking and savings (including: ATM and debit card use, direct deposit, ACH payments, combined statements, mobile banking services, internet-based banking, bank by mail, as well as overdraft protection via line of credit or transfer from another deposit account) designed to meet the transactional, savings, and investment needs for both consumer and business customers throughout its primary market area. Webster Bank manages the flow of funds in its deposit accounts and provides a variety of accounts and rates consistent with FDIC regulations. Webster Bank’s Retail Pricing Committee and its Commercial and Institutional Liability Pricing Committee meet regularly to determine pricing and marketing initiatives.
Total deposits were $22.8 billion at March 31, 2019 compared to $21.9 billion at December 31, 2018. The increase is predominately related to an increase in health savings accounts of $468.6 million and time deposits of $158.1 million. See Note 7: Deposits in the Notes to Condensed Consolidated Financial Statements contained elsewhere in this report for additional information.
Borrowings. Borrowings primarily consist of FHLB advances which are utilized as a source of funding for liquidity and interest rate risk management purposes. At March 31, 2019 and December 31, 2018, FHLB advances totaled $1.0 billion and $1.8 billion, respectively. Webster Bank had additional borrowing capacity from the FHLB of approximately $3.2 billion at March 31, 2019 and $2.6 billion at December 31, 2018. Webster Bank also had additional borrowing capacity at the FRB of approximately $0.7 billion at March 31, 2019 and $0.6 billion at December 31, 2018.
Securities sold under agreements to repurchase, whereby securities are delivered to counterparties under an agreement to repurchase the securities at a fixed price in the future, to a lesser extent, are also utilized as a source of funding. Unpledged investment securities of $4.9 billion at March 31, 2019 could have been used for collateral on borrowings such as repurchase agreements or, alternatively, to increase borrowing capacity by approximately $4.6 billion at the FHLB or approximately $4.7 billion at the FRB. In addition, Webster Bank may utilize term and overnight Fed funds to meet short-term liquidity needs.
Long-term debt consists of senior fixed-rate notes maturing in 2024 and 2029, and junior subordinated notes maturing in 2033. The Company completed an underwritten public offering of $300 million senior fixed-rate notes on March 25, 2019, of which it invested the net proceeds of $296.4 million in Webster Bank, as permanent capital, to be used for working capital needs or other general purposes. The notes carry a 4.10% coupon rate and were priced to yield 4.141%, and mature on March 25, 2029. At issuance, the fixed interest rate on a $150 million portion of the notes was swapped to a variable rate and designated in a fair value hedging relationship. During April 2019, the Company initiated a fair value hedging relationship for the remaining $150 million portion of the notes.
Total borrowed funds were $2.2 billion at March 31, 2019 compared to $2.6 billion at December 31, 2018. Borrowings represented 7.7% and 9.5% of total assets at March 31, 2019 and December 31, 2018, respectively. A lower usage of FHLB advances, achieved from deposits growing faster than loans, resulted in the decrease in borrowings. For additional information, see Note 8: Borrowings in the Notes to Condensed Consolidated Financial Statements contained elsewhere in this report.

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Liquidity. Webster meets its cash flow requirements at an efficient cost under various operating environments through proactive liquidity management at both the Holding Company and Webster Bank. Liquidity comes from a variety of cash flow sources such as operating activities, including principal and interest payments on loans and securities, or financing activities, including unpledged investment securities, which can be sold or utilized to secure funding, and new deposits. Webster is committed to maintaining a strong, increasing base of core deposits, consisting of demand, checking, savings, health savings, and money market accounts, to support growth in its loan and lease portfolio. Liquidity is reviewed and managed in order to maintain stable, cost effective funding to promote overall balance sheet strength. Net cash provided by operating activities was $43.3 million for the three months ended March 31, 2019 as compared to $132.3 million for the three months ended March 31, 2018. The decrease is most significantly the impact of collateral settlement of derivative contracts in the periods and a decline in sales of loans held for sale.
Holding Company Liquidity. The primary source of liquidity at the Holding Company is dividends from Webster Bank. Webster Bank paid $80 million in dividends to the Holding Company during the three months ended March 31, 2019. To a lesser extent, investment income, net proceeds from investment sales, borrowings, and public offerings may provide additional liquidity. The main uses of liquidity are the payment of principal and interest to holders of senior notes and junior subordinated debt, the payment of dividends to preferred and common shareholders, repurchases of its common stock, and purchases of available-for-sale investment securities. There are certain restrictions on the payment of dividends by Webster Bank to the Holding Company, which are described in the section captioned "Supervision and Regulation" in Item 1 of Webster’s 2018 Form 10-K. At March 31, 2019, $285.6 million of retained earnings are available for the payment of dividends by Webster Bank to the Holding Company.
The Company has a common stock repurchase program authorized by the Board of Directors, with $78.7 million of remaining repurchase authority at March 31, 2019. In addition, Webster periodically acquires common shares outside of the repurchase program related to stock compensation plan activity. The Company records the purchase of shares of common stock at cost based on the settlement date for these transactions. During the three months ended March 31, 2019, a total of 335,004 shares of common stock were repurchased for approximately $19.1 million, of which 227,199 shares were purchased under the common stock repurchase program at a cost of approximately $13.0 million, and 107,805 shares were purchased, at market prices, related to stock compensation plan activity for a cost of approximately $6.1 million.
Webster Bank Liquidity. Webster Bank's primary source of funding is core deposits. The primary use of this funding is for loan portfolio growth. Including time deposits, Webster Bank had a loan to total deposit ratio of 82.7% and 84.5% at March 31, 2019 and December 31, 2018, respectively.
Webster Bank is required by OCC regulations to maintain liquidity sufficient to ensure safe and sound operations. Whether liquidity is adequate, as assessed by the OCC, depends on such factors as the overall asset/liability structure, market conditions, competition, and the nature of the institution’s deposit and loan customers. Webster Bank exceeded all regulatory liquidity requirements as of March 31, 2019. The Company has a detailed liquidity contingency plan designed to respond to liquidity concerns in a prompt and comprehensive manner. The plan is designed to provide early detection of potential problems and details specific actions required to address liquidity stress scenarios.
Applicable OCC regulations require Webster Bank, as a commercial bank, to satisfy certain minimum leverage and risk-based capital requirements. As an OCC regulated commercial institution, it is also subject to a minimum tangible capital requirement. As of March 31, 2019, Webster Bank was in compliance with all applicable capital requirements and exceeded the FDIC requirements for a well-capitalized institution. See Note 11: Regulatory Matters in the Notes to Condensed Consolidated Financial Statements contained elsewhere in this report for a further discussion of regulatory requirements applicable to the Holding Company and Webster Bank.
The liquidity position of the Company is continuously monitored, and adjustments are made to the balance between sources and uses of funds as deemed appropriate. Management is not aware of any events that are reasonably likely to have a material adverse effect on the Company’s liquidity, capital resources, or operations. In addition, management is not aware of any regulatory recommendations regarding liquidity, which, if implemented, would have a material adverse effect on the Company. Webster Bank's latest OCC CRA rating was Outstanding.
Off-Balance Sheet Arrangements
Webster engages in a variety of financial transactions that, in accordance with GAAP, are not recorded in the financial statements or are recorded in amounts that differ from the notional amounts. Such transactions are utilized in the normal course of business, for general corporate purposes or for customer financing needs. Corporate purpose transactions are structured to manage credit, interest rate, and liquidity risks, or to optimize capital. Customer transactions are structured to manage their funding requirements or facilitate certain trade arrangements. These transactions give rise to, in varying degrees, elements of credit, interest rate, and liquidity risk. For the three months ended March 31, 2019, Webster did not engage in any off-balance sheet transactions that would have a material effect on its financial condition. For additional information, see Note 18: Commitments and Contingencies in the Notes to Condensed Consolidated Financial Statements contained elsewhere in this report.

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Asset/Liability Management and Market Risk
An effective asset/liability management process must balance the risks and rewards from both short and long-term interest rate risks in determining management strategy and action. To facilitate and manage this process, interest rate sensitivity is monitored on an ongoing basis by the Company's ALCO.
The following table summarizes the estimated impact that gradual parallel changes in income of 100 and 200 basis points might have on Webster's net interest income (NII) over a twelve month period, starting March 31, 2019 and December 31, 2018 for each subsequent twelve month period as compared to NII assuming no change in interest rates:
NII
-200bp
-100bp
+100bp
+200bp
March 31, 2019
(10.5)%
(4.6)%
3.0%
5.6%
December 31, 2018
(10.9)%
(4.7)%
3.2%
5.9%
The following table summarizes the estimated impact that gradual parallel changes in interest rates of 100 and 200 basis points might have on Webster's pre-tax, pre-provision net revenue (PPNR) over a twelve month period, starting March 31, 2019 and December 31, 2018 for each subsequent twelve month period as compared to PPNR assuming no change in interest rates:
PPNR
-200bp
-100bp
+100bp
+200bp
March 31, 2019
(16.8)%
(7.8)%
4.7%
9.2%
December 31, 2018
(18.3)%
(7.9)%
5.0%
9.2%
Interest rates are assumed to change up or down in a parallel fashion, and NII and PPNR results in each scenario are compared to a flat rate scenario as a base. The flat rate scenario holds the end of period yield curve constant over a twelve month forecast horizon. The flat rate scenario as of both March 31, 2019 and December 31, 2018 assumed a Fed Funds rate of 2.50%. Asset sensitivity for both NII and PPNR was lower as of March 31, 2019 when compared to December 31, 2018 primarily due to a reduction in the flat rate scenario income attributed to changes in the market rate environment in the first quarter of 2019 and the resulting impact these changes had on forecast prepayment speeds. Further contributing to these changes were increases in fixed-rate investments and fixed-rate loan balances.
Webster can also hold futures, options, and forward foreign currency contracts to minimize the price volatility of certain assets and liabilities. Changes in the market value of these positions are recognized in earnings.
The following table summarizes the estimated impact that yield curve twists or immediate non-parallel changes in interest rates might have on Webster’s NII for the subsequent twelve month period starting March 31, 2019 and December 31, 2018:
 
Short End of the Yield Curve
 
Long End of the Yield Curve
NII
-100bp
-50bp
+50bp
+100bp
 
-100bp
-50bp
+50bp
+100bp
March 31, 2019
(6.5)%
(3.0)%
1.4%
2.9%
 
(3.8)%
(1.8)%
1.5%
2.6%
December 31, 2018
(7.1)%
(3.3)%
1.7%
3.4%
 
(3.3)%
(1.6)%
1.3%
2.3%
The following table summarizes the estimated impact that immediate non-parallel changes in interest rates might have on Webster’s PPNR for the subsequent twelve month period starting March 31, 2019 and December 31, 2018:
 
Short End of the Yield Curve
 
Long End of the Yield Curve
PPNR
-100bp
-50bp
+50bp
+100bp
 
-100bp
-50bp
+50bp
+100bp
March 31, 2019
(10.7)%
(4.9)%
2.0%
3.9%
 
(5.9)%
(3.0)%
2.6%
4.6%
December 31, 2018
(11.6)%
(5.4)%
2.4%
4.8%
 
(5.6)%
(2.9)%
2.4%
4.2%
The non-parallel scenarios are modeled with the short end of the yield curve moving up or down 50 and 100 basis points, while the long end of the yield curve remains unchanged and vice versa. The short end of the yield curve is defined as terms of less than eighteen months, and the long end as terms of greater than eighteen months. The results above reflect the annualized impact of immediate rate changes.
Sensitivity to the short end of the yield curve for NII and PPNR decreased as of March 31, 2019 when compared to December 31, 2018 due primarily to the increase in balances of fixed-rate investments and loans. NII and PPNR were more sensitive to changes in the long end of the yield curve as of March 31, 2019 when compared to December 31, 2018 due to increased forecast prepayment speeds.

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The following table summarizes the estimated economic value of assets, liabilities, and off-balance sheet contracts at March 31, 2019 and December 31, 2018 and the projected change to economic values if interest rates instantaneously increase or decrease by 100 basis points:
 
(Dollars in thousands)
Book
Value
Estimated
Economic
Value
Estimated Economic Value Change
 
 
-100 bp
+100 bp
 
March 31, 2019
 
 
 
 
 
Assets
$
28,238,129

$
27,695,796

$
542,465

$
(656,535
)
 
Liabilities
25,271,874

23,854,200

714,669

(623,964
)
 
Net
$
2,966,255

$
3,841,596

$
(172,204
)
$
(32,571
)
 
Net change as % base net economic value
 
 
(4.5
)%
(0.8
)%
 
 
 
 
 
 
 
December 31, 2018
 
 
 
 
 
Assets
$
27,610,315

$
26,972,752

$
568,122

$
(677,864
)
 
Liabilities
24,723,800

23,119,466

719,658

(615,650
)
 
Net
$
2,886,515

$
3,853,286

$
(151,536
)
$
(62,214
)
 
Net change as % base net economic value
 
 
(3.9
)%
(1.6
)%
Changes in economic value can be best described using duration. Duration is a measure of the price sensitivity of financial instruments for small changes in interest rates. For fixed-rate instruments, it can also be thought of as the weighted-average expected time to receive future cash flows. For floating-rate instruments, it can be thought of as the weighted-average expected time until the next rate reset. The longer the duration, the greater the price sensitivity for given changes in interest rates. Floating-rate instruments may have durations as short as one day and, therefore, have very little price sensitivity due to changes in interest rates. Increases in interest rates typically reduce the value of fixed-rate assets as future discounted cash flows are worth less at higher discount rates. A liability's value decreases for the same reason in a rising rate environment. A reduction in value of a liability is a benefit to Webster.
Duration gap is the difference between the duration of assets and the duration of liabilities. A duration gap near zero implies that the balance sheet is matched and would exhibit no change in estimated economic value for a small change in interest rates. Webster's duration gap was negative 0.7 years at both March 31, 2019 and December 31, 2018. A negative duration gap implies that liabilities are longer than assets and, therefore, they have more price sensitivity than assets and will reset their interest rates slower than assets. Consequently, Webster's net estimated economic value would generally be expected to increase when interest rates rise as the benefit of the decreased value of liabilities would more than offset the decreased value of assets. The opposite would generally be expected to occur when interest rates fall. Earnings would also generally be expected to increase when interest rates rise and decrease when interest rates fall over the longer term absent the effects of new business booked in the future.
These estimates assume that management does not take any action to mitigate any positive or negative effects from changing interest rates. The earnings and economic values estimates are subject to factors that could cause actual results to differ. Management believes that Webster's interest rate risk position at March 31, 2019 represents a reasonable level of risk given the current interest rate outlook. Management, as always, is prepared to act in the event that interest rates do change rapidly.
For a detailed description of the Company's asset/liability management process, refer to the section captioned "Asset/Liability Management and Market Risk" in Item 7. Management's Discussion And Analysis Of Financial Condition And Results Of Operations included in its Form 10-K for the year ended December 31, 2018.
Impact of Inflation and Changing Prices
The Condensed Consolidated Financial Statements and related data presented herein have been prepared in accordance with GAAP, which requires the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation.
Unlike most industrial companies, substantially all of the assets and liabilities of a banking institution are monetary in nature. As a result, interest rates have a more significant impact on Webster's performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the price of goods and services.

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Application of Critical Accounting Policies and Accounting Estimates
The Company’s significant accounting policies are described in Note 1 to the Consolidated Financial Statements included in its 2018 Annual Report on Form 10-K. Modifications to significant accounting policies, if made during the year, are described in Note 1 to the Condensed Consolidated Financial Statements included in Item 1 of this report. The preparation of the Condensed Consolidated Financial Statements in accordance with GAAP and practices generally applicable to the financial services industry requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses, and to disclose contingent assets and liabilities. Actual results could differ from those estimates.
Management has identified the Company's most critical accounting policies as:
allowance for loan and lease losses; and
realizability of deferred tax assets.
These particular accounting policies are considered most critical in that they are important to the Company’s financial condition and results, and they require management’s subjective and complex judgment as a result of the need to make estimates about the effects of matters that are inherently uncertain. The accounting policies and estimates, including the nature of the estimates and types of assumptions used, are described throughout Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Webster's 2018 Form 10-K, and Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, of this report.
Recently Issued Accounting Standards Updates
Refer to Note 1: Summary of Significant Accounting Policies in the Notes to Condensed Consolidated Financial Statements contained elsewhere in this report for a summary of recently issued ASUs and the expected impact on the Company's financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The required information is set forth above, in Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, see the section captioned "Asset/Liability Management and Market Risk," which is incorporated herein by reference.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company has performed an evaluation, under the supervision and with the participation of the Company's management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company's disclosure controls and procedures, as defined in Rules 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934. Based on this evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures for recording, processing, summarizing, and reporting the information the Company is required to disclose in the reports it files under the Securities Exchange Act of 1934, within the time periods specified in SEC rules and forms, were effective as of March 31, 2019.
Changes in Internal Control over Financial Reporting
During the quarter ended March 31, 2019, we implemented new lease accounting policies, procedures and controls as part of our adoption of ASU 2016-02 and subsequent ASUs issued to amend this Topic. There were no other changes made to the Company's internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Webster, or its subsidiaries, may be involved in certain routine legal proceedings and claims occurring, from time-to-time, in the ordinary course of business. These possible loss contingencies are evaluated based on information currently available, including advice of counsel and assessment of available insurance coverage. Webster establishes an accrual for specific legal matters when it determines that the likelihood of an unfavorable outcome is probable and the loss is reasonably estimable. This accrual is periodically reviewed and may be adjusted as circumstances change. Webster also estimates certain loss contingencies for possible litigation and claims, whether or not there is an accrued probable loss. Webster believes it has defenses to all the claims asserted against it in existing litigation matters and intends to defend itself in those matters.
Management believes that the ultimate outcome of these proceedings, individually and in the aggregate, is not presently nor in the future anticipated to be be material to Webster or its consolidated financial condition. However, legal proceedings are subject to inherent uncertainties, with which unfavorable rulings could occur and, as such, there is no assurance that the ultimate resolution of these matters will not significantly exceed the amounts currently accrued by Webster or that the Company’s litigation accrual will not need to be adjusted in future periods. Such an outcome could be material to the Company’s operating results in a particular period, depending on, among other factors, the size of the loss or liability imposed and the level of the Company’s income for that period.
ITEM 1A. RISK FACTORS
During the three months ended March 31, 2019, there were no material changes to the risk factors previously disclosed in Webster's Annual Report on Form 10-K for the year ended December 31, 2018.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
The following table provides information with respect to any purchase of equity securities of Webster Financial Corporation's 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 March 31, 2019:
Period
Total
Number of
Shares
Purchased (1)
Average Price
Paid
Per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
Maximum
Dollar Amount Available for Repurchase
Under the Plans
or Programs (1)
January
97

$
51.00


$
91,745,715

February
165,284

56.65

59,201

88,398,976

March
169,623

57.46

167,998

78,742,318

Total
335,004

57.06

227,199

78,742,318

(1)
On October 24, 2017, the Company's Board of Directors approved a common stock repurchase program which authorizes management to repurchase, in open market or privately negotiated transactions, subject to market conditions and other factors, up to a maximum of $100 million of common stock. The program will remain in effect until fully utilized or until modified, superseded, or terminated.
Of the total number of shares purchased during the three months ended March 31, 2019, 107,805 shares were acquired outside of the repurchase program related to stock compensation plan activity, at market prices.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable

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ITEM 6. EXHIBITS
The following is the exhibit index.
Exhibit Number
 
Exhibit Description
 
Exhibit Included
 
Incorporated by Reference
 
 
 
Form
 
Exhibit
 
Filing Date
3
 
Certificate of Incorporation and Bylaws.
 
 
 
 
 
 
 
 
3.1
 
 
 
 
10-Q
 
3.1
 
8/9/2016
3.2
 
 
 
 
8-K
 
3.1
 
6/11/2008
3.3
 
 
 
 
8-K
 
3.1
 
11/24/2008
3.4
 
 
 
 
8-K
 
3.1
 
7/31/2009
3.5
 
 
 
 
8-K
 
3.2
 
7/31/2009
3.6
 
 
 
 
8-A12B
 
3.3
 
12/4/2012
3.7
 
 
 
 
8-A12B
 
3.3
 
12/12/2017
3.8
 
 
 
 
8-K
 
3.1
 
6/12/2014
4.1
 
 
 
 
8-K
 
4.1
 
3/25/2019
4.2
 
 
 
 
8-K
 
4.2
 
3/25/2019
4.3
 
 
 
 
8-K
 
4.2
 
3/25/2019
10
 
Material Contracts (1)
 
 
 
 
 
 
 
 
10.1
 
 
X
 
 
 
 
 
 
31.1
 
 
X
 
 
 
 
 
 
31.2
 
 
X
 
 
 
 
 
 
32.1
 
 
X (2)
 
 
 
 
 
 
32.2
 
 
X (2)
 
 
 
 
 
 
101.INS
 
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embeded within the Inline XBRL document
 
 
 
 
 
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema Document
 
X
 
 
 
 
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
 
X
 
 
 
 
 
 
101.DEF
 
XBRL Taxonomy Extension Definitions Linkbase Document
 
X
 
 
 
 
 
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
 
X
 
 
 
 
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
 
X
 
 
 
 
 
 
(1) Material contracts are management contracts, or compensatory plans, or arrangements in which directors or executive officers are eligible to participate.
(2) Exhibit is furnished herewith and shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
WEBSTER FINANCIAL CORPORATION
 
 
 
 
Registrant
 
 
 
 
 
Date: May 7, 2019
 
 
By:
/s/ John R. Ciulla
 
 
 
 
John R. Ciulla
 
 
 
 
President and Chief Executive Officer
 
 
 
 
(Principal Executive Officer)
 
 
 
 
 
Date: May 7, 2019
 
 
By:
/s/ Glenn I. MacInnes
 
 
 
 
Glenn I. MacInnes
 
 
 
 
Executive Vice President and Chief Financial Officer
 
 
 
 
(Principal Financial Officer)
 
 
 
 
 
Date: May 7, 2019
 
 
By:
/s/ Albert J. Wang
 
 
 
 
Albert J. Wang
 
 
 
 
Senior Vice President and Chief Accounting Officer
 
 
 
 
(Principal Accounting Officer)
 
 
 
 
 


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