Webster Financial
Annual Report 2018

Plain-text annual report

W E B S T E R F I N A N C I A L C O R P O R AT I O N A N N U A L R E P O R T 2 0 1 8 Progress Purpose CONTENTS: A Letter from the President and CEO 2 A Letter from the Chairman 7 Commercial Banking 8 HSA Bank 10 Community Banking 12 Financial Highlights 14 Shareholder Information 15 Webster Financial Corporation 2018 Annual Report 1 A L E T T E R F R O M T H E P R E S I D E N T A N D C E O Dear Shareholders, I am pleased to report our 2018 results. Measured by differentiated financial performance, high levels of customer satisfaction and strong employee engagement, 2018 was among Webster’s strongest years ever. This progress was the outcome of purposeful execution of our long-term strategic priorities: aggressively growing HSA Bank, expanding Commercial Banking and optimizing Community Banking. Earnings per share grew 43% from the prior year. Total revenues reached a record $1.2 billion, driven primarily by commercial loan growth and the highest net interest margin in the company’s publicly traded history. Webster has now achieved 37 consecutive quarters of year-over-year revenue growth. Consolidated pre-provision net revenue (PPNR) grew 22.5%, resulting from double-digit PPNR growth in all three lines of business. Credit quality remains strong and at pre-Great Recession levels. We continue to distinguish ourselves from our peers with our loan-to-deposit ratio of 84%, which benefits from the growth of HSA Bank’s low-cost, long-duration deposits. Solid operating leverage drove a notable improvement in our efficiency ratio to 57.8%, compared to 60.3% in 2017. Our strategic management framework, anchored by a disciplined capital allocation process, continues to drive investment into those activities that will maximize economic profit over time. John R. Ciulla President and Chief Executive Officer Consolidated PPNR grew 22.5%, resulting from double-digit PPNR growth in all three lines of business. STRE NGTH IN N UMBER S $1.2 BILLION Total annual revenue 37 Consecutive quarters of revenue growth 57.8% Efficiency ratio 13.4% ROACE 17.2% Return on tangible common equity 2 Webster Financial Corporation 2018 Annual Report GROWTH in earnings per share A L E T T E R F R O M T H E P R E S I D E N T A N D C E O 13.4% $ in millions $352 9.9% 8.4% $247 $198 2016 2017 2018 2016 2017 2018 ROACE EARNINGS TO COMMON 43% GROWTH in earnings per share Webster Financial Corporation 2018 Annual Report 3 Webster Financial Corporation 2018 Annual Report 3 A L E T T E R F R O M T H E P R E S I D E N T A N D C E O Webster generated substantial economic profit, as our return on average common equity (ROACE) of 13.4% was well in excess of our stated cost of capital of 9.5%. The return on tangible common equity was 17.2%. Our performance results from thoughtful and focused execution on stated strategies which leverage our differentiated businesses, as well as our strong relationships with individuals, small businesses and middle market companies across our geographic footprint. Looking forward, you can expect the same level of commitment to purposeful progress on clearly defined strategies. The key to our success is our people, and our inclusive and diverse workplace fosters consistent high performance. We continued to make meaningful advancements in technology during 2018. These have been critical in ensuring that our customers’ information remains secure, and in providing them with at-market mobile and online functionality. These will continue to bring efficiencies to internal processes, resulting in an overall reduction in the cost of delivering products and services to our customers. In 2018, Webster made important investments in our bankers and the communities we serve. Following passage of federal tax reform legislation, we augmented our annual philanthropic and community investment by $1 million, creating new programs and expanding giving across the Webster footprint. We made a payment of a one-time, $1,000 cash bonus to each of our full-time bankers, from entry level through assistant vice president, representing 70% of our full-time employees. We also accelerated our plan and increased the Webster minimum wage to $15 per hour. Additionally, we created job opportunities for new employees and high-performing bankers by enhancing our investment in early career programs and strategic banker development initiatives. The key to our success is our people, and our inclusive and diverse workplace fosters consistent high performance, enabling our bankers to be their best in serving our customers and communities. I am honored to serve as co-chair of Webster’s Diversity and Inclusion (D&I) Council, which works to shape the strategy and actions supporting our D&I focus. Last year, we issued our inaugural Environmental, Social and Governance (ESG) Report, highlighting Webster’s commitment to being a good corporate citizen. Our 2018 ESG Report, available shortly, will illustrate our leadership on responsible lending, sustainability, diversity and ethical governance. 4 Webster Financial Corporation 2018 Annual Report A L E T T E R F R O M T H E P R E S I D E N T A N D C E O Our enterprise risk management program is a component of our disciplined approach to growth, capital management and new activities, ensuring consistency with our strategic priorities and supporting active oversight of our risk profile. We continue to strengthen our processes at every level to effectively sustain our risk management efforts. Webster is dedicated to meeting the banking and credit needs of our neighbors and businesses in the communities we serve. We believe that helping to meet these needs is essential to community development. We are proud that in 2018 Webster received an “Outstanding” rating on our Community Reinvestment Act performance evaluation. This rating, the highest possible, was given by our primary regulator, the U.S. Office of the Comptroller of the Currency. Our commitment to excellence earned us national recognition in 2018. The Reputation Institute named us to the “Top 25 Most Reputable Banks” in the United States. Additionally, Bank Director magazine rated us as the best overall bank in the Northeast and number two nationally in their annual RankingBanking study. The study also named Webster the top bank in the Northeast for Best Technology Strategy, Best Small Business Strategy and Best Board. Our considerable progress over time, and especially this past year, has been made possible thanks to the quality and dedication of our almost 3,400 community- oriented, values-guided Webster bankers who excel in service to our customers, our communities and one another. Together with strong support from our deeply engaged Board of Directors, we are driving Webster toward our vision to be among the highest-performing mid-sized banks in the country. Thank you for your continued confidence in Webster. Sincerely, John R. Ciulla President and Chief Executive Officer Our commitment to excellence earned us national recognition… Webster was named among the “Top 25 Most Reputable Banks” in the United States. Webster Financial Corporation 2018 Annual Report 5 6 Webster Financial Corporation 2018 Annual Report A L E T T E R F R O M T H E C H A I R M A N Dear Shareholders, Webster has once again delivered strong results, achieving a year of record financial performance. Consistent with our long-term strategic focus, our total shareholder return over the past five years ranks highest in our proxy peer group. In his first year as Webster’s CEO, John Ciulla ably led his capable and dedicated management team in making meaningful business and operational progress in pursuit of our strategic priorities. The Board and I are confident that Webster will continue to build on this momentum and realize greater success for years to come. Following the orderly CEO transition, John has demonstrated reliable stewardship of our values, known as The Webster Way. These values of responsibility, respectfulness, trustworthiness, citizenship and teamwork form the unshakable core that brings Webster bankers together in pursuit of common goals, and sets us apart in the markets we serve. Our values sustain us as we advance Webster’s mission of helping individuals, families and businesses achieve their financial goals. The Board and I would like to recognize Joel Becker, an original member of the Webster Board of Directors, for his many contributions during more than three decades of service on our Board. We are grateful for his guidance and support, and I thank him on behalf of Webster for his dedication. On behalf of the Board of Directors, we thank you for your investment in Webster. Sincerely, James C. Smith Chairman of the Board of Directors WEBSTER FINANCIAL CORPORATION AND WEBSTER BANK Board of Directors James C. Smith Chairman John R. Ciulla President and Chief Executive Officer John J. Crawford (Lead Director) President Strategem, LLC William L. Atwell Managing Director Atwell Partners, LLC Joel S. Becker Chairman and Chief Executive Officer Torrco Elizabeth E. Flynn Retired Vice Chairman Marsh, LLC E. Carol Hayles Former Executive Vice President and Chief Financial Officer CIT Group, Inc. Laurence C. Morse Managing Partner Fairview Capital Partners, Inc. Karen R. Osar Retired Executive Vice President and Chief Financial Officer Chemtura Corporation Mark Pettie President Blackthorne Associates, LLC Lauren C. States Executive-in-Residence Northeastern University D’Amore-McKim School of Business Webster Financial Corporation 2018 Annual Report 7 FPOC O M M E R C I A L B A N K I N G Commercial Banking generated consistent growth and strong profitability in 2018 through continued investment and focused execution. Building on our solid foundation through investments in people and technology, we develop strong relationships in the markets we serve while enhancing client experience. Commercial Banking grew loans 12.0% in 2018, surpassing $10 billion for the first time. Representing more than half of Webster’s total loan portfolio, our $10.4 billion of loans, coupled with $4.0 billion in deposits, fueled revenue growth of $43.7 million or 11.6%. Net interest income growth of 10.6% and non-interest income growth of 17.3% resulted in double-digit PPNR growth of 10.6%. Our loan originations totaled $4.4 billion compared to $3.2 billion in 2017. Leveraging our deep industry expertise in select segments, we provide lending, deposit, and payment and treasury solutions through these business units: Middle Market, which consists of Middle Market Banking, Sponsor & Specialty Finance, and Webster Capital Finance, our equipment leasing subsidiary, offers a full array of financial services to a diversified group of companies. By capitalizing on our industry specialization and delivering competitive products and services to our customers, Middle Market experienced 12.3% loan growth, totaling $5.9 billion in loans at year end. Commercial Real Estate (CRE) loans grew 12.6% to $3.0 billion, representing 31% of Commercial Banking’s loan originations and net loan growth in 2018. CRE has consistently maintained strong credit performance while serving its clients in our chosen markets. Ranked among the top 25 asset-based lenders in the U.S., New York-based subsidiary Webster Business Credit Corporation (WBCC) builds relationships with growing middle market companies. WBCC loans grew 16.2% to $967.2 million. Our Treasury and Payment Solutions (TPS) team of treasury professionals delivers a broad range of deposit, lending, treasury and trade services for business and institutional clients. We continue to invest in TPS, successfully upgrading our client platform, Webster Web-Link®, a multi-year project that concluded in 2018. Private Banking serves high net worth individuals and institutional clients, providing wealth advisory, investment management, tailored lending, fiduciary and banking services. We continued to build momentum in 2018, with Private Banking ending the year at $1.9 billion in assets under management/assets under administration (AUM/AUA). The performance of Commercial Banking is a result of our differentiated strategy and the strength of our relationships and bankers. STRE NGTH IN N UMBER S $4.0 $10.4 BILLION in loan balances BILLION in deposit balances $1.9 BILLION in investment AUM/AUA balances $4.4 BILLION in loan originations 10.6% GROWTH in PPNR 8 Webster Financial Corporation 2018 Annual Report 12% TOTAL LOAN GROWTH Consistent growth and strong profitability Webster Financial Corporation 2018 Annual Report 9 Helping over 2.7 million HSA accountholders own their health 10 Webster Financial Corporation 2018 Annual Report H S A B A N K As the leading bank administrator of Health Savings Accounts (HSAs), HSA Bank remains a strategic priority and key differentiator. The strong performance by HSA Bank is reflected in the 10.6% increase in accounts, now totaling 2.7 million accountholders. Total footings of $7.2 billion increased $894.0 million or 14.2%, and include $5.7 billion in low-cost, long-duration deposit balances, and $1.5 billion in assets under administration through linked investment accounts. Account growth coupled with rising interest rates were the primary drivers of our $50.5 million or 27.7% growth in revenue. This resulted in pretax net revenue (PTNR) of $108.0 million in 2018, an increase of 56.6% from a year ago. In 2018, HSA Bank made noteworthy progress toward our goals of offering an industry-leading customer experience, maximizing revenue growth and achieving operational excellence. Our COBRA third-party administration solution enables employers to centralize more of their employee benefits with one trusted partner. HSAdvisor+SM is an advisor-driven HSA investment program, empowering investment advisors to provide an open-architecture HSA investment lineup to benefit accountholders tied to an employer client. The program enables nearly all investment advisors and firms in the U.S. to offer this compelling HSA investment product to help accountholders meet their financial healthcare needs now and in retirement. Guided Portfolio provides accountholders with a mutual fund investment program that accommodates diverse investment styles and strategies through a lineup of high-quality, low-cost, professionally selected mutual funds. This option includes a tool that considers an accountholder’s anticipated HSA contribution, time horizon and risk tolerance to generate a guided allocation—a set of suggestions for how an accountholder might best allocate portfolio assets. We expanded our distribution channels and added three new products to our comprehensive suite, ensuring we are positioned to take advantage of anticipated market growth by helping members plan and save for healthcare expenses. In addition to being the leading bank administrator of HSAs based on assets under administration, HSA Bank delivers Health Reimbursement Arrangements (HRAs), Flexible Spending Accounts (FSAs), COBRA Administration and Commuter Benefits nationwide. STREN GTH IN N UMBERS $1.5 $5.7 BILLION in HSA deposits BILLION in linked investments $7.2 BILLION in total footings 14.2% INCREASE in total footings 56.6% GROWTH in PTNR Webster Financial Corporation 2018 Annual Report 11 C O M M U N I T Y B A N K I N G Community Banking continued to make progress optimizing distribution channels and processes, investing in digital offerings and capabilities, and focusing on high-value consumers and businesses. We serve a customer base of 370,000, including 49,000 businesses, and held $11.9 billion in deposits and $8.0 billion in loans at year end. Deposit growth of $380.3 million, or 3.3%, and improved spread were the key drivers in revenue growth of $23.5 million, or 4.8%. Strategic investments were more than offset by efficiency efforts as we continued to optimize our network and the customer lending experience. This resulted in double-digit PPNR growth of $12.0 million, or 10.1%. In 2018, we launched a new service that allows customers to complete home lending and select business loan closings remotely, utilizing video chat and e-signature features. Nearly half of all small business applications were originated through our digital end-to-end FastTrack lending program, which provides credit decisions in as little as 24 hours from application completion. Consistent with our continued focus on network optimization, we completed the consolidation of four banking centers and a strategic sale of six additional banking centers in 2018, resulting in a 7.0% reduction in banking center square footage. Banking centers are a critical part of our customer experience, and we will continue to assess our network to ensure Webster is meeting customer preferences. Nearly half of our consumer households are digitally active, and self-service transactions through online, mobile and ATM channels account for 71% of all balance-changing transactions. We introduced a new mobile app featuring key improvements, such as real-time balance alerts with push notifications, and enhancements to biometric log-in and mobile deposit. Mobile deposits as a percentage of all deposits grew by 21.0%. In 2018, we continued to focus on enhancing high-value relationships with further developments to our Premier Banking relationship package. We also introduced Student Loan Refinancing, which provides a digital solution for customers to consolidate student loan debt. As always, we remain grounded in our bankers’ ability to understand our customers’ unique needs, and to build trusting, long-lasting relationships by offering them the right solutions. STRE NGTH IN N UMBER S $8.0 $11.9 BILLION in loan balances BILLION in deposit balances $3.4 BILLION in investment AUA balances 10.1% GROWTH in PPNR #1 SBA LENDER in New England (by dollar volume) 12 Webster Financial Corporation 2018 Annual Report #1 Call Center in the New England region 2018 J.D. Power U.S. Retail Banking Satisfaction Study Webster Financial Corporation 2018 Annual Report 13 F I N A N C I A L H I G H L I G H T S For the years ending December 31st: (In thousands, except per share and ratio data) CONSOLIDATED BALANCE SHEETS Total assets Loans and leases Allowance for loan and lease losses Investment securities Deposits Total equity STATEMENT OF INCOME Net interest income Provision for loan and lease losses Non-interest income Net impairment loss recognized in earnings Non-interest income excluding impairment Non-interest expense Income before income tax expense Income tax expense Net income EARNINGS APPLICABLE TO COMMON SHAREHOLDERS PER COMMON SHARE DATA Net income - diluted Dividends declared Tangible book value per common share Book value per common share Weighted-average common shares — diluted KEY PERFORMANCE RATIOS Return on average assets Return on average common shareholders’ equity Net interest margin Non-interest income as a percentage of total revenue Tangible common equity Average shareholders’ equity to average assets ASSET QUALITY RATIOS Allowance for loan losses/total loans Net charge-offs/average loans Nonperforming loans/total loans Nonperforming assets/total loans plus OREO Allowance for loan losses/nonperforming loans 14 Webster Financial Corporation 2018 Annual Report 2018 2017 2016 $27,610,315 18,465,489 212,353 7,224,150 21,858,845 2,886,515 26,487,645 17,523,858 199,994 7,125,429 20,993,729 2,701,958 26,072,529 17,026,588 194,320 7,151,749 19,303,857 2,527,012 906,681 42,000 282,568 0 282,568 705,616 441,633 81,215 360,418 796,287 40,900 259,478 126 259,604 661,075 353,790 98,351 255,439 718,513 56,350 264,478 149 264,627 623,191 303,450 96,323 207,127 $351,703 246,831 198,423 $3.81 1.25 23.60 29.72 92,227 1.33% 13.37 3.60 23.76 8.05 10.30 1.15% 0.16 0.84 0.87 137.22 2.67 1.03 21.59 27.76 92,356 0.97 9.92 3.30 24.58 7.67 9.97 1.14 0.20 0.72 0.76 158.00 2.16 0.98 19.94 26.17 91,856 0.82 8.44 3.12 26.91 7.19 9.84 1.14 0.23 0.79 0.81 144.98 SHAREHOLDER INFORMATION CORPORATE HEADQUARTERS Webster Financial Corporation and Webster Bank 145 Bank Street Waterbury, CT 06702 800.325.2424 WebsterBank.com TRANSFER AGENT AND REGISTRAR Regular Mail Broadridge Corporate Issuer Solutions, Inc. PO Box 1342 Brentwood, NY 11717 855.222.4926 (Toll Free) 720.864.4321 (Toll) shareholder@broadridge.com http://shareholder.broadridge.com/webster Registered/Overnight Mail Broadridge Corporate Issuer Solutions, Inc. Attn: IWS 1155 Long Island Avenue Edgewood, NY 11717 DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN Shareholders wishing to receive a prospectus for the Dividend Reinvestment and Stock Purchase Plan are invited to write to Broadridge Corporate Issuer Solutions, Inc. at one of the addresses listed above. STOCK LISTING INFORMATION The common stock of Webster is traded on the New York Stock Exchange under the symbol “WBS.” INVESTOR RELATIONS CONTACT Terrence K. Mangan Senior Vice President Investor Relations 203.578.2202 tmangan@websterbank.com CORPORATE PROFILE Webster Financial Corporation is the holding company for Webster Bank, National Association, and other subsidiaries, and is regulated by the Federal Reserve Board of Governors. Webster serves consumers, businesses, not-for-profit organizations and governmental entities in Connecticut, Massachusetts, Rhode Island and metro New York City, with a distribution network of 157 banking centers and 316 ATMs at year end, as well as a full range of online and mobile banking services. In addition, Webster offers commercial real estate, asset-based lending and equipment finance services regionally, and health savings accounts nationally through HSA Bank. Webster Bank is a member of the FDIC and is regulated by the Office of the Comptroller of the Currency and the Bureau of Consumer Financial Protection. At year end, Webster Bank’s financial intermediation activities were organized broadly around three distinct lines of business: Commercial Banking, HSA Bank and Community Banking. REPORTS A copy of our Annual Report on Form 10-K for the fiscal year ending December 31, 2018, as well as our quarterly reports, news releases, and other information, may be obtained free of charge by accessing our Investor Relations website (www.wbst.com). For a printed copy of our Form 10-K, please contact: Terrence K. Mangan, Senior Vice President, Investor Relations, 145 Bank Street, Waterbury, CT 06702. The certifications of Webster’s chief executive officer and chief financial officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, are included as exhibits to our Annual Report on Form 10-K for the fiscal year ending December 31, 2018. ANNUAL MEETING The annual meeting of shareholders of Webster Financial Corporation will be held on April 25, 2019 at 4:00 p.m. at the New Britain Museum of American Art, 56 Lexington Street, New Britain, Connecticut. WEBSTER INFORMATION For more information on Webster products and services, call 800.325.2424 or visit us at WebsterBank.com. Webster Financial Corporation 2018 Annual Report 15 OUR MISSION To help individuals, families and businesses achieve their financial goals. OUR VISION We strive to be among the highest performing mid-sized banks in the country. OPERATING MANAGEMENT COMMITTEE WEBSTER FINANCIAL CORPORATION John R. Ciulla President and Chief Executive Officer Glenn I. MacInnes Executive Vice President and Chief Financial Officer Daniel H. Bley Executive Vice President Chief Risk Officer Bernard M. Garrigues Executive Vice President Chief Human Resources Officer Karen A. Higgins-Carter Executive Vice President Chief Information Officer Nitin J. Mhatre Executive Vice President Head of Community Banking Christopher J. Motl Executive Vice President Head of Commercial Banking Brian R. Runkle Executive Vice President Head of Bank Operations Charles L. Wilkins Executive Vice President Head of HSA Bank Harriet Munrett Wolfe, Esq. Executive Vice President General Counsel and Secretary Elzbieta Cieslik Executive Vice President General Auditor Webster Bank, N.A. 16 Webster Financial Corporation 2018 Annual Report UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 _______________________________________________________________________________ _______________________________________________________________________________ FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Fiscal Year Ended December 31, 2018 Commission File Number: 001-31486 _______________________________________________________________________________ WEBSTER FINANCIAL CORPORATION (Exact name of registrant as specified in its charter) _______________________________________________________________________________ Delaware (State or other jurisdiction of incorporation or organization) 06-1187536 (I.R.S. Employer Identification No.) 145 Bank Street, Waterbury, Connecticut 06702 (Address and zip code of principal executive offices) Registrant's telephone number, including area code: (203) 578-2202 Securities registered pursuant to Section 12(b) of the Act: Title of each class Common Stock, $.01 par value Depository Shares, each representing 1/1000th interest in a share of 5.25% Series F Non-Cumulative Perpetual Preferred Stock Name of exchange on which registered New York Stock Exchange New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None ______________________________________________________________________________ Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of 1933. Yes No Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes No Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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 Emerging growth company Accelerated filer Non-accelerated filer Smaller reporting 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 aggregate market value of common stock held by non-affiliates of Webster Financial Corporation was approximately $5.8 billion, based on the closing sale price of the common stock on the New York Stock Exchange on June 30, 2018, the last trading day of the registrant's most recently completed second quarter. The number of shares of common stock, par value $.01 per share, outstanding as of February 15, 2019 was 92,288,409. Part III: Portions of the Definitive Proxy Statement (the "Proxy Statement") for the Annual Meeting of Shareholders to be held on April 25, 2019. Documents Incorporated by Reference INDEX Page No. Forward-Looking Statements Key to Acronyms and Terms PART I Item 1. Business Item 1A. Risk Factors Item 1B. Unresolved Staff Comments Item 2. Properties Item 3. Legal Proceedings Item 4. Mine Safety Disclosures PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Item 6. Selected Financial Data Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 7A. Quantitative and Qualitative Disclosures About Market Risk Item 8. Financial Statements and Supplementary Data Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Item 9A. Controls and Procedures Item 9B. Other Information PART III Item 10. Directors, Executive Officers and Corporate Governance Item 11. Executive Compensation Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Item 13. Certain Relationships and Related Transactions, and Director Independence Item 14. Principal Accountant Fees and Services PART IV Item 15. Exhibits and Financial Statement Schedules EXHIBIT INDEX SIGNATURES ii iii 1 12 18 19 19 19 20 22 22 57 58 121 121 123 123 124 125 125 125 127 126 128 i WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES FORWARD-LOOKING STATEMENTS This Annual Report on Form 10-K contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by words such as "believes," "anticipates," "expects," "intends," "targeted," "continue," "remain," "will," "should," "may," "plans," "estimates," and similar references to future periods; however, such words are not the exclusive means of identifying such statements. Examples of forward-looking statements include, but are not limited to: • • • • 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 the 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 securities in our investment portfolio; inflation, changes in interest rates, and securities market and monetary fluctuations; the timely development and acceptance of new products and services and the perceived value of these 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 laws and regulations 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 Annual Report on Form 10-K 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. ii 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 ARRC ......................................... Alternative Reference Rates Committee ASC ............................................ Accounting Standards Codification ASU ............................................ Accounting Standards Update Basel III...................................... Capital rules under a global regulatory framework developed by the Basel Committee on Banking Supervision BHC Act ..................................... Bank Holding Company Act of 1956, as amended Capital Rules ............................. Final rules establishing a new comprehensive capital framework for U.S. banking organizations CET1 capital.............................. Common Equity Tier 1 Capital, defined by Basel III capital rules CFPB .......................................... Consumer Financial Protection Bureau CFTC.......................................... Commodity Futures Trading Commission CLO............................................ Collateralized loan obligation securities CMBS ......................................... Non-agency commercial mortgage-backed securities CME ........................................... Chicago Mercantile Exchange CRA............................................ Community Reinvestment Act of 1977 DIF.............................................. Federal Deposit Insurance Fund Dodd-Frank Act ........................ Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 DTA............................................. Deferred tax asset EGRRCPA................................. Economic Growth, Regulatory Relief, and Consumer Protection Act ERMC ........................................ Enterprise Risk Management Committee FASB........................................... Financial Accounting Standards Board FDIC........................................... Federal Deposit Insurance Corporation FHLB.......................................... Federal Home Loan Bank FICO........................................... Fair Isaac Corporation FINRA........................................ Financial Industry Regulatory Authority FRA............................................. Federal Reserve Act 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 .................................. HSA Bank, a division of Webster Bank, National Association LEP............................................. Loss emergence period LGD............................................ Loss given default LIBOR........................................ London Interbank Offered Rate 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 QM.............................................. Qualified mortgage SALT .......................................... State and local tax SEC............................................. United States Securities and Exchange Commission SERP .......................................... Supplemental defined benefit retirement plan SIPC ........................................... Securities Investor Protection Corporation SOFR.......................................... Secured overnight financing rate Tax Act ....................................... Tax Cuts and Jobs Act of 2017 TDR ............................................ Troubled debt restructuring, defined in ASC 310-40 "Receivables-Troubled Debt Restructurings by Creditors" UTB ............................................ Unrecognized tax benefit VIE ............................................. Variable interest entity, defined in ASC 810-10 "Consolidation-Overall" VOE............................................ Voting interest entity Webster Bank or the 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 iii ITEM 1. BUSINESS Company Overview PART 1 Webster Financial Corporation is a bank holding company and financial holding company under the Bank Holding Company Act of 1956, as amended (BHC Act), incorporated under the laws of Delaware in 1986, and headquartered in Waterbury, Connecticut. Its principal asset is all of the outstanding capital stock of Webster Bank, National Association (Webster Bank). References in this report to Webster, the Company, we, our, or us, mean Webster Financial Corporation and its consolidated subsidiaries. At December 31, 2018, Webster had assets of $27.6 billion, net loans and leases of $18.3 billion, deposits of $21.9 billion, and shareholders' equity of $2.9 billion. Webster had 3,265 full-time equivalent employees at December 31, 2018. Webster provides its employees with comprehensive benefits, some of which are provided on a contributory basis, including medical and dental plans, a 401(k) savings plan with a company matching contribution, life insurance, and short-term and long-term disability coverage. Webster Financial Corporation's common stock is traded on the New York Stock Exchange under the symbol WBS. Webster's internet address is www.websterbank.com and investor relations internet address is www.wbst.com. Webster makes available free of charge on these websites its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, definitive proxy statements, and amendments, if any, to those documents filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934, as soon as practicable after it electronically files such material with, or furnishes it to, the United States Securities and Exchange Commission (SEC). These documents are also available to the public on the Internet at the SEC's website at www.sec.gov. Information on Webster’s website and its investor relations website is not incorporated by reference into this report. Business Segments The Company delivers a wide range of banking, investment, and financial services to businesses and individuals through three reportable segments - Commercial Banking, HSA Bank, a division of Webster Bank, National Association (HSA Bank), and Community Banking. Commercial Banking provides lending, deposit, and treasury and payment solutions with a focus on building relationships with companies that have annual revenues greater than $25 million. Commercial Banking is comprised of the following: • Middle Market delivers a full array of financial services to a diversified group of companies, leveraging industry specialization and delivering competitive products and services, primarily in the Northeast. • Commercial Real Estate provides financing, primarily in the Northeast, for the acquisition, development, construction, or refinancing of commercial real estate for which the property is the primary security for the loan and income generated from the property is the primary repayment source. • Webster Business Credit Corporation is the asset-based lending subsidiary of Webster Bank and is one of the top 25 asset- based lenders in the U.S. Webster Business Credit Corporation builds relationships with growing middle market companies by financing core working capital and import financing needs primarily with revolving credit facilities with advance rates against accounts receivable and inventory. Webster Business Credit Corporation lends primarily in the eastern half of the U.S. • Webster Capital Finance is the equipment finance subsidiary of Webster Bank. Webster Capital Finance offers small to mid- ticket financing for critical equipment with specialties in construction, transportation, environmental and manufacturing equipment. Webster Capital Finance lends primarily in the eastern half of the U.S. and in other select markets • Treasury and Payment Solutions delivers a broad range of deposit, lending, treasury, and trade services, primarily in the Northeast, via a dedicated team of treasury professionals and local commercial bankers. Treasury and Payment Solutions is comprised of Government and Institutional Banking, Cash Management Sales and Product Management to deliver holistic solutions to Webster’s increasingly sophisticated business and institutional clients. HSA Bank is a leading bank administrator of health savings accounts based on assets under administration. With a focus on health savings accounts, HSA Bank also delivers health reimbursement arrangements, and flexible spending and commuter benefit account administration services to employers and individuals in all 50 states. Health savings accounts are distributed nationwide directly to employers and individual consumers as well as through national and regional insurance carriers, benefit consultants and financial advisors. At December 31, 2018, HSA Bank had over 2.7 million accounts with more than $7.2 billion in health savings account deposits and linked investment balances. 1 Community Banking serves consumers and business banking customers primarily throughout southern New England and into Westchester County, NY. Community Banking is comprised of personal and business banking, as well as a distribution network consisting of 157 banking centers, 316 ATMs, a customer care center, and a full range of web and mobile based banking services. • 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 (FINRA), and a member of the Securities Investor Protection Corporation (SIPC). 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. Additional information relating to our business segments is included under the caption "Segment Reporting" in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations. Subsidiaries of Webster Financial Corporation Webster Financial Corporation's direct consolidated subsidiaries include Webster Bank, Webster Wealth Advisors, Inc., and Webster Licensing, LLC. Additionally, Webster Financial Corporation, the Holding Company, owns all of the outstanding common stock of Webster Statutory Trust, an unconsolidated financial vehicle that has issued, and may in the future issue, trust preferred securities. Webster Bank offers its wide range of financial services to individuals, families and businesses. Through its HSA Bank division, Webster Bank offers health savings accounts, health reimbursement accounts, flexible spending accounts, and other financial solutions. Through its strategic partnership with LPL, Webster Bank offers investment and securities-related services. Webster Bank's significant direct subsidiaries include: Webster Mortgage Investment Corporation, a passive investment subsidiary whose primary function is to provide servicing on qualified passive investments, such as residential real estate and commercial mortgage real estate loans acquired from Webster Bank; Webster Business Credit Corporation, which offers asset-based lending services; and Webster Capital Finance, Inc., which offers equipment financing for end users of equipment. Webster Bank also has various other subsidiaries that are not significant to the consolidated group. Competition Webster is subject to strong competition from banks, thrifts, credit unions, non-bank health savings account trustees, consumer finance companies, investment companies, insurance companies, and online lending and savings institutions. Certain of these competitors are larger financial institutions with substantially greater resources, lending limits, larger branch systems, and a wider array of commercial and consumer banking services than Webster. Competition could intensify in the future as a result of industry consolidation, the increasing availability of products and services from non-bank entities, greater technological developments in the industry, and continued bank regulatory reforms. Webster faces substantial competition for deposits and loans throughout its market areas. The primary factors in competing for deposits are interest rates, personalized services, the quality and range of financial services, convenience of office locations and hours, mobile banking and other automated services. Competition for deposits comes from other commercial banks, thrifts, credit unions, non-bank health savings account trustees, mutual funds, and other investment alternatives. The primary factors in competing for consumer and commercial loans are interest rates, loan origination fees, ease and convenience of loan origination channels, the quality and range of lending services, personalized service and ability to close within customers' desired time frame. Competition for origination of loans comes primarily from commercial banks, non-bank lenders, savings institutions, mortgage banking firms, mortgage brokers, online lenders, and insurance companies. Other factors which affect competition include the general and local economic conditions, current interest rate levels, and volatility in the lending markets. Supervision and Regulation Webster and its bank and non-bank subsidiaries are subject to comprehensive regulation under federal and state laws. The regulatory framework applicable to bank holding companies and their subsidiary banks is intended to protect depositors, the Federal Deposit Insurance Fund (DIF), and the U.S. banking system as a whole. This system is not designed to protect equity investors in bank holding companies. Set forth below is a summary of the significant laws and regulations applicable to Webster and its bank and non-bank subsidiaries. The description that follows is qualified in its entirety by reference to the full text of the statutes, regulations, and policies that are described. Such statutes, regulations, and policies are subject to ongoing review by Congress and state legislatures and federal and state regulatory agencies. A change in any of the statutes, regulations, or regulatory policies applicable to Webster and its bank and non-bank subsidiaries could have a material effect on the results of the Company. 2 Webster Financial Corporation is a separate and distinct legal entity from Webster Bank and its other subsidiaries. As a registered bank holding company and a financial holding company it is subject to inspection, examination, and supervision by the Board of Governors of the Federal Reserve System, and is regulated under the BHC Act. Webster is under the jurisdiction of the SEC and is subject to the disclosure and other regulatory requirements of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, as administered by the SEC. Webster is subject to the rules for companies listed on the New York Stock Exchange. In addition, the Consumer Financial Protection Bureau (CFPB) supervises Webster for compliance with federal consumer financial protection laws. Webster also is subject to oversight by state attorneys general for compliance with state consumer protection laws. Webster's non-bank subsidiaries are subject to federal and state laws and regulations, including regulations of the Federal Reserve System. Webster Bank is organized as a national banking association under the National Bank Act. Webster Bank is subject to the supervision of, and to regular examination by, the Office of the Comptroller of the Currency (OCC) as its primary federal regulator, as well as by the Federal Deposit Insurance Corporation (FDIC) as its deposit insurer. Webster Bank's deposits are insured by the FDIC up to the applicable deposit insurance limits in accordance with FDIC laws and regulations. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) significantly changed the financial regulatory regime in the United States. Since the enactment of the Dodd-Frank Act, U.S. banks and financial services firms have been subject to enhanced regulation and oversight. Several provisions of the Dodd-Frank Act are subject to further rulemaking, guidance, and interpretation by the federal banking agencies. The current administration and its appointees to the federal banking agencies have expressed interest in reviewing, revising, and perhaps repealing portions of the Dodd-Frank Act and certain of its implementing regulations. On May 14, 2018, the President signed into law the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA), which among other things, amended certain provisions of the Dodd-Frank Act as well as statutes administered by the Federal Reserve System, the FDIC, and the OCC. The amendments made by the EGRRCPA provide limited regulatory relief for certain financial institutions and additional tailoring of banking and consumer protection laws, while preserving the existing framework under which U.S. financial institutions are regulated, including the discretionary authority of the Federal Reserve System, the FDIC, and the OCC to supervise bank holding companies and insured depository institutions, such as Webster Financial Corporation and Webster Bank. In addition, EGRRCPA includes certain other banking-related consumer protection as securities law-related provisions. Many of the EGRRCPA changes must be implemented through rules adopted by the federal banking regulators and certain changes remain subject to substantial regulatory discretion of the federal banking regulators. As a result, the full impact of EGRRCPA will remain unclear for the immediate future. The Company expects to continue to evaluate the potential impact of EGRRCPA as it is further implemented by the regulators. Bank Holding Company Regulation Webster Financial Corporation is a bank holding company as defined under the BHC Act. The BHC Act generally limits the business of bank holding companies to banking, managing or controlling banks, and other activities that the Board of Governors of the Federal Reserve System has determined to be so closely related to banking as to be a proper incident thereto. Bank holding companies that have elected to become financial holding companies, such as Webster Financial Corporation, may engage in any activity, or acquire and retain the shares of a company engaged in any activity that is either (i) financial in nature or incidental to such financial activity (as determined by the Board of Governors of the Federal Reserve System in consultation with the Secretary of the Treasury) or (ii) complementary to a financial activity, and that does not pose a substantial risk to the safety and soundness of depository institutions or the financial system (as solely determined by the Board of Governors of the Federal Reserve System). Activities that are financial in nature include securities underwriting and dealing, insurance underwriting, and making merchant banking investments. Mergers and Acquisitions The BHC Act, the Bank Merger Act, and other federal and state statutes regulate the direct and indirect acquisition of depository institutions. The BHC Act requires the prior Federal Reserve System approval for a bank holding company to acquire, directly or indirectly, 5% or more of any class of voting securities of a commercial bank or its parent holding company and for a company, other than a bank holding company, to acquire 25% or more of any class of voting securities of a bank or bank holding company. Under the Change in Bank Control Act, any person, including a company, may not acquire, directly or indirectly, control of a bank without providing 60 days prior notice and receiving a non-objection from the appropriate federal banking agency. Under the Bank Merger Act, the prior approval of the appropriate federal banking agency is required for insured depository institutions to merge or enter into purchase and assumption transactions. In reviewing applications seeking approval of merger or purchase and assumption transactions, the federal banking agencies will consider, among other things, the competitive effect and public benefits of the transactions, the capital position of the combined banks, the applicant's performance record under the Community Reinvestment Act of 1977 (CRA), and the effectiveness of the merging banks in combating money laundering. 3 Enhanced Prudential Standards Section 165 of the Dodd-Frank Act imposes enhanced prudential standards on larger banking organizations. However, as of the enactment of EGRRCPA on May 24, 2018, bank holding companies with less than $100 billion in assets, such as Webster Financial Corporation are exempt from the enhanced prudential standards imposed under Section 165. As a result Webster Financial Corporation is relieved from the requirement to conduct company-run stress testing for itself and Webster Bank. However, while the federal banking agencies will not require company-run stress testing, the capital planning and risk management practices of the Company will continue to be reviewed through regular supervisory processes of the Federal Reserve System and the OCC. The Company will continue to perform certain stress tests internally and incorporate the economic models and information developed through its stress testing program into its risk management and business planning activities. Furthermore, under a previously issued rule of the Federal Reserve System implementing enhanced prudential standards required by the Dodd-Frank Act, bank holding companies with more than $10 billion in assets were subject to certain rules, including a requirement to establish a separate risk committee of independent directors to manage enterprise-wide risk. EGRRCPA subsequently increased the asset threshold for requiring a bank holding company to establish a separate risk committee of independent directors from $10 billion to $50 billion. Notwithstanding the changes implemented by EGRRCPA, the Company anticipates retaining its Risk Committee of the Board of Directors. Debit Card Interchange Fees The Dodd-Frank Act requires that any interchange transaction fee charged for a debit transaction be reasonable and proportional to the cost incurred by the issuer for the transaction, with regulations that establish such fee standards, eliminate exclusivity arrangements between issuers and networks for debit card transactions, and limit restrictions on merchant discounting for use of certain payment forms and minimum or maximum amount thresholds as a condition for acceptance of credit cards. Under the Federal Reserve System's approved final debit card interchange rule pursuant to the Dodd-Frank Act, an issuer's base fee is capped at 21 cents per transaction and allows for an additional amount equal to 5 basis points of the transaction's value. The Federal Reserve System separately issued a final rule that also allows a fraud-prevention adjustment of 1 cent per transaction conditioned upon an issuer developing, implementing, and updating reasonably designed fraud-prevention policies and procedures. Identity Theft The SEC and the Commodity Futures Trading Commission (CFTC) jointly issued final rules and guidelines implementing provisions of the Dodd-Frank Act which require certain regulated entities to establish programs to address risks of identity theft. The rules require financial institutions and creditors to develop and implement a written identity theft prevention program that is designed to detect, prevent, and mitigate identity theft in connection with certain existing accounts or the opening of new accounts. The rules include guidelines to assist entities in the formulation and maintenance of programs that would satisfy these requirements. In addition, the rules establish special requirements for any credit and debit card issuers that are subject to the jurisdiction of the SEC or the CFTC, to assess the validity of notifications of changes of address under certain circumstances. Webster implemented an ID Theft Prevention Program, approved by its Board of Directors, in compliance with these requirements. Volcker Rule Section 619 of the Dodd-Frank Act, commonly known as the Volcker Rule, restricts the ability of banking entities, such as Webster and Webster Bank, from: (i) engaging in proprietary trading and (ii) investing in or sponsoring certain covered funds, subject to certain limited exceptions. Under the Volcker Rule, the term covered funds is defined as any issuer that would be an investment company under the Investment Company Act but for the exemption in section 3(c)(1) or 3(c)(7) of that Act, which includes collateralized loan obligation securities (CLO) and collateralized debt obligation securities. There are also several exemptions from the definition of covered fund, including, among other things, loan securitizations, joint ventures, certain types of foreign funds, entities issuing asset-backed commercial paper, and registered investment companies. The Federal Reserve approved Webster's illiquid funds extension request, thereby providing Webster with up to five additional years, to July 21, 2022, to bring such holdings into compliance with the Volcker Rule. Dividends The principal source of liquidity for the Holding Company is dividends from Webster Bank. Prior approval of the OCC would be required if the total of all dividends declared by a national bank in a year would exceed the sum of its net income for that year and its undistributed net income for the preceding two years, less any required transfers to surplus. Federal law also prohibits a national bank from paying dividends that would be greater than its undivided profits after deducting statutory bad debt in excess of allowance for loan and lease losses (ALLL). Webster Bank paid the Holding Company $290.0 million in dividends during the year ended December 31, 2018 and had $341.8 million of undistributed net income available for payment of dividends at December 31, 2018. 4 In addition, Webster Financial Corporation and Webster Bank are subject to other regulatory policies and requirements relating to the payment of dividends, including requirements to maintain adequate capital above regulatory minimums. Federal regulatory agencies are authorized to determine, under certain circumstances relating to the financial condition of a bank holding company, or a bank, that the payment of dividends would be an unsafe or unsound practice and to prohibit payment thereof. The federal banking agencies have indicated that paying dividends that deplete a bank's capital base to an inadequate level would be an unsafe and unsound banking practice and that banking organizations should generally pay dividends only out of current operating earnings. Federal Reserve System Federal Reserve System regulations require depository institutions to maintain cash reserves against their transaction accounts, primarily interest-bearing and regular checking accounts. The required cash reserves can be in the form of vault cash and, if vault cash does not fully satisfy the required cash reserves, in the form of a balance maintained with Federal Reserve Banks. The Board of Governors of the Federal Reserve System generally makes annual adjustments to the tiered cash reserve requirements. The regulations require that Webster maintain cash reserves against aggregate transaction accounts in excess of the exempt amount of $16.0 million at December 31, 2018. Effective January 17, 2019, amounts greater than $16.3 million up to and including $124.2 million have a reserve requirement of 3% and amounts in excess of $124.2 million have a reserve requirement of 10%. Webster Bank is in compliance with these cash reserve requirements. As a national bank and member of the Federal Reserve System, Webster Bank is required to hold capital stock of the Federal Reserve Bank (FRB) of Boston. The required shares may be adjusted up or down based on changes to Webster Bank's common stock and paid-in surplus. Webster Bank was in compliance with these requirements, with a total investment in FRB of Boston stock of $50.7 million at December 31, 2018. The FRBs pay a semi-annual dividend, to member banks with total assets greater than $10 billion, equal to the lesser of 6% or the yield on the 10-year Treasury note auctioned at the last auction prior to the dividend payment date. For the semi-annual period ended December 31, 2018, the FRB of Boston declared a cash dividend equal to an annual yield of 2.92%. Federal Home Loan Bank System The Federal Home Loan Bank (FHLB) System provides a central credit facility for member institutions. Webster Bank is a member of the FHLB of Boston. Webster Bank (the Bank) is required to purchase and hold shares of capital stock in the FHLB for both membership and activity-based purposes. The capital stock requirement includes an amount equal to 0.35% of the aggregate principal amount of the Bank's unpaid residential mortgage loans and similar obligations at the beginning of each year, up to a maximum of $25 million, plus an amount that varies from 3.0% to 4.5% depending on the maturities of its FHLB advances, which totaled approximately $1.8 billion at December 31, 2018. Webster Bank was in compliance with these requirements, with a total investment in FHLB stock of $98.6 million at December 31, 2018. On November 2, 2018, the FHLB paid a quarterly cash dividend equal to an annual yield of 5.87%. Source of Strength Doctrine Federal Reserve System policy requires bank holding companies to act as a source of financial and managerial strength to their subsidiary banks. Section 616 of the Dodd-Frank Act codified the requirement that bank holding companies act as a source of financial strength. As a result, Webster Financial Corporation is expected to commit resources to support Webster Bank, including at times when Webster Financial Corporation may not be in a financial position to provide such resources. Any capital loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary banks. The U.S. bankruptcy code provides that, in the event of a bank holding company's bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to priority of payment. In addition, under the National Bank Act, if the capital stock of Webster Bank is impaired by losses, or otherwise, the OCC is authorized to require payment of the deficiency by assessment upon the Holding Company. If the assessment is not paid within three months, the OCC could order a sale of the Webster Bank stock held by Webster Financial Corporation to cover any deficiency. Capital Adequacy The final rules establishing a new comprehensive capital framework for U.S. banking organizations (Capital Rules) under a global regulatory framework developed by the Basel Committee on Banking Supervision (BASEL III) adopted by the Federal Reserve System, the OCC, and the FDIC generally implement the capital framework for strengthening international capital standards. The Capital Rules define the components of regulatory capital, as well as address other issues affecting the numerator in banking institutions’ regulatory capital ratios. The Capital Rules also address asset risk weights and other matters affecting the denominator in banking institutions’ regulatory capital ratios. The Capital Rules: (i) include the capital measure Common Equity Tier 1, defined by Basel III capital rules (CET1 capital) and related regulatory capital ratio of CET1 to risk-weighted assets; (ii) specify that Tier 1 capital consists of CET1 capital and additional Tier 1 capital instruments meeting certain revised requirements; (iii) mandate that most deductions or adjustments to regulatory capital measures be made to CET1 capital and not to the other components of capital; and (iv) expand the scope of deductions from and adjustments to capital as compared to existing regulations. 5 Under the Capital Rules, for most banking organizations, including Webster, the most common form of additional Tier 1 capital is non-cumulative perpetual preferred stock, and the most common forms of Tier 2 capital are subordinated notes and the qualifying portion of ALLL, in each case, subject to specific requirements of the Capital Rules. Tier 1 capital to adjusted, as defined, average consolidated assets is known as the Tier 1 leverage ratio. Pursuant to the Capital Rules, ratio thresholds are as follows: CET1 risk-based capital Total risk-based capital Tier 1 risk-based capital Tier 1 leverage capital Adequately Capitalized Well Capitalized 4.5% 8.0 6.0 4.0 6.5% 10.0 8.0 5.0 The Capital Rules also include a capital conservation buffer, composed entirely of CET1 capital, in addition to the minimum risk- weighted asset ratios. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions hold a capital conservation buffer above its minimum risk-based capital requirements in order to avoid limitations on distributions, such as dividends; equity; other capital instrument repurchases; and certain discretionary bonus payments to executive officers, based on the amount of the shortfall. The Capital Rules became fully phased-in on January 1, 2019. Thus, the capital standards applicable to Webster and Webster Bank beginning in 2019, include an additional capital conservation buffer for which the lowest capital ratio excess over adequately capitalized must be at least 2.5%. The Capital Rules provide for a number of deductions from and adjustments to CET1 capital. These include, for example, the requirement that mortgage servicing assets, certain deferred tax assets (DTAs), and significant investments in non-consolidated financial institutions be deducted from CET1 capital to the extent that any one such category exceeds 10% of CET1 capital or all such items, in the aggregate, exceed 15% of CET1 capital. Under the Basel III Rule, certain off-balance sheet commitments and obligations are converted into risk-weighted assets, that together with on-balance sheet assets, are the base against which regulatory capital is measured. The risk-weighting categories are standardized for bank holding companies and banks based on a risk-sensitive analysis, depending on the nature of the exposure. Risk weights range from 0% for U.S. government securities to 1,250% for exposures such as certain tranches of securitizations or certain equity exposures. Prompt Corrective Action and Safety and Soundness Pursuant to Section 38 of the Federal Deposit Insurance Act, federal banking agencies are required to take prompt corrective action should an insured depository institution fail to meet certain capital adequacy standards. At each successive lower capital category, an insured depository institution is subject to more restrictions and prohibitions, including restrictions on growth, restrictions on interest rates paid on deposits, restrictions or prohibitions on payment of dividends and restrictions on the acceptance of brokered deposits. Furthermore, if an insured depository institution is classified in one of the under capitalized categories, it is required to submit a capital restoration plan to the appropriate federal banking agency, and the holding company must guarantee the performance of that plan. Based upon its capital levels, a bank that is classified as well capitalized, adequately capitalized, or under capitalized may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for hearing, determines that an unsafe or unsound condition, or an unsafe or unsound practice, warrants such treatment. Prompt corrective action ratios are as follows: CET1 risk-based capital Total risk-based capital Tier 1 risk-based capital Tier 1 leverage capital Well Capitalized 6.5% 10.0 8.0 5.0 Adequately Capitalized 4.5% 8.0 6.0 4.0 Under Capitalized < 4.5% < 8.0% < 6.0% < 4.0% Significantly Under-Capitalized < 3.0% < 6.0% < 4.0% < 3.0% An insured depository institution with a ratio of tangible equity to total assets that is less than 2% is considered critically under- capitalized. Bank holding companies and insured depository institutions may also be subject to potential enforcement actions of varying levels of severity by the federal banking agencies for unsafe or unsound practices in conducting their business, or for violation of any law, rule, regulation, condition imposed in writing by the agency or term of a written agreement with the agency. In more serious cases, enforcement actions may include the issuance of directives to increase capital; the issuance of formal and informal agreements; the imposition of civil monetary penalties; the issuance of a cease and desist order that can be judicially enforced; the issuance of removal and prohibition orders against officers, directors, and other institution affiliated parties; the termination of the insured depository institution’s deposit insurance; the appointment of a conservator or receiver for the insured depository institution; and the enforcement of such actions through injunctions or restraining orders based upon a judicial determination that the FDIC, as receiver, would be harmed if such equitable relief was not granted. 6 Transactions with Affiliates and Insiders Under federal law, transactions between insured depository institutions and their affiliates are governed by Sections 23A and 23B of the Federal Reserve Act (FRA) and Federal Reserve Regulation W. In a bank holding company context, at a minimum, the parent holding company of a bank, and any companies which are controlled by such parent holding company, are affiliates of the bank. Generally, sections 23A and 23B of the FRA are intended to protect insured depository institutions from losses arising from transactions with non-insured affiliates by limiting the extent to which a bank or its subsidiaries may engage in covered transactions with any one affiliate and with all affiliates of the bank in the aggregate, and requiring that such transactions be on terms consistent with safe and sound banking practices. Further, Section 22(h) of the FRA and its implementing Regulation O restricts loans to directors, executive officers, and principal stockholders or insiders. Under Section 22(h), loans to insiders and their related interests may not exceed, together with all other outstanding loans to such persons and affiliated entities, the institution's total capital and surplus. Loans to insiders above specified amounts must receive the prior approval of the board of directors. Further, under Section 22(h) of the FRA, loans to directors, executive officers, and principal stockholders must be made on terms substantially the same as offered in comparable transactions to other persons, except that such insiders may receive preferential loans made under a benefit or compensation program that is widely available to the bank's employees and does not give preference to the insider over the employees. Section 22(g) of the FRA places additional limitations on loans to executive officers. Consumer Protection and Consumer Financial Protection Bureau Supervision The Dodd-Frank Act centralized responsibility for consumer financial protection by creating the CFPB, an independent agency charged with responsibility for implementing, enforcing, and examining compliance with federal consumer financial protection laws. The Company is subject to a number of federal and state laws designed to protect borrowers and promote lending to various sectors of the economy and population. These laws include the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Fair Debt Collection Procedures Act, the Truth in Lending Act, the Home Mortgage Disclosure Act, the Real Estate Settlement Practices Act, various state law counterparts, and the Consumer Financial Protection Act of 2010, which is part of the Dodd-Frank Act. The Dodd-Frank Act does not prevent states from adopting stricter consumer protection standards. State regulation of financial products and potential enforcement actions could also adversely affect the Company’s business, financial condition or operations. The ability-to-repay provision of the Truth in Lending Act requires creditors to make reasonable, good faith determinations that borrowers are able to repay their mortgages before extending the credit based on a number of factors and consideration of financial information about the borrower from reasonably reliable third-party documents. Under the Dodd-Frank Act and the qualified mortgage provisions of the Truth in Lending Act, commonly known as the qualified mortgage (QM) Rule, loans meeting the definition of qualified mortgage are entitled to a presumption that the lender satisfied the ability-to-repay requirements. The presumption is a conclusive presumption/safe harbor for prime loans meeting QM requirements and a refutable presumption for higher-priced/subprime loans meeting QM requirements. The QM definition incorporates the statutory requirements, such as not allowing negative amortization or terms longer than 30 years. The QM Rule also adds an explicit maximum 43% debt-to-income ratio for borrowers if the loan is to meet the QM definition, though some mortgages that meet GSE, FHA, and VA underwriting guidelines may, for a period not to exceed seven years, meet the QM definition without being subject to the 43% debt-to-income limits. The CFPB is expected to continue to issue and amend rules implementing the consumer financial protection laws, which may impact Webster Bank's operations. Financial Privacy and Data Security Webster is subject to federal laws, including the Gramm-Leach-Bliley Act and certain state laws containing consumer privacy protection provisions. These provisions limit the ability of banks and other financial institutions to disclose nonpublic information about consumers to affiliated and non-affiliated third parties and limit the reuse of certain consumer information received from non-affiliated financial institutions. These provisions require notice of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain nonpublic personal information to affiliates or non-affiliated third parties by means of opt-out or opt-in authorizations. The Gramm-Leach-Bliley Act requires that financial institutions implement comprehensive written information security programs that include administrative, technical, and physical safeguards to protect consumer information. Federal banking agencies have also adopted guidelines for establishing information security standards and programs to protect such information. These guidelines, along with related regulatory materials, increasingly focus on risk management and processes related to information technology and the use of third-parties in the provision of financial products and services. The federal bank regulatory agencies expect financial institutions to establish lines of defense and to ensure that their risk management processes address the risk posed by compromised customer credentials, and also expect financial institutions to maintain sufficient business continuity plannning processes to ensure rapid recovery, resumption, and maintenance of the institution's operations after a cyber attack. Further, pursuant to interpretive guidance issued under the Gramm-Leach-Bliley Act and certain state laws, financial institutions are required to notify customers of security breaches that result in unauthorized access to their non-public personal information. 7 Depositor Preference The Federal Deposit Insurance Act provides that, in the event of the liquidation or other resolution of an insured depository institution, the claims of depositors of the institution, including the claims of the FDIC as subrogee of insured depositors, and certain claims for administrative expenses of the FDIC as a receiver, will have priority over other general unsecured claims against the institution. If an insured depository institution fails, insured and uninsured depositors, along with the FDIC, will have priority in payment ahead of unsecured, non-deposit creditors, including the parent bank holding company, with respect to any extensions of credit they have made to such insured depository institution. Federal Deposit Insurance The FDIC’s deposit insurance limit is $250,000 per depositor, per insured bank, for each account ownership category. Substantially all of the deposits of Webster Bank are insured up to applicable limits by the DIF of the FDIC and are subject to deposit insurance assessments to maintain the DIF. The Bank’s quarterly assessment is calculated using the FDIC’s standardized risk-based assessment methodology, determined by the FDIC, which multiplies the Bank's assessment base by its assessment rate. The assessment base is defined as the average consolidated total assets less the average tangible equity of the Bank. The assessment rate is based on measures of the institution’s capital adequacy, asset quality, management, earnings, liquidity and sensitivity to market risk (CAMELS) ratings, certain financial measures to assess an institution’s ability to withstand asset-related stress and funding-related stress, and a measure of loss severity that estimates the relative magnitude of potential losses to the FDIC in the event of the Bank’s failure. The FDIC also has the ability to make discretionary adjustments to the base assessment rate to reflect idiosyncratic quantitative and qualitative risk factors not captured in the FDIC’s standardized risk-based assessment methodology. Under the Federal Deposit Insurance Act, the FDIC may terminate deposit insurance upon a finding that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. Webster's management is not aware of any practice, condition, or violation that might lead to the termination of its deposit insurance. Incentive Compensation The Dodd-Frank Act requires the federal banking agencies and the SEC to establish joint regulations or guidelines prohibiting incentive-based payment arrangements at specified regulated entities, including Webster and Webster Bank, with at least $1 billion in total consolidated assets that encourage inappropriate risks by providing an executive officer, employee, director or principal shareholder with excessive compensation, fees, or benefits that could lead to material financial loss to the entity. The federal banking agencies and the SEC proposed such regulations in 2016, but the regulations have not yet been finalized. If the regulations are adopted in the form initially proposed, they will restrict the manner in which executive compensation is structured. The Dodd-Frank Act also requires publicly traded companies to give stockholders a non-binding vote on executive compensation at their first annual meeting taking place six months after the date of enactment and at least every three years thereafter and on so-called "golden parachute" payments in connection with approvals of mergers and acquisitions. At Webster's 2011 Annual Meeting of Shareholders, its shareholders voted on a non-binding, advisory basis to hold a non-binding, advisory vote on the compensation of named executive officers of Webster annually. As a result of the vote, the Board of Directors determined to hold the vote annually. Community Reinvestment Act and Fair Lending Laws Webster Bank has a responsibility under the CRA, as implemented by OCC regulations to help meet the credit needs of its communities, including low and moderate-income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to its particular community. The OCC examines Webster Bank's record of compliance with the CRA. In addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit discrimination in lending practices on the basis of characteristics specified in those statutes. Webster Bank's failure to comply with the provisions of the CRA could, at a minimum, result in regulatory restrictions on its activities and the activities of Webster Financial Corporation. Webster Bank's failure to comply with the Equal Credit Opportunity Act and the Fair Housing Act could result in enforcement actions against it by the OCC, as well as other federal regulatory agencies, including the CFPB and the Department of Justice. Webster Bank's latest OCC CRA rating was Outstanding. 8 USA PATRIOT Act Under Title III of the USA PATRIOT Act, all financial institutions are required to take certain measures to identify their customers, prevent money laundering, monitor customer transactions, and report suspicious activity to U.S. law enforcement agencies. Financial institutions also are required to respond to requests for information from federal banking agencies and law enforcement agencies. Information sharing among financial institutions for the above purposes is encouraged by an exemption granted to complying financial institutions from the privacy provisions of the Gramm-Leach-Bliley Act and other privacy laws. Financial institutions that hold correspondent accounts for foreign banks or provide private banking services to foreign individuals are required to take measures to avoid dealing with certain foreign individuals or entities, including foreign banks with profiles that raise money laundering concerns, and are prohibited from dealing with foreign "shell banks" and persons from jurisdictions of particular concern. The primary federal banking agencies and the Secretary of the Treasury have adopted regulations to implement several of these provisions. All financial institutions also are required to establish internal anti-money laundering programs. The effectiveness of a financial institution in combating money laundering activities is a factor to be considered in any application submitted by the financial institution under the Bank Merger Act. Webster has in place a Bank Secrecy Act and USA PATRIOT Act compliance program and engages in very few transactions of any kind with foreign financial institutions or foreign persons. Office of Foreign Assets Control Regulation The United States government has imposed economic sanctions that affect transactions with designated foreign countries, nationals, and others. These are typically known as the "OFAC" rules based on their administration by the U.S. Treasury Department Office of Foreign Assets Control. The Office of Foreign Assets Control-administered sanctions targeting countries take many different forms. Generally, they contain one or more of the following elements: (i) restrictions on trade with or investment in a sanctioned country, including prohibitions against direct or indirect imports from and exports to a sanctioned country and prohibitions on U.S. persons engaging in financial transactions relating to making investments in, or providing investment-related advice or assistance to, a sanctioned country; and (ii) a blocking of assets in which the government or specially designated nationals of the sanctioned country have an interest, by prohibiting transfers of property subject to U.S. jurisdiction (including property in the possession or control of U.S. persons). Blocked assets (property and bank deposits) cannot be paid out, withdrawn, set off, or transferred in any manner without a license from the Office of Foreign Assets Control. Failure to comply with these sanctions could have serious legal and reputational consequences. Future Legislative Initiatives Federal and state legislatures may introduce legislation that will impact the financial services industry. In addition, federal banking agencies may introduce regulatory initiatives that are likely to impact the financial services industry, generally. Such initiatives may include proposals to expand or contract the powers of bank holding companies and/or depository institutions or proposals to substantially change the financial institution regulatory system. Such legislation could change banking statutes and the operating environment of the Company in substantial and unpredictable ways. If enacted, such legislation could increase or decrease the cost of doing business, limit or expand permissible activities, or affect the competitive balance among banks, savings associations, credit unions, and other financial institutions. The Company cannot predict whether any such legislation will be enacted, and, if enacted, the effect that it or any implementing regulations would have on the financial condition or results of operations of the Company. A change in statutes, regulations, or regulatory policies applicable to Webster or any of its subsidiaries could have a material effect on the business of the Company. Risk Management Framework Webster takes a comprehensive approach to risk management with a defined enterprise risk management framework which provides a structured approach for identifying, assessing and managing risks across the Company in a coordinated manner, including strategic and reputational, credit, information security and technology, operational and compliance, market, liquidity, and capital risks as discussed in detail in the sections below. Strategic and Reputational Risks The enterprise risk management framework enables the aggregation of risk across the enterprise and ensures the Company has the tools, programs, and processes in place to support informed decision making in order to anticipate risks before they materialize and to maintain Webster's risk profile consistent with its risk strategy and appetite. The enterprise risk management framework includes an articulated risk appetite statement approved annually by the Board of Directors. The risk appetite statement is supported by board and business level scorecards with defined risk tolerance limits to ensure that Webster maintains an acceptable risk profile by providing a common framework and a comparable set of measures that indicate the level of risk that the Company is willing to accept. The risk appetite is refreshed annually in conjunction with the strategic plan to align risk appetite with Webster's strategy and financial plan. 9 Webster promotes proactive risk management by all Webster employees and clear ownership and accountability across three lines of defense to enable an effective and credible challenge in line with Webster's strong risk culture. Employees in each line of business serve as the first line of defense and have responsibility for identifying, managing and owning the risks in their businesses. Risk and enterprise support functions, for example third party risk management and legal departments, serve as the second line of defense and are responsible for providing guidance, oversight and challenge to the first line of defense. Internal Audit and Credit Risk Review, both of which are independent of management, serve as the third line of defense and ensure, through review and testing, that appropriate risk management controls, processes and systems are in place and functioning effectively. The Risk Committee of the Board of Directors, comprised of independent directors, oversees all of Webster's risk-related matters and provides input and guidance to the Board of Directors and the executive team, as appropriate. Webster's Enterprise Risk Management Committee (ERMC), which reports directly to the Risk Committee of the Board of Directors, is chaired by the Chief Risk Officer and is comprised of Webster's executive management and senior risk officers. The Chief Risk Officer is responsible for establishing and maintaining Webster's enterprise risk management framework and overseeing credit risk, operational and compliance risk, Bank Secrecy Act compliance and loan workout/recovery programs. The Corporate Treasurer, who reports to the Chief Financial Officer, is responsible for overseeing market, liquidity, and capital risk management activities. The Chief Information Officer, who reports to the Chief Executive Officer, is responsible for overseeing information security and technology risk management activities. Credit Risk Webster manages and controls credit risk in its loan and investment portfolios through established underwriting practices, adherence to standards, and utilization of various portfolio and transaction monitoring tools and processes. Credit policies and underwriting guidelines provide limits on exposure and establish various other standards as deemed necessary and prudent. Additional approval requirements and reporting are implemented to ensure proper risk identification, decision rationale, risk ratings, and disclosure of policy exceptions. Credit risk management policies and transaction approvals are managed under the supervision of the Chief Credit Officer who reports to the Chief Risk Officer. The Chief Credit Officer and team of credit executives are independent of the loan production and treasury areas. The credit risk function oversees the underwriting, approval and portfolio management process, establishes and ensures adherence to credit policies, and manages the collections and problem asset resolution activities. As part of credit risk management governance, Webster has an established Credit Risk Management Committee that meets regularly to review key credit risk topics, issues, and policies. The Credit Risk Management Committee reviews Webster's credit risk scorecard, which covers key risk indicators and limits established as part of the Company's risk appetite framework. The Credit Risk Management Committee is chaired by the Chief Credit Officer and includes senior managers responsible for lending as well as senior managers from the credit risk management function. Important findings regarding credit quality and trends within the loan and investment portfolios are regularly reported by the Chief Credit Officer to the ERMC and Risk Committee of the Board of Directors. In addition to the credit risk management team, there is an independent Credit Risk Review function that assesses risk ratings and credit underwriting process for all areas of the organization that incur credit risk. The head of Credit Risk Review reports directly to the Risk Committee of the Board of Directors and administratively to the Chief Risk Officer. Credit Risk Review findings are reported to the Credit Risk Management Committee, ERMC and Risk Committee of the Board of Directors. Corrective measures are monitored and tested to ensure risk issues are mitigated or resolved. Information Security and Technology Risks The use of technology to store and process information and an increasing use of mobile devices and cloud technologies to conduct financial transactions continues to expose Webster to the risk of potential operational disruption, or information security incidents. Sources of these risks include deliberate or accidental acts by employees, external parties, technology failure, third-party security practices, and environmental factors. Webster is committed to preventing, detecting, and responding to incidents that may impact the confidentiality, integrity, and availability of information assets and has established a comprehensive information security and technology framework, with policies, procedures, processes, systems, and oversight by the Information Security Oversight Committee. The Chief Information Security Officer is responsible for overseeing the development and implementation of Webster's information security framework and serves as the Chair of the Information Security Oversight Committee. Operational and Compliance Risks Operational risk represents the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. The Operational Risk function is responsible for establishing processes and tools to identify, manage, and aggregate operational risk across the organization; providing guidance and advice on operational risk matters; and educating the organization on operational risks. Compliance risk represents the risk of non-adherence to applicable laws and regulations, including fines penalties and reputation damage. Specific programs and functions have been implemented to manage the risks associated with legal and regulatory requirements, suppliers and other third-parties, information security, business disruption, fraud, analytical and forecasting models, and new products and services. 10 Webster's Operational Risk Management Committee, which consists of senior risk officers and senior managers responsible for operational and compliance risk management across the Company, periodically reviews the aforementioned programs, as well as key operational risk trends, issues, and mitigation activities. The Director of Enterprise and Operational Risk Management chairs the Operational Risk Management Committee and is responsible for overseeing the development and implementation of Webster's operational risk management framework. Market Risk Market risk refers to the risk of loss arising from adverse changes in interest rates, foreign currency exchange rates, commodity prices, and other relevant market rates and prices, such as equity prices. The risk of loss is assessed from the perspective of adverse changes in fair values, cash flows, and future earnings. Due to the nature of its operations, Webster is primarily exposed to interest rate risk. Webster's interest rate sensitivity is monitored on an ongoing basis by its Asset/Liability Committee (ALCO). The primary goal of ALCO is to manage interest rate risk to maximize earnings and net economic value in changing interest rate and business environments, subject to Board approved risk limits. ALCO is chaired by Webster's Corporate Treasurer and members include the Chief Executive Officer, Chief Financial Officer and Chief Risk Officer. ALCO activities and findings are regularly reported to the ERMC and the Board of Directors. Liquidity Risk Liquidity risk refers to the ability to meet a demand for funds by converting assets into cash or cash equivalents and by increasing liabilities at an acceptable cost. Liquidity management for Webster Bank involves maintaining the ability to meet day-to-day and longer-term cash flow requirements of customers, whether they are depositors wishing to withdraw funds or borrowers requiring funds to meet their credit needs. Sources of funds include deposits, borrowings, or sales of assets such as unencumbered investment securities. The Holding Company requires funds for dividends to shareholders, payment of debt obligations, repurchase of shares, potential acquisitions, and for general corporate purposes. Its sources of funds include dividends from Webster Bank, income from investment securities, and the issuance of equity and debt in the capital markets. Both the Holding Company and Webster Bank maintain a level of liquidity necessary to achieve their business objectives under both normal and stressed conditions. Liquidity risk is monitored and managed by ALCO and reviewed regularly with the ERMC and the Board of Directors. Capital Risk Webster aims to maintain adequate capital in both normal and stressed environments to support its business objectives and risk appetite. ALCO monitors regulatory and tangible capital levels according to regulatory requirements and management operating ranges and recommends capital conservation, generation, and/or deployment strategies. ALCO also has responsibility for the annual capital plan, capital ratio range setting, contingency planning and stress testing, which are all reviewed and approved by the ERMC and the Board of Directors, at least annually. Internal Audit Internal Audit provides independent, objective assurance and advisory services by applying a risk-based approach to selectively test and evaluate the design and operating effectiveness of applicable internal controls throughout the Company. This evaluation function brings a systematic and disciplined approach to enhancing the effectiveness of the Company's governance, risk management, and internal control processes. Results of Internal Audit reviews are reported to management and the Audit Committee of the Board of Directors. Corrective measures are monitored to ensure risk issues are mitigated or resolved. The General Auditor reports functionally to the Audit Committee and administratively to the Chief Executive Officer. The appointment or replacement of the General Auditor is overseen by the Audit Committee. Additional information on risks and uncertainties and additional factors that could affect the Company's results of operations can be found in Item 1A and elsewhere within this Form 10-K for the year ended December 31, 2018, and in other reports Webster Financial Corporation files with the SEC. 11 ITEM 1A. RISK FACTORS An investment in our securities involves risks and uncertainties, some of which are inherent in the financial services industry and others of which are more specific to our business. The discussion below addresses the material risks and uncertainties, of which we are currently aware, that could adversely affect our business and impact results of operations or financial condition. Before making an investment decision, you should carefully consider the risks and uncertainties described below together with all of the other information included or incorporated by reference in this report. If any of the events or circumstances described in the following risks factors actually occurs, our business, results of operations or financial condition could be harmed, as a result. Risks Relating to the Economy, Financial Markets, and Interest Rates Difficult conditions in the economy and the financial markets may have a materially adverse effect on our business, financial condition and results of operations. Our financial performance is highly dependent upon the business environment in the markets where we operate and in the United States as a whole. Unfavorable or uncertain economic and market conditions can be caused by declines in economic growth, decreases in business activity, weakening of investor or business confidence, limitations on the availability or increases in the cost of credit and capital, increases in inflation, changes in interest rates, changes in tax laws, high unemployment, natural disasters or a combination of these or other factors. In particular, we may face the following risks in connection with developments in the current economic and market environment: • • • • • consumer and business confidence levels may decline and lead to less credit usage and increases in delinquencies and default rates; our ability to assess the creditworthiness of our customers may be impaired if the models and approaches we use to select, manage, and underwrite our customers become less predictive of future behaviors; customer desire to do business with us may decline, whether as a result of a decreased demand for loans or other financial products and services or decreased deposits or other investments in accounts with us; competition in our industry could intensify as a result of the increasing consolidation of financial services companies and changes in financial services technologies; and the effects of recent and proposed changes in laws such as the Tax Cuts and Jobs Act of 2017 (Tax Act). The business environment and financial markets in the U.S. have experienced volatility in recent years and may continue to do so for the foreseeable future. There can be no assurance that economic conditions will not worsen. Difficult economic conditions could adversely affect our business, results of operations and financial condition. Changes in local economic conditions could adversely affect our business. A significant percentage of our loans are secured by real estate, primarily across the Northeast. Our success depends in part upon economic conditions in Southern New England and our other geographic markets. Adverse changes in such local markets could reduce our growth in loans and deposits, impair our ability to collect our loans, increase problem loans and charges-offs, and otherwise negatively affect our performance and financial condition. The soundness of other financial institutions could adversely affect our business. Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services companies are interrelated as a result of trading, clearing, counterparty or other relationships. We have exposure to many different industries and counterparties, and we routinely execute transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, mutual and hedge funds, and other institutional clients. As a result, defaults by, or even rumors or questions about, one or more financial services companies, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions. Many of these transactions expose us to credit risk in the event of default of our counterparty or client. In addition, our credit risk may be exacerbated if the collateral held by us cannot be realized or is liquidated at prices not sufficient to recover the full amount of the loan or derivative exposure due us. There is no assurance that any such losses would not materially and adversely affect our business, financial condition or results of operations. We may not pay dividends if we are not able to receive dividends from our subsidiary, Webster Bank. We are a separate and distinct legal entity from our banking and non-banking subsidiaries and depend on the payment of cash dividends from Webster Bank and our existing liquid assets as the principal sources of funds for paying cash dividends on our common stock. Unless we receive dividends from Webster Bank or choose to use our liquid assets, we may not be able to pay dividends. Webster Bank’s ability to pay dividends is subject to its ability to earn net income and to meet certain regulatory requirements. See the sub-section captioned "Dividends" in Item 1 of this report for a discussion of regulatory and other restrictions on dividend declarations. 12 Changes in interest rates and spreads could have an impact on earnings and financial condition which could have a negative impact on the value of our stock. Our consolidated earnings and financial condition are dependent to a large degree upon net interest income, which is the difference between interest earned from loans and investments and interest paid on deposits and borrowings. The narrowing of interest rate spreads could adversely affect our earnings and financial condition. We cannot predict with certainty or control changes in interest rates. Regional and local economic conditions and the policies of regulatory authorities, including monetary policies of the FRB, affect interest income and interest expense. While we have ongoing policies and procedures designed to manage the risks associated with changes in market interest rates, changes in interest rates still may have an adverse effect on our profitability. For example, high interest rates could affect the amount of loans that we can originate because higher rates could cause customers to apply for fewer mortgages, or cause depositors to shift funds from accounts that have a comparatively lower cost to accounts with a higher cost, or experience customer attrition due to competitor pricing. If the cost of interest-bearing deposits increases at a rate greater than the yields on interest-earning assets increase, net interest income will be negatively affected. Changes in the asset and liability mix may also affect net interest income. Similarly, lower interest rates cause higher yielding assets to prepay and floating or adjustable rate assets to reset to lower rates. If we were not able to reduce our funding costs sufficiently, due to either competitive factors or the maturity schedule of existing liabilities, then our net interest margin would decline. The uncertainty about the future of London Interbank Offered Rate (LIBOR) may adversely impact our business. The Financial Conduct Authority (the authority that regulates LIBOR) has announced it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. This announcement indicates that the continuation of LIBOR on the current basis cannot, and will not, be guaranteed after 2021. The Alternative Reference Rates Committee (ARRC) has proposed that the Secured Overnight Financing Rate (SOFR) is the rate that represents best practice as the alternative to LIBOR for use in derivatives and other financial contracts that are currently indexed to LIBOR. ARRC has proposed a paced market transition plan to SOFR from LIBOR and organizations are currently working on industry wide and company specific transition plans as it relates to derivatives and cash markets exposed to LIBOR. It is not possible at this time to predict whether and to what extent banks will continue to provide submissions for the calculation of LIBOR. Similarly, it is not possible to predict whether LIBOR will continue to be viewed as an acceptable market benchmark, what rate or rates may become accepted alternatives to LIBOR, or what the effect of any such changes in views or alternatives may be on the markets for LIBOR-indexed financial instruments. The market transition away from LIBOR to an alternative reference rate, such as the SOFR, is complex and could have a range of adverse effects on our loan and lease and investment portfolios, asset-liability management, business, financial condition and results of operations. Webster has material contracts that are indexed to LIBOR and is currently monitoring this activity and evaluating the related risks. Our stock price can be volatile. Stock price volatility may negatively impact the price at which our common stock may be sold, and may also negatively impact the timing of any sale. Our stock price can fluctuate widely in response to a variety of factors including, among other things: • • • • • • • • • • • • actual or anticipated variations in operating results; changes in recommendations by securities analysts; operating and stock price performance of other companies that investors deem comparable to us; news reports relating to trends, concerns and other issues in the financial services and healthcare industries; new technology used, or services offered, by competitors; perceptions in the marketplace regarding us and/or our competitors; significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving us or our competitors; failure to integrate acquisitions or realize anticipated benefits from acquisitions; additional investments from third parties; issuance of additional shares of stock; changes in government regulations or actions by government regulators; and geo-political conditions such as acts or threats of terrorism or military conflicts. General market fluctuations, industry factors and general economic and political conditions and events, such as economic slowdowns or recessions, interest rate changes, credit loss trends or currency fluctuations, could also cause our stock price to decrease regardless of our operating results. 13 Regulatory, Compliance, Environmental and Legal Risks We are subject to extensive government regulation and supervision, which may interfere with our ability to conduct our business and may negatively impact our financial results. We, primarily through Webster Bank and certain non-bank subsidiaries, are subject to extensive federal and state regulation and supervision. Banking regulations are intended to protect depositors’ funds, the DIF and the safety and soundness of the banking system as a whole, not shareholders. These regulations affect our lending practices, capital structure, investment practices, dividend policy and growth, among other things. Congress and federal regulatory agencies continually review banking laws, regulations and policies for possible changes. Changes to statutes, regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies, could affect us in substantial and unpredictable ways. Such changes could subject us to additional costs, limit the types of financial services and products we may offer, and/or limit what we may charge for certain banking services, among other things. Additionally, recent changes to the legal and regulatory framework governing our operation, including the continued implementation of Dodd-Frank Act and EGRRCPA have and will continue to affect the lending, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act imposed additional regulatory obligations and increased scrutiny from federal banking agencies. In general, we expect this focus to continue and compliance requirements can be costly to implement. Compliance personnel and resources may increase our costs of operations and adversely impact our earnings. Failure to comply with laws, regulations or policies could result in sanctions by regulatory agencies, civil money penalties and/ or reputation damage, which could have a material adverse effect on our business, financial condition and results of operations. While we have policies and procedures designed to prevent any such violations, there can be no assurance that such violations will not occur. See the section captioned "Supervision and Regulation" in Item 1 of this report for further information. Changes in accounting standards and policies could materially impact how we report our results of operations and financial condition. Our accounting policies and methods are fundamental to how we record and report our results of operations and financial condition. Accordingly, we exercise judgment in selecting and applying these accounting policies and methods so they comply with U.S. Generally Accepted Accounting Principles (GAAP). From time to time, the Financial Accounting Standards Board (FASB), regulatory agencies, and other bodies that establish accounting standards periodically change the financial accounting and reporting standards governing the preparation of our financial statements. Additionally, those bodies may change prior interpretations or positions on how these standards should be applied. The impact of these changes can be difficult to predict and can materially impact how we report our results of operations and financial condition. We could be required to apply new or revised guidance retrospectively, which may result in the revision of prior period financial statements by material amounts. Such changes could also require the Company to incur additional personnel, technology, or other costs. Notably, on January 1, 2020, the Company will be required to comply with a new accounting standard commonly referred to as the Current Expected Credit Losses (CECL). CECL will fundamentally change how we estimate credit losses on loans and certain other instruments requiring earlier recognition of expected credit losses measured over the life of the instrument. A discussion of accounting standards issued but not yet adopted including CECL can be found in Note 1 to the Consolidated Financial Statements. Health care reforms could adversely affect our HSA Bank division and our revenues, financial position and our results of operations. The enactment of health care reforms affecting health savings accounts at the federal or state level may affect our HSA Bank division, which is a bank custodian of health savings accounts. We cannot predict if any such reforms will ultimately become law, or, if enacted, what their terms or the regulations promulgated pursuant to such laws will be. Any health care reforms enacted may be phased in over a number of years but, if enacted, could, with respect to the operations of HSA Bank, reduce our revenues, increase our costs, and require us to revise the ways in which we conduct business or put us at risk for loss of business. In addition, our results of operations, financial position, and cash flows could be materially adversely affected by such changes. Changes in the federal, state or local tax laws may negatively impact our financial performance. We are subject to changes in tax law that could increase our effective tax rates. While the Tax Act reduced the federal corporate tax rate from 35% to 21% beginning in 2018, which has had a favorable impact on our earnings and capital generation abilities, the new legislation also enacted limitations on certain deductions, such as FDIC deposit insurance premiums, which partially offset the increase in net earnings from the lower tax rate. In addition, further changes in the tax law, changes in interpretations, guidance or regulations that may be promulgated, or actions that we may take as a result of the Tax Act could negatively impact our business. Similarly, our customers are likely to continue to experience varying effects from both the individual and business tax provisions of the Tax Act and such effects, whether positive or negative, may have a corresponding impact on our financial performance and the economy as a whole. 14 We are subject to financial and reputational risks from potential liability arising from lawsuits. The nature of our business ordinarily results in a certain amount of claims and legal action. Whether claims and related legal actions are founded or unfounded, if such claims and legal actions are not resolved in a manner favorable to us they may result in significant financial liability and/or adversely affect our market perception, the products and services we offer, as well as impact customer demand for those products and services. We assess our liabilities and contingencies in connection with outstanding legal proceedings as well as certain threatened claims utilizing the latest and most reliable information. For matters where a loss is not probable or the amount of the loss cannot be estimated, no accrual is established. For matters where it is probable we will incur a loss and the amount can be reasonably estimated, we establish an accrual for the loss. Once established, the accrual is adjusted periodically to reflect any relevant developments. The actual cost of any outstanding legal proceedings or threatened claims, however, may turn out to be substantially higher than the amount accrued. These costs may adversely affect our business, results of operations and prospects. We are exposed to risk of environmental liabilities with respect to properties to which we obtain title. A large portion of our loan portfolio is secured by real estate. In the course of our business, we may foreclose and take title to real estate and could be subject to environmental liabilities with respect to these properties. We may be held liable to a government entity or to third parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination, or may be required to clean up hazardous or toxic substances, or chemical releases at a property. The costs associated with investigation and remediation activities could be substantial. In addition, if we are the owner or former owner of a contaminated site, we may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property. These costs and claims could adversely affect our business, results of operations and prospects. Risks Relating to the Competitive Environment in Which We Operate We operate in a highly competitive industry and market area. If we fail to compete effectively, our financial condition and results of operations may be materially adversely affected. We face substantial competition in all areas of our operations from a variety of different competitors, many of which are larger and may have more financial resources than we do. Such competitors primarily include national, regional, and community banks within the various markets in which we operate. We also face competition from many other types of financial institutions, including, without limitation, savings and loans, credit unions, non-bank health savings account trustees, finance companies, brokerage firms, insurance companies, online lenders, factoring companies and other financial intermediaries. Some of the financial services organizations with which the Company competes are not subject to the same degree of regulation as is imposed on bank holding companies and federally insured depository institutions, which may give them certain advantages over the Company in accessing funding and in providing various services. The financial services industry could become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation. Technology has lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks. Additionally, due to their size, many competitors may be able to achieve economies of scale and, as a result, may offer a broader range of products and services than we do, as well as better pricing for those products and services. Our ability to compete successfully depends on a number of factors, including, among other things: • • • • • • the ability to develop, maintain and build upon long-term customer relationships based on top quality service, high ethical standards and safe, sound assets; the ability to expand market position; the scope, relevance and pricing of products and services offered to meet customer needs and demands; the rate at which we introduce new products and services relative to our competitors; customer satisfaction with our level of service and products; and industry and general economic trends. Failure to perform in any of these areas could significantly weaken our competitive position, which could adversely affect our growth and profitability, which, in turn, could have a material adverse effect on our financial condition and results of operations. The loss of key partnerships could adversely affect our HSA Bank division. Our HSA Bank division relies on partnerships with various health insurance carriers and other partners to maximize our distribution model. In particular, health plan partners, who provide high deductible health plan options, are a significant source of new and existing health savings account holders. If these health plan partners or other partners choose to align with our competitors, our results of operations, business and prospects could be adversely affected. 15 We may not be able to attract and retain skilled people. Our success depends, in large part, on our ability to attract and retain key people. Competition for the best people in most activities in which we engage can be intense and we may not be able to hire people or to retain them. The unexpected loss of services of key personnel could have a material adverse impact on the business because we would lose their skills, knowledge of the market, years of industry experience and may have difficulty promptly finding qualified replacement personnel. Risks Relating to Risk Management We continually encounter technological change. The failure to understand and adapt to these changes could negatively impact our business. The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology- driven products and services. The effective use of technology can increase efficiency and enable financial institutions to better serve customers and to reduce costs. However, some new technologies needed to compete effectively result in incremental operating costs and capital investments. Our future success depends, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in operations. Many of our competitors, because of their larger size and available capital, have substantially greater resources to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers within the same time frame as our large competitors. Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse impact on our business and, in turn, our financial condition and results of operations. New lines of business or new products and services may subject us to additional risks. A failure to successfully manage these risks may have a material adverse effect on our business. From time to time, we may implement new lines of business, offer new products and services within existing lines of business or shift our asset mix. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed. In developing and marketing new lines of business and/or new products and services and/or shifting asset mix, we may invest significant time and resources. Initial timetables for the introduction and development of new lines of business and/or new products or services may not be achieved and price and profitability targets may not prove attainable. External factors, such as compliance with regulations, competitive alternatives, and shifting market preferences, may also impact the successful implementation of a new line of business or a new product or service. Furthermore, any new line of business and/ or new product or service could have a significant impact on the effectiveness of our system of internal controls. Failure to successfully manage these risks in the development and implementation of new lines of business or new products or services could have a material adverse effect on our business, results of operations and financial condition. A failure or breach of our systems, or those of our third party vendors and other service providers, including as a result of cyber attacks, could disrupt our businesses, result in the misuse of confidential or proprietary information, damage our reputation, increase our costs and cause losses. As a large financial institution, we depend on our ability to process, record, and monitor a large number of customer transactions, and customer, public and regulatory expectations regarding operational and information security have increased over time. Accordingly, our operational systems and infrastructure must continue to be safeguarded and monitored for potential failures, disruptions and breakdowns. Our business, financial, accounting, data processing systems or other operating systems and facilities may stop operating properly or become disabled as a result of a number of factors that may be wholly or partially beyond our control. For example, there could be sudden increases in customer transaction volume; electrical or telecommunications outages; natural disasters; pandemics; events arising from political or social matters, including terrorist acts; and cyber attacks. Although we have business continuity plans and believe we have robust information security procedures and controls in place, disruptions or failures in the physical infrastructure or operating systems that support our businesses and customers, or cyber attacks or security breaches of the networks, systems or devices on which customers’ personal information is stored and that our customers use to access our products and services could result in customer attrition, regulatory fines, penalties or intervention, reputational damage, reimbursement or other compensation costs, and/or additional compliance costs, which could have a materially adverse effect on our results of operations and financial condition. Third parties with whom we do business or that facilitate our business activities, including exchanges, clearing houses, financial intermediaries or vendors that provide services or security solutions for our operations, could also be sources of operational and information security risk to us, including from breakdowns or failures of their own systems, capacity constraints and cyber attacks. 16 Although to date we have not experienced any material losses relating to cyber attacks or other information security breaches, there can be no assurance that we will not suffer such losses in the future. Our risk and exposure to these matters remains heightened and as a result the continued development and enhancement of our controls, processes and practices designed to protect and facilitate the recovery of our systems, computers, software, data and networks from attack, damage or unauthorized access remain a high priority for us. As an additional layer of protection, we have purchased network and privacy liability risk insurance coverage which includes digital asset loss, business interruption loss, network security liability, privacy liability, network extortion and data breach coverage. As cyber threats continue to evolve, we may be required to expend significant additional resources to modify our protective measures or to investigate and remediate any information security vulnerabilities. Disruptions in services provided by third-party vendors that we rely on may result in a material adverse effect on our business. We rely on third-party vendors to provide products and services necessary to maintain day-to-day operations. For example, we are dependent on our vendor-provided core banking processing systems to process a large number of increasingly complex transactions. Accordingly, we are exposed to the risk that these vendors might not perform in accordance with the contracted arrangements or service level agreements because of changes in the vendor’s organizational structure, financial condition, support for existing products, services and technology strategic focus or for any other reason. Such failure to perform could be disruptive to our operations, which could have a materially adverse impact on our business, results of operations and financial condition. While we require third-party outsourced service providers to have business continuity and disaster recovery plans that are aligned with our overall recovery plans, we cannot be assured that such plans will operate successfully or in a timely manner so as to prevent any such material adverse impact. Our controls and procedures may fail or be circumvented, which may result in a material adverse effect on our business. Management regularly reviews and updates our internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of our controls and procedures, failure to implement any necessary improvement of our controls and procedures, or failure to comply with regulations related to controls and procedures could have a material adverse effect on our business, results of operations and financial condition. We face risks in connection with completed or potential acquisitions. From time to time we may evaluate expansion through the acquisition of banks or branches, or other financial businesses or assets. Such acquisitions involve various risks commonly associated with acquisitions, including, among other things: • The possible loss of key employees and customers; • • • • Potential business disruptions; Potential changes in banking or tax laws or regulations that may affect the business; Potential exposure to unknown or contingent liabilities; and Potential difficulties in integrating the target business into our own. Acquisitions typically involve the payment of a premium over book and market values, and therefore, some dilution of the Company’s tangible book value and net income per common share may occur in connection with any future transaction. Furthermore, failure to realize the expected revenue increases, cost savings, increases in geographic or product presence, and/or other projected benefits from an acquisition could have a material adverse effect on the Company’s business, financial condition and results of operations. Our business may be adversely affected by fraud. As a financial institution, we are inherently exposed to operational risk in the form of theft and other fraudulent activity by employees, customers, and other third parties targeting the Company or the Company’s customers or data. Such activity may take many forms, including check fraud, electronic fraud, wire fraud, phishing, social engineering and other dishonest acts. Although we devote substantial resources to maintaining effective policies and internal controls to identify and prevent such incidents, given the increasing sophistication of possible perpetrators, we may experience financial losses or reputational harm as a result of fraud. 17 Risks Relating to Accounting Estimates Our allowance for loan and lease losses may be insufficient. Our business is subject to periodic fluctuations based on national and local economic conditions. These fluctuations are not predictable, cannot be controlled and may have a material adverse impact on our operations and financial condition. For example, declines in housing activity including declines in building permits, housing starts and home prices, may make it more difficult for our borrowers to sell their homes or refinance their debt. Sales may also slow, which could strain the resources of real estate developers and builders. We may suffer higher loan and lease losses as a result of these factors and the resulting impact on our borrowers. A declining economy could negatively affect employment levels and impact the ability of our borrowers to service their debt. Bank regulatory agencies also periodically review our allowance for loan and lease losses and may require an increase in the provision for loan and lease losses or the recognition of further loan charge-offs, based on judgments different than those of management. In addition, if charge-offs in future periods exceed the allowance for loan and lease losses, we may need, depending on an analysis of the adequacy of the allowance for loan and lease losses, additional provisions to increase the allowance for loan and lease losses. Any increases in the allowance for loan and lease losses will result in a decrease in net income and, possibly, capital, and may have a material adverse effect on our financial condition and results of operations. If our goodwill were determined to be impaired it could have a negative impact on our profitability. Accounting standards require that the purchase method of accounting be used for all business combinations. Under purchase accounting, if the purchase price of an acquired company exceeds the fair value of the acquired company’s net assets, the excess is carried on the balance sheet as goodwill, by the acquirer. A significant decline in our expected future cash flows, a continuing period of market disruption, market capitalization to book value deterioration, or slower growth rates may require us to record charges in the future related to the impairment of our goodwill. If we were to conclude that a future write-down is necessary, we would record the appropriate charge, which may have a material adverse effect on our financial condition and results of operations. If all or a significant portion of the unrealized losses in our investment securities were determined to be other-than-temporarily impaired, we would recognize a material charge to our earnings and our capital ratios would be adversely impacted. When the fair value of a security declines, management must assess whether that decline is other-than-temporary. When management reviews whether a decline in fair value is other-than-temporary, it considers numerous factors, many of which involve significant judgment. No assurance can be provided that the amount of the unrealized losses will not increase. To the extent that any portion of the unrealized losses in our investment securities portfolio is determined to be other-than-temporary impairment (OTTI), we will recognize a charge to our earnings in the quarter during which such determination is made and our capital ratios will be adversely impacted. If any such charge is deemed significant, a rating agency might downgrade our credit rating or put us on a credit watch. A downgrade or a significant reduction in our capital ratios might adversely impact our ability to access the capital markets or might increase our cost of capital. Even if we do not determine that the unrealized losses associated with the investment portfolio require an impairment charge, increases in such unrealized losses adversely impact the tangible common equity ratio, which may adversely impact credit rating agency and investor sentiment. Any such negative perception also may adversely impact our ability to access the capital markets or might increase our cost of capital. We may not be able to fully realize the balance of our net DTA. The value of our DTA is partially reduced by a valuation allowance. A valuation allowance is provided when it is more-likely- than-not that some portion of our DTA will not be realized. We regularly assess available positive and negative evidence to determine whether it is more-likely-than-not that our net DTA will not be realized. Realization of a DTA requires us to apply significant judgment and is inherently speculative because it requires estimates that cannot be made with certainty. If we were to conclude that a significant portion of our remaining DTA is not more-likely-than-not to be realized, the required valuation allowance could adversely affect our financial position, results of operations and regulatory capital ratios. ITEM 1B. UNRESOLVED STAFF COMMENTS Not applicable 18 ITEM 2. PROPERTIES The Company maintains its headquarters in Waterbury, Connecticut. This owned facility houses the Company's executive and primary administrative functions, as well as the principal banking headquarters of Webster Bank. Other key operation and administration functions are in an owned facility in New Britain, Connecticut and in leased facilities in Hartford, Connecticut and Southington, Connecticut. The Company considers its properties suitable and adequate for present needs. In addition to the property noted above, the Company's segments maintain the following leased or owned offices. Lease expiration dates vary, up to 68 years, with renewal options for 1 to 25 years. For additional information regarding leases and rental payments see Note 21: Commitments and Contingencies in the Notes to Consolidated Financial Statements contained elsewhere in this report. Commercial Banking The Commercial Banking segment maintains offices across a footprint that primarily ranges from Boston, Massachusetts to Washington, D.C. Significant properties are located in: Hartford, New Haven, Stamford, and Waterbury, Connecticut; Boston, Massachusetts; New York City and White Plains, New York; Conshohocken, Pennsylvania; and Providence, Rhode Island. The Commercial Banking segment also includes: Webster Capital Finance with headquarters in New Britain, Connecticut; Webster Business Credit Corporation with headquarters in New York, New York and offices in Atlanta, Georgia, Baltimore, Maryland, Boston, Massachusetts, Chicago, Illinois, Dallas, Texas, Charlotte, North Carolina and New Milford, Connecticut; and Private Banking with headquarters in Stamford, Connecticut and offices in Hartford, New Haven, Waterbury, and Greenwich, Connecticut, Boston, Massachusetts, and Providence, Rhode Island. HSA Bank The HSA Bank segment is headquartered in Milwaukee, Wisconsin with an office in Sheboygan, Wisconsin. Community Banking The Community Banking segment maintains the following banking centers: Location Connecticut Massachusetts Rhode Island New York Total banking centers ITEM 3. LEGAL PROCEEDINGS Leased 71 19 6 7 103 Owned 41 10 3 — 54 Total 112 29 9 7 157 From time to time, Webster Financial Corporation or its subsidiaries are subject to certain legal proceedings and claims in the ordinary course of business. Management presently believes that the ultimate outcome of these proceedings, individually and in the aggregate, will not be material to Webster or its consolidated financial position. Webster establishes an accrual for specific legal matters when it determines that the likelihood of an unfavorable outcome is probable and the loss is reasonably estimable. Legal proceedings are subject to inherent uncertainties, and unfavorable rulings could occur that could cause Webster to adjust its litigation accrual or could have, individually or in the aggregate, a material adverse effect on its business, financial condition, or operating results. ITEM 4. MINE SAFETY DISCLOSURES Not applicable 19 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES Market Information Webster Financial Corporation's common shares trade on the New York Stock Exchange under the symbol WBS. On February 15, 2019, there were 5,365 shareholders of record as determined by Broadridge, the Company’s transfer agent. Exchanges of Registered Securities Registered securities are exchanged as part of employee and director stock compensation plans. Recent Sales of Unregistered Securities No unregistered securities were sold by Webster Financial Corporation during the year ended December 31, 2018. Issuer Purchases of Equity Securities The following table provides information with respect to any purchase of equity securities for 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 December 31, 2018: Period October November December Total Total Number of Shares Purchased (1) Average Price Paid Per Share — $ 1,483 — 1,483 — 60.84 — 60.84 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) — $ 91,745,715 — — — 91,745,715 91,745,715 91,745,715 (1) On October 24, 2017, the Company announced that its Board of Directors had 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. This program will remain in effect until fully utilized or until modified, superseded, or terminated. All 1,483 shares purchased during the three months ended December 31, 2018 were related to stock compensation plan activity, acquired at market prices, outside of the repurchase program. 20 Performance Graph The performance graph compares Webster Financial Corporation’s cumulative shareholder return on its common stock over the last five fiscal years to the cumulative total return of the Standard & Poor’s 500 Index (S&P 500 Index) and the Keefe, Bruyette & Woods Regional Banking Index (KRX Index). Cumulative shareholder return is measured by dividing total dividends (assuming dividend reinvestment) for the measurement period plus share price change for a period by the share price at the beginning of the measurement period. The cumulative shareholder return over a five-year period assumes a simultaneous initial investment of $100, on December 31, 2013, in Webster Financial Corporation common stock and in each of the indices above. Webster Financial Corporation S&P 500 Index KRX Index Period Ending December 31, 2013 100 100 100 $ $ $ 2014 107 114 102 $ $ $ 2015 125 115 109 $ $ $ 2016 188 129 151 $ $ $ 2017 198 157 154 $ $ $ 2018 178 150 127 $ $ $ 21 ITEM 6. SELECTED FINANCIAL DATA The required information is set forth below, in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, under the section captioned "Results of Operations," which is incorporated herein by reference. ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Consolidated Financial Statements and the accompanying Notes thereto of Webster Financial Corporation contained elsewhere in this report. Results of Operations Selected Financial Data (Dollars in thousands, except per share data) Balance Sheets Total assets Loans and leases, net Investment securities Deposits (1) Borrowings Preferred stock Total shareholders' equity Statements Of Income Interest income Interest expense Net interest income Provision for loan and lease losses Non-interest income Non-interest expense Income before income tax expense Income tax expense (2) Net income Earnings applicable to common shareholders Per Share Data Basic earnings per common share Diluted earnings per common share Dividends and dividend equivalents declared per common share Dividends declared per Series A preferred stock share Dividends declared per Series E preferred stock share Dividends declared per Series F preferred stock share Book value per common share Tangible book value per common share (non-GAAP) Key Performance Ratios Tangible common equity ratio (non-GAAP) Return on average assets Return on average common shareholders’ equity Return on average tangible common shareholders' equity (non-GAAP) Net interest margin Efficiency ratio (non-GAAP) Asset Quality Ratios Non-performing loans and leases as a percentage of loans and leases Non-performing assets as a percentage of loans and leases plus OREO Non-performing assets as a percentage of total assets ALLL as a percentage of non-performing loans and leases ALLL as a percentage of loans and leases Net charge-offs as a percentage of average loans and leases Ratio of ALLL to net charge-offs 2018 $ 27,610,315 18,253,136 7,224,150 21,858,845 2,634,703 145,037 2,886,515 $ 1,055,167 148,486 906,681 42,000 282,568 705,616 441,633 81,215 360,418 351,703 $ $ $ 3.83 3.81 1.25 — — 1,323.44 29.72 23.60 At or for the years ended December 31, 2016 2017 2015 2014 $ 26,487,645 17,323,864 7,125,429 20,993,729 2,546,141 145,056 2,701,958 $ 26,072,529 16,832,268 7,151,749 19,303,857 4,017,948 122,710 2,527,012 $ 24,641,118 15,496,745 6,907,683 17,952,778 4,040,799 122,710 2,413,960 $ 22,497,175 13,740,761 6,666,828 15,651,605 4,335,193 151,649 2,322,815 $ $ $ $ $ $ $ $ $ $ $ $ 913,605 117,318 796,287 40,900 259,478 661,075 353,790 98,351 255,439 246,831 2.68 2.67 1.03 — 1,600.00 — 27.76 21.59 821,913 103,400 718,513 56,350 264,478 623,191 303,450 96,323 207,127 198,423 2.17 2.16 0.98 — 1,600.00 — 26.17 19.94 $ $ $ $ 760,040 95,415 664,625 49,300 237,777 555,341 297,761 93,032 204,729 195,361 2.15 2.13 0.89 21.25 1,600.00 — 24.99 18.69 718,941 90,500 628,441 37,250 202,108 501,600 291,699 91,973 199,726 188,496 2.10 2.08 0.75 85.00 1,600.00 — 23.99 18.10 8.05% 1.33 13.37 17.17 3.60 57.75 0.84% 0.87 0.59 137.22 1.15 0.16 7.16 x 7.67% 0.97 9.92 13.00 3.30 60.33 0.72% 0.76 0.50 158.00 1.14 0.20 5.68 x 7.19% 0.82 8.44 11.36 3.12 62.01 0.79% 0.81 0.53 144.98 1.14 0.23 5.25 x 7.12% 0.87 8.70 11.96 3.08 59.93 0.89% 0.92 0.59 125.05 1.12 0.23 5.21 x 7.46% 0.93 8.85 11.90 3.21 59.18 0.93% 0.98 0.61 122.62 1.15 0.23 5.21 x (1) The Company completed its acquisition of the health savings account business of JPMorgan Chase Bank, N.A. on January 13, 2015, assuming approximately $1.4 billion in deposits. (2) The enactment of the Tax Act in December 2017 impacted income tax expense in 2018 and 2017. Refer to Note 8 to the Consolidated Financial Statements contained in Item 8 of this Annual Report on Form 10-K for additional information. 22 The non-GAAP financial measures identified in the preceding table provide 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. The following tables reconcile non-GAAP financial measures with financial measures defined by GAAP: (Dollars and shares in thousands, except per share data) 2018 2017 2016 2015 2014 At December 31, Tangible book value per common share (non-GAAP): Shareholders' equity (GAAP) Less: Preferred stock (GAAP) Goodwill and other intangible assets (GAAP) $ 2,886,515 $ 2,701,958 $ 2,527,012 $ 2,413,960 $ 2,322,815 145,037 564,137 145,056 567,984 122,710 572,047 122,710 577,699 151,649 532,553 Tangible common shareholders' equity (non-GAAP) $ 2,177,341 $ 1,988,918 $ 1,832,255 $ 1,713,551 $ 1,638,613 Common shares outstanding 92,247 92,101 91,868 91,677 Tangible book value per common share (non-GAAP) $ 23.60 $ 21.59 $ 19.94 $ 18.69 $ 90,512 18.10 Tangible common equity ratio (non-GAAP): Tangible common shareholders' equity (non-GAAP) $ 2,177,341 $ 1,988,918 $ 1,832,255 $ 1,713,551 $ 1,638,613 Total assets (GAAP) $27,610,315 $26,487,645 $26,072,529 $24,641,118 $22,497,175 Less: Goodwill and other intangible assets (GAAP) 564,137 567,984 572,047 577,699 532,553 Tangible assets (non-GAAP) $27,046,178 $25,919,661 $25,500,482 $24,063,419 $21,964,622 Tangible common equity ratio (non-GAAP) 8.05% 7.67% 7.19% 7.12% 7.46% For the years ended December 31, (Dollars in thousands) 2018 2017 2016 2015 2014 Return on average tangible common shareholders' equity (non-GAAP): Net Income (GAAP) Less: Preferred stock dividends (GAAP) Add: Intangible assets amortization, tax-affected (GAAP) Income adjusted for preferred stock dividends and intangible assets amortization (non-GAAP) Average shareholders' equity (non-GAAP) Less: Average preferred stock (non-GAAP) Average goodwill and other intangible assets (non-GAAP) $ 360,418 $ 255,439 $ 207,127 $ 204,729 $ 199,726 7,853 3,039 8,184 2,640 8,096 3,674 8,711 4,121 10,556 1,745 $ 355,604 $ 249,895 $ 202,705 $ 200,139 $ 190,915 $ 2,782,132 $ 2,617,275 $ 2,481,417 $ 2,387,286 $ 2,289,699 145,068 566,048 124,978 570,054 122,710 574,785 134,682 579,366 151,649 533,549 Average tangible common shareholders' equity (non-GAAP) $ 2,071,016 $ 1,922,243 $ 1,783,922 $ 1,673,238 $ 1,604,501 Return on average tangible common shareholders' equity (non-GAAP) 17.17% 13.00% 11.36% 11.96% 11.90% Efficiency ratio (non-GAAP): Non-interest expense (GAAP) Less: Foreclosed property activity (GAAP) Intangible assets amortization (GAAP) Other expense (non-GAAP) Non-interest expense (non-GAAP) Net interest income (GAAP) Add: Tax-equivalent adjustment (non-GAAP) Non-interest income (GAAP) Other (non-GAAP) Less: Gain on sale of investment securities, net (GAAP) One-time gain on: sale of banking centers - redemption of an asset (GAAP) Income (non-GAAP) Efficiency ratio (non-GAAP) $ 705,616 $ 661,075 $ 623,191 $ 555,341 $ 501,600 $ $ $ $ $ $ (139) 3,847 11,878 690,030 906,681 9,026 282,568 1,244 — 4,596 (238) 4,062 9,029 648,222 796,287 16,953 259,478 1,798 — — (326) 5,652 3,513 614,352 718,513 13,637 264,478 1,780 414 7,331 $ $ $ $ 517 6,340 975 547,509 664,625 10,617 237,777 1,111 609 (74) 2,685 3,029 495,960 628,441 11,124 202,108 1,889 5,499 — — $ 1,194,923 $ 1,074,516 $ 990,663 $ 913,521 $ 838,063 57.75% 60.33% 62.01% 59.93% 59.18% 23 The following table summarizes daily average balances, interest and yield, and net interest margin on a fully tax-equivalent basis: Years ended December 31, Average Balance 2018 Interest Yield/ Rate Average Balance 2017 Interest Yield/ Rate Average Balance 2016 Interest Yield/ Rate (Dollars in thousands) Assets Interest-earning assets: Loans and leases $18,033,587 $ 845,146 4.69% $17,295,027 $ 712,794 4.12% $16,266,101 $ 624,300 3.84% Investment securities FHLB and FRB stock Interest-bearing deposits Loans held for sale 7,137,326 211,227 132,607 63,178 15,519 6,067 1,125 628 2.93 4.58 1.78 4.04 7,047,744 210,044 155,949 63,397 29,680 5,988 698 1,034 2.97 3.84 1.10 3.49 6,910,649 203,467 188,854 57,747 44,560 6,039 295 1,449 2.95 3.20 0.51 3.25 Total interest-earning assets 25,382,217 $1,064,193 4.18% 24,591,797 $ 930,558 3.78% 23,467,911 $ 835,550 3.56% Non-interest-earning assets 1,640,385 Total assets $27,022,602 1,669,370 $26,261,167 1,753,316 $25,221,227 Liabilities and equity Interest-bearing liabilities: Demand deposits $ 4,185,183 $ — —% $ 4,079,493 $ — —% $ 3,853,700 $ — —% Health savings accounts 5,540,000 10,980 0.20 4,839,988 9,612 0.20 4,150,733 9,342 0.23 Interest-bearing checking, money market and savings Time deposits Total deposits Securities sold under agreements to repurchase and other borrowings FHLB advances Long-term debt Total borrowings 9,115,168 2,818,271 21,658,622 784,998 1,339,492 225,895 2,350,385 36,559 42,868 90,407 13,491 33,461 11,127 58,079 0.40 1.52 0.42 1.72 2.50 4.93 2.47 9,508,416 27,287 2,137,574 25,354 20,565,471 62,253 876,660 14,365 1,764,347 30,320 225,639 10,380 2,866,646 55,065 0.29 1.19 0.30 1.64 1.72 4.60 1.92 8,921,844 2,027,029 18,953,306 17,989 22,527 49,858 947,858 2,413,309 14,528 29,033 225,607 9,981 3,586,774 53,542 0.20 1.11 0.26 1.53 1.20 4.42 1.49 Total interest-bearing liabilities 24,009,007 $ 148,486 0.62% 23,432,117 $ 117,318 0.50% 22,540,080 $ 103,400 0.46% Non-interest-bearing liabilities 231,463 Total liabilities 24,240,470 Preferred stock Common shareholders' equity Total shareholders' equity 145,068 2,637,064 2,782,132 Total liabilities and equity $27,022,602 211,775 23,643,892 124,978 2,492,297 2,617,275 $26,261,167 199,730 22,739,810 122,710 2,358,707 2,481,417 $25,221,227 Tax-equivalent net interest income Less: Tax-equivalent adjustments Net interest income Net interest margin 915,707 (9,026) $ 906,681 813,240 (16,953) $ 796,287 732,150 (13,637) $ 718,513 3.60% 3.30% 3.12% 24 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 investments, 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 76.2% of total revenue for the year ended December 31, 2018. 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 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 portfolio, • the size and duration of the wholesale funding portfolio, • off-balance sheet interest rate contracts, and • the pricing and structure of loans and deposits. The Federal Open Market Committee has gradually raised the federal funds rate target range nine times since December 16, 2015. Effective December 20, 2018, the target range was increased to 2.25-2.50% as compared to 1.25-1.50% at December 31, 2017. See the "Asset/Liability Management and Market Risk" section for further discussion of Webster's interest rate risk position. Comparison of 2018 to 2017 Financial Performance Net income of $360.4 million for the year ended December 31, 2018 increased 41.1% over the year ended December 31, 2017. Strong loan growth funded with growth in low-cost long-duration health savings account deposits, contributed to a 30 basis points increase in net interest margin. Non-interest income improved, led by growth in deposit service fees, while non-interest expense increases for strategic growth initiatives partially offset the increases in revenue. Income before income tax expense was $441.6 million for the year ended December 31, 2018, an increase of $87.8 million from $353.8 million for the year ended December 31, 2017. The primary drivers to the increase in income before income tax expense include: • net interest income increased $110.4 million; • deposit service fees increased $11.0 million; and • a $4.6 million gain on the sale of six banking centers. This was partially offset by increased non-interest expense of $44.5 million and provision for loan and lease losses of $1.1 million. The impact of the items outlined above, coupled with the effect from income tax expense of $81.2 million for an effective tax rate of 18.4% for the year ended December 31, 2018, and $98.4 million for an effective tax rate of 27.8% for the year ended December 31, 2017, resulted in net income of $360.4 million and diluted earnings per share of $3.81 for the year ended December 31, 2018 compared to net income of $255.4 million and diluted earnings per share of $2.67 for the year ended December 31, 2017. The decreases in both tax expense and the effective tax rate principally reflect the reduction of the U.S corporate tax rate from 35% to 21%, effective in 2018 as a result of the Tax Act along with related tax planning benefits. The efficiency ratio, a non-GAAP financial measure which quantifies the cost expended to generate a dollar of revenue was 57.75% for 2018 and 60.33% for 2017. The improvement in the ratio highlights the Company's strong net interest income growth accelerating at a rate greater than the increase in non-interest expense. Net charge-offs as a percentage of average loans and leases was 0.16% for the year ended December 31, 2018 as compared to 0.20% for the year ended December 31, 2017. Non-performing assets as a percentage of loans, leases, and other real estate owned (OREO) increased to 0.87% at December 31, 2018 from 0.76% at December 31, 2017, as non-performing asset balances slowly increased during the year. 25 Net Interest Income Net interest income totaled $906.7 million for the year ended December 31, 2018 compared to $796.3 million for the year ended December 31, 2017, an increase of $110.4 million. Average interest-earning assets during 2018 increased $0.8 billion compared to 2017, mainly due to increased loan balances, up 4.3%. Loan yields improved 57 basis points. Net interest income increased primarily due to these increases partially offset by the 12 basis points increase in deposit costs. The overall average yield on interest-earning assets increased 40 basis points to 4.18% during 2018 from 3.78% during 2017. The average yield on interest- earning assets is primarily impacted by changes in market interest rates as well as changes in the volume and relative mix of interest-earning assets. Average interest-bearing liabilities during 2018 increased $0.6 billion compared to 2017, primarily from health savings account growth of $0.7 billion in 2018. The increases in other deposits of $0.3 billion was offset by the decrease in borrowings of $0.5 billion. The average cost of interest-bearing liabilities increased 12 basis points to 0.62% during 2018 compared to 0.50% during 2017, primarily the result of the federal funds rate being increased four times during 2018. Net interest margin increased 30 basis points to 3.60% for the year ended December 31, 2018 from 3.30% for the year ended December 31, 2017. The increase in net interest margin is primarily due to an increase in commercial loan and home equity line yields which are primarily variable rate, partially offset by reduced effective yields on the portfolio of tax-exempt securities, and an increased cost of interest-bearing liabilities. The increased cost of interest-bearing liabilities was due to the federal funds rate increases, mitigated by lower borrowing balances as well as a shift towards deposit balances which are generally lower cost and not as sensitive to increases in the federal funds rate. 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: (In thousands) Change in interest on interest-earning assets: Loans and leases Loans held for sale Investments (2) Total interest income Change in interest on interest-bearing liabilities: Deposits Borrowings Total interest expense Change in tax-equivalent net interest income Years ended December 31, 2018 vs. 2017 Increase (decrease) due to Rate (1) Volume Total $ $ $ $ $ 98,805 97 (114) 98,788 21,000 12,946 33,946 64,842 $ $ $ $ $ 33,547 (504) 1,804 34,847 7,154 (9,932) (2,778) 37,625 $ 132,352 (407) 1,690 $ 133,635 $ 28,154 3,014 $ 31,168 $ 102,467 (1) The change attributable to mix, a combined impact of rate and volume, is included with the change due to rate. (2) Investments include: Investment Securities; FHLB and FRB stock; and Interest-bearing deposits. Average loans and leases for the year ended December 31, 2018 increased $0.7 billion compared to the average for the year ended December 31, 2017. The loan and lease portfolio comprised 71.0% of the average interest-earning assets at December 31, 2018 compared to 70.3% of the average interest-earning assets at December 31, 2017. The loan and lease portfolio yield increased 57 basis points to 4.69% for the year ended December 31, 2018, compared to the loan and lease portfolio yield of 4.12% for the year ended December 31, 2017. The increase in the yield on the loan and lease portfolio is due to variable rate loans resetting higher. Additionally, rising interest rates resulted in a reduction in variable rate loans at their floors. Average investments for the year ended December 31, 2018 increased $66.0 million compared to the average for the year ended December 31, 2017. Investments comprised 28.9% of the average interest-earning assets at December 31, 2018 compared to 29.6% at December 31, 2017. Investments yield was 2.98% for both the year ended December 31, 2018 and the year ended December 31, 2017. A decrease from the effect of the Tax Act on tax exempt securities was essentially offset by increased yields on variable rate securities. 26 Average deposits for the year ended December 31, 2018 increased $1.1 billion compared to the average for the year ended December 31, 2017. The increase is comprised of $105.7 million in non-interest-bearing deposits and $1.0 billion in interest-bearing deposits. The increase in interest-bearing deposits, and an improved product mix to low-cost deposits, was primarily due to health savings account deposit growth. The average cost of deposits increased 12 basis points to 0.42% for the year ended December 31, 2018 from 0.30% for the year ended December 31, 2017. The average cost of deposits increased due to a change in mix from an increase in certificate of deposit accounts as well as selected deposit product rate increases. Higher cost time deposits increased to 16.1% for the year ended December 31, 2018 from 13.0% for the year ended December 31, 2017, as a percentage of total interest-bearing deposits. Average borrowings for the year ended December 31, 2018 decreased $516.3 million compared to the average for the year ended December 31, 2017. Securities sold under agreements to repurchase and other borrowings decreased $91.7 million, and FHLB advances decreased $424.9 million as need for borrowing declined. The average cost of borrowings increased 55 basis points to 2.47% for the year ended December 31, 2018 from 1.92% for the year ended December 31, 2017. The increase in the average cost of borrowings was primarily due to the federal funds rate increases which approximated an 81 basis points impact. Cash flow hedges impacted the average cost of borrowings as follows: (In thousands) Interest rate swaps on FHLB advances Interest rate forward swap on senior fixed-rate notes Interest rate swaps on brokered CDs and deposits Net increase to interest expense on borrowings Provision for Loan and Lease Losses Years ended December 31, 2018 2017 5,901 306 350 6,557 $ $ 6,799 306 780 7,885 $ $ The provision for loan and lease losses was $42.0 million for the year ended December 31, 2018, which increased $1.1 million compared to the year ended December 31, 2017. The increase in provision for loan and lease losses was due primarily to loan growth. Total net charge-offs were $29.6 million and $35.2 million for the year ended December 31, 2018 and 2017, respectively. The decrease in net charge-offs was primarily due to lower consumer and commercial real estate loan related net charge-offs. See the sections captioned "Loans and Leases" through "Allowance for Loan and Lease Losses Methodology," contained elsewhere in this report for further details. 27 Non-Interest Income (Dollars in thousands) Deposit service fees Loan and lease related fees Wealth and investment services Mortgage banking activities Increase in cash surrender value of life insurance policies Impairment loss on securities recognized in earnings Other income Total non-interest income Years ended December 31, Increase (decrease) 2018 2017 Amount Percent $ 162,183 $ 151,137 $ 11,046 7.3% 32,025 32,843 4,424 14,614 — 36,479 26,448 31,055 9,937 14,627 (126) 26,400 5,577 1,788 (5,513) (13) 126 10,079 21.1 5.8 (55.5) (0.1) 100.0 38.2 $ 282,568 $ 259,478 $ 23,090 8.9% Total non-interest income was $282.6 million for the year ended December 31, 2018, an increase of $23.1 million, compared to $259.5 million for the year ended December 31, 2017. The increase is primarily attributable to higher deposit service fees, loan and lease related fees, and other income slightly offset by lower mortgage banking activities. Deposit service fees totaled $162.2 million for 2018 compared to $151.1 million for 2017. The increase was a result of increased service charges driven by health savings account growth and usage activities, increased checking account service charges and higher check card interchange. Loan and lease related fees totaled $32.0 million for 2018 compared to $26.4 million for 2017. The increase was primarily the result of higher fees from loan syndication, loan servicing, line usage, and letters of credit. Mortgage banking activities totaled $4.4 million for 2018 compared to $9.9 million for 2017. The decrease was the result of lower refinance activity. Other income totaled $36.5 million for 2018 compared to $26.4 million for 2017. The increase was primarily due to an increase in gains from treasury derivatives and life insurance policies, as well as a gain of $4.6 million on the sale of banking centers in 2018. 28 Non-Interest Expense (Dollars in thousands) Compensation and benefits Occupancy Technology and equipment Intangible assets amortization Marketing Professional and outside services Deposit insurance Other expense Total non-interest expense Years ended December 31, Increase (decrease) 2018 2017 Amount Percent $ 381,496 $ 356,505 $ 24,991 7.0% 59,463 97,877 3,847 16,838 20,300 34,749 91,046 60,490 89,464 4,062 17,421 16,858 25,649 90,626 (1,027) 8,413 (215) (583) 3,442 9,100 420 (1.7) 9.4 (5.3) (3.3) 20.4 35.5 0.5 $ 705,616 $ 661,075 $ 44,541 6.7% Total non-interest expense was $705.6 million for the year ended December 31, 2018, an increase of $44.5 million, compared to $661.1 million for the year ended December 31, 2017. The increase is primarily attributable to higher compensation and benefits, technology and equipment, professional and outside services and deposit insurance. Compensation and benefits totaled $381.5 million for 2018 compared to $356.5 million for 2017. The increase was primarily due to strategic hires, annual merit increases, and higher medical costs. Technology and equipment totaled $97.9 million for 2018 compared to $89.5 million for 2017. The increase was primarily due to higher depreciation and service contracts to support strategic and infrastructure projects. Professional and outside services totaled $20.3 million for 2018 compared to $16.9 million for 2017. The increase was primarily due to consulting services used for strategic projects. Deposit insurance totaled $34.7 million for 2018 compared to $25.6 million for 2017. The increase is due to $10.0 million of additional FDIC premiums for prior periods' assessments and related interest. See Note 1 to the Consolidated Financial Statements included in Item 8 of this report for additional information. Income Taxes Webster recognized income tax expense of $81.2 million for the year ended December 31, 2018 and $98.4 million for the year ended December 31, 2017, and the effective tax rates were 18.4% and 27.8%, respectively. The decreases in both tax expense and the effective tax rate principally reflect the reduction of the U.S corporate tax rate from 35% to 21%, effective in 2018 as a result of the Tax Act along with related tax planning benefits. The Company's gross DTAs applicable to its net operating loss and credit carryforwards of $70.8 million, or $32.6 million net of the $38.2 million related valuation allowance, reflects management's estimates of the Company's taxable income through the year 2032 and includes assumptions about the content and apportionment of its income for state and local tax (SALT) purposes. Those estimates and assumptions reflect the Company's plans and strategies for growth from its ordinary and recurring operations over the near term as well as a longer-term 4% growth rate assumption. Management believes the $32.6 million net DTAs are more likely than not realizable and their estimates form a reasonable basis for this determination. For additional information on Webster's income taxes, including its DTAs, see Note 8: Income Taxes in the Notes to Consolidated Financial Statements contained elsewhere in this report. 29 Comparison of 2017 to 2016 Financial Performance Net income of $255.4 million for the year ended December 31, 2017 increased 23.3% over the year ended December 31, 2016. Strong loan growth, funded with growth in low-cost low-duration health savings account deposits, resulted in an 18 basis points increase in net interest margin, and a lower provision for loan and lease losses, driven by stable credit performance throughout the year also positively impacted net interest margin. Non-interest income improved, excluding a one-time gain on the sale of an asset in 2016, while non-interest expense increases for strategic growth initiatives partially offset the net interest growth. Income before income tax expense was $353.8 million for the year ended December 31, 2017, an increase of $50.3 million from $303.5 million for the year ended December 31, 2016. The primary factors positively impacting income before income tax expense include: • net interest income increased $77.8 million; and • provision for loan and lease losses decreased $15.5 million. This was partially offset by a $37.9 million increase in non-interest expense and a $7.3 million one-time gain on the sale of an asset in 2016. The impact of the items outlined above, coupled with the effect from income tax expense of $98.4 million and $96.3 million for the years ended December 31, 2017 and 2016, respectively, resulted in net income of $255.4 million and diluted earnings per share of $2.67 for the year ended December 31, 2017 compared to net income of $207.1 million and diluted earnings per share of $2.16 for the year ended December 31, 2016. See the "Income Taxes" section for additional information with regard to the effect from income taxes, including the impact of the Tax Act. The efficiency ratio, a non-GAAP financial measure which quantifies the cost expended to generate a dollar of revenue was 60.33% for 2017 and 62.01% for 2016. The improvement in the ratio highlights the Company's strong net interest income growth accelerating at a rate greater than the increase in non-interest expense. Credit quality remained stable to slightly improved as demonstrated by the asset quality ratios. Net charge-offs as a percentage of average loans and leases was 0.20% for the year ended December 31, 2017 as compared to 0.23% for the year ended December 31, 2016. Non-performing assets as a percentage of loans, leases, and OREO decreased to 0.76% at December 31, 2017 from 0.81% at December 31, 2016, primarily driven by lower non-performing asset balances and, to a lesser extent, further reduced by loan growth. Net Interest Income Net interest income totaled $796.3 million for the year ended December 31, 2017 compared to $718.5 million for the year ended December 31, 2016, an increase of $77.8 million. Average interest-earning assets during 2017 increased $1.1 billion compared to 2016, substantially due to a significant increase in loan balances, with yield improvement of 28 basis points, up 6.3%. Net interest income increased primarily due to these increases, although the securities portfolio average balances and yields were modestly improved as well. The overall average yield on interest-earning assets increased 22 basis points to 3.78% during 2017 from 3.56% during 2016. The average yield on interest-earning assets is primarily impacted by changes in market interest rates as well as changes in the volume and relative mix of interest-earning assets. Average interest-bearing liabilities during 2017 increased $0.9 billion compared to 2016, primarily from health savings account growth, as other deposit balance increases and FHLB advance balance decreases basically offset, and the average cost of interest-bearing liabilities increased 4 basis points to 0.50% during 2017 compared to 0.46% during 2016. The average cost of borrowings increase is a result of the federal funds rate being increased four times between December 2016 and December 2017. Net interest margin increased 18 basis points to 3.30% for the year ended December 31, 2017 from 3.12% for the year ended December 31, 2016. The increase in net interest margin is primarily due to an increase in commercial loan yields and balances, as well as improved investment portfolio yields, partially offset by an increased cost of borrowing due to the federal funds rate increases, somewhat mitigated by a shift from FHLB advances to deposit balances which are generally lower cost and also not as sensitive to the federal funds rate increases. 30 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: (In thousands) Change in interest on interest-earning assets: Loans and leases Loans held for sale Investments (2) Total interest income Change in interest on interest-bearing liabilities: Deposits Borrowings Total interest expense Change in tax-equivalent net interest income Years ended December 31, 2017 vs. 2016 Increase (decrease) due to Rate (1) Volume Total $ $ $ $ $ 50,509 120 2,744 53,373 8,574 10,327 18,901 34,472 $ $ $ $ $ 37,985 (534) 4,185 41,636 3,821 (8,803) (4,982) 46,618 $ $ $ $ $ 88,494 (414) 6,929 95,009 12,395 1,524 13,919 81,090 (1) The change attributable to mix, a combined impact of rate and volume, is included with the change due to rate. (2) Investments include: Securities; FHLB and FRB stock; and Interest-bearing deposits. Average loans and leases for the year ended December 31, 2017 increased $1.0 billion compared to the average for the year ended December 31, 2016. The loan and lease portfolio comprised 70.3% of the average interest-earning assets at December 31, 2017 compared to 69.3% of the average interest-earning assets at December 31, 2016. The loan and lease portfolio yield increased 28 basis points to 4.12% for the year ended December 31, 2017, compared to the loan and lease portfolio yield of 3.84% for the year ended December 31, 2016. The increase in the yield on average loans and leases is due to increased yield on floating rate loans as well as increased spreads on loan originations. Average investments for the year ended December 31, 2017 increased $109.8 million compared to the average for the year ended December 31, 2016. The investment portfolio comprised 29.6% of the average interest-earning assets at December 31, 2017 compared to 30.5% of the average interest-earnings assets at December 31, 2016. The investment portfolio yield increased 5 basis points to 2.98% for the year ended December 31, 2017 compared to the investment portfolio yield of 2.93% for the year ended December 31, 2016. The increase in the yield on the investment portfolio is primarily due to a reduction in premium amortization from slower prepayment speeds and increased yields on floating-rate securities, more than offsetting lower current market rates on investment securities purchases compared to the yield on investment securities paydowns and maturities. Average deposits for the year ended December 31, 2017 increased $1.6 billion compared to the average for the year ended December 31, 2016. The increase is comprised of an increase of $225.8 million in non-interest-bearing deposits and an increase of $1.4 billion in average interest-bearing deposits. The increase in average interest-bearing deposits, and an improved product mix to low-cost deposits, was primarily due to health savings account deposit growth. The average cost of deposits increased 4 basis points to 0.30% for the year ended December 31, 2017 from 0.26% for the year ended December 31, 2016. The increase in average cost of deposits is mainly the result of an increase in the rate paid on public money market accounts. Higher cost time deposits decreased to 13.0% for the year ended December 31, 2017 from 13.4% for the year ended December 31, 2016, as a percentage of total interest-bearing deposits. Average borrowings for the year ended December 31, 2017 decreased $720.1 million compared to the average for the year ended December 31, 2016. Average securities sold under agreements to repurchase and other borrowings decreased $71.2 million, and average FHLB advances decreased $649.0 million as utilization of advances maturing within one year declined significantly. The average cost of borrowings increased 43 basis points to 1.92% for the year ended December 31, 2017 from 1.49% for the year ended December 31, 2016. The increase in average cost of borrowings is the result of the federal funds rate being increased four times between December 2016 and December 2017. Cash flow hedges impacted the average cost of borrowings as follows: (In thousands) Interest rate swaps on repurchase agreements Interest rate swaps on FHLB advances Interest rate forward swap on senior fixed-rate notes Interest rate swaps on brokered CDs and deposits Net increase to interest expense on borrowings $ $ 31 $ Years ended December 31, 2016 2017 361 — 8,315 6,799 306 306 780 780 9,762 7,885 $ Provision for Loan and Lease Losses The provision for loan and lease losses was $40.9 million for the year ended December 31, 2017, which decreased $15.5 million compared to the year ended December 31, 2016. The decrease in provision for loan and lease losses was due primarily to lower loan growth as compared to the rate for 2016. Total net charge-offs was $35.2 million and $37.0 million for the year ended December 31, 2017 and 2016, respectively. The decrease was primarily due to lower commercial real estate and other commercial loan related net charge-offs. Non-Interest Income (Dollars in thousands) Deposit service fees Loan and lease related fees Wealth and investment services Mortgage banking activities Increase in cash surrender value of life insurance policies Gain on sale of investment securities, net Impairment loss on securities recognized in earnings Other income Total non-interest income Years ended December 31, Increase (decrease) 2017 2016 Amount Percent $ 151,137 $ 140,685 $ 10,452 7.4 % 26,448 31,055 9,937 14,627 — (126) 26,581 28,962 14,635 14,759 414 (149) (133) 2,093 (4,698) (132) (414) 23 26,400 38,591 (12,191) (0.5) 7.2 (32.1) (0.9) (100.0) 15.4 (31.6) $ 259,478 $ 264,478 $ (5,000) (1.9)% Total non-interest income was $259.5 million for the year ended December 31, 2017, a decrease of $5.0 million, compared to $264.5 million for the year ended December 31, 2016. The decrease is primarily attributable to lower other income and mortgage banking activities, more than offsetting higher deposit service fees and wealth and investment services. Deposit service fees totaled $151.1 million for 2017 compared to $140.7 million for 2016. The increase was a result of higher checking account service charges and check card interchange attributable to health savings account growth and usage activity. Wealth and investment services totaled $31.1 million for 2017 compared to $29.0 million for 2016. The increase was primarily due to increased sales coupled with growth in assets under management. Mortgage banking activities totaled $9.9 million for 2017 compared to $14.6 million for 2016. The decrease was due to lower volume of conforming residential mortgage originations, driven by a decrease in refinance activity. Other income totaled $26.4 million for 2017 compared to $38.6 million for 2016. The decrease was primarily due to the following items recorded in 2016: a $7.3 million gain on the redemption of an ownership interest in a privately held investment; a $2.7 million favorable adjustment to the fair value of a contingent receivable; and a $2.0 million gain on the sale of commercial loans, which did not repeat in 2017. Other income was also impacted by lower net client interest rate hedging activities/hedging revenues, nearly offset by a settlement gain and increased alternative investment gains. 32 Non-Interest Expense (Dollars in thousands) Compensation and benefits Occupancy Technology and equipment Intangible assets amortization Marketing Professional and outside services Deposit insurance Other expense Total non-interest expense Years ended December 31, Increase (decrease) 2017 2016 Amount Percent $ 356,505 $ 325,998 $ 30,507 9.4% 60,490 89,464 4,062 17,421 16,858 25,649 90,626 61,110 79,882 5,652 19,703 14,801 26,006 90,039 (620) 9,582 (1,590) (2,282) 2,057 (357) 587 (1.0) 12.0 (28.1) (11.6) 13.9 (1.4) 0.7 $ 661,075 $ 623,191 $ 37,884 6.1% Total non-interest expense was $661.1 million for the year ended December 31, 2017, an increase of $37.9 million from the year ended December 31, 2016. The increase is primarily attributable to higher compensation and benefits, technology and equipment, professional and outside services, and other expenses, somewhat offset by lower marketing and intangible assets amortization. Compensation and benefits totaled $356.5 million for 2017 compared to $326.0 million for 2016. The increase was driven by strategic hires within HSA Bank as well as additional annual merit compensation and group insurance costs. In addition, in response to the Tax Act, the Company announced a further investment in its employees and communities. As a result, an expense of $2.6 million is included in compensation and benefits for 2017 to cover a one-time cash bonus to full-time employees who are below the vice president level. Occupancy totaled $60.5 million for 2017 compared to $61.1 million for 2016. Charges related to banking center optimization were offset by lower utilities and depreciation of premises and equipment. Technology and equipment totaled $89.5 million for 2017 compared to $79.9 million for 2016. The increase was primarily due to increased service contracts and additional depreciation on infrastructure to support bank growth. Marketing totaled $17.4 million for 2017 compared to $19.7 million for 2016. The decrease was due to lower media spend. Professional and outside services totaled $16.9 million for 2017 compared to $14.8 million for 2016. The increase was primarily due to consulting services used for strategic projects. Other expense totaled $90.6 million for 2017 compared to $90.0 million for 2016. The increase was primarily due to $3.8 million of cost associated with the redemption of Series E Preferred Stock, substantially offset by pension expense that was $2.7 million lower in 2017 as compared to 2016. Income Taxes Webster recognized income tax expense of $98.4 million in 2017 and $96.3 million in 2016, and the effective tax rates were 27.8% and 31.7%, respectively. The increase in tax expense principally reflects the higher level of pre-tax income in 2017, while the decrease in the effective rate principally reflects the $7.8 million net benefit recognized in the fourth quarter of 2017, the $28.7 million net benefit related to SALT DTAs and the $20.9 million expense attributable to the Tax Act, and $7.1 million of excess tax benefits recognized under Accounting Standards Update (ASU) No. 2016-09, Compensation - Stock Compensation (Topic 718) - Improvements to Employee Share Based Payments Accounting, which the Company adopted effective January 1, 2017. 33 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. The Corporate Treasury unit 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 within Commercial Banking and 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 with 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. As such, net interest income represents the difference between a funding credit allocation, reflecting the value of the duration funding, and the interest paid on deposits. 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, 316 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, a broker dealer registered with the SEC, a registered investment advisor under federal and applicable state laws, a member of the FINRA, and a member of the SIPC. 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. 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. 34 Webster allocates the provision for loan and lease losses to each reportable segment based on management’s estimate of the inherent loss content in each of the specific loan and lease portfolios. Management believes the reserve level is adequate to cover inherent losses in each reportable segment. For additional discussion related to asset quality metrics, see the "Asset Quality" section elsewhere within this report. 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. A charge related to additional FDIC premiums pertaining to prior periods' deposit insurance assessments and related interest is included in the Corporate and Reconciling category for the year ended December 31, 2018. See Note 1 to the Consolidated Financial Statements included in Item 1 of this report for additional information. Beginning in 2018, income tax expense is estimated for each reportable segment individually. The 2017 income tax expense was estimated for all segments using the consolidated effective tax rate. This change in the estimate of income tax expense reflects an estimate of full profitability for each of the individual business segments based on the nature of their operations. The following tables present net income (loss), selected balance sheet information, and assets under administration/management for Webster’s reportable segments and the Corporate and Reconciling category for the periods presented: (In thousands) Net income (loss): Commercial Banking HSA Bank Community Banking Corporate and Reconciling Consolidated Total (In thousands) Total assets Loans and leases Goodwill Deposits Not included in above amounts: Assets under administration/management (In thousands) Total assets Loans and leases Goodwill Deposits Not included in above amounts: Assets under administration/management Years ended December 31, 2018 2017 2016 $ $ 160,185 79,908 98,292 22,033 360,418 $ 133,594 $ 115,366 49,774 83,468 (11,397) 255,439 38,230 60,959 (7,428) 207,127 $ $ Commercial Banking At December 31, 2018 Community Banking Corporate and Reconciling HSA Bank Total $ 10,477,050 $ 70,826 $ 8,727,335 $ 8,335,104 $ 27,610,315 10,437,319 55 8,028,115 — 21,813 516,560 — — 18,465,489 538,373 4,030,554 5,740,601 11,856,652 231,038 21,858,845 1,930,199 1,460,204 3,391,946 — 6,782,349 Commercial Banking At December 31, 2017 Community Banking Corporate and Reconciling HSA Bank Total $ 9,350,028 $ 76,308 $ 8,909,671 $ 8,151,638 $ 26,487,645 9,323,376 328 8,200,154 — 21,813 516,560 — — 17,523,858 538,373 4,122,608 5,038,681 11,476,334 356,106 20,993,729 2,039,375 1,268,402 3,376,185 — 6,683,962 35 Commercial Banking Operating Results: (In thousands) Net interest income Provision for loan and lease losses Net interest income after provision Non-interest income Non-interest expense Income before income taxes Income tax expense Net income Comparison of 2018 to 2017 $ $ $ $ Years ended December 31, 2017 322,393 38,518 283,875 55,194 154,037 185,032 51,438 133,594 $ $ 2018 356,509 34,773 321,736 64,765 174,054 212,447 52,262 160,185 2016 287,596 37,455 250,141 57,253 138,379 169,015 53,649 115,366 Net income increased $26.6 million in 2018 compared to 2017. Net interest income increased $34.1 million, primarily due to loan and deposit growth and higher loan and deposit margins. The provision for loan and lease losses decreased $3.7 million. The current year provision for loan and lease losses benefited from a stable asset quality and overall credit environment. Non-interest income increased $9.6 million, primarily due to loan related fees and client interest rate hedging activities. Non-interest expense increased $20.0 million, related to FDIC insurance and investments in people and technology, Comparison of 2017 to 2016 Net income increased $18.2 million in 2017 compared to 2016. Net interest income increased $34.8 million, primarily due to loan and deposit growth. The provision for loan and lease losses increased $1.1 million, primarily due to loan growth. Non-interest income decreased $2.1 million, primarily due to lower client interest rate hedging activities. Non-interest expense increased $15.7 million, related to strategic hires and investments in cash management product enhancements and support functions. Selected Balance Sheet Information and Assets Under Administration/Management: (In thousands) Total assets Loans and leases Deposits 2018 $ 10,477,050 10,437,319 4,030,554 At December 31, 2017 $ 9,350,028 9,323,376 4,122,608 2016 $ 9,069,445 9,066,905 3,592,531 Assets under administration/management (not included in above amounts) 1,930,199 2,039,375 1,781,840 Loans and leases increased $1.1 billion at December 31, 2018 compared to December 31, 2017, due to loan originations greater than prior year levels by $1.2 billion partially offset by an increase in prepayments. Loans and leases increased $0.3 billion at December 31, 2017 compared to December 31, 2016, primarily due to new originations. Loan originations were $4.4 billion, $3.2 billion and $3.3 billion in 2018, 2017 and 2016, respectively. Deposits decreased $92.1 million at December 31, 2018 compared to December 31, 2017, primarily due to a decrease in municipal deposits. Deposits increased $530.1 million at December 31, 2017 compared to December 31, 2016, due to growth in client and operating funds maintained for cash management services. Through Private Banking, Commercial Banking held approximately $1.5 billion, $1.7 billion, and $1.5 billion in assets under management, at December 31, 2018, December 31, 2017, and December 31, 2016, respectively In addition Private Banking had assets under administration of $422.5 million, $357.5 million, and $271.7 million,at December 31, 2018, December 31, 2017, and December 31, 2016, respectively. 36 HSA Bank Operating Results: (In thousands) Net interest income Non-interest income Non-interest expense Income before income taxes Income tax expense Net income Comparison of 2018 to 2017 $ $ $ $ Years ended December 31, 2017 104,704 77,378 113,143 68,939 19,165 49,774 $ $ 2018 143,255 89,323 124,594 107,984 28,076 79,908 2016 81,451 71,710 97,152 56,009 17,779 38,230 Net income increased $30.1 million in 2018 compared to 2017. Net interest income increased $38.6 million, reflecting growth in deposits and improvement in deposit spreads. Non-interest income increased $11.9 million, primarily due to a higher volume of fee and interchange income primarily as a result of the growth in the number of accounts. Non-interest expense increased $11.5 million, primarily due to increased compensation and benefits, processing costs related to incremental account growth and investments in expanded sales force. Comparison of 2017 to 2016 Net income increased $11.5 million in 2017 compared to 2016. Net interest income increased $23.3 million, reflecting the growth in deposits and improved deposit spreads. Non-interest income increased $5.7 million, due to growth in accounts. Non-interest expense increased $16.0 million, primarily due to increased compensation and benefits cost, increased processing costs in support of business growth as well as continued investment in key initiatives related to continuous improvement, customer service, and expanded sales force. Selected Balance Sheet Information and Assets Under Administration, through linked brokerage accounts: (In thousands) Total assets Deposits $ 2018 70,826 5,740,601 At December 31, 2018 2017 76,308 5,038,681 $ $ 2016 83,987 4,362,503 Assets under administration, through linked brokerage accounts (not included in above amounts) 1,460,204 1,268,402 878,190 HSA Bank deposits accounted for 26.3% and 24.0% of the Company’s total deposits as of December 31, 2018 and December 31, 2017, respectively. Deposits increased $0.7 billion at December 31, 2018 compared to December 31, 2017. The increase is related to organic deposit and account growth. Deposits increased $0.7 billion at December 31, 2017 compared to December 31, 2016. The increase is also related to organic deposit and account growth. Assets under administration increased $191.8 million at December 31, 2018 compared to December 31, 2017, primarily due to the increasing number of account holders with investment accounts partially offset by the fourth-quarter decline in market value of investments. Assets under administration increased $390.2 million at December 31, 2017 compared to December 31, 2016, primarily by due to the increasing number of account holders with investment accounts and market value increases. The combination of deposit balances and assets under administration is known as total footings. Total footings were $7.2 billion, comprised of deposit balances of $5.7 billion and assets under administration of $1.5 billion at December 31, 2018, compared to total footings of $6.3 billion, comprised of deposit balances of $5.0 billion and assets under administration of $1.3 billion at December 31, 2017. 37 Community Banking Operating Results: (In thousands) Net interest income Provision for loan and lease losses Net interest income after provision Non-interest income Non-interest expense Income before income taxes Income tax expense Net income Comparison of 2018 to 2017 $ $ $ $ Years ended December 31, 2017 383,700 2,382 381,318 107,368 373,081 115,605 32,137 83,468 $ $ 2018 404,869 7,227 397,642 109,669 384,599 122,712 24,420 98,292 2016 367,137 18,895 348,242 110,197 369,132 89,307 28,348 60,959 Net income increased $14.8 million in 2018 compared to 2017. Net interest income increased $21.2 million, primarily due to growth in deposit balances, coupled with improved interest spreads on deposits. The provision for loan and lease losses increased by $4.8 million primarily due to changes in loan balances and asset quality. Non-interest income increased $2.3 million, due to gain on the sale of six banking centers, coupled with growth in deposit and loan fees; partially offset by decreased fee income from mortgage banking activities, as a result of lower mortgage production. Non-interest expense increased $11.5 million, primarily due to higher compensation-related expenses and continued investments in technology. Comparison of 2017 to 2016 Net income increased $22.5 million in 2017 compared to 2016. Net interest income increased $16.6 million, primarily due to portfolio balances growth in both loans and deposits, coupled with improved interest spreads on deposits. The overall increase was partially offset by the effects of tightening spreads on the loan portfolio. The provision for loan and lease losses decreased $16.5 million, loan portfolio quality improvements in the residential, home-equity and business banking portfolios. Non-interest income decreased $2.8 million, primarily due to lower fees from mortgage banking activities and business client interest rate hedging activities; partially offset by increased fee income from investment services and deposit related service charges. Non- interest expense increased $3.9 million, primarily due to charges related to banking centers optimization, increased compensation and benefits, and increased investments and consulting in technology infrastructure, partially offset by lower marketing and the absence, in 2017, of core deposit intangible amortization which ended in 2016. Selected Balance Sheet Information and Assets Under Administration: (In thousands) Total assets Loans Deposits 2018 $ 8,727,335 8,028,115 11,856,652 At December 31, 2017 $ 8,909,671 8,200,154 11,476,334 2016 $ 8,721,046 7,959,558 10,970,977 Assets under administration (not included in above amounts) 3,391,946 3,376,185 2,980,113 Loan portfolio balances decreased $172.0 million at December 31, 2018 compared to December 31, 2017. The decrease is related to net attrition in residential mortgage and home equity balances as loan principal paydowns exceeded new loan production. These balance declines were partially offset by continued growth in the business banking portfolio. Loan portfolio balances increased $240.6 million at December 31, 2017 compared to December 31, 2016, due to growth in the business banking, residential mortgages, home equity lines, and personal loans. Loan originations were $1.3 billion, $1.9 billion, and $2.3 billion for the years ended 2018, 2017 and 2016, respectively. The decrease of $588.0 million in originations for the year ended December 31, 2018 is driven by lower production in residential mortgages and home equity products. Deposits increased $380.3 million at December 31, 2018 compared to December 31, 2017, due to the Boston expansion and growth in time deposit balances. Deposits increased $505.4 million at December 31, 2017 compared to December 31, 2016, due to growth in business and personal transaction account balances and increases in time deposit balances. Additionally, investment and securities-related services had assets under administration, in its strategic partnership with LPL, of $3.4 billion at December 31, 2018, compared to $3.4 billion at December 31, 2017 and $3.0 billion at December 31, 2016. 38 Financial Condition Webster had total assets of $27.6 billion at December 31, 2018 compared to $26.5 billion at December 31, 2017, an increase of $1.1 billion, or 4.2%. Loans and leases of $18.3 billion, net of ALLL of $212.4 million, at December 31, 2018 increased $937 million compared to loans and leases of $17.3 billion, net of ALLL of $200.0 million, at December 31, 2017. The increases were driven by strong commercial loan origination activity. Total deposits of $21.9 billion at December 31, 2018 increased $0.9 billion compared to $21.0 billion at December 31, 2017. Non- interest-bearing deposits decreased 0.7%, and interest-bearing deposits increased 5.3% during the year ended December 31, 2018, primarily due to growth in health savings accounts and time deposits. At December 31, 2018, total shareholders' equity was $2.9 billion compared to $2.7 billion at December 31, 2017, an increase of $184.6 million or, 6.8%. Changes in shareholders' equity for the year ended December 31, 2018 consisted of an increase of $360.4 million for net income, partially offset by $39.1 million for other comprehensive loss, $115.3 million for dividends to common shareholders, and $7.9 million for dividends paid to preferred shareholders. The quarterly cash dividend to common shareholders was increased for the seventh consecutive year, on April 23, 2018, to $0.33 per common share from $0.26 per common share. On January 29, 2019, Webster Financial Corporation’s Board of Directors declared a quarterly dividend of $0.33 per share. See the "Selected Financial Highlights" section contained elsewhere in this item and Note 13: Regulatory Matters in the Notes to Consolidated Financial Statements contained elsewhere in this report for information on Webster’s 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 types 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 December 31, 2018, the Company had no investments in obligations of individual states, counties, or municipalities which exceeded 10% of consolidated shareholders’ equity. Webster maintains, through its Corporate Treasury Unit, 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, and CMBS. The combined carrying value of investment securities totaled $7.2 billion at December 31, 2018 and $7.1 billion at December 31, 2017. Available-for-sale investment securities increased by $260.7 million, primarily due to principal purchase activity for Agency MBS and CMBS more than offsetting principal paydowns throughout the portfolio. The tax-equivalent yield in the portfolio was 2.89% for the year ended December 31, 2018 compared to 2.74% for the year ended December 31, 2017. Held-to-maturity investment securities decreased by $162.0 million, primarily due to principal paydowns throughout the portfolio exceeding purchase activity for Agency MBS and municipal bonds and notes. The tax-equivalent yield in the portfolio was 2.96% for the year ended December 31, 2018 compared to 3.12% for the year ended December 31, 2017. The Company held $6.2 billion in investment securities that are in an unrealized loss position at December 31, 2018. Approximately $1.2 billion of this total has been in an unrealized loss position for less than twelve months, while the remainder, $5.0 billion, has been in an unrealized loss position for twelve months or longer. These investment securities were evaluated by management and were determined not to be other-than-temporarily impaired. The Company does not have the 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 investments, the Company may be required to record impairment charges for OTTI in future periods. The total unrealized loss was $226.9 million at December 31, 2018. 39 The following table summarizes the amortized cost and fair value of investment securities: (In thousands) Available-for-sale: U.S. Treasury Bills Agency CMO Agency MBS Agency CMBS CMBS CLO Single issuer-trust preferred Corporate debt 2018 2017 At December 31, Amortized Cost Unrealized Gains Unrealized Losses Fair Value Amortized Cost Unrealized Gains Unrealized Losses Fair Value $ 7,549 $ 1 $ — $ 7,550 $ 1,247 $ — $ — $ 238,968 1,521,534 608,167 447,897 114,641 — 55,860 412 1,631 — 645 94 — — (4,457) (42,076) (41,930) (2,961) (1,964) — 234,923 308,989 1,481,089 1,124,960 566,237 445,581 112,771 — 608,276 358,984 209,075 7,096 56,504 (5,281) 50,579 1,158 2,151 — 2,157 910 — 797 (3,814) (19,270) (20,250) (74) (134) (46) (679) 1,247 306,333 1,107,841 588,026 361,067 209,851 7,050 56,622 Securities available-for-sale $ 2,994,616 $ 2,783 $ (98,669) $ 2,898,730 $ 2,675,131 $ 7,173 $ (44,267) $ 2,638,037 Held-to-maturity: Agency CMO Agency MBS Agency CMBS Municipal bonds and notes CMBS Private Label MBS $ 208,113 $ 287 $ (5,255) $ 203,145 $ 260,114 $ 664 $ (4,824) $ 255,954 2,517,823 667,500 715,041 216,943 — 8,250 53 2,907 405 — (79,701) (22,572) (18,285) (2,388) — 2,446,372 2,569,735 16,989 644,981 699,663 214,960 — 696,566 711,381 249,273 323 — 8,584 2,175 1 (37,442) (10,011) (6,558) (620) — 2,549,282 686,555 713,407 250,828 324 Securities held-to-maturity $ 4,325,420 $ 11,902 $ (128,201) $ 4,209,121 $ 4,487,392 $ 28,413 $ (59,455) $ 4,456,350 The following table summarizes debt securities period-end amount and weighted-average yield by contractual maturity, which reflects callable securities that have issued a call notice: (Dollars in thousands) Available-for-sale: U.S. Treasury Bills Agency CMO Agency MBS Agency CMBS CMBS CLO Corporate debt Within 1 Year 1 - 5 Years 5 - 10 Years After 10 Years Total Amount Weighted Average Yield Amount Weighted Average Yield Amount Weighted Average Yield Amount Weighted Average Yield Amount Weighted Average Yield At December 31, 2018 $ 7,550 2.43% $ —% $ — —% $ — —% $ 7,550 2.43% — — — — — 2.90 — — — — — — — 17,029 3.75 — — — — 10,363 15,850 — 177,864 70,076 — 2.44 2.27 — 3.90 4.15 — 224,560 1,465,239 566,237 250,688 42,695 30,264 2.55 2.86 2.38 3.70 4.29 2.97 234,923 1,481,089 566,237 445,581 112,771 50,579 2.55 2.86 2.38 3.78 4.20 2.95 Securities available-for-sale Held-to-maturity: Agency CMO Agency MBS Agency CMBS Municipal bonds and notes CMBS Securities held-to-maturity Total debt securities $ $ $ $ 2.77% $ 17,029 3.75% $ 274,153 3.81% $2,579,683 2.83% $2,898,730 2.92% —% $ — — 6.62 — — 704 — 3,355 — —% $ 410 2.60% $ 207,703 2.60% $ 208,113 2.60% 4.25 — 5.70 — 11,903 — 22,992 — 2.76 — 4.24 — 2,505,216 667,500 681,647 216,943 2.79 2.71 3.64 3.00 2,517,823 667,500 715,041 216,943 2.79 2.71 3.70 3.00 7,047 6.62% $ 4,059 5.45% $ 35,305 3.72% $4,279,009 2.91% $4,325,420 2.93% 34,912 3.55% $ 21,088 4.08% $ 309,458 3.80% $6,858,692 2.88% $7,224,150 2.93% — — — — — 20,315 27,865 — — — 7,047 — The benchmark 10-year U.S. Treasury rate increased to 2.69% on December 31, 2018 from 2.41% on December 31, 2017. Webster Bank has the ability to use its investment portfolio as well as interest-rate derivative financial instruments, within internal policy guidelines to manage interest rate risk as part of its asset/liability strategy. See Note 15: Derivative Financial Instruments in the Notes to Consolidated Financial Statements contained elsewhere in this report for additional information concerning the use of derivative financial instruments. 40 Loans and Leases The following table provides the composition of loans and leases: (Dollars in thousands) Amount % Amount % Amount % Amount % Amount % 2018 2017 At December 31, 2016 2015 2014 Residential Consumer: Home equity Other consumer Total consumer Commercial: $ 4,389,866 23.8 $ 4,464,651 25.5 $ 4,232,771 24.9 $ 4,042,960 25.8 $ 3,498,675 25.2 2,153,911 11.7 2,336,846 13.3 2,395,483 14.1 2,439,415 15.6 2,459,458 17.7 227,257 1.2 237,695 1.4 274,336 1.6 248,830 1.6 75,307 0.5 2,381,168 12.9 2,574,541 14.7 2,669,819 15.7 2,688,245 17.2 2,534,765 18.2 Commercial non-mortgage 5,269,557 28.5 4,551,580 26.0 4,151,740 24.4 3,575,042 22.8 3,098,892 22.3 Asset-based Total commercial Commercial real estate: Commercial real estate Commercial construction 971,876 5.3 837,490 4.8 808,836 4.7 755,709 4.8 662,615 4.8 6,241,433 33.8 5,389,070 30.8 4,960,576 29.1 4,330,751 27.6 3,761,507 27.1 4,715,949 25.5 4,249,549 24.2 4,141,025 24.3 3,696,596 23.6 3,326,906 23.9 218,816 1.2 279,531 1.6 375,041 2.2 300,246 1.9 235,449 1.7 Total commercial real estate 4,934,765 26.7 4,529,080 25.8 4,516,066 26.5 3,996,842 25.5 3,562,355 25.6 Equipment financing Net unamortized premiums Net deferred fees 504,351 14,809 2.7 0.1 (903) — 545,877 15,316 5,323 3.1 0.1 — 630,040 9,402 7,914 3.7 0.1 — 594,984 7,477 10,476 3.8 — 0.1 532,117 2,580 8,026 3.8 — 0.1 Total loans and leases $ 18,465,489 100.0 $ 17,523,858 100.0 $ 17,026,588 100.0 $ 15,671,735 100.0 $ 13,900,025 100.0 Total residential loans were $4.4 billion at December 31, 2018, a net decrease of $74.8 million from December 31, 2017, primarily due to loan repayments of $460.9 million, partially offset by originations of $400.2 million during the year ended December 31, 2018. Total consumer loans were $2.4 billion at December 31, 2018, a net decrease of $193.4 million from December 31, 2017, primarily the result of net paydowns in the equity line and loan products of $704.5 million partially offset by originations of $473.7 million during the year ended December 31, 2018. Total commercial loans were $6.2 billion at December 31, 2018, a net increase of $852.4 million from December 31, 2017. The growth in commercial loans is primarily related to new originations of $2.4 billion in commercial non-mortgage loans for the year ended December 31, 2018, partially offset by loan payments. Asset-based loans increased $134.4 million from December 31, 2017, reflective of $388.4 million in originations and line usage during the year ended December 31, 2018, partially offset by loan payments. Total commercial real estate loans were $4.9 billion at December 31, 2018, a net increase of $405.7 million from December 31, 2017 as a result of originations of $1.8 billion during the year ended December 31, 2018, partially offset by loan payments. Equipment financing loans and leases were $504.4 million at December 31, 2018, a net decrease of $41.5 million from December 31, 2017, primarily the result lower originations during the year ended December 31, 2018. 41 The following table provides contractual maturity and interest-rate sensitivity information for loans and leases: (In thousands) Residential Consumer: Home equity Other consumer Total consumer Commercial: Commercial non-mortgage Asset-based Total commercial Commercial real estate: Commercial real estate Commercial construction Total commercial real estate Equipment financing Total loans and leases (In thousands) Fixed rate Variable rate Total loans and leases Asset Quality At December 31, 2018 Contractual Maturity One Year Or Less $ 904 $ One To Five Years 27,890 More Than Five Years $ 4,387,843 $ 3,068 13,664 16,732 572,924 156,107 729,031 97,034 201,113 298,147 3,653,763 813,064 4,466,827 2,069,077 12,748 2,081,825 1,020,748 — 1,020,748 Total 4,416,637 2,169,179 227,525 2,396,704 5,247,435 969,171 6,216,606 345,703 66,950 412,653 30,093 $ 1,189,413 1,661,237 137,704 1,798,941 399,042 $ 6,990,847 2,701,374 14,177 2,715,551 79,262 $ 10,285,229 4,708,314 218,831 4,927,145 508,397 $ 18,465,489 Interest-Rate Sensitivity One Year Or Less 180,125 $ 1,009,288 $ 1,189,413 $ One To Five Years 986,806 6,004,041 $ 6,990,847 More Than Five Years $ 4,128,313 6,156,916 $ 10,285,229 $ Total 5,295,244 13,170,245 $ 18,465,489 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 or for the years ended December 31, 2018 2017 2016 2015 2014 Non-performing loans and leases as a percentage of loans and leases 0.84% 0.72% 0.79% 0.89% 0.93% Non-performing assets as a percentage of loans and leases plus OREO Non-performing assets as a percentage of total assets 0.87 0.59 0.76 0.50 0.81 0.53 0.92 0.59 0.98 0.61 ALLL as a percentage of non-performing loans and leases 137.22 158.00 144.98 125.05 122.62 ALLL as a percentage of loans and leases Net charge-offs as a percentage of average loans and leases Ratio of ALLL to net charge-offs 1.15 0.16 1.14 0.20 1.14 0.23 1.12 0.23 1.15 0.23 7.16x 5.68x 5.25x 5.21x 5.21x 42 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 loans and leases past due 90 days or more and accruing, non-accrual loans and leases, and troubled debt restructuring (TDR)s. Management monitors potential problem loans and leases due to a higher degree of risk associated with 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 $226.9 million at December 31, 2018 compared to $271.5 million at December 31, 2017. Past Due Loans and Leases The following table provides information regarding loans and leases past due 30 days or more and accruing income: At December 31, (Dollars in thousands) Residential Consumer: Home equity Other consumer Commercial: 2018 2016 Amount (1) % (2) Amount (1) % (2) Amount (1) % (2) Amount (1) % (2) Amount (1) % (2) 0.49 $ 11,202 17,216 13,771 15,032 12,789 0.31 0.29 0.26 0.37 2014 2015 2017 $ $ $ $ 14,595 2,729 0.68 1.20 18,397 3,997 0.79 1.68 14,578 3,715 0.61 1.35 13,261 2,000 0.54 0.80 16,415 1,110 0.67 1.47 Commercial non-mortgage 1,700 0.03 5,809 0.13 1,949 0.05 4,052 0.11 2,099 0.07 Commercial real estate: Commercial real estate Equipment financing Loans and leases past due 30-89 days Residential Commercial non-mortgage Commercial real estate Loans and leases past due 90 days and accruing Total loans and leases over 30 days past due and accruing income Deferred costs and unamortized premiums 1,514 915 34,242 0.03 0.18 0.19 — — 104 — — — 551 2,358 44,883 0.01 0.43 0.26 — — 644 0.01 243 — 8,173 1,596 41,213 0.20 0.25 0.24 — — 749 0.02 — — 2,250 602 37,197 2,029 0.06 0.10 0.24 0.05 22 — — — 2,714 701 40,255 2,039 0.08 0.13 0.29 0.06 48 — — — 104 — 887 0.01 749 — 2,051 0.01 2,087 0.02 34,346 0.19 45,770 0.26 41,962 0.25 39,248 0.25 42,342 0.30 86 77 86 86 96 Total $ 34,432 $ 45,847 $ 42,048 $ 39,334 $ 42,438 (1) Past due loan and lease balances exclude non-accrual loans and leases. (2) Represents the principal balance of past due loans and leases as a percentage of the outstanding principal balance within the comparable loan and lease category. The percentage excludes the impact of deferred costs and unamortized premiums. 43 Non-performing Assets The following table provides information regarding lending-related non-performing assets: (Dollars in thousands) Residential Consumer: Home equity Other consumer Total consumer Commercial: Commercial non-mortgage Asset-based loans Total commercial Commercial real estate: Commercial real estate Commercial construction Total commercial real estate Equipment financing Total non-performing loans and leases (3) Deferred costs and unamortized premiums 2018 Amount (1) % (2) 2017 Amount (1) % (2) At December 31, 2016 Amount (1) % (2) 2015 Amount (1) % (2) 2014 Amount (1) % (2) $ 49,069 1.12 $ 44,407 0.99 $ 47,201 1.12 $ 54,101 1.34 $ 64,022 1.83 33,456 1,493 34,949 55,951 224 56,175 1.55 0.66 1.47 1.06 0.02 0.90 35,601 1,706 37,307 39,402 589 39,991 1.52 0.72 1.45 0.87 0.07 0.74 35,875 1,663 37,538 1.50 0.61 1.41 37,279 558 37,837 1.53 0.22 1.41 39,950 280 40,230 1.62 0.37 1.59 38,550 0.93 27,086 0.76 6,436 0.21 — — — — — — 38,550 0.78 27,086 0.63 6,436 0.17 8,243 0.17 4,484 0.11 — 0.17 1.25 0.84 — 8,243 6,314 154,750 17 — 0.10 0.07 0.72 — 4,484 393 126,582 (69) 0.24 0.18 0.23 0.04 0.79 9,859 662 10,521 225 134,035 (219) 0.45 1.15 0.51 0.12 0.89 16,750 3,461 20,211 706 139,941 128 0.45 1.55 0.52 0.10 0.94 15,016 3,659 18,675 518 129,881 267 Total $ 154,767 $ 126,513 $ 133,816 $ 140,069 $ 130,148 Total non-performing loans and leases $ 154,750 $ 126,582 $ 134,035 $ 139,941 $ 129,881 Foreclosed and repossessed assets: Residential and consumer Commercial Total foreclosed and repossessed assets 6,460 407 6,867 5,759 305 6,064 3,911 — 3,911 5,029 — 5,029 3,517 2,999 6,516 Total non-performing assets $ 161,617 $ 132,646 $ 137,946 $ 144,970 $ 136,397 (1) Balances by class exclude the impact of net deferred costs and unamortized premiums. (2) Represents the principal balance of non-performing loans and leases as a percentage of the outstanding principal balance within the comparable loan and lease category. The percentage excludes the impact of deferred costs and unamortized premiums. (3) Includes non-accrual restructured loans and leases of $91.9 million, $74.3 million, $75.7 million, $100.9 million and $76.9 million as of December 31, 2018, 2017, 2016, 2015 and 2014, respectively. The following table provides detail of non-performing loan and lease activity: (In thousands) Beginning balance Additions Paydowns/draws Charge-offs Other reductions Ending balance Years ended December 31, 2018 126,582 $ 124,991 (54,468) (35,298) (7,057) 154,750 $ 2017 134,035 139,095 (100,417) (37,903) (8,228) 126,582 $ $ 44 Impaired Loans and Leases Loans 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 loans of a similar nature. Consumer and residential loans for which the borrower has been discharged in Chapter 7 bankruptcy are considered collateral dependent impaired loans at the date of discharge. Commercial, commercial real estate, and equipment financing loans and leases over a specific dollar amount, risk rated substandard or worse and non-accruing, all TDRs, and all loans that have had a partial charge-off are evaluated individually for impairment. Impairment may be evaluated at the present value of estimated future cash flows using the original interest rate of the loan or at the fair value of collateral, less estimated selling costs. To the extent that an impaired loan or lease balance is collateral dependent, the Company determines the fair value of the collateral. For residential and consumer collateral dependent loans, a third-party appraisal is obtained upon loan default. Fair value of the collateral for residential and consumer collateral dependent loans is reevaluated every six months, by either a new appraisal or other internal valuation methods. Fair value is also reassessed, with any excess amount charged off, for consumer loans that reach 180 days past due per Federal Financial Institutions Examination Council guidelines. For commercial, commercial real estate, and equipment financing collateral dependent loans and leases, Webster's impairment process requires the Company to determine the fair value of the collateral by obtaining a third-party appraisal or asset valuation, an interim valuation analysis, blue book reference, or other internal methods. Fair value of the collateral for commercial loans is reevaluated quarterly. Whenever the Company has a third-party real estate appraisal performed by independent licensed appraisers, a licensed in-house appraisal officer or qualified individual reviews these appraisals for compliance with the Financial Institutions Reform Recovery and Enforcement Act and the Uniform Standards of Professional Appraisal Practice. A fair value shortfall is recorded as an impairment reserve against the ALLL. Subsequent to an appraisal or other fair value estimate, should reliable information come to management's attention that the value has declined further, additional impairment may be recorded to reflect the particular situation, thereby increasing the ALLL. Any impaired loan for which no specific valuation allowance was necessary at December 31, 2018 and December 31, 2017 is the result of either sufficient cash flow or sufficient collateral coverage of the book balance. At December 31, 2018, there were 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, compared to 1,606 impaired loans and leases with a recorded investment balance of $246.8 million, which included loans and leases of $105.4 million, with an impairment allowance of $16.6 million at December 31, 2017. The overall reduction in the number of impaired loans is due primarily to small dollar consumer loans being resolved. The reduction of $1.2 million in impaired reserve balance reflects management's current assessment on the resolution of these credits based on collateral considerations, guarantees, or expected future cash flows of the impaired loans. 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. The most common types of modifications include covenant modifications, forbearance, and/or other concessions. If the buyer does not perform in accordance with the modified terms, the loan is reevaluated to determine the most appropriate course of action, which may include foreclosure. 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 each consumer loan TDR, except those that were performing prior to TDR status, on non-accrual status for a minimum period of 6 months. Commercial TDRs are evaluated on a case-by-case basis for determination of whether or not to place them on non-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 6 months. Initially, all TDRs are reported as impaired. Generally, TDRs are classified as impaired loans and reported as 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 6 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. 45 The following tables provide information for TDRs: (In thousands) Beginning balance Additions Paydowns/draws Charge-offs Transfers to OREO Ending balance (In thousands) Accrual status Non-accrual status Total recorded investment of TDRs (1) Specific reserves for TDR included in the balance of ALLL Additional funds committed to borrowers in TDR status Years ended December 31, 2018 221,404 75,565 (48,643) (14,283) (3,629) 230,414 $ $ 2017 223,528 36,253 (31,641) (3,178) (3,558) 221,404 At December 31, 2018 138,479 91,935 230,414 11,930 3,893 $ $ $ 2017 147,113 74,291 221,404 12,384 2,736 $ $ $ $ $ (In thousands) Residential Consumer Commercial (1) Total recorded investment of TDRs 2018 Amount % (2) 2.34 $ 103,531 1.63 39,144 0.75 87,739 1.25 $ 230,414 2017 Amount % (2) 2.55 $ 114,295 1.75 45,436 0.59 61,673 1.26 $ 221,404 At December 31, 2016 Amount % (2) 2.81 $ 119,391 1.70 45,673 0.58 58,464 1.31 $ 223,528 2015 Amount % (2) 3.31 $ 134,448 1.79 48,425 1.01 89,817 1.74 $ 272,690 2014 Amount % (2) 4.05 $ 141,982 1.97 50,249 1.61 126,563 2.29 $ 318,794 (1) Consists of commercial, commercial real estate and equipment financing loans and leases. (2) Represents the balance of TDR as a percentage of the outstanding balance within the comparable loan and lease category. The percentage includes the impact of deferred costs and unamortized premiums. 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 the 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 as of December 31, 2018. 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 is reviewed to ensure its continued appropriateness. 46 • 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 loss given default (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 the 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. A 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. Webster Bank has credit policies and procedures in place designed to support lending activity within an acceptable level of risk. Management reviews and approves these policies and procedures on a regular basis. 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. Commercial loans are underwritten after evaluating and understanding the borrower’s ability to operate and service its debt. Assessment of management is a critical element of the underwriting process and credit decision. 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. The cash flows of borrowers, however, 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 periodically 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. These 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. These loans are closely monitored with on-site inspections by third-party professionals and the Company's internal staff. 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 Fair Isaac Corporation (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 applicable CFPB rules. At December 31, 2018, the ALLL was $212.4 million compared to $200.0 million at December 31, 2017. The increase of $12.4 million in the reserve at December 31, 2018 compared to December 31, 2017 is primarily due to growth in commercial banking offset by lower reserves on impaired loans in the residential and home-equity loan portfolios. 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, increased to 1.15% at December 31, 2018 as compared to 1.14% at December 31, 2017, and reflects an updated assessment of inherent losses and impaired reserves conducted throughout the year. ALLL as a percentage of non-performing loans and leases decreased to 137.22% at December 31, 2018 from 158.00% at December 31, 2017. 47 The following table provides an allocation of the ALLL by portfolio segment: At December 31, (Dollars in thousands) Residential Consumer Commercial Commercial real estate Equipment financing 2018 Amount $ 19,599 28,681 98,793 60,151 5,129 Total ALLL $ 212,353 2017 Amount $ 19,058 36,190 89,533 49,407 5,806 $ 199,994 % (1) 0.44 1.20 1.59 1.22 1.01 1.15 2016 Amount $ 23,226 45,233 71,905 47,477 6,479 $ 194,320 % (1) 0.42 1.40 1.67 1.09 1.06 1.14 2015 Amount $ 25,876 42,052 59,977 41,598 5,487 $ 174,990 % (1) 0.55 1.68 1.46 1.05 1.02 1.14 2014 Amount $ 25,452 43,518 47,068 37,148 6,078 $ 159,264 % (1) 0.64 1.56 1.39 1.04 0.91 1.12 % (1) 0.73 1.71 1.26 1.05 1.13 1.15 (1) Percentage represents allocated ALLL to total loans and leases within the comparable category. However, the allocation of a portion of the allowance to one category of loans and leases does not preclude its availability to absorb losses in other categories. The ALLL reserve allocated to the residential loan portfolio at December 31, 2018 increased $0.5 million compared to December 31, 2017. The year-over-year increase is primarily attributable to higher loss rates, partially offset by a decrease in TDR loans of $10.8 million. The ALLL reserve allocated to the consumer portfolio at December 31, 2018 decreased $7.5 million compared to December 31, 2017. The year-over-year decrease is primarily attributable to improved credit quality and a decrease in the loan portfolio balance. The ALLL reserve allocated to the commercial portfolio at December 31, 2018 increased $9.3 million compared to December 31, 2017. The year-over-year increase is primarily attributable to loan growth of $852.4 million, partially offset by improved net rating migration. The ALLL reserve allocated to the commercial real estate portfolio at December 31, 2018 increased $10.7 million compared to December 31, 2017. The year-over-year increase is primarily attributable to loan growth of $405.7 million, partially offset by improved net rating migration. The ALLL reserve allocated to the equipment financing portfolio at December 31, 2018 decreased $0.7 million compared to December 31, 2017. The year-over-year decrease is primarily attributable to a reduction in the loan balance of $41.5 million. The following table provides detail of activity in the ALLL: (In thousands) Beginning balance Provision Charge-offs: Residential Consumer Commercial Commercial real estate Equipment financing Total charge-offs Recoveries: Residential Consumer Commercial Commercial real estate Equipment financing Total recoveries Net charge-offs Residential Consumer Commercial Commercial real estate Equipment financing Net charge-offs Ending balance At or for the years ended December 31, 2018 $ 199,994 42,000 2017 $ 194,320 40,900 2016 $ 174,990 56,350 2015 $ 159,264 49,300 2014 $ 152,573 37,250 (3,455) (19,228) (18,220) (2,061) (423) (43,387) 1,980 7,091 4,439 161 75 13,746 (2,500) (24,447) (8,147) (9,275) (558) (44,927) 1,024 6,037 2,358 165 117 9,701 (4,636) (20,669) (18,360) (2,682) (565) (46,912) 1,756 5,343 1,626 631 536 9,892 (6,508) (17,679) (11,522) (7,578) (273) (43,560) 875 4,366 2,738 647 1,360 9,986 (6,214) (20,712) (13,668) (3,237) (595) (44,426) 1,324 5,055 4,369 885 2,234 13,867 (1,475) (12,137) (13,781) (1,900) (348) (29,641) $ 212,353 (1,476) (18,410) (5,789) (9,110) (441) (35,226) $ 199,994 (2,880) (15,326) (16,734) (2,051) (29) (37,020) $ 194,320 (5,633) (13,313) (8,784) (6,931) 1,087 (33,574) $ 174,990 (4,890) (15,657) (9,299) (2,352) 1,639 (30,559) $ 159,264 48 Net charge-offs for the years ended December 31, 2018 and 2017 were $29.6 million and $35.2 million, respectively. Net charge- offs decreased by $5.6 million during the year ended December 31, 2018 compared to the year ended December 31, 2017. The decrease in net charge-off activity is primarily due to improved asset quality in consumer loans, a large charge-off in commercial real estate from 2017, partially offset by the increase in commercial loans. The following table provides a summary of total net charge-offs (recoveries) to average loans and leases by category: Residential Consumer Commercial Commercial real estate Equipment financing Total net charge-offs to total average loans and leases Reserve for Unfunded Credit Commitments Years ended December 31, 2018 2017 2016 2015 2014 0.03% 0.49 0.23 0.04 0.07 0.16% 0.03% 0.70 0.11 0.20 0.07 0.20% 0.07% 0.56 0.36 0.05 — 0.23% 0.15% 0.51 0.22 0.18 (0.20) 0.23% 0.14% 0.61 0.26 0.07 (0.34) 0.23% A reserve for unfunded credit commitments provides for probable losses inherent with funding the unused portion of legal commitments to lend. Reserve calculation factors are consistent with the ALLL methodology for funded loans using the PD, LGD, and LEP applied to the underlying borrower risk and facility grades, and a draw down factor applied to utilization rates. The following tables provide detail of activity in the reserve for unfunded credit commitments: (In thousands) Beginning balance Provision (benefit) Ending balance At or for the years ended December 31, 2018 2017 2016 2015 2014 $ $ 2,362 144 2,506 $ $ 2,287 75 2,362 $ $ 2,119 168 2,287 $ $ 5,151 (3,032) 2,119 $ $ 4,384 767 5,151 49 Sources of Funds and Liquidity Sources of Funds. The primary source of Webster Bank’s cash flows 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 flows. While scheduled loan and investment security repayments are a relatively stable source of funds, loan and investment security prepayments and deposit inflows are influenced by prevailing interest rates and 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 FHLB Boston capital stock of $98.6 million at December 31, 2018 and $100.9 million at December 31, 2017 for its membership and for outstanding advances and other extensions of credit. Webster Bank received $4.6 million in dividends from the FHLB Boston during 2018. 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 December 31, 2018 and December 31, 2017, Webster Bank held $50.7 million of FRB of Boston 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. Webster Bank received $1.5 million in dividends from the FRB of Boston during 2018. 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 $21.9 billion, $21.0 billion, and $19.3 billion at December 31, 2018, 2017, and 2016, respectively, with time deposits that exceed the FDIC limit, presently $250 thousand, representing approximately 2.5%, 2.7%, and 2.5%, respectively, of total deposits. For additional information, see Note 9: Deposits in the Notes to Consolidated Financial Statements contained elsewhere in this report. Daily average balances of deposits by type and weighted-average rates paid thereon for the periods as indicated: (Dollars in thousands) Non-interest-bearing: Demand Interest-bearing: Checking Health savings accounts Money market Savings Time deposits Total interest-bearing Total average deposits 2018 Years ended December 31, 2017 2016 Average Balance Average Rate Average Balance Average Rate Average Balance Average Rate $ 4,185,183 $ 4,079,493 $ 3,853,700 2,585,593 5,540,000 2,351,188 4,178,387 2,818,271 17,473,439 21,658,622 $ 0.08% 0.20 0.95 0.29 1.52 0.52 0.42% $ 2,601,962 4,839,988 2,488,422 4,418,032 2,137,574 16,485,978 20,565,471 0.07% 0.20 0.61 0.23 1.19 0.38 0.30% $ 2,422,862 4,150,733 2,279,301 4,219,681 2,027,029 15,099,606 18,953,306 0.07% 0.23 0.36 0.19 1.11 0.33 0.26% Total average deposits increased $1.1 billion, or 5.3%, in 2018 compared to 2017 and increased $1.6 billion, or 8.5%, in 2017 compared to 2016. The increase was driven by continued growth in health savings account deposits. The following table presents time deposits with a denomination of $100,000 or more at December 31, 2018 by maturity periods: (In thousands) Due within 3 months Due after 3 months and within 6 months Due after 6 months and within 12 months Due after 12 months Time deposits with a denomination of $100 thousand or more 50 $ $ 344,888 320,725 457,564 394,531 1,517,708 Borrowings. Borrowings primarily consist of FHLB advances, which are utilized as a source of funding. At December 31, 2018 and December 31, 2017, FHLB advances totaled $1.8 billion and $1.7 billion, respectively. Webster Bank had additional borrowing capacity from the FHLB of approximately $2.6 billion at both December 31, 2018 and December 31, 2017. Webster Bank also had additional borrowing capacity from the FRB of $0.6 billion and $0.5 billion at December 31, 2018 and December 31, 2017, respectively. 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 $4.7 billion at December 31, 2018 could have been used for collateral on borrowings such as repurchase agreements or, alternatively, to increase borrowing capacity by approximately $4.4 billion with the FHLB or approximately $4.6 billion with the FRB. In addition, Webster Bank may utilize term and overnight Fed funds to meet short-term borrowing needs. The Company also maintains long-term debt consisting of senior fixed-rate notes maturing in 2024 and junior subordinated notes maturing in 2033. Total borrowed funds were $2.6 billion, $2.5 billion and $4.0 billion, and represented 9.5%, 9.6% and 15.4% of total assets at December 31, 2018, 2017 and 2016, respectively. For additional information, see Note 10: Borrowings in the Notes to Consolidated Financial Statements contained elsewhere in this report. Daily average balances of borrowings by type and weighted-average rates paid thereon for the periods as indicated: (Dollars in thousands) FHLB advances Securities sold under agreements to repurchase Fed funds purchased Long-term debt Total average borrowings Years ended December 31, 2018 Average Balance 1,339,492 467,873 317,125 225,895 2,350,385 $ $ Average Rate 2.50% $ 1.57 1.94 4.93 2.47% $ 2017 Average Balance 1,764,347 695,922 180,738 225,639 2,866,646 Average Rate 1.72% $ 1.79 1.06 4.60 1.92% $ 2016 Average Balance 2,413,309 744,957 202,901 225,607 3,586,774 Average Rate 1.20% 1.82 0.46 4.42 1.49% Total average borrowings decreased $516.3 million, or 18.0%, in 2018 compared to 2017 and decreased $720.1 million, or 20.1%, in 2017 compared to 2016. The decrease in 2018 compared to 2017 was the result of deposits growing faster than loans which allowed for a lower usage of FHLB advances. The decrease in 2017 compared to 2016 was primarily due to a decrease in FHLB borrowings while the other categories also slightly decreased. Average borrowings represented 8.7%, 10.9%, and 14.2% of average total assets for December 31, 2018, 2017, and 2016, respectively. The following table sets forth additional information for short-term borrowings: (Dollars in thousands) Securities sold under agreements to repurchase: At end of year Average during year Highest month-end balance during year Fed funds purchased: At end of year Average during year Highest month-end balance during year At or for the years ended December 31, 2018 2017 2016 Amount Rate Amount Rate Amount Rate $ 236,874 245,407 264,491 0.35% $ 288,269 310,853 0.25 335,902 — 0.17% $ 340,526 321,460 0.18 365,361 — 345,000 317,125 424,400 2.52 1.96 — 55,000 180,738 182,000 1.37 1.06 — 209,000 202,893 294,000 0.16% 0.16 — 0.60 0.46 — 51 The following table summarizes contractual obligations to make future payments as of December 31, 2018: (In thousands) Senior notes Junior subordinated debt FHLB advances Securities sold under agreements to repurchase Fed funds purchased Deposits with stated maturity dates Operating leases Purchase obligations Total contractual obligations Payments Due by Period (1) Less than one year 1-3 years 3-5 years After 5 years $ $ — $ — 1,403,026 236,874 345,000 2,381,229 30,889 42,698 4,439,716 $ — $ — 415,000 — — 738,078 58,323 35,234 1,246,635 $ — $ — 392 — — 77,239 45,729 3,401 126,761 $ 150,000 $ 77,320 8,390 — — — 78,882 — 314,592 $ Total 150,000 77,320 1,826,808 236,874 345,000 3,196,546 213,823 81,333 6,127,704 (1) Amounts for borrowings do not include interest. Amounts for leases are reflected as specified in the underlying contracts. The Company also has the following obligations which have been excluded from the above table: • unfunded commitments remaining for particular investments in private equity funds of $13.4 million, for which neither the payment timing, nor eventual obligation is certain; • credit related financial instruments with contractual amounts totaling $6.1 billion, of which many of these commitments are expected to expire unused or only partially used, and therefore, the total amount of these commitments does not necessarily reflect future cash payments; and • liabilities for uncertain tax positions totaling $4.7 million, for which uncertainty exists regarding the amount that may ultimately be paid, as well as the timing of any such payment. 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 investments, or financing activities, including unpledged 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 $469.4 million for the year ended December 31, 2018 as compared to $445.0 million for the year ended December 31, 2017. The increase is primarily a result of the effects of the Tax Act. Holding Company Liquidity. The primary source of liquidity at the Holding Company is dividends from Webster Bank. Webster Bank paid $290.0 million in dividends to the Holding Company during the year ended December 31, 2018. 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 capital securities, 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 contained elsewhere in this report. At December 31, 2018, there was $341.8 million of retained earnings 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. 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 year ended December 31, 2018, a total of 443,004 shares of common stock were repurchased at a cost of approximately $25.9 million, of which 228,004 shares were purchased related to stock compensation plan activity at a cost of approximately $13.8 million, and 215,000 shares were purchased under the common stock repurchase program at a cost of approximately $12.2 million. The shares purchased under the common stock repurchase program were acquired under authority of a remaining balance from a previous program coupled with the current program, which results in a remaining repurchase authority for the Company's common stock repurchase program of $91.7 million at December 31, 2018. 52 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 84.5% and 83.5% at December 31, 2018 and December 31, 2017, 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 December 31, 2018. 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 minimum tangible capital requirements. As of December 31, 2018, Webster Bank was in compliance with all applicable capital requirements and exceeded the FDIC requirements for a well-capitalized institution. See Note 13: Regulatory Matters in the Notes to Consolidated Financial Statements contained elsewhere in this report for a further discussion of regulatory requirements applicable to Webster Financial Corporation 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 year ended December 31, 2018, Webster did not engage in any off-balance sheet transactions that would have a material effect on its financial condition. 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 ALCO. The primary goal of ALCO is to manage interest rate risk to maximize net income and net economic value over time in changing interest rate environments subject to Board approved risk limits. The Board sets policy limits for earnings at risk for parallel ramps in interest rates over twelve months of plus and minus 100, 200, and 300 basis points, as well as interest rate curve twist shocks of plus and minus 50 and 100 basis points. Economic value, or equity at risk, limits are set for parallel shocks in interest rates of plus and minus 100, 200, and 300 basis points. Based on the near historic lows in short-term interest rates prior to December 31, 2017, the declining interest rate scenarios of minus 200 basis points, or more, for both earnings at risk and equity at risk were temporarily suspended by ALCO policy. During the year ended December 31, 2018, the declining 200 basis point interest rate scenarios were re-instituted. The results of these re-instituted minus rate scenarios are outside of the established interest rate risk limits due to the impact of deposit floors. Due to the low probability of occurrence and the current level of rates, the Board has approved a temporary exception to policy. ALCO also regularly reviews earnings at risk scenarios for non-parallel changes in rates, as well as longer-term scenarios of up to four years in the future. Management measures interest rate risk using simulation analysis to calculate earnings and equity at risk. These risk measures are quantified using simulation software from one of the leading firms in the field of asset/liability modeling. Key assumptions relate to the behavior of interest rates and spreads, prepayment speeds, and the run-off of deposits. From such simulations, interest rate risk is quantified, and appropriate strategies are formulated and implemented. 53 Earnings at risk is defined as the change in earnings (excluding provision for loan and lease losses and income tax expense) due to changes in interest rates. Interest rates are assumed to change up or down in a parallel fashion, and earnings results are compared to a flat rate scenario as a base. The flat rate scenario holds the end of the period yield curve constant over the twelve month forecast horizon. Earnings simulation analysis incorporates assumptions about balance sheet changes such as asset and liability growth, loan and deposit pricing, and changes to the mix of assets and liabilities. It is a measure of short-term interest rate risk. Equity at risk is defined as the change in the net economic value of assets and liabilities due to changes in interest rates compared to a base net economic value. Equity at risk analyzes sensitivity in the present value of cash flows over the expected life of existing assets, liabilities, and off-balance sheet contracts. It is a measure of the long-term interest rate risk to future earnings streams embedded in the current balance sheet. Asset sensitivity is defined as earnings or net economic value increasing compared to a base scenario when interest rates rise and decreasing when interest rates fall. In other words, assets are more sensitive to changing interest rates than liabilities and, therefore, re-price faster. Likewise, liability sensitivity is defined as earnings or net economic value decreasing compared to a base scenario when interest rates rise and increasing when interest rates fall. Key assumptions underlying the present value of cash flows include the behavior of interest rates and spreads, asset prepayment speeds, and attrition rates on deposits. Cash flow projections from the model are compared to market expectations for similar collateral types and adjusted based on experience with Webster Bank's own portfolio. The model's valuation results are compared to observable market prices for similar instruments whenever possible. The behavior of deposit and loan customers is studied using historical time series analysis to model future customer behavior under varying interest rate environments. The equity at risk simulation process uses multiple interest rate paths generated by an arbitrage-free trinomial lattice term structure model. The Base Case rate scenario, against which all others are compared, uses the month-end LIBOR/Swap yield curve as a starting point to derive forward rates for future months. Using interest rate swap option volatilities as inputs, the model creates multiple rate paths for this scenario with forward rates as the mean. In shock scenarios, the starting yield curve is shocked up or down in a parallel fashion. Future rate paths are then constructed in a similar manner to the Base Case. Cash flows for all instruments are generated using product specific prepayment models and account specific system data for properties such as maturity date, amortization type, coupon rate, repricing frequency, and repricing date. The asset/liability simulation software is enhanced with a mortgage prepayment model and a collateralized mortgage obligation database. Instruments with explicit options such as caps, floors, puts and calls, and implicit options such as prepayment and early withdrawal ability require such a rate and cash flow modeling approach to more accurately quantify value and risk. On the asset side, risk is impacted the most by mortgage loans and mortgage-backed securities, which can typically prepay at any time without penalty and may have embedded caps and floors. In the loan portfolio, floors are a benefit to interest income in low rate environments. Floating-rate loans at floors pay a higher interest rate than a loan at a fully indexed rate without a floor, as with a floor there is a limit on how low the interest rate can fall. As market rates rise, however, the interest rate paid on these loans does not rise until the fully indexed rate rises through the contractual floor. On the liability side, there is a large concentration of customers with indeterminate maturity deposits who have options to add or withdraw funds from their accounts at any time. Implicit floors on deposits, based on historical data, are modeled. Webster Bank also has the option to change the interest rate paid on these deposits at any time. Webster's earnings at risk model incorporates net interest income (NII) and non-interest income and expense items, some of which vary with interest rates. These items include mortgage banking income, servicing rights, cash management fees, and derivative mark-to-market adjustments. Four main tools are used for managing interest rate risk: • the size and duration of the investment portfolio; • the size and duration of the wholesale funding portfolio; • off-balance sheet interest rate contracts; and • the pricing and structure of loans and deposits. ALCO meets at least monthly to make decisions on the investment and funding portfolios based on the economic outlook, the Committee's interest rate expectations, the risk position, and other factors. ALCO delegates pricing and product design responsibilities to individuals and sub-committees but monitors and influences their actions on a regular basis. Various interest rate contracts, including futures and options, interest rate swaps, and interest rate caps and floors can be used to manage interest rate risk. These interest rate contracts involve, to varying degrees, credit risk and interest rate risk. Credit risk is the possibility that a loss may occur if a counterparty transaction fails to perform according to the terms of the contract. The notional amount of interest rate contracts is the amount upon which interest and other payments are based. The notional amount is not exchanged, and therefore, should not be taken as a measure of credit risk. See Note 15: Derivative Financial Instruments in the Notes to Consolidated Financial Statements contained elsewhere in this report for additional information. 54 Certain derivative instruments, primarily forward sales of mortgage-backed securities, are utilized by Webster Bank in its efforts to manage risk of loss associated with its mortgage banking activities. Prior to closing and funds disbursement, an interest-rate lock commitment is generally extended to the borrower. During such time, Webster Bank is subject to risk that market rates of interest may change impacting pricing on loan sales. In an effort to mitigate this risk, forward delivery sales commitments are established, thereby setting the sales price. The following table summarizes the estimated impact that gradual parallel changes in interest rates of 100 and 200 basis points, over a twelve month period starting December 31, 2018 and December 31, 2017, might have on Webster’s NII for the subsequent twelve month period compared to NII assuming no change in interest rates: December 31, 2018 December 31, 2017 -200bp (10.9)% N/A -100bp (4.7)% (5.9)% +100bp 3.2% 3.4% +200bp 5.9% 6.4% The following table summarizes the estimated impact that gradual parallel changes in interest rates of 100 and 200 basis points, over a twelve month period starting December 31, 2018 and December 31, 2017, might have on Webster’s pre-tax, pre-provision net revenue (PPNR) for the subsequent twelve month period, compared to PPNR assuming no change in interest rates: December 31, 2018 December 31, 2017 -200bp (18.3)% N/A -100bp (7.9)% (10.4)% +100bp 5.0% 5.3% +200bp 9.2% 9.9% 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 December 31, 2017 assumed a federal funds rate of 1.50%, while the flat rate scenario as of December 31, 2018 assumed a federal funds rate of 2.50%. Asset sensitivity for both NII and PPNR on December 31, 2018 was lower as compared to December 31, 2017, primarily due to higher earnings from higher starting rates and to the maturity of long- term fixed-rate borrowings. 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 immediate non-parallel changes in interest rates might have on Webster’s NII for the subsequent twelve month period starting December 31, 2018 and December 31, 2017: December 31, 2018 December 31, 2017 Short End of the Yield Curve Long End of the Yield Curve -100bp (7.1)% (8.5)% -50bp (3.3)% (4.3)% +50bp 1.7% 2.0% +100bp 3.4% 3.9% -100bp (3.3)% (3.9)% -50bp (1.6)% (1.7)% +50bp 1.3% 1.3% +100bp 2.3% 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 December 31, 2018 and December 31, 2017: December 31, 2018 December 31, 2017 Short End of the Yield Curve Long End of the Yield Curve -100bp (11.6)% (14.8)% -50bp (5.4)% (7.5)% +50bp 2.4% 2.9% +100bp 4.8% 5.7% -100bp (5.6)% (4.8)% -50bp (2.9)% (2.2)% +50bp 2.4% 2.2% +100bp 4.2% 4.0% 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. These results above reflect the annualized impact of immediate rate changes. The actual impact can be uneven during the year especially in the short end scenarios where asset yields tied to Prime or LIBOR change immediately, while certain deposit rate changes take more time. Sensitivity to increases in the short end of the yield curve for NII and PPNR decreased from December 31, 2017 due primarily to higher earnings from higher starting rates and to the maturity of long-term fixed-rate borrowings. Sensitivity to increases in the long end of the yield curve was more positive than December 31, 2017 in PPNR due to higher market interest rates and the resulting decreased forecast prepayment speeds in the residential loan and investment portfolios. Sensitivity to decreases in the long end of the yield curve was less negative than at December 31, 2017 in PPNR due to decreased forecasted prepayment speeds in the residential loan and investment portfolios. 55 The following table summarizes the estimated economic value of assets, liabilities, and off-balance sheet contracts at December 31, 2018 and December 31, 2017 and the projected change to economic values if interest rates instantaneously increase or decrease by 100 basis points: (Dollars in thousands) At December 31, 2018 Assets Liabilities Net Net change as % base net economic value At December 31, 2017 Assets Liabilities Net Book Value Estimated Economic Value Estimated Economic Value Change -100 bp +100 bp $ $ $ $ 27,610,315 $ 24,723,800 2,886,515 $ 568,122 26,972,752 $ 23,119,466 719,658 3,853,286 $ (151,536) (3.9)% 26,487,645 $ 23,785,687 2,701,958 $ 505,148 25,971,043 $ 22,509,322 729,967 3,461,721 $ (224,819) $ $ $ $ (677,864) (615,650) (62,214) (1.6)% (631,744) (624,789) (6,955) Net change as % base net economic value (6.5)% (0.2)% 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 or minimal changes (positive or negative) in estimated economic value for a small change in interest rates, however, larger rate movements typically result in a measurable level of price sensitivity. Webster's duration gap was negative 0.7 years at December 31, 2018 when measured using 50 basis point changes in rates. At December 31, 2017, the duration gap was a negative 0.9 years. 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. The change in Webster's duration gap is due primarily to the higher starting interest rates and the resulting decrease in forecast prepayment assumptions in mortgage-related investments and roll forward and maturities of borrowings. 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 December 31, 2018 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. Impact of Inflation and Changing Prices The 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. 56 Critical Accounting Policies and Accounting Estimates The Company's significant accounting policies, as described in the Notes to Consolidated Financial Statements, are fundamental to understanding its results of operations and financial condition. As stated in Note 1: Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements contained elsewhere in this report, the preparation of financial statements in accordance with GAAP requires management to make judgments and accounting estimates that affect the amounts reported in the Consolidated Financial Statements and the accompanying Notes thereto. While the Company bases estimates on historical experience, current information and other factors deemed to be relevant, actual results could differ materially from those estimates. Accounting estimates are necessary in the application of certain accounting policies and procedures and can be susceptible to significant change. Critical accounting policies are defined as those that are most important to the portrayal of the Company's financial condition and results of operation, and that require management to make the most difficult, subjective, and complex judgments about matters that are inherently uncertain and which could potentially result in materially different amounts using different assumptions or under different conditions. The two critical accounting policies identified by management, which are discussed with the appropriate committees of the Board of Directors, are summarized below. Allowance for Loan and Lease Losses The ALLL is a reserve established through a provision for loan and lease losses charged to expense, which represents management’s best estimation of probable losses that are inherent within the Company’s portfolio of loans and leases as of the balance sheet date. Changes in the ALLL and, therefore, in the related provision for loan and lease losses can materially affect net income. The level of the ALLL reflects management’s judgment based on continuing evaluation of specific credit risks, loss experience, current portfolio quality, present economic, political, adequacy of underlying collateral, present value of expected future cash flows and regulatory conditions and inherent risks not captured in quantitative modeling and methodologies, as well as trends therein. The allowance balance may be allocated for specific portfolio segments; however, the entire allowance balance is available to absorb credit losses inherent in the total loan and lease portfolio. While management utilizes its best judgment and information available, the ultimate adequacy of the ALLL is dependent upon a variety of factors beyond the Company’s control, including performance of the Company’s loan portfolio, the economy, interest rate sensitivity, and other external factors. Management evaluates the composition of the ALLL on a quarterly basis. Composition of the ALLL, including valuation methodology, is more fully illustrated in Note 4: Loans and Leases in the Notes to Consolidated Financial Statements contained elsewhere in this report and in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, section captioned "Allowance for Loan and Lease Losses Methodology." Realizability of Deferred Tax Assets In accordance with ASC Topic 740, "Income Taxes," certain aspects of accounting for income taxes require significant management judgment, including assessing the realizability of DTAs. A DTA represents an item for which a benefit may be recognized for financial accounting purposes if it has been determined to be more likely than not realizable for tax purposes in a future period. A DTA valuation allowance represents the portion of a DTA determined unlikely to be realized in the future based on management's judgment. Such judgment is often subjective and involves estimates and assumptions about matters that are inherently uncertain, including with respect to the existence, and amounts, of taxable income necessary to realize a DTA in future periods. While management believes it has utilized a reasonable method for its determination of DTAs and the related valuation allowance, should factors and conditions differ materially from those used by management, the actual realization of DTAs could differ materially from the reported amounts. Management evaluates the realizability and the sufficiency of the reported amounts on a quarterly basis. Income taxes are more fully described in Note 8: Income Taxes in the Notes to Consolidated Financial Statements contained elsewhere in this report and in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, section captioned "Income Taxes." Recently Issued Accounting Standards Updates Refer to Note 1: Summary of Significant Accounting Policies in the Notes to 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The required information is set forth above, in Item 7, 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. 57 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index to Consolidated Financial Statements Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets Consolidated Statements of Income Consolidated Statements of Comprehensive Income Consolidated Statements of Shareholders' Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements Page No. 59 60 61 62 63 64 66 58 Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors Webster Financial Corporation: Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Webster Financial Corporation and subsidiaries (the “Company”) as of December 31, 2018 and 2017, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2018, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 1, 2019 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. We have served as the Company’s auditor since 2013. Hartford, Connecticut March 1, 2019 KPMG LLP is a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. KPMG LLPOne Financial Plaza755 Main StreetHartford, CT 06103 WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share data) Assets: Cash and due from banks Interest-bearing deposits Securities available-for-sale, at fair value Investment securities held-to-maturity (fair value of $4,209,121 and $4,456,350) Federal Home Loan Bank and Federal Reserve Bank stock Loans held for sale (valued under fair value option $7,908 and $20,888) Loans and leases Allowance for loan and lease losses Loans and leases, net Deferred tax assets, net Premises and equipment, net Goodwill Other intangible assets, net Cash surrender value of life insurance policies Accrued interest receivable and other assets Total assets Liabilities and shareholders' equity: Deposits: Non-interest-bearing Interest-bearing Total deposits Securities sold under agreements to repurchase and other borrowings Federal Home Loan Bank advances Long-term debt Accrued expenses and other liabilities Total liabilities Shareholders’ equity: Preferred stock, $.01 par value: Authorized - 3,000,000 shares; Series F issued and outstanding (6,000 shares) Common stock, $.01 par value: Authorized - 200,000,000 shares; Issued (93,686,311 and 93,680,291 shares) Paid-in capital Retained earnings Treasury stock, at cost (1,508,456 and 1,658,526 shares) Accumulated other comprehensive loss, net of tax Total shareholders' equity Total liabilities and shareholders' equity See accompanying Notes to Consolidated Financial Statements. December 31, 2018 2017 $ 260,422 69,077 2,898,730 4,325,420 149,286 11,869 18,465,489 (212,353) 18,253,136 96,516 124,850 538,373 25,764 543,616 313,256 $ 27,610,315 $ 231,158 25,628 2,638,037 4,487,392 151,566 20,888 17,523,858 (199,994) 17,323,864 92,630 130,001 538,373 29,611 531,820 286,677 $ 26,487,645 $ 4,162,446 17,696,399 21,858,845 581,874 1,826,808 226,021 230,252 24,723,800 $ 4,191,496 16,802,233 20,993,729 643,269 1,677,105 225,767 245,817 23,785,687 145,037 145,056 937 1,114,394 1,828,303 (71,504) (130,652) 2,886,515 $ 27,610,315 937 1,122,164 1,595,762 (70,430) (91,531) 2,701,958 $ 26,487,645 60 WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data) Interest Income: Interest and fees on loans and leases Taxable interest and dividends on securities Non-taxable interest on securities Loans held for sale Total interest income Interest Expense: Deposits Securities sold under agreements to repurchase and other borrowings Federal Home Loan Bank advances Long-term debt Total interest expense Net interest income Provision for loan and lease losses Net interest income after provision for loan and lease losses Non-interest Income: Deposit service fees Loan and lease related fees Wealth and investment services Mortgage banking activities Increase in cash surrender value of life insurance policies Gain on sale of investment securities, net Impairment loss on securities recognized in earnings Other income Total non-interest income Non-interest Expense: Compensation and benefits Occupancy Technology and equipment Intangible assets amortization Marketing Professional and outside services Deposit insurance Other expense Total non-interest expense Income before income tax expense Income tax expense Net income Preferred stock dividends and other Earnings applicable to common shareholders Earnings per common share: Basic Diluted See accompanying Notes to Consolidated Financial Statements. $ $ 61 Years ended December 31, 2018 2017 2016 $ $ 842,449 191,493 20,597 628 1,055,167 708,566 181,131 22,874 1,034 913,605 62,253 14,365 30,320 10,380 117,318 796,287 40,900 755,387 151,137 26,448 31,055 9,937 14,627 — (126) 26,400 259,478 356,505 60,490 89,464 4,062 17,421 16,858 25,649 90,626 661,075 353,790 98,351 255,439 (8,608) 246,831 2.68 2.67 $ $ $ 621,028 180,346 19,090 1,449 821,913 49,858 14,528 29,033 9,981 103,400 718,513 56,350 662,163 140,685 26,581 28,962 14,635 14,759 414 (149) 38,591 264,478 325,998 61,110 79,882 5,652 19,703 14,801 26,006 90,039 623,191 303,450 96,323 207,127 (8,704) 198,423 2.17 2.16 90,407 13,491 33,461 11,127 148,486 906,681 42,000 864,681 162,183 32,025 32,843 4,424 14,614 — — 36,479 282,568 381,496 59,463 97,877 3,847 16,838 20,300 34,749 91,046 705,616 441,633 81,215 360,418 (8,715) 351,703 3.83 3.81 $ $ WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands) Net income Other comprehensive (loss) income, net of tax: Total available-for-sale securities Total derivative instruments Total defined benefit pension and postretirement benefit plans Other comprehensive (loss) income, net of tax Comprehensive income See accompanying Notes to Consolidated Financial Statements. Years ended December 31, 2018 2017 2016 $ 360,418 $ 255,439 $ 207,127 (43,427) 5,703 (1,397) (39,121) 321,297 $ (7,590) 4,565 4,135 1,110 (9,069) 5,912 4,270 1,113 $ 256,549 $ 208,240 62 WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (In thousands, except per share data) Balance at December 31, 2015 Net income Other comprehensive income, net of tax Common stock dividends/equivalents $0.98 per share Series E preferred stock dividends $1,600.00 per share Stock-based compensation Exercise of stock options Common shares acquired from stock compensation plan activity Common stock repurchase program Common stock warrants repurchased Preferred Stock Common Stock Paid-In Capital Retained Earnings Treasury Stock, at cost Accumulated Other Comprehensive Loss, Net of Tax Total Shareholders' Equity $ 122,710 $ 937 $ 1,124,325 $ 1,315,948 $ (71,854) $ (78,106) $ 2,413,960 — — — — — — — — — — — — — — — — — — — — 149 — 2,976 (1,350) — — 207,127 — (90,062) (8,096) — — — — 403 — 10,713 13,112 — (11,664) — (11,206) (163) — — — 207,127 1,113 — — — — — — — 1,113 (89,913) (8,096) 14,092 11,762 (11,664) (11,206) (163) Balance at December 31, 2016 122,710 937 1,125,937 1,425,320 (70,899) (76,993) 2,527,012 Adoption of ASU No. 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220)-Reclassification of Certain Tax Effects from AOCI Net income Other comprehensive income, net of tax Common stock dividends/equivalents $1.03 per share Series E preferred stock dividends $1,600.00 per share Dividends accrued on Series F preferred stock Stock-based compensation Exercise of stock options Common shares acquired from stock compensation plan activity Common stock repurchase program Redemption of Series E preferred stock Issuance of Series F preferred stock Balance at December 31, 2017 Adoption of ASU No. 2017-08, Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20)-Premium Amortization on Purchased Callable Debt Securities and ASU No. 2016-01, Financial Instruments-Overall (Subtopic 825-10)-Recognition and Measurement of Financial Assets and Financial Liabilities Net income Other comprehensive loss, net of tax Common stock dividends/equivalents $1.25 per share Series F preferred stock dividends $1,323.4375 per share Dividends accrued on Series F preferred stock Stock-based compensation Exercise of stock options Stock units conversion to shares Common shares acquired from stock compensation plan activity Common stock repurchase program — — — — — — — — — — (122,710) 145,056 145,056 — — — — — — — — — — — Series F preferred stock issuance adjustment (19) — — — — — — — — — — — — — — — 15,648 255,439 — 168 (95,097) (8,096) (88) 2,636 — — — — — — — 11,548 12,200 — (11,694) — (11,585) — — — — — — — (3,941) — — — — (15,648) — — 255,439 1,110 — — — — — — — — — 1,110 (94,929) (8,096) (88) 14,184 8,259 (11,694) (11,585) (122,710) 145,056 937 1,122,164 1,595,762 (70,430) (91,531) 2,701,958 — — — — — — — — — — — — — — — 99 — — (1,541) (5,762) (1,373) 360,418 — (115,442) (7,875) 22 3,275 — (566) (6,484) — — — — — — 9,878 7,935 7,050 — — — — (13,779) — (12,158) — — — — (1,373) 360,418 (39,121) (39,121) — — — — — — — — — (115,343) (7,875) 22 11,612 2,173 — (13,779) (12,158) (19) Balance at December 31, 2018 $ 145,037 $ 937 $ 1,114,394 $ 1,828,303 $ (71,504) $ (130,652) $ 2,886,515 See accompanying Notes to Consolidated Financial Statements. 63 WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Operating Activities: Years ended December 31, 2018 2017 2016 Net income Adjustments to reconcile net income to net cash provided by operating activities: $ 360,418 $ 255,439 $ 207,127 Provision for loan and lease losses Deferred tax expense (benefit) Depreciation and amortization Amortization of earning assets and funding premium/discount, net Stock-based compensation Gain on sale, net of write-down, on foreclosed and repossessed assets Loss (gain) on sale, net of write-down, on premises and equipment Impairment loss on securities recognized in earnings Gain on the sale of investment securities, net Increase in cash surrender value of life insurance policies Gain from life insurance policies Mortgage banking activities Proceeds from sale of loans held for sale Originations of loans held for sale Net decrease (increase) in derivative contract assets net of liabilities Gain on sale of banking center deposits Gain on redemption of other assets Net (increase) decrease in accrued interest receivable and other assets Net (decrease) increase in accrued expenses and other liabilities Net cash provided by operating activities Investing Activities: Net (increase) decrease in interest-bearing deposits Purchases of available-for-sale securities Proceeds from maturities and principal payments of available-for-sale securities Proceeds from sales of available-for-sale securities Purchases of held-to-maturity securities Proceeds from maturities and principal payments of held-to-maturity securities Net proceeds from (purchase of) Federal Home Loan Bank stock Alternative investments (capital call) return of capital, net Net increase in loans Proceeds from loans not originated for sale Proceeds from life insurance policies Proceeds from the sale of foreclosed properties and repossessed assets Proceeds from the sale of premises and equipment Additions to premises and equipment Divestiture of banking center deposits, net cash paid Proceeds from redemption of other assets Net cash used for investing activities See accompanying Notes to Consolidated Financial Statements. 42,000 9,472 38,750 50,984 11,612 (709) 346 — — (14,614) (2,553) (4,424) 188,025 (171,883) (4,615) (4,596) — (739) (28,066) 469,408 (43,449) (873,108) 538,747 — (393,693) 524,862 2,280 (1,215) (990,014) 1,687 4,271 8,011 567 (32,958) (107,361) — (1,361,373) 40,900 (9,074) 37,172 45,444 12,276 (784) (15) 126 — (14,627) — (9,937) 333,027 (287,634) 32,763 — — (19,790) 29,680 444,966 3,833 (660,106) 984,732 — (1,043,278) 687,439 43,080 873 (549,213) 14,679 746 7,603 3,357 (28,546) — 7,581 (527,220) 56,350 17,700 36,449 57,331 11,438 (976) 397 149 (414) (14,759) — (14,635) 438,925 (452,886) 27,929 — (7,331) 54,269 (18,918) 398,145 126,446 (980,870) 672,965 259,283 (1,066,156) 795,953 (6,299) (381) (1,440,141) 34,170 — 9,205 1,550 (40,731) — — (1,635,006) 64 WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS, continued (In thousands) Financing Activities: Net increase in deposits Contingent consideration Proceeds from Federal Home Loan Bank advances Repayments of Federal Home Loan Bank advances Net decrease in securities sold under agreements to repurchase and other borrowings Redemption of Series E preferred stock Issuance of Series F preferred stock Dividends paid to common shareholders Dividends paid to preferred shareholders Exercise of stock options Excess tax benefits from stock-based compensation Common stock repurchase program Common shares acquired related to stock compensation plan activity Common stock warrants repurchased Net cash provided by financing activities Net (decrease) increase in cash and due from banks Cash and due from banks at beginning of period Cash and due from banks at end of period Supplemental disclosure of cash flow information: Interest paid Income taxes paid Noncash investing and financing activities: Transfer of loans and leases to foreclosed properties and repossessed assets Transfer of loans from portfolio to loans held for sale See accompanying Notes to Consolidated Financial Statements. Years ended December 31, 2018 2017 2016 979,519 — 8,960,000 (8,810,297) 1,690,197 — 12,255,000 (13,420,791) 1,351,609 5,000 19,630,000 (19,451,219) (61,395) — — (114,959) (7,875) 2,173 — (12,158) (13,779) — 921,229 29,264 231,158 260,422 144,726 60,925 8,105 5,443 $ $ $ (306,257) (122,710) 145,056 (94,630) (8,096) 8,259 — (11,585) (11,694) — 122,749 40,495 190,663 231,158 114,046 109,059 8,972 7,234 $ $ $ (201,874) — — (89,522) (8,096) 11,762 3,204 (11,206) (11,664) (163) 1,227,831 (9,030) 199,693 190,663 102,438 80,143 6,769 39,383 $ $ $ 65 Note 1: Summary of Significant Accounting Policies Nature of Operations Webster Financial Corporation is a bank holding company and financial holding company under the BHC Act, incorporated under the laws of Delaware in 1986 and headquartered in Waterbury, Connecticut. At December 31, 2018, Webster Financial Corporation's principal asset is all of the outstanding capital stock of 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 GAAP, and to general practices within the financial services industry. The Consolidated Financial Statements and the accompanying Notes thereto include the accounts of Webster Financial Corporation and all other entities in which it has a controlling financial interest. Intercompany accounts and transactions have been eliminated in consolidation. Assets that the Company holds or manages in a fiduciary or agency capacity for customers, typically referred to as assets under administration or assets under management are not included in the accompanying Consolidated Balance Sheets since those assets are not Webster's, and the Company is not the primary beneficiary. 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. Principles of Consolidation The purpose of consolidated financial statements is to present the results of operations and the financial position of the Company and its subsidiaries as if the consolidated group were a single economic entity. In accordance with the applicable accounting guidance for consolidations, the consolidated financial statements include any voting interest entities (VOEs) in which the Company has a controlling financial interest and any variable interest entities (VIEs) for which the Company is deemed to be the primary beneficiary. The Company generally consolidates its VOEs if the Company, directly or indirectly, owns more than 50% of the outstanding voting shares of the entity and the non-controlling shareholders do not hold any substantive participating or controlling rights. A VIE is an entity that has either a total equity investment that is insufficient to finance its activities without additional subordinated financial support or whose equity investors lack the ability to control the entity’s activities or lack the ability to receive expected benefits or absorb obligations in a manner that is consistent with their investment in the entity. The Company evaluates each VIE to understand the purpose and design of the entity, and its involvement in the ongoing activities of the VIE and will consolidate the VIE if it has (i) the power to direct the activities of the VIE that most significantly affect the VIE's economic performance and (ii) an obligation to absorb losses of the VIE, or the right to receive benefits from the VIE, that could potentially be significant to the VIE. The Company accounts for unconsolidated partnerships and certain other investments using the equity method of accounting if it has the ability to significantly influence the operating and financial policies of the investee. This is generally presumed to exist when the Company owns between 20% and 50% of a corporation, or when it has greater than 3%-5% interest in a limited partnership or similarly structured entity. See Note 2: Variable Interest Entities for further information. 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. Federal Deposit Insurance Corporation Assessment The Company reclassified certain loans under existing and modified FDIC loan category classifications in its regulatory filings, which resulted in an obligation for additional FDIC premiums for the period June 30, 2015 through December 31, 2017. During 2018, the Company made a $10.0 million payment to the FDIC to resolve its obligation. 66 Cash Equivalents Cash equivalents have a maturity of three months or less. Cash and due from banks. Cash equivalents, including cash on hand, certain cash due from banks and deposits at the FRB of Boston, are referenced as cash and due from banks in the accompanying Consolidated Balance Sheets and Consolidated Statements of Cash Flows. Interest-bearing deposits. Cash equivalents, primarily representing deposits at the FRB of Boston in excess of reserve requirements, and federal funds sold, which essentially represent uncollateralized loans to other financial institutions, are referenced as interest- bearing deposits in the accompanying Consolidated Balance Sheets and Consolidated Statements of Cash Flows. The Company regularly evaluates the credit risk associated with those financial institutions to assure that Webster not become exposed to any significant credit risk on cash equivalents. Investment in Debt Securities Investment securities are classified as available-for-sale or held-to-maturity at the time of purchase. Any classification change subsequent to trade date is reviewed for compliance with corporate objectives and accounting policy. Debt securities classified as held-to-maturity are those which Webster has the ability and intent to hold to maturity. Securities classified as held-to-maturity are recorded at amortized cost net of unamortized premiums and discounts. Discount accretion income and premium amortization expense are recognized as interest income according to a constant yield methodology, with consideration given to prepayment assumptions on mortgage backed securities. Premiums are amortized to the earliest call date for debt securities purchased at a premium, with explicit, non-contingent call features and are callable at a fixed price and preset date. Securities classified as available-for-sale are recorded at fair value with unrealized gains and losses recorded as a component of other comprehensive income (OCI) or other comprehensive loss (OCL). Should securities be transferred from available-for-sale to held-to-maturity they would be recorded at fair value at the time of transfer and the respective gain or loss would be recorded as a separate component of OCI or OCL and amortized as an adjustment to interest income over the remaining life of such security. Securities classified as available-for-sale or held-to-maturity and in an unrealized loss position are evaluated for OTTI on a quarterly basis. The evaluation considers several qualitative factors, including the period of time the security has been in a loss position, and the amount of the unrealized loss. If the Company intends to sell a debt security or it is more likely than not the Company will be required to sell the debt security prior to recovery of its amortized cost basis, it is written down to fair value, and the loss is recognized in non-interest income. If the Company does not intend to sell the debt security and it is more likely than not that the Company will not be required to sell the debt security prior to recovery of its amortized cost basis, only the credit component of the unrealized loss is recorded as an impairment charge in non-interest income. The remaining loss component would be recorded to accumulated other comprehensive loss, net of tax (AOCL). The specific identification method is used to determine realized gains and losses on sales of securities. See Note 3: Investment Securities for further information. Investment in Equity Securities The Company’s accounting treatment for equity investments differs for those with and without readily determinable fair values. Equity investments with readily determinable fair values are recorded at fair value with changes in fair value recorded in non- interest income. For equity investments without readily determinable fair values, the Company elected the “measurement alternative,” and therefore carry these investments at cost, less impairment (if any), plus or minus changes in observable prices. Certain 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. On a quarterly basis, the Company reviews its equity investments without readily determinable fair values for impairment. If the equity investment is considered impaired, an impairment loss equal to the amount by which the carrying value exceeds its fair value is recorded through a charge to earnings. The impairment loss may be reversed in a subsequent period if there are observable transactions for the identical or similar investment of the same issuer at a higher amount than the carrying amount that was established when the impairment was recognized. Impairment as well as upward or downward adjustments resulting from observable price changes in orderly transactions for identical or similar investments are included in non-interest income. Equity investments in entities that finance affordable housing and other community development projects provide a return primarily through the realization of tax benefits. The Company applies the proportional amortization method to account for its investments in qualified affordable housing projects. Investment in Federal Home Loan Bank and Federal Reserve Bank Stock Webster Bank is a member of the FHLB and the Federal Reserve System, and is required to maintain an investment in capital stock of the FHLB of Boston and FRB of Boston. Based on redemption provisions, the stock of both the FHLB and the FRB has no quoted market value and is carried at cost. Membership stock is reviewed for impairment as economic circumstances warrant special review. 67 Loans Held for Sale Residential mortgage loans that are classified as held for sale at the time of origination are accounted for under the fair value option method. Loans not originated for sale but subsequently transferred to held for sale are valued at the lower of cost or fair value method of accounting and are valued on an individual asset basis. Any cost amount in excess of fair value is recorded as a valuation allowance and recognized as a reduction of other non-interest income. Gains or losses on the sale of loans held for sale are recorded as mortgage banking activities. Cash flows from the sale of loans that were originated specifically for resale are presented as operating cash flows. Cash flows from the sale of loans originated for investment then subsequently transferred to held for sale are presented as investing cash flows. See Note 5: Transfers of Financial Assets for further information. Transfers and Servicing of Financial Assets Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is generally considered to have been surrendered when: (i) the transferred assets are legally isolated from the Company or its consolidated affiliates, even in bankruptcy or other receivership; (ii) the transferee has the right to pledge or exchange the assets with no conditions that constrain the transferee and provide more than a trivial benefit to the Company; and (iii) the Company does not maintain the obligation or unilateral ability to reclaim or repurchase the assets. The Company sells financial assets in the normal course of business, the majority of which are residential mortgage loan sales, primarily to government-sponsored enterprises through established programs, commercial loan sales through participation agreements, and other individual or portfolio loan and securities sales. In accordance with accounting guidance for asset transfers, the Company considers any ongoing involvement with transferred assets in determining whether the assets can be derecognized from the balance sheet. With the exception of servicing and certain performance-based guarantees, the Company’s continuing involvement with financial assets sold is minimal and generally limited to market customary representation and warranty clauses covering certain characteristics of the mortgage loans sold and the Company's origination process. The gain or loss on sale depends on the previous carrying amount of the transferred financial assets, the consideration received, and any other assets obtained or liabilities incurred in exchange for the transferred assets. When the Company sells financial assets, it may retain servicing rights and/or other interests in the financial assets. Servicing assets and any other interests held by the Company are recorded at fair value upon transfer, and thereafter are carried at the lower of cost or fair value. See Note 5: Transfers of Financial Assets for further information. Loans and Leases Loans and leases are stated at the principal amount outstanding, net of amounts charged off, unearned income, unamortized premiums and discounts, and deferred loan and lease fees/costs which are recognized as yield adjustments using the interest method. These yield adjustments are amortized over the contractual life of the related loans and leases adjusted for prepayments when applicable. Interest on loans and leases is credited to interest income as earned based on the interest rate applied to principal amounts outstanding. Prepayment fees are recognized in non-interest income. Cash flows from loans and leases are presented as investing cash flows. Loans and leases are placed on non-accrual status when collection of principal and interest in accordance with contractual terms is doubtful, generally when principal or interest payments become 90 days delinquent, unless the loan or lease is well secured and in process of collection, or sooner if management concludes circumstances indicate that the borrower may be unable to meet contractual principal or interest payments. Residential real estate loans, excluding loans fully insured against loss and in the process of collection, and consumer loans are placed on non-accrual status at 90 days past due, or at the date when the Company is notified that the borrower is discharged in bankruptcy. A charge-off for the balance in excess of the fair value of the collateral less cost to sell, is recorded at 180 days if the loan balance exceeds the fair value of the collateral less costs to sell. Residential loans that are more than 90 days past due, fully insured against loss, and in the process of collection, remain accruing and are reported as 90 days or more past due and accruing. Commercial, commercial real estate loans, and equipment finance loans or leases are subject to a detailed review when 90 days past due to determine accrual status, or when payment is uncertain and a specific consideration is made to put a loan or lease on non-accrual status. When loans and leases are placed on non-accrual status, the accrual of interest is discontinued, and any unpaid accrued interest is reversed and charged against interest income. If ultimate repayment of a non-accrual loan or lease is expected, any payments received are applied in accordance with contractual terms. If ultimate repayment is not expected on commercial, commercial real estate, and equipment finance loans and leases, any payment received on a non-accrual loan or lease is applied to principal until the unpaid balance has been fully recovered. Any excess is then credited to interest income when received. If the Company determines, through a current valuation analysis, that principal can be repaid on residential real estate and consumer loans, interest payments may be taken into income as received on a cash basis. 68 Loans are generally removed from non-accrual status when they become current as to principal and interest or demonstrate a period of performance under contractual terms and, in the opinion of management, are fully collectible as to principal and interest. Pursuant to regulatory guidance, a loan discharged under Chapter 7 of the U.S. bankruptcy code is removed from non-accrual status when the bank expects full repayment of the remaining pre-discharged contractual principal and interest, the loan is a closed- end amortizing loan, it is fully collateralized, and post-discharge the loan had at least six consecutive months of current payments. See Note 4: Loans and Leases for further information. Allowance for Loan and Lease Losses The ALLL is a reserve established through a provision for loan and lease losses charged to expense and represents management’s best estimate of probable losses that may be incurred within the existing loan and lease portfolio as of the balance sheet date. The level of the allowance reflects management’s view of trends in losses, current portfolio quality, and present economic, political, and regulatory conditions. The ALLL may be allocated for specific portfolio segments; however, the entire allowance balance is available to absorb credit losses inherent in the total loan and lease portfolio. A charge-off is recorded when all or a portion of the loan or lease is deemed to be uncollectible. Back-testing is performed to compare original estimated losses and actual observed losses, resulting in ongoing refinements. While management utilizes its best judgment based on the information available at the time, the ultimate adequacy of the allowance is dependent upon a variety of factors that are beyond the Company’s control, which include the performance of the Company’s portfolio, economic conditions, interest rate sensitivity, and other external factors. The ALLL consists of the following three elements: (i) specific valuation allowances established for probable losses on impaired loans and leases; (ii) quantitative valuation allowances calculated using loss experience for like loans and leases with similar characteristics and trends, adjusted, as necessary, to reflect the impact of current conditions; and (iii) qualitative factors determined based on general economic conditions and other factors that may be internal or external to the Company. 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. A loan identified as a TDR is considered an impaired loan for the entire term of the loan, with few exceptions. If a loan is impaired, a specific valuation allowance may be established, and the loan is reported net, at the present value of estimated future cash flows using the loan’s original interest rate or at the fair value of collateral less cost to sell if repayment is expected from collateral liquidation. Interest payments on non-accruing impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. Loans and leases, or portions thereof, are charged off when deemed uncollectible. Factors considered by management in determining impairment include payment status, collateral value, discharged bankruptcy, and the likelihood of collecting scheduled principal and interest payments. The current or weighted-average (for multiple notes within a commercial borrowing arrangement) interest rate of the loan is used as the discount rate, for determining net present value of the loan evaluated for impairment, when the interest rate floats with a specified index. A change in terms or payments would be included in the impairment calculation. See Note 4: Loans and Leases for further information. Reserve for Unfunded Commitments The reserve for unfunded commitments provides for probable losses inherent with funding the unused portion of legal commitments to lend. The unfunded reserve calculation includes factors that are consistent with the ALLL methodology for funded loans using the PD, LGD, and a draw down factor applied to the underlying borrower risk and facility grades. The reserve for unfunded credit commitments is included within other liabilities in the accompanying Consolidated Balance Sheets, and changes in the reserve are reported as a component of other non-interest expense in the accompanying Consolidated Statements of Income. See Note 21: Commitments and Contingencies for further information. Troubled Debt Restructurings A modified loan is considered a TDR when the following two conditions are met: (i) the borrower is experiencing financial difficulties; and (ii) the modification constitutes a concession. The Company considers all aspects of the restructuring in determining whether a concession has been granted, including the debtor's ability to access funds at a market rate. In general, a concession exists when the modified terms of the loan are more attractive to the borrower than standard market terms. Modified terms are dependent upon the financial position and needs of the individual borrower. The most common types of modifications include covenant modifications and forbearance. Loans for which the borrower has been discharged under Chapter 7 bankruptcy are considered collateral dependent TDR, impaired at the date of discharge, and charged down to the fair value of collateral less cost to sell, if management considers that loss potential likely exists. The Company’s policy is to place consumer loan TDR, except those that were performing prior to TDR status, on non-accrual status for a minimum period of six months. Commercial TDR are evaluated on a case-by-case basis for determination of whether or not to place them on non-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. 69 Generally, TDRs are classified as impaired loans and reported as 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 a 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. See Note 4: Loans and Leases for further information. Foreclosed and Repossessed Assets Real estate acquired through foreclosure or completion of a deed in lieu of foreclosure and other assets acquired through repossession are carried at the lower of cost or market value less estimated selling costs and are included within other assets in the accompanying Consolidated Balance Sheets. Independent appraisals generally are obtained to substantiate fair value and may be subject to adjustment based upon historical experience or specific geographic trends impacting the property. Within 90 days of a loan being foreclosed upon, the excess of loan balance over fair value less cost to sell is charged off against the ALLL. Subsequent write- downs in value, maintenance costs as incurred, and gains or losses upon sale are charged to non-interest expense in the accompanying Consolidated Statements of Income. Premises and Equipment Premises and equipment are carried at cost, less accumulated depreciation. Depreciation of premises and equipment is computed on a straight-line basis over the estimated useful lives of the assets, as follows: Building and Improvements Leasehold improvements Fixtures and equipment Data processing and software Minimum 5 5 5 3 Maximum 40 20 10 7 - - - - years years (or term or lease, if shorter) years years Repairs and maintenance costs are charged to non-interest expense as incurred. Premises and equipment that is actively marketed for sale is reclassified to assets held for disposition. The cost and accumulated depreciation relating to premises and equipment retired or otherwise disposed of are eliminated, and any resulting losses are charged to non-interest expense. See Note 6: Premises and Equipment for further information. Goodwill Goodwill represents the excess purchase price of businesses acquired over the fair value of the identifiable net assets acquired and is assigned to specific reporting units. Goodwill is not subject to amortization but rather is evaluated for impairment annually, or more frequently in interim periods if events occur or circumstances change indicating it would more likely than not result in a reduction of the fair value of a reporting unit below its carrying value. Goodwill is evaluated for impairment by performing a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount, including goodwill. If the qualitative assessment indicates it is more likely than not that the fair value of the reporting unit is less than its carrying amount, including goodwill, then a 2 Step quantitative process will be performed that will require the Company to utilize an equally weighted combined income and market approach to arrive at an indicated fair value range for the reporting unit. In Step 1, the fair value of a reporting unit is compared to its carrying amount, including goodwill, to ascertain if a goodwill impairment exists. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered impaired, and it is not necessary to continue to Step 2 of the impairment process. Otherwise, Step 2 is performed where the implied fair value of goodwill is compared to the carrying value of goodwill in the reporting unit. If a reporting unit's carrying value exceeds fair value, the difference is charged to non- interest expense. The Company applied the qualitative assessment for its reporting units during its annual impairment review this year to determine if the 2-step quantitative impairment test was necessary. Based on its qualitative assessment, the Company determined that there was no evidence of impairment to the balance of its goodwill. See Note 7: Goodwill and Other Intangible Assets for further information. Other Intangible Assets Other intangible assets represent purchased assets that lack physical substance but can be distinguished from goodwill because of contractual or other legal rights, or because the asset is capable of being sold or exchanged either separately or in combination with a related contract, asset, or liability. Other intangible assets with finite useful lives are amortized to non-interest expense over their estimated useful lives and are evaluated for impairment whenever events occur or circumstances change indicating the carrying amount of the asset may not be recoverable. Core deposit and customer relationship intangible assets are amortized over their estimated useful lives. See Note 7: Goodwill and Other Intangible Assets for further information. 70 Cash Surrender Value of Life Insurance Investment in life insurance represents the cash surrender value of life insurance policies on certain current and former officers of Webster. Cash surrender value increases are recorded in non-interest income, decreases are the result of collection on the policies, with death benefit proceeds in excess of cash surrender value recorded in other non-interest income upon the death of an insured. Securities Sold Under Agreements to Repurchase These agreements are accounted for as secured financing transactions since Webster maintains effective control over the transferred investment securities and the transfer meets the other criteria for such accounting. Obligations to repurchase the sold investment securities are reflected as a liability in the accompanying Consolidated Balance Sheets. The investment securities underlying the agreements are delivered to a custodial account for the benefit of the dealer or bank with whom each transaction is executed. The dealers or banks, which may sell, loan, or otherwise hypothecate such securities to other parties in the normal course of their operations, agree to resell to Webster the same securities at the maturity date of the agreements. The investment securities underlying the agreements with Bank customers are pledged; however, the customer does not have ability to hypothecate the underlying securities. See Note 10: Borrowings for further information. Revenue From Contracts With Customers Revenue from contracts with customers generally comprises non-interest income earned by the Company in exchange for services provided to customers and is recognized when services are complete or as they are rendered. These revenue streams include deposit service fees, wealth and investment services, and an insignificant component of other non-interest income in the accompanying Consolidated Statements of Income. The Company identifies the performance obligations included in the contracts with customers, determines the transaction price, allocates the transaction price to the performance obligations, as applicable, and recognizes revenue when performance obligations are satisfied. Services provided over a period of time are typically transferred to customers evenly over the term of the contracts and revenue is recognized evenly over the period services are provided. Contract receivables are included in accrued interest receivable and other assets. Payment terms vary by services offered, and the time between completion of performance obligations and payment is typically not significant. See Note 20: Revenue from Contracts with Customers for further information. Share-Based Compensation Webster maintains stock compensation plans under which restricted stock, restricted stock units, non-qualified stock options, incentive stock options, or stock appreciation rights may be granted to employees and directors. Share awards are issued from available treasury shares. Share-based compensation cost is recognized over the vesting period, is based on the grant-date fair value, net of a reduction for estimated forfeitures which is adjusted for actual forfeitures as they occur, and is reported as a component of compensation and benefits expense. Awards are generally subject to a 3-year vesting period, while certain conditions provide for a 1-year vesting period. Excess tax benefits result when tax return deductions exceed recognized compensation cost determined using the grant-date fair value approach for financial statement purposes. For restricted stock and restricted stock unit awards, fair value is measured using the Company's common stock closing price at the date of grant. For certain performance-based restricted stock awards, fair value is measured using the Monte Carlo valuation methodology, which provides for the 3-year performance period. Awards ultimately vest in a range from zero to 150% of the target number of shares under the grant. Compensation expense is subject to adjustment based on management's assessment of Webster's return on equity performance relative to the target number of shares condition. Stock option awards use the Black-Scholes Option- Pricing Model to measure fair value at the date of grant. Dividends are paid on the time-based shares upon grant and are non-forfeitable, while dividends are accrued on the performance- based awards and paid on earned shares when the performance target is met. See Note 18: Share-Based Plans for further information. Marketing Costs Marketing costs are expensed as incurred over the projected benefit period. 71 Income Taxes Income tax expense, or benefit, is comprised of two components, current and deferred. The current component reflects taxes payable or refundable for a current period based on applicable tax laws, and the deferred component represents the tax effects of temporary differences between amounts recognized for financial accounting and tax purposes. Deferred tax assets and liabilities reflect the tax effects of such differences that are anticipated to result in taxable or deductible amounts in the future, when the temporary differences reverse. DTAs are recognized if it is more likely than not they will be realized, and may be reduced by a valuation allowance if it is more likely than not that all or some portion will not be realized. Tax positions that are uncertain but meet a more likely than not recognition threshold are initially and subsequently measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position meets the more likely than not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to management's judgment. Webster recognizes interest expense and penalties on uncertain tax positions as a component of income tax expense and recognizes interest income on refundable income taxes as a component of other non-interest income. See Note 8: Income Taxes for further information. Earnings Per Common Share Earnings per common share is computed under the two-class method. Basic earnings per common share is computed by dividing earnings allocated to common shareholders by the weighted-average number of common shares outstanding during the applicable period, excluding outstanding non-participating securities. Certain non-vested restricted stock awards are participating securities as they have non-forfeitable rights to dividends or dividend equivalents. Diluted earnings per common share is computed using the weighted-average number of shares determined for the basic earnings per common share computation plus the dilutive effect of stock compensation and warrants for common stock using the treasury stock method. A reconciliation of the weighted-average shares used in calculating basic earnings per common share and the weighted-average common shares used in calculating diluted earnings per common share is provided in Note 14: Earnings Per Common Share. Comprehensive Income Comprehensive income includes all changes in shareholders’ equity during a period, except those resulting from transactions with shareholders. Comprehensive income consists of net income, and the after-tax effect of the following items: changes in net unrealized gain/loss on securities available for sale, changes in net unrealized gain/loss on derivative instruments, and changes in net actuarial gain/loss and prior service cost for defined benefit pension and other postretirement benefit plans. Comprehensive income is reported in the accompanying Consolidated Statements of Shareholders' Equity, Consolidated Statements of Comprehensive Income, and Note 12: Accumulated Other Comprehensive Loss, Net of Tax. Derivative Instruments and Hedging Activities Derivatives are recognized as assets and liabilities in the accompanying Consolidated Balance Sheets and measured at fair value. For exchange-traded contracts, fair value is based on quoted market prices. For non-exchange traded contracts, fair value is based on dealer quotes, pricing models, discounted cash flow methodologies, or similar techniques for which the determination of fair value may require management judgment or estimation, relating to future rates and credit activities. Interest Rate Swap Agreements. For asset/liability management purposes, the Company may use interest rate swaps or interest rate caps to hedge various exposures or to modify interest rate characteristics of various balance sheet accounts. Interest rate swaps are contracts in which a series of interest rate flows are exchanged over a prescribed period of time. The notional amount on which the interest payments are based is not exchanged. Swap agreements entered into for hedge purposes are derivative instruments and generally convert a portion of the Company’s variable-rate debt to a fixed-rate (cash flow hedge), or convert a portion of its fixed-rate debt to a variable-rate (fair value hedge). Webster uses forward-settle interest rate swaps to 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. Forward-settle swaps typically have a future effective date that coincides with the expected debt issuance date. The forward-settle swaps are typically terminated and cash settled upon hedge debt issuance date. The gain or loss on a derivative designated and qualifying as a fair value hedging instrument, as well as the offsetting gain or loss on the hedged item attributable to the risk being hedged, is recognized currently in earnings in the same accounting period. The effective portion of the gain or loss on a derivative designated and qualifying as a cash flow hedging instrument is initially reported as a component of AOCL and subsequently reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The ineffective portion of the gain or loss on the derivative instrument, if any, is recognized in non- interest income. 72 Interest rate derivative financial instruments receive hedge accounting treatment only if they are qualified and properly designated as hedges and are expected to be, and are, effective in substantially reducing interest rate risk arising from specifically identified assets and liabilities. A hedging instrument is expected at inception to be highly effective at offsetting changes in the hedged transactions attributable to the changes in the hedged risk. The Company expects that the hedging relationship will be highly effective; however, it does not assume there is no ineffectiveness. The Company performs quarterly prospective and retrospective assessments of the hedge effectiveness to ensure the hedging relationship continues to be highly effective and that hedge accounting can continue to be applied. Those derivative financial instruments that do not meet specified hedging criteria are recorded at fair value with changes in fair value recorded in income. Cash flows from derivative financial instruments designated for hedge accounting are classified in the cash flow statement in the same category as the cash flows of the asset or liability being hedged. Derivative Loan Commitments. Mortgage loan commitments related to the origination of mortgages that will be held for sale upon funding are considered derivative instruments. Loan commitments that are derivatives are recognized at fair value on the Consolidated Balance Sheets in other assets and other liabilities with changes in their fair values recorded in non-interest income. Counterparty Credit Risk. The Company's exposure from bilateral, non-cleared derivatives is collateralized and subject to daily margin call settlements. Credit exposure related to non-cleared derivatives may be offset by the amount of collateral pledged by the counterparty. The Company's credit exposure on interest rate swaps consists of the net favorable value plus interest payments of all swaps by each of the counterparties. Cleared derivative transactions are with our selected clearing exchange, Chicago Mercantile Exchange (CME). Exposure is settled to market on a daily basis, with additional credit exposure related to initial margin collateral pledged to CME at trade execution. Institutional counterparties are underwritten and approved through the Company’s independent credit approval process. The Company evaluates the credit risk of its counterparties, taking into account such factors as the likelihood of default, its net exposures, and remaining contractual life, among other things, in determining if any adjustments related to credit risk are required. See Note 15: Derivative Financial Instruments for further information. Offsetting Assets and Liabilities. The Company presents derivative receivables and derivative payables with the same counterparty and the related variation margin of cash collateral receivables and payables on a net basis in the Consolidated Balance Sheets when a legally enforceable master netting agreement exists. The cash collateral, relating to the initial margin, is included within accrued interest receivable and other assets in the Consolidated Balance Sheets. Fair Value Measurements The Company measures many of its assets and liabilities on a fair value basis, in accordance with ASC Topic 820, "Fair Value Measurement." Fair value is used on a recurring basis for certain assets and liabilities in which fair value is the primary basis of accounting. Examples of these include derivative instruments, available-for-sale securities and loans held for sale where the Company has elected the fair value option. Additionally, fair value is used on a non-recurring basis to evaluate assets or liabilities for impairment. Examples of these include impaired loans and leases, mortgage servicing assets, long-lived assets, goodwill, and loans not originated for sale but subsequently transferred to held for sale, which are accounted for at the lower of cost or fair value. Further information regarding the Company's policies and methodology used to measure fair value is presented in Note 16: Fair Value Measurements. Employee Retirement Benefit Plan Webster Bank maintains a noncontributory defined benefit pension plan covering all employees that were participants on or before December 31, 2007. Costs related to this qualified plan, based upon actuarial computations of current and future benefits for eligible employees, are charged to non-interest expense and are funded in accordance with the requirements of the Employee Retirement Income Security Act. The plan is recorded as an asset if overfunded or a liability if underfunded. There is a supplemental retirement plan for select executive level employees that were participants on or before December 31, 2007. There is also a postretirement healthcare benefits plan for certain retired employees. The Company elected to change its approach for estimating service and interest components of net periodic pension cost, utilizing a full yield curve approach to measure the benefit obligation of the retirement benefit plans, effective January 1, 2017. The Company changed to this new estimate method to improve the correlation between projected benefit cash flows and the corresponding yield spot rates, and to provide a more precise measurement of service and interest costs. Historically the Company estimated service and interest costs utilizing a single-weighted average discount rate derived from the yield curve used to measure the benefit obligation at the beginning of the period. The new method measures service and interest costs separately using the full yield curve approach applied to each corresponding obligation. Service costs are determined based on duration-specific spot rates applied to the service cost cash flows. The interest cost calculation is determined by applying duration-specific spot rates to the year-by-year projected benefit obligation. 73 Recently Adopted Accounting Standards Updates Effective January 1, 2018, the following new accounting guidance was adopted by the Company: ASU No. 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20) - Premium Amortization on Purchased Callable Debt Securities. The Update shortens the amortization period for certain investments in callable debt securities purchased at a premium by requiring that the premium be amortized to the earliest call date. Prior to adoption, the Company amortized the premium as a yield adjustment over the contractual life of such debt securities held within the portfolio. The Update accelerates the Company's recognition of premium amortization on those debt securities. The Company adopted the Update during the first quarter of 2018 on a modified retrospective basis. As a result, the Company recorded a $2.8 million cumulative-effect adjustment directly to retained earnings as of January 1, 2018. ASU No. 2017-07, Compensation - Retirement Benefits (Topic 715) - Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The Update requires the Company to retrospectively report service cost as a part of compensation expense and the other components of net periodic benefit cost separately from service cost in the Company's consolidated financial statements. The Company previously included all components of net periodic benefit cost as a component of compensation and benefits expense. Upon adoption, only service cost remains in compensation and benefits expense, while the interest cost on benefit obligations, expected return on plan assets, amortization of prior service cost, and recognized net loss components of the net periodic benefit cost are included in other expense. The Company adopted the Update during the first quarter of 2018 on a retrospective basis. As a result, the Company reclassified, for prior periods, the components of it's net periodic benefit costs other than the service cost component from compensation and benefits to other expense in the accompanying Condensed Consolidated Statements of Income. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements. ASU No. 2016-15, Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments. The Update addresses the following eight specific cash flow issues, with the objective of reducing the existing diversity in practice: debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate- owned life insurance policies, including bank-owned life insurance policies; distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. The Company adopted the Update during the first quarter of 2018 on a retrospective basis. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements. ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10) - Recognition and Measurement of Financial Assets and Financial Liabilities, and ASU No. 2018-03, Technical Corrections and Improvements to Financial Instruments - Overall (Subtopic 825-10) - Recognition and Measurement of Financial Assets and Financial Liabilities. The Updates included targeted amendments in connection with the recognition, measurement, presentation, and disclosure of financial instruments. The main provisions require investments in equity securities to be measured at fair value through net income, unless they qualify for a practical expedient, and require fair value changes arising from changes in instrument-specific credit risk for financial liabilities that are measured under the fair value option to be recognized in other comprehensive income. The provisions also emphasized the existing requirement to use exit prices to measure fair value for disclosure purposes. The Company adopted the Updates during the first quarter of 2018 primarily on a modified retrospective basis. As a result, the Company recorded a benefit of $1.4 million for a cumulative-effect adjustment directly to retained earnings as of January 1, 2018, due to a change in valuation method, from cost less impairment, to net asset value using the practical expedient. Also, the measurement alternative has been elected for equity securities, existing as of January 1, 2018, without readily determinable fair values on a prospective basis. 74 ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) and subsequent ASUs issued to clarify this Topic. The Update, and subsequent related updates, establish a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most previous revenue recognition guidance, including industry-specific guidance. The Updates are intended to increase comparability across industries. The core principle of the revenue model is that a company will recognize revenue when it transfers control of goods or services to customers, at an amount that reflects the consideration to which it expects to be entitled in exchange for those goods or services. The Company adopted the Updates during the first quarter of 2018 on a modified retrospective transition approach. The Company did not identify any material changes to the timing of revenue recognition. The Company changed how it presents certain recurring revenue streams associated with wealth and investment services as other income, versus a contra expense. The adoption of this guidance did not have a material impact on the Company's financial condition or results of operations, and there was no cumulative effect adjustment to opening retained earnings as no material changes were identified in the timing of revenue recognition, however, additional disclosure has been incorporated in Note 20: Revenue from Contracts with Customers. Accounting Standards Issued but not yet Adopted The following list identifies ASUs applicable to the Company that have been issued by the FASB but are not yet effective: 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 update is effective for the Company on January 1, 2019. The Company does not expect this Update to have a material impact on its consolidated financial statements. 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. This 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 defined benefit pension plans and other postretirement plans. This 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. This 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. 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 the financial reporting for hedging activities with the economic objectives of those activities. The update requires a modified retrospective transition method in which the Company will recognize a cumulative effect of the change on the opening balance for each affected component of equity in the financial statements as of the date of adoption. The Update is effective for the Company on January 1, 2019. The adoption will not have a material impact on the Company's consolidated financial statements. 75 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 to 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 the 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 delays recognition until 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 replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to determine credit loss estimates. The change from an incurred loss method to an expected loss method represents a fundamental shift from existing GAAP and may result in 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 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 expected future changes in macroeconomic conditions. The Company contracted with system solution providers and is in the process of implementing the selected solutions. During 2019, the Company will focus 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 impact of adopting these Updates is expected to be influenced by the composition, characteristics, and credit quality of our loan and securities portfolios as well as the economic conditions in effect at the adoption date. Therefore, we are unable to reasonably estimate the impact of adoption at this time. ASU No. 2016-02, Leases (Topic 842) and subsequent ASUs issued to clarify this Topic. The Update introduces a lessee model that requires substantially all leases to be recorded as assets and liabilities on the balance sheet and will require 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. A new transition method option that would allow the Company to use the effective date, January 1, 2019, as the date of initial application of the new leases standard and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption is included by way of a subsequent Update. The Company will elect this transition method and will record an immaterial transition adjustment to beginning retained earnings. The Company has engaged a third party consultant to assist with its implementation efforts including with its review of existing leases, and certain service contracts for embedded leases, to evaluate the impact of these Updates. The review of certain service contracts for embedded leases has not identified leases individually or in aggregate that would have a material impact to the Company's financial statements. The Company will utilize a third-party software solution to assist with the accounting under these updates. Management's implementation of the lease accounting standard is substantially complete. Upon adoption of the standard, the Company expects to recognize a right of use asset of approximately $160 million and a lease liability of approximately $180 million, primarily relating to the Company's real-estate lease portfolio. 76 Securities and Exchange Commission’s Final Rule on Disclosure Update and Simplification The SEC adopted the Final Rule, Disclosure Update and Simplification, that amends certain of the SEC’s disclosure requirements to reduce redundant, duplicative, or outdated disclosures due to changes in U.S. GAAP, International Financial Reporting Standards, or changes in technology or the business environment. Most of the amendments included in the SEC’s Final Rule eliminate certain disclosure requirements. This Final Rule is effective for all filings submitted on or after November 5, 2018. The Company eliminated certain information from Item 5. Market For Registrant's Common Equity, Related Stockholder Matters, And Issuer Purchases Of Equity Securities, contained elsewhere in this report. One of the amendments requires expanded interim disclosures for stockholders’ equity, which includes the disclosure of dividends per share for each class of share rather than only for common stock as well as disclosure for changes in stockholders’ equity in interim periods. After the issuance of the Final Rule, the SEC published an interpretation that provides an extended transition period for companies to comply with the new interim disclosure requirement. The Company will comply with the new interim disclosure requirement when it files its first quarter 2019 Form 10-Q and does not expect the new disclosure requirement to have a material impact on its financial statements. 77 Note 2: Variable Interest Entities The Company has an investment interest in the following entities that meet the definition of a 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. Investments held in the Rabbi Trust primarily consist of mutual funds that invest in equity and fixed income securities. The Company is considered the primary beneficiary of the Rabbi Trust as it has the power to direct the 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 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 Consolidated Statements of Income. Refer to Note 16: 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. Refer to Note 3: Investment Securities for additional information. Tax Credit - Finance Investments. The Company makes equity investments in entities that finance affordable housing and other community development projects and provide a return primarily through the realization of tax benefits. In most instances the investments require the funding of capital commitments in the future. While the Company's investment in an entity may exceed 50% of its outstanding equity interests, the entity is not consolidated as Webster is not involved in its management. For these investments, the Company determined it is not the primary beneficiary due to its inability to direct the activities that most significantly impact the economic performance of the VIEs. The Company applies the proportional amortization method to account for its investments in qualified affordable housing projects. At December 31, 2018 and December 31, 2017, the aggregate carrying value of the Company's tax credit-finance investments was $29.1 million and $33.5 million, respectively, which represents the Company's maximum exposure to loss. At December 31, 2018 and December 31, 2017, unfunded commitments have been recognized, totaling $10.4 million and $17.3 million, respectively, and are included in accrued expenses and other liabilities in the accompanying 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 Consolidated Balance Sheets, and the related interest expense is reported as interest expense on long-term debt in the accompanying Consolidated Statements of Income. Other 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 December 31, 2018 and December 31, 2017, the aggregate carrying value of the Company's other investments in VIEs was $17.6 million and $13.8 million, respectively, and the maximum exposure to loss of the Company's other investments in VIEs, including unfunded commitments, was $31.0 million and $22.9 million, respectively. Refer to Note 16: Fair Value Measurements for additional information. The Company's equity interests in Tax Credit-Finance Investments, Webster Statutory Trust, and Other Investments are included in accrued interest receivable and other assets in the accompanying Consolidated Balance Sheets. 78 Note 3: Investment Securities A Summary of the amortized cost and fair value of investment securities is presented below: At December 31, 2018 2017 Amortized Cost Unrealized Gains Unrealized Losses Fair Value Amortized Cost Unrealized Gains Unrealized Losses Fair Value (In thousands) Available-for-sale: U.S. Treasury Bills $ 7,549 $ 1 $ — $ 7,550 $ 1,247 $ — $ — $ 1,247 Agency CMO Agency MBS Agency CMBS CMBS CLO Single issuer-trust preferred Corporate debt 238,968 1,521,534 608,167 447,897 114,641 — 55,860 412 1,631 — 645 94 — — (4,457) 234,923 308,989 (42,076) 1,481,089 1,124,960 (41,930) 566,237 (2,961) (1,964) — 445,581 112,771 — (5,281) 50,579 608,276 358,984 209,075 7,096 56,504 1,158 2,151 (3,814) 306,333 (19,270) 1,107,841 — (20,250) 588,026 2,157 910 — 797 (74) (134) (46) (679) 361,067 209,851 7,050 56,622 Total available-for-sale $ 2,994,616 $ 2,783 $ (98,669) $ 2,898,730 $ 2,675,131 $ 7,173 $ (44,267) $ 2,638,037 Held-to-maturity: Agency CMO Agency MBS Agency CMBS Municipal bonds and notes CMBS Private Label MBS $ 208,113 $ 287 $ (5,255) $ 203,145 $ 260,114 $ 664 $ (4,824) $ 255,954 2,517,823 8,250 (79,701) 2,446,372 2,569,735 16,989 (37,442) 2,549,282 667,500 715,041 216,943 — 53 (22,572) 644,981 2,907 (18,285) 699,663 405 — (2,388) 214,960 — — 696,566 711,381 249,273 323 — (10,011) 686,555 8,584 2,175 1 (6,558) 713,407 (620) 250,828 — 324 Total held-to-maturity $ 4,325,420 $ 11,902 $ (128,201) $ 4,209,121 $ 4,487,392 $ 28,413 $ (59,455) $ 4,456,350 Other-Than-Temporary Impairment The amount in the amortized cost columns in the table above includes other-than-temporary impairment related to certain CLO positions that were previously considered Covered Funds as defined by Section 619 of the Dodd-Frank Act, commonly known as the Volcker Rule. The Company has taken measures to bring its CLO positions into conformance with the Volcker Rule. The following table presents the changes in OTTI: (In thousands) Beginning balance Reduction for investment securities called Additions for OTTI not previously recognized in earnings Ending balance Years ended December 31, 2017 2016 2018 $ $ 1,364 $ 3,243 $ 3,288 (542) — (2,005) 126 (194) 149 822 $ 1,364 $ 3,243 To the extent that changes occur in interest rates, credit movements, and other factors that impact fair value and expected recovery of amortized cost of its investment securities, the Company may, in future periods, be required to recognize OTTI in earnings. 79 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: (Dollars in thousands) Available-for-sale: Agency CMO Agency MBS Agency CMBS CMBS CLO Single issuer-trust preferred Corporate debt Total available-for-sale in an unrealized loss position Held-to-maturity: Agency CMO Agency MBS Agency CMBS Municipal bonds and notes CMBS At December 31, 2018 Less Than Twelve Months Twelve Months or Longer Fair Value Unrealized Losses Fair Value Unrealized Losses # of Holdings Total Fair Value Unrealized Losses $ 15,524 $ (72) $ 180,641 $ (4,385) 321,678 (2,078) — 343,457 83,305 — — (2,937) (1,695) — 975,084 566,237 5,193 14,873 — (39,998) (41,930) (24) (269) — 35,990 (1,820) 14,589 (3,461) 36 184 37 39 5 — 8 $ 196,165 $ (4,457) 1,296,762 (42,076) 566,237 348,650 98,178 (41,930) (2,961) (1,964) — — 50,579 (5,281) $ $ 799,954 $ (8,602) $ 1,756,617 $ (90,067) 309 $ 2,556,571 $ (98,669) 691 $ (1) $ 182,396 $ (5,254) 288,635 (1,916) 1,892,951 (77,785) — 68,351 24,881 — (882) (270) 635,284 414,776 132,464 (22,572) (17,403) (2,118) 25 272 56 223 20 $ 183,087 $ (5,255) 2,181,586 (79,701) 635,284 483,127 157,345 (22,572) (18,285) (2,388) Total held-to-maturity in an unrealized loss position $ 382,558 $ (3,069) $ 3,257,871 $ (125,132) 596 $ 3,640,429 $ (128,201) (Dollars in thousands) Available-for-sale: Agency CMO Agency MBS Agency CMBS CMBS CLO Single issuer-trust preferred Corporate debt Total available-for-sale in an unrealized loss position Held-to-maturity: Agency CMO Agency MBS Agency CMBS Municipal bonds and notes CMBS At December 31, 2017 Less Than Twelve Months Twelve Months or Longer Fair Value Unrealized Losses Fair Value Unrealized Losses # of Holdings Total Fair Value Unrealized Losses $ 81,001 $ (449) $ 119,104 $ (3,365) 416,995 (2,920) 54,182 23,869 56,335 7,050 11,082 (851) (74) (134) (46) (395) 606,021 533,844 (16,350) (19,399) — — — — — — 6,265 (284) 27 135 36 6 3 1 4 $ 200,105 $ (3,814) 1,023,016 588,026 (19,270) (20,250) 23,869 56,335 7,050 17,347 (74) (134) (46) (679) $ $ 650,514 $ (4,869) $ 1,265,234 $ (39,398) 212 $ 1,915,748 $ (44,267) 98,090 $ (1,082) $ 106,775 $ (3,742) 762,107 576,770 6,432 92,670 (4,555) (7,599) (38) (413) 1,197,839 (32,887) 109,785 226,861 14,115 (2,412) (6,520) (207) 22 205 56 92 13 $ 204,865 $ (4,824) 1,959,946 686,555 233,293 106,785 (37,442) (10,011) (6,558) (620) Total held-to-maturity in an unrealized loss position $ 1,536,069 $ (13,687) $ 1,655,375 $ (45,768) 388 $ 3,191,444 $ (59,455) 80 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 impaired as of December 31, 2018. 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 December 31, 2018. Available-for-Sale Securities Agency CMO. There were unrealized losses of $4.5 million on the Company’s investment in Agency CMO at December 31, 2018, compared to $3.8 million at December 31, 2017. Unrealized losses increased due to higher market rates while principal balances decreased for this asset class since December 31, 2017. 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 $42.1 million on the Company’s investment in residential mortgage-backed securities issued by government agencies at December 31, 2018, compared to $19.3 million at December 31, 2017. Unrealized losses increased due to higher market rates, while principal balances increased for this asset class since December 31, 2017. 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 $41.9 million on the Company's investment in commercial mortgage-backed securities issued by government agencies at December 31, 2018, compared to $20.3 million at December 31, 2017. Unrealized losses increased due to higher market rates while principal balances remained approximately the same for this asset class since December 31, 2017. 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 $3.0 million on the Company’s investment in CMBS at December 31, 2018, compared to $0.1 million at December 31, 2017. The portfolio of mainly floating rate CMBS experienced increased market spreads which resulted in lower market prices and higher unrealized losses at December 31, 2018 compared to December 31, 2017. 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 $2.0 million on the Company’s investments in CLO at December 31, 2018 compared to $0.1 million unrealized losses at December 31, 2017. Unrealized losses increased due to increased market spreads while principal balances decreased due to call activity since December 31, 2017. Contractual cash flows for the bonds continue to perform as expected. Corporate debt. There were $5.3 million of unrealized losses on the Company's corporate debt portfolio at December 31, 2018, compared to $0.7 million at December 31, 2017. Unrealized losses increased due to increased market spreads since December 31, 2017. The Company performs periodic credit reviews of the issuer to assess the likelihood for ultimate recovery of amortized cost. Held-to-Maturity Securities Agency CMO. There were unrealized losses of $5.3 million on the Company’s investment in Agency CMO at December 31, 2018, compared to $4.8 million at December 31, 2017. Unrealized losses increased due to higher market rates while principal balances decreased since December 31, 2017. 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 $79.7 million on the Company’s investment in residential mortgage-backed securities issued by government agencies at December 31, 2018, compared to $37.4 million at December 31, 2017. Unrealized losses increased due to higher market rates while principal balances increased for this asset class since December 31, 2017. 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. 81 Agency CMBS. There were unrealized losses of $22.6 million on the Company’s investment in commercial mortgage-backed securities issued by government agencies at December 31, 2018, compared to $10.0 million at December 31, 2017. Unrealized losses increased due to higher market rates while principal balances increased since December 31, 2017. 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 $18.3 million on the Company’s investment in municipal bonds and notes at December 31, 2018, compared to $6.6 million at December 31, 2017. Unrealized losses increased due to higher market rates while principal balances increased since December 31, 2017. The Company performs periodic credit reviews of the issuers and the securities are currently performing as expected. CMBS. There were unrealized losses of $2.4 million on the Company’s investment in CMBS at December 31, 2018, compared to $0.6 million unrealized losses at December 31, 2017. Unrealized losses increased due to higher market rates on mainly seasoned fixed rate conduit transactions while principal balances decreased since December 31, 2017. Internal stress tests are performed on individual bonds to monitor potential losses under stress scenarios. Sales of Available-for Sale Securities There were no sales during the years ended December 31, 2018 and 2017. For the year ended December 31, 2016, proceeds from sales were $259.3 million, with gross realized gains of $2.9 million less gross realized losses of $2.5 million resulting in a gain on sale of investment securities, net of $0.4 million. Contractual Maturities The amortized cost and fair value of debt securities by contractual maturity are set forth below: (In thousands) Due in one year or less Due after one year through five years Due after five through ten years Due after ten years Total debt securities At December 31, 2018 Available-for-Sale Held-to-Maturity Amortized Cost Fair Value Amortized Cost Fair Value $ $ 27,865 27,880 $ 17,155 17,126 274,027 275,969 2,673,641 2,579,683 2,994,616 $ 2,898,730 $ 7,047 $ 7,909 31,455 4,279,009 7,059 8,019 31,500 4,162,543 $ 4,325,420 $ 4,209,121 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 December 31, 2018, the Company had a carrying value of $1.2 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 not reflect actual durations, which may be impacted by prepayments. Investment securities with a carrying value totaling $2.2 billion at December 31, 2018 and $2.4 billion at December 31, 2017 were pledged to secure public funds, trust deposits, repurchase agreements, and for other purposes, as required or permitted by law. 82 Note 4: Loans and Leases The following table summarizes loans and leases: (In thousands) Residential Consumer Commercial Commercial Real Estate Equipment Financing Loans and leases (1) (2) At December 31, 2018 4,416,637 2,396,704 6,216,606 4,927,145 508,397 18,465,489 $ $ 2017 4,490,878 2,590,225 5,368,694 4,523,828 550,233 17,523,858 $ $ (1) Loans and leases include net deferred fees and net premiums and discounts of $13.9 million and $20.6 million at December 31, 2018 and December 31, 2017, respectively. (2) At December 31, 2018, the Company had pledged $7.1 billion of eligible loans as collateral to support borrowing capacity at the FHLB of Boston and the FRB of Boston. Loans and Leases Portfolio Aging The following tables summarize the aging of loans and leases: At December 31, 2018 (In thousands) Residential Consumer: Home equity Other consumer Commercial: Commercial non-mortgage Asset-based Commercial real estate: Commercial real estate Commercial construction Equipment financing Total (In thousands) Residential Consumer: Home equity Other consumer Commercial: Commercial non-mortgage Asset-based Commercial real estate: Commercial real estate Commercial construction Equipment financing Total 30-59 Days Past Due and Accruing 8,513 $ 60-89 Days Past Due and Accruing 4,301 $ 90 or More Days Past Due and Accruing Non-accrual 49,188 $ — $ Total Past Due and Non-accrual 62,002 $ Current Total Loans and Leases $ 4,354,635 $ 4,416,637 9,250 1,774 1,011 — 1,275 — 510 22,333 $ 5,385 957 702 — 245 — 405 11,995 $ $ — — 104 — — — — 104 33,495 1,494 55,810 224 48,130 4,225 57,627 224 2,121,049 223,300 2,169,179 227,525 5,189,808 968,947 5,247,435 969,171 8,242 — 6,314 $ 154,767 9,762 — 7,229 189,199 4,698,552 218,831 501,168 4,708,314 218,831 508,397 $ 18,276,290 $ 18,465,489 $ At December 31, 2017 30-59 Days Past Due and Accruing 8,643 $ 60-89 Days Past Due and Accruing 5,146 $ 90 or More Days Past Due and Accruing Non-accrual 44,481 — $ $ Total Past Due and Non-accrual 58,270 $ Current Total Loans and Leases $ 4,432,608 $ 4,490,878 12,668 2,556 5,212 — 478 — 1,732 31,289 5,770 1,444 603 — 77 — 626 13,666 $ $ $ — — 644 — 248 — — 892 35,645 1,707 39,214 589 54,083 5,707 45,673 589 2,298,185 232,250 2,352,268 237,957 4,488,242 834,190 4,533,915 834,779 4,484 — 393 $ 126,513 $ 5,287 — 2,751 172,360 4,238,987 279,554 547,482 4,244,274 279,554 550,233 $ 17,351,498 $ 17,523,858 Interest on non-accrual loans and leases that would have been recorded as additional interest income for the years ended December 31, 2018, 2017, and 2016, had the loans and leases been current in accordance with their original terms, totaled $9.7 million, $8.4 million, and $11.0 million, respectively. 83 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: Loans and leases $ 4,416,637 $ 2,396,704 $ 6,216,606 $ 4,927,145 $ 103,531 $ 39,144 $ 99,512 $ 10,828 $ 4,313,106 2,357,560 6,117,094 4,916,317 6,315 $ 259,330 502,082 18,206,159 508,397 $ 18,465,489 At or for the Year ended December 31, 2018 Residential Consumer Commercial Commercial Real Estate Equipment Financing Total 19,058 $ 2,016 (3,455) 1,980 19,599 $ 4,286 $ 15,313 $ 36,190 $ 4,628 (19,228) 7,091 28,681 $ 1,383 $ 27,298 $ 89,533 $ 23,041 (18,220) 4,439 98,793 $ 7,824 $ 90,969 $ 49,407 $ 12,644 (2,061) 161 60,151 $ 1,661 $ 58,490 $ 5,806 $ (329) (423) 75 5,129 $ 196 $ 4,933 $ 199,994 42,000 (43,387) 13,746 212,353 15,350 197,003 At or for the Year ended December 31, 2017 Residential Consumer Commercial Commercial Real Estate Equipment Financing Total 23,226 $ (2,692) (2,500) 1,024 19,058 $ 4,805 $ 14,253 $ 45,233 $ 9,367 (24,447) 6,037 36,190 $ 1,668 $ 34,522 $ 71,905 $ 23,417 (8,147) 2,358 89,533 $ 9,786 $ 79,747 $ 47,477 $ 11,040 (9,275) 165 49,407 $ 272 $ 49,135 $ 6,479 $ (232) (558) 117 5,806 $ 23 $ 5,783 $ 194,320 40,900 (44,927) 9,701 199,994 16,554 183,440 (In thousands) Allowance for loan and lease losses: Balance at January 1, 2018 Provision (benefit) charged to expense Losses charged off Recoveries Balance at December 31, 2018 Individually evaluated for impairment Collectively evaluated for impairment Loan and lease balances: Individually evaluated for impairment Collectively evaluated for impairment $ $ $ $ $ (In thousands) Allowance for loan and lease losses: Balance at January 1, 2017 Provision (benefit) charged to expense Losses charged off Recoveries Balance at December 31, 2017 Individually evaluated for impairment Collectively evaluated for impairment Loan and lease balances: Individually evaluated for impairment Collectively evaluated for impairment $ $ $ $ $ Loans and leases $ 4,490,878 $ 2,590,225 $ 5,368,694 $ 4,523,828 $ 114,295 $ 45,436 $ 72,471 $ 11,226 $ 4,376,583 2,544,789 5,296,223 4,512,602 3,325 $ 246,753 546,908 17,277,105 550,233 $ 17,523,858 (In thousands) Allowance for loan and lease losses: Balance at January 1, 2016 Provision (benefit) charged to expense Losses charged off Recoveries Balance at December 31, 2016 Individually evaluated for impairment Collectively evaluated for impairment Loan and lease balances: Individually evaluated for impairment Collectively evaluated for impairment $ $ $ $ $ At or for the Year ended December 31, 2016 Residential Consumer Commercial Commercial Real Estate Equipment Financing Total 25,876 $ 230 (4,636) 1,756 23,226 $ 8,090 $ 15,136 $ 42,052 $ 18,507 (20,669) 5,343 45,233 $ 2,903 $ 42,330 $ 59,977 $ 28,662 (18,360) 1,626 71,905 $ 7,422 $ 64,483 $ 41,598 $ 7,930 (2,682) 631 47,477 $ 169 $ 47,308 $ 5,487 $ 1,021 (565) 536 6,479 $ 9 $ 6,470 $ 174,990 56,350 (46,912) 9,892 194,320 18,593 175,727 119,424 $ 45,719 $ 53,037 $ 24,755 $ 4,135,258 2,638,781 4,887,894 4,486,091 6,420 $ 249,355 629,209 16,777,233 635,629 $ 17,026,588 Loans and leases $ 4,254,682 $ 2,684,500 $ 4,940,931 $ 4,510,846 $ 84 Impaired Loans and Leases The following tables summarize impaired loans and leases: (In thousands) Residential: 1-4 family Consumer home equity Commercial: Commercial non-mortgage Asset-based Commercial real estate: Commercial real estate Commercial construction Equipment financing Total (In thousands) Residential: 1-4 family Consumer home equity Commercial: Commercial non-mortgage Asset based Commercial real estate: Commercial real estate Commercial construction Equipment financing Total At December 31, 2018 Unpaid Principal Balance Total Recorded Investment Recorded Investment No Allowance Recorded Investment With Allowance Related Valuation Allowance $ 113,575 44,654 $ 103,531 39,144 $ 64,899 30,576 $ 38,632 8,568 $ 120,165 550 13,355 — 6,368 298,667 $ 99,287 225 10,828 — 6,315 259,330 65,724 — 2,125 — 2,946 166,270 $ $ $ 33,563 225 8,703 — 3,369 93,060 $ 4,286 1,383 7,818 6 1,661 — 196 15,350 At December 31, 2017 Unpaid Principal Balance Total Recorded Investment Recorded Investment No Allowance Recorded Investment With Allowance Related Valuation Allowance $ 125,352 50,809 $ 114,295 45,436 $ 69,759 34,418 $ 44,536 11,018 $ 79,900 3,272 11,994 — 3,409 274,736 71,882 589 11,226 — 3,325 246,753 $ 27,313 589 6,387 — 2,932 141,398 $ $ $ 44,569 — 4,839 — 393 105,355 $ 4,805 1,668 9,786 — 272 — 23 16,554 The following table summarizes the average recorded investment and interest income recognized for impaired loans and leases: Years ended December 31, Average Recorded Investment $ 108,913 $ 42,290 2018 Accrued Interest Income Cash Basis Interest Income 3,781 $ 1,158 1,106 980 Average Recorded Investment $ 116,859 $ 45,578 2017 Accrued Interest Income Cash Basis Interest Income 4,138 $ 1,323 1,264 1,046 Average Recorded Investment $ 126,936 $ 47,072 2016 Accrued Interest Income Cash Basis Interest Income 4,377 $ 1,361 1,200 985 85,585 407 3,064 — 11,027 198 — — — 62,459 295 1,095 — 17,397 417 — — — 54,708 — 1,540 — 28,451 511 — — — — 4,820 $ 253,042 $ — 112 8,313 $ — — 2,086 594 4,872 $ 248,054 $ 12 207 7,192 $ — — 2,310 3,574 3,421 $ 264,162 $ 92 184 8,065 $ — — 2,185 (In thousands) Residential Consumer home equity Commercial Commercial non- mortgage Asset based Commercial real estate: Commercial real estate Commercial construction Equipment financing Total 85 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 PD and the 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 loss. 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 borrowers’ 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: (In thousands) (1) - (6) Pass (7) Special Mention (8) Substandard (9) Doubtful Total Commercial At December 31, Commercial Real Estate At December 31, Equipment Financing At December 31, 2018 2017 2018 2017 2018 2017 $ 5,781,138 $ 5,048,162 $ 4,773,298 $ 4,355,916 $ 494,585 $ 525,105 206,351 222,405 6,712 104,594 206,883 9,055 75,338 78,509 — 62,065 105,847 — 1,303 12,509 — 8,022 17,106 — $ 6,216,606 $ 5,368,694 $ 4,927,145 $ 4,523,828 $ 508,397 $ 550,233 For residential and consumer loans, the Company considers factors such as past due status, updated FICO scores, employment status, collateral, geography, loans discharged in bankruptcy, and the status of first lien position loans on second lien position loans 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 TDRs: (Dollars in thousands) Accrual status Non-accrual status Total recorded investment of TDR Specific reserves for TDR included in the balance of ALLL Additional funds committed to borrowers in TDR status At December 31, 2018 2017 $ $ $ 138,479 91,935 230,414 11,930 3,893 147,113 74,291 221,404 12,384 2,736 $ $ $ For years ended December 31, 2018, 2017 and 2016, Webster charged off $14.3 million, $3.2 million, and $18.6 million, respectively, for the portion of TDRs deemed to be uncollectible. 86 The following table provides information on the type of concession for loans and leases modified as TDRs: (Dollars in thousands) Residential: Extended Maturity Adjusted Interest rates Combination Rate and Maturity Other (2) Consumer home equity: Extended Maturity Adjusted Interest rates Combination Rate and Maturity Other (2) Commercial non mortgage: Extended Maturity Adjusted Interest rates Combination Rate and Maturity Other (2) Commercial real estate: Extended Maturity Adjusted Interest rates Combination Rate and Maturity Other (2) Equipment Financing Extended Maturity Total Years ended December 31, 2018 2017 2016 Number of Loans and Leases Post- Modification Recorded Investment(1) Number of Loans and Leases Post- Modification Recorded Investment(1) Number of Loans and Leases Post- Modification Recorded Investment(1) 1 — 9 21 4 — 6 45 12 — 15 20 2 — 3 1 $ 20 — 947 3,573 469 — 618 2,812 823 — 8,842 41,248 97 — 1,485 5,111 16 2 12 39 12 1 14 73 12 — 18 4 — — — — $ 2,569 335 1,733 6,200 976 247 3,469 4,907 1,233 — 9,592 6,375 — — — — 17 2 13 24 11 — 15 52 12 — 2 13 3 1 2 1 $ 2,801 528 1,537 4,090 484 — 1,156 3,131 14,883 — 648 1,767 4,921 237 335 509 4 143 736 66,781 $ — 203 — 37,636 $ 7 175 6,642 43,669 $ (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, and/or other concessions. The 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 years ended December 31, 2018, 2017 and 2016. The recorded investment of TDRs in commercial, commercial real estate, and equipment financing segregated by risk rating exposure is as follows: (In thousands) (1) - (6) Pass (7) Special Mention (8) Substandard (9) Doubtful Total At December 31, $ 2018 13,165 84 67,880 6,610 $ 2017 8,268 355 53,050 — $ 87,739 $ 61,673 87 Note 5: Transfers of Financial Assets 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 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 may also 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 Consolidated Statements of Income. The following table provides a summary of activity in the reserve for loan repurchases: (In thousands) Beginning balance (Benefit) provision charged to expense Repurchased loans and settlements charged off Ending balance The following table provides information for mortgage banking activities: $ $ Years ended December 31, 2017 790 100 (18) 872 2016 $ 1,192 (303) (99) 790 2018 872 (160) (38) 674 $ $ $ (In thousands) Residential mortgage loans held for sale: Proceeds from sale Loans sold with servicing rights retained Net gain on sale Ancillary fees Fair value option adjustment Years ended December 31, 2017 2018 2016 $ 188,025 166,909 $ 335,656 304,788 $ 438,925 399,318 3,146 1,544 (266) 6,211 2,629 1,097 11,629 3,532 (526) The Company has retained servicing rights on residential mortgage loans totaling $2.5 billion and $2.6 billion at December 31, 2018 and 2017, respectively. The following table presents the changes in carrying value for mortgage servicing assets: (In thousands) Beginning balance Additions Amortization Ending balance Years ended December 31, 2017 2018 2016 $ $ 25,139 4,459 (8,383) 21,215 $ $ 24,466 9,249 (8,576) 25,139 $ $ 20,698 11,312 (7,544) 24,466 Loan servicing fees, net of mortgage servicing rights amortization, were $1.2 million, $0.8 million, and $1.1 million, for the years ended December 31, 2018, 2017, and 2016, respectively, and are included as a component of loan and lease related fees in the accompanying Consolidated Statements of Income. See Note 16: Fair Value Measurements for additional fair value information on loans held for sale and mortgage servicing assets. Additionally, loans not originated for sale were sold approximately at carrying value, except as noted, for cash proceeds of $1.3 million for certain commercial loans and $0.4 million for certain residential loans for the year ended December 31, 2018; for cash proceeds of $7.2 million for certain commercial loans and $7.4 million for certain residential loans for the year ended December 31, 2017; and for cash proceeds of $26.5 million, resulting in a gain of $2.1 million, for certain commercial loans and $7.6 for certain residential loans for the year ended December 31, 2016. 88 Note 6: Premises and Equipment A summary of premises and equipment follows: (In thousands) Land Buildings and improvements Leasehold improvements Fixtures and equipment Data processing and software Total premises and equipment Less: Accumulated depreciation and amortization Premises and equipment, net At December 31, 2018 10,997 79,619 77,669 75,219 252,723 496,227 (371,377) 124,850 $ $ 2017 11,302 80,646 82,067 76,665 234,667 485,347 (355,346) 130,001 $ $ Depreciation and amortization of premises and equipment was $34.9 million, $33.1 million, and $30.8 million for the years ended December 31, 2018, 2017, and 2016, respectively. The following table provides a summary of activity for assets held for disposition: (In thousands) Beginning balance Additions Write-downs Sales Ending balance Years ended December 31, 2018 2017 $ $ 144 498 (137) (414) 91 $ $ 637 2,006 (529) (1,970) 144 Assets held for disposition are included as a component of accrued interest receivable and other assets in the accompanying Consolidated Balance Sheets. Note 7: Goodwill and Other Intangible Assets Goodwill and other intangible assets by reportable segment consisted of the following: (In thousands) Goodwill: Community Banking HSA Bank Total Goodwill Other intangible assets: HSA Bank - Core deposits HSA Bank - Customer relationships Total Other intangible assets At December 31, 2018 2017 Gross Carrying Amount Accumulated Amortization Net Carrying Amount Gross Carrying Amount Accumulated Amortization Net Carrying Amount $ $ 516,560 21,813 538,373 $ $ 516,560 21,813 538,373 $ $ 22,000 $ 21,000 43,000 $ (10,842) $ (6,394) (17,236) $ 11,158 14,606 25,764 $ $ 22,000 $ 21,000 43,000 $ (8,610) $ (4,779) (13,389) $ 13,390 16,221 29,611 As of December 31, 2018, the remaining estimated aggregate future amortization expense for intangible assets is as follows: (In thousands) 2019 2020 2021 2022 2023 Thereafter $ 3,847 3,847 3,847 3,847 3,847 6,529 89  Note 8: Income Taxes Income tax expense reflects the following expense (benefit) components: (In thousands) Current: Federal State and local Total current Deferred: Federal State and local Total deferred Total federal Total state and local Income tax expense Years ended December 31, 2018 2017 2016 $ $ $ 58,334 13,409 71,743 96,364 11,061 107,425 $ 8,508 964 9,472 39,568 (48,642) (9,074) 66,842 14,373 81,215 $ 135,932 (37,581) 98,351 $ 73,194 5,429 78,623 12,542 5,158 17,700 85,736 10,587 96,323 Included in the Company's income tax expense for the years ended December 31, 2018, 2017, and 2016, are net tax credits of $1.2 million, $1.6 million, and $1.0 million, respectively. The income tax expense for the year ended December 31, 2017 also included benefits from operating loss carryforwards of $25.1 million. These net tax credits and benefits are exclusive of the Tax Act impacts. The Company's deferred state and local benefit in 2017 includes $47.5 million related to a reduction in its beginning-of-year valuation allowance for SALT DTA's, or $37.5 million net of deferred federal expense of $10.0 million. The deferred state and local benefit in 2017 also includes $1.8 million from other SALT DTA adjustments, net of federal effects. The Company's deferred federal expense in 2017 also includes $31.5 million from a re-measurement of its DTA upon the enactment of the Tax Act. Due to a $10.6 million impact of the Tax Act on the $39.3 million of net SALT DTA adjustments noted above, the Company reported a $20.9 million expense attributable to the Tax Act, and a $28.7 million net benefit from SALT DTAs in 2017. The following table reflects a reconciliation of reported income tax expense to the amount that would result from applying the federal statutory rate of 21.0% in 2018, and 35.0% in 2017 and 2016: (Dollars in thousands) Income tax expense at federal statutory rate Reconciliation to reported income tax expense: SALT expense, net of federal Tax-exempt interest income, net Increase in cash surrender value of life insurance Excess tax benefits, net Non-deductible FDIC deposit insurance premiums SALT DTA adjustments, net of federal Tax Act impacts, net Other, net Years ended December 31, 2018 2017 2016 Amount Percent Amount Percent Amount Percent $ 92,743 21.0% $ 123,826 35.0% $ 106,208 35.0% 11,354 (6,475) (3,069) (4,483) 2,215 — (10,982) (88) 2.6 (1.5) (0.7) (1.0) 0.5 — (2.5) — 8,189 (10,826) (5,120) (6,349) — (28,724) 20,891 (3,536) 2.3 (3.1) (1.4) (1.8) — (8.1) 5.9 (1.0) 6,882 (8,917) (5,166) — — — — (2,684) 2.3 (2.9) (1.7) — — — — (1.0) 31.7% Income tax expense and effective tax rate $ 81,215 18.4% $ 98,351 27.8% $ 96,323 Included in the Tax Act impacts, net for 2018 are $10.4 million of tax planning benefits related to the Tax Act. 90 The following table reflects the significant components of the DTAs, net: (In thousands) Deferred tax assets: Allowance for loan and lease losses Net operating loss and credit carry forwards Compensation and employee benefit plans Net unrealized loss on securities available for sale Other Gross deferred tax assets Valuation allowance Total deferred tax assets, net of valuation allowance Deferred tax liabilities: Equipment financing leases Premises and equipment Loan origination costs, net Goodwill and other intangible assets Mortgage servicing assets Other Gross deferred tax liabilities Deferred tax assets, net At December 31, 2018 2017 $ $ $ $ 54,390 70,808 29,623 25,060 14,388 194,269 (38,181) 156,088 28,140 10,293 9,608 6,293 3,604 1,634 59,572 96,516 $ $ $ $ 51,203 71,813 25,023 9,548 15,529 173,116 (38,292) 134,824 27,955 472 1,018 6,364 4,445 1,940 42,194 92,630 The Company's DTAs, net increased by $3.9 million during 2018, reflecting the $9.5 million deferred tax expense and a $13.4 million benefit allocated directly to shareholders' equity. The $38.2 million valuation allowance at December 31, 2018 is attributable to SALT net operating loss carryforwards and the $111 thousand decrease in the valuation allowance during 2018 pertains to the utilization of $0.4 million of capital loss carryforwards previously expected to expire. SALT net operating loss carryforwards approximating $1.2 billion at December 31, 2018 are scheduled to expire in varying amounts during tax years 2023 through 2037, and credits totaling $0.5 million at December 31, 2018, have a five-year carryover period, with excess credits subject to expiration annually. The valuation allowance of $38.2 million has been established for approximately $644 million of those net operating loss carryforwards estimated to expire. Management believes it is more likely than not that the results of future operations will generate sufficient taxable income to realize its total DTAs, net of the valuation allowance. Although taxable income in prior years is no longer able to be included as a source of taxable income, due to the general repeal of the carryback of net operating losses under the Tax Act, significant positive evidence remains in support of management's conclusion regarding the realizability of Webster's DTAs, including projected future reversals of existing taxable temporary differences and book-taxable income levels in recent and projected future years. There can, however, be no assurance that any specific level of future income will be generated or that the Company’s DTAs will ultimately be realized. A deferred tax liability of $15.2 million has not been recognized for certain thrift bad-debt reserves, established before 1988, that would become taxable upon the occurrence of certain events: distributions by Webster Bank in excess of certain earnings and profits; the redemption of Webster Bank’s stock; or liquidation. Webster does not expect any of those events to occur. At December 31, 2018 the cumulative taxable temporary differences applicable to those reserves approximated $58.0 million. 91 The following table reflects a reconciliation of the beginning and ending balances of unrecognized tax benefits (UTBs): (In thousands) Beginning balance Additions as a result of tax positions taken during the current year Additions as a result of tax positions taken during prior years Reductions as a result of tax positions taken during prior years Reductions relating to settlements with taxing authorities Reductions as a result of lapse of statute of limitation periods Ending balance Years ended December 31, 2018 2017 2016 $ $ 3,595 249 71 (474) (97) (488) 2,856 $ $ 3,847 584 7 (61) (392) (390) 3,595 $ $ 5,094 613 — (625) (693) (542) 3,847 At December 31, 2018, 2017, and 2016, there were $2.3 million, $2.8 million, and $2.5 million, respectively, of UTBs that if recognized would affect the effective tax rate. Webster recognizes interest and penalties related to UTBs, where applicable, in income tax expense. During the years ended December 31, 2018, 2017, and 2016, Webster recognized none, an expense of $0.2 million, and a benefit of $0.2 million, respectively. At December 31, 2018 and 2017, the Company had accrued interest and penalties related to UTBs of $1.8 million and $1.9 million, respectively. Webster has determined it is reasonably possible that its total UTBs could decrease by an amount in the range of $0.7 million to $1.8 million by the end of 2019, primarily as a result of potential lapses in statute-of-limitation periods and/or potential settlements with state and local taxing authorities concerning apportionment and tax-base determinations. Webster's federal tax returns for all years subsequent to 2014 remain open to examination. Webster's tax returns to its principal state tax jurisdictions of Connecticut, Massachusetts, New York, and Rhode Island for years subsequent to 2014 are either under, or remain open to examination. Note 9: Deposits A summary of deposits by type follows: (In thousands) Non-interest-bearing: Demand Interest-bearing: Checking Health savings accounts Money market Savings Time deposits Total interest-bearing Total deposits At December 31, 2018 2017 $ 4,162,446 $ 4,191,496 2,518,472 5,740,601 2,100,084 4,140,696 3,196,546 17,696,399 $ 21,858,845 2,736,952 5,038,681 2,209,492 4,348,700 2,468,408 16,802,233 $ 20,993,729 Time deposits and interest-bearing checking, included in above balances, obtained through brokers Time deposits, included in above balance, that exceed the FDIC limit Demand deposit overdrafts reclassified as loan balances $ $ 869,003 555,949 2,245 898,157 561,512 2,210 The scheduled maturities of time deposits are as follows: (In thousands) 2019 2020 2021 2022 2023 Thereafter Total time deposits 92 $ At December 31, 2018 2,381,229 594,754 143,324 47,224 30,015 — 3,196,546 $ Note 10: Borrowings Total borrowings of $2.6 billion at December 31, 2018 and $2.5 billion at December 31, 2017, are described in detail below. The following table summarizes securities sold under agreements to repurchase and other borrowings: (In thousands) Securities sold under agreements to repurchase: Original maturity of one year or less Original maturity of greater than one year, non-callable Total securities sold under agreements to repurchase Fed funds purchased Securities sold under agreements to repurchase and other borrowings At December 31, 2018 2017 Total Outstanding Rate Total Outstanding Rate $ $ 236,874 — 236,874 345,000 581,874 0.35% $ — 0.35 2.52 1.64 $ 288,269 300,000 588,269 55,000 643,269 0.17% 3.10 1.66 1.37 1.64 Repurchase agreements are used as a source of borrowed funds and are collateralized by U.S. Government agency mortgage- backed securities which are delivered to broker/dealers. Repurchase agreements counterparties are limited to primary dealers in government securities and commercial/municipal customers through Webster’s Treasury Unit. Dealer counterparties have the right to pledge, transfer, or hypothecate purchased securities during the term of the transaction. The Company has right of offset with respect to all repurchase agreement assets and liabilities. Total securities sold under agreements to repurchase represents the gross amount for these transactions, as only liabilities are outstanding for the periods presented. The following table provides information for FHLB advances: (Dollars in thousands) Maturing within 1 year After 1 but within 2 years After 2 but within 3 years After 3 but within 4 years After 4 but within 5 years After 5 years Federal Home Loan Bank advances Aggregate carrying value of assets pledged as collateral Remaining borrowing capacity At December 31, 2018 2017 Total Outstanding 1,403,026 215,000 200,000 150 242 8,390 1,826,808 6,689,761 2,568,664 $ $ $ Weighted- Average Contractual Coupon Rate 2.55% 1.73 3.16 — 2.95 2.65 2.52 Total Outstanding 1,150,000 103,026 215,000 200,000 170 8,909 1,677,105 6,402,066 2,600,624 $ $ $ Weighted- Average Contractual Coupon Rate 1.48% 1.81 1.73 2.06 — 2.65 1.61 (1) (1) (1) (1) Weighted-average contractual coupon rates for December 31, 2017 are presented as revised for these classifications to correct an immaterial error in presentation. The percentages reported in the Company's 2017 Annual Report on Form 10-K were: After 3 but within 4 years - 4.13%; After 5 years - 1.96%; and overall rate - 1.85%. Webster Bank was 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) 4.375% Senior fixed-rate notes due February 15, 2024 Junior subordinated debt Webster Statutory Trust I floating-rate notes due September 17, 2033 (1) Total notes and subordinated debt Discount on senior fixed-rate notes Debt issuance cost on senior fixed-rate notes Long-term debt At December 31, 2018 2017 $ 150,000 77,320 227,320 (608) (691) $ 226,021 $ 150,000 77,320 227,320 (727) (826) $ 225,767 (1) The interest rate on Webster Statutory Trust I floating-rate notes, which varies quarterly based on 3-month LIBOR plus 2.95%, was 5.74% at December 31, 2018 and 4.55% at December 31, 2017. 93 Note 11: Shareholders' Equity Share activity during the year ended December 31, 2018 is as follows: Balance at January 1, 2018 Restricted share activity Stock options exercised Common stock repurchased Warrant exercise Series F Preferred Stock issuance Series E Preferred Stock redemption Balance at December 31, 2018 Common Stock Preferred Stock Series F 6,000 — — — — — — 6,000 Common Stock Issued 93,680,291 — — — 6,020 — — 93,686,311 Treasury Stock Held 1,658,526 (182,553) (182,517) 215,000 — — — 1,508,456 Common Stock Outstanding 92,021,765 182,553 182,517 (215,000) 6,020 — — 92,177,855 On October 24, 2017, Webster announced that its Board of Directors had authorized a $100 million common stock repurchase program under which shares may be repurchased from time to time in the open market or in privately negotiated transactions, subject to market conditions and other factors. During 2018, common stock repurchased was acquired, at an average cost of $56.55 per common share. The shares were acquired under authority of a remaining balance from a previous program coupled with the current program, which results in a remaining repurchase authority for the common stock repurchase program of $91.7 million at December 31, 2018. On June 8, 2011, the U.S. Treasury closed an underwritten public offering of 3,282,276 warrants issued in connection with the Company’s participation in the Capital Purchase Program, each representing the right to purchase one share of Webster common stock, $0.01 par value per share. As of December 31, 2017, 8,752 warrants remained outstanding. During 2018, there were 8,647 warrants exercised in cashless exchange transactions. The warrants had an exercise price of $18.28 and expired on November 21, 2018. Accordingly, no warrants remained outstanding at December 31, 2018. Preferred Stock Webster has 6,000,000 depository shares outstanding, each representing 1/1000th ownership interest in a share of Webster's 5.25% Series F Non-Cumulative Perpetual Preferred Stock, par value $0.01 per share, with a liquidation preference of $25,000 per share (equivalent to $25 per depository share) (the Series F Preferred Stock). Webster will pay dividends as declared by the Board of Directors or a duly authorized committee of the Board. Dividends are payable at a rate of 5.25% per annum, quarterly in arrears, on the fifteenth day of each March, June, September, and December. Dividends on the Series F Preferred Stock are not cumulative and are not mandatory. If for any reason the Board of Directors or a duly authorized committee of the Board does not declare a dividend on the Series F Preferred Stock for any dividend period, such dividend will not accrue or be payable, and Webster will have no obligation to pay dividends for such dividend period, whether or not dividends are declared for any future dividend periods. The terms of the Series F Preferred Stock prohibit the Company from declaring or paying any cash dividends on its common stock, unless Webster has declared and paid full dividends on the Series F Preferred Stock for the most recently completed dividend period. The Company may redeem the Series F Preferred Stock, at its option in whole or in part, on December 15, 2022, or any dividend payment date thereafter, or in whole but not in part upon a "regulatory capital treatment event" as defined in the certificate of designation, at a redemption price equal to the liquidation preference plus any declared and unpaid dividends, without accumulation of any undeclared dividends. The Series F Preferred Stock does not have any voting rights except with respect to authorizing or increasing the authorized amount of senior stock, certain changes to the terms of the Series F Preferred Stock, or in the case of certain dividend non-payments. 94 Note 12: Accumulated Other Comprehensive Loss, Net of Tax The following table summarizes the changes in AOCL by component: (In thousands) Balance at December 31, 2015 Available For Sale Securities Derivative Instruments Defined Benefit Pension and Other Postretirement Benefit Plans Total $ (6,407) $ (22,980) $ (48,719) $ (78,106) Other comprehensive (loss) income before reclassifications Amounts reclassified from accumulated other comprehensive loss Net current-period other comprehensive (loss) income, net of tax Balance at December 31, 2016 Other comprehensive (loss) income before reclassifications Amounts reclassified from accumulated other comprehensive loss Net current-period other comprehensive (loss) income, net of tax Balance at Adoption of ASU No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220) - Reclassification of Certain Tax Effects from AOCI Balance at December 31, 2017 Other comprehensive (loss) income before reclassifications Amounts reclassified from accumulated other comprehensive loss Net current-period other comprehensive (loss) income, net of tax (8,901) (168) (9,069) (15,476) (7,590) — (7,590) (4,881) (27,947) (43,427) — (43,427) 825 5,087 5,912 (232) 4,502 4,270 (8,308) 9,421 1,113 (17,068) (44,449) (76,993) 181 4,384 4,565 (2,513) (15,016) 208 5,495 5,703 98 4,037 4,135 (8,254) (48,568) (7,122) 5,725 (1,397) (7,311) 8,421 1,110 (15,648) (91,531) (50,341) 11,220 (39,121) Balance at December 31, 2018 $ (71,374) $ (9,313) $ (49,965) $ (130,652) The following table provides information for the items reclassified from AOCL: Accumulated Other Comprehensive Loss Components 2018 2017 2016 Associated Line Item in the Consolidated Statements Of Income Years ended December 31, (In thousands) Available-for-sale securities: Unrealized gains on investments Unrealized losses on investments Total before tax Tax expense Net of tax Derivative instruments: Cash flow hedges Tax benefit Net of tax Defined benefit pension and other postretirement benefit plans: Amortization of net loss Prior service costs Total before tax Tax benefit Net of tax $ $ — — — — — $ $ — — — — — $ 414 Gain on sale of investment securities, net (149) Impairment loss recognized in earnings 265 (97) 168 $ Income tax expense $ (7,425) $ (7,160) $ (8,020) Interest expense 1,930 2,776 2,933 Income tax expense $ (5,495) $ (4,384) $ (5,087) $ (7,708) $ (6,612) $ (7,126) — (7,708) 1,983 — (6,612) 2,575 (1) (1) (14) (7,140) 2,638 Income tax expense $ (5,725) $ (4,037) $ (4,502) (1) These accumulated other comprehensive income components are included in the computation of net periodic benefit cost (see Note 17: Retirement Benefit Plans for further details). 95 The following tables summarize the items and related tax effects for each component of OCI/OCL, net of tax: (In thousands) Available-for-sale securities: Net unrealized loss during the period Reclassification for net gain included in net income Net non-credit other-than-temporary impairment Total available-for-sale securities Derivative instruments: Net unrealized gain during the period Reclassification adjustment for net loss included in net income Total derivative instruments Defined benefit pension and other postretirement benefit plans: Current year actuarial loss Reclassification adjustment for amortization of net loss included in net income Reclassification adjustment for prior service cost included in net income Total defined benefit pension and postretirement benefit plans Other comprehensive loss, net of tax (In thousands) Available-for-sale securities: Net unrealized loss during the period Reclassification for net gain included in net income Net non-credit other-than-temporary impairment Total available-for-sale securities Derivative instruments: Net unrealized gain during the period Reclassification adjustment for net loss included in net income Total derivative instruments Defined benefit pension and other postretirement benefit plans: Current year actuarial gain Reclassification adjustment for amortization of net loss included in net income Reclassification adjustment for prior service cost included in net income Total defined benefit pension and postretirement benefit plans Other comprehensive income, net of tax (In thousands) Available-for-sale securities: Net unrealized loss during the period Reclassification for net gain included in net income Net non-credit other-than-temporary impairment Total available-for-sale securities Derivative instruments: Net unrealized gain during the period Reclassification adjustment for net loss included in net income Total derivative instruments Defined benefit pension and other postretirement benefit plans: Current year actuarial loss Reclassification adjustment for amortization of net loss included in net income Reclassification adjustment for prior service cost included in net income Total defined benefit pension and postretirement benefit plans Other comprehensive income, net of tax 96 Year ended December 31, 2018 Tax Benefit (Expense) Net of Tax Amount Pre-Tax Amount $ (58,792) — — (58,792) 280 7,425 7,705 (9,600) 7,708 — (1,892) (52,979) $ $ 15,365 — — 15,365 (72) (1,930) (2,002) 2,478 (1,983) — 495 13,858 $ (43,427) — — (43,427) 208 5,495 5,703 (7,122) 5,725 — (1,397) (39,121) $ $ $ $ $ $ Year ended December 31, 2017 Tax Benefit (Expense) Net of Tax Amount Pre-Tax Amount (12,423) — — (12,423) 291 7,160 7,451 155 6,612 — 6,767 1,795 $ $ 4,833 — — 4,833 (110) (2,776) (2,886) (57) (2,575) — (2,632) (685) $ $ (7,590) — — (7,590) 181 4,384 4,565 98 4,037 — 4,135 1,110 Year ended December 31, 2016 Tax Benefit (Expense) Net of Tax Amount Pre-Tax Amount (14,113) (414) 149 (14,378) 1,331 8,020 9,351 (368) 7,126 14 6,772 1,745 $ $ 5,212 152 (55) 5,309 (506) (2,933) (3,439) 136 (2,633) (5) (2,502) (632) $ $ (8,901) (262) 94 (9,069) 825 5,087 5,912 (232) 4,493 9 4,270 1,113 Note 13: 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 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. Under 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 and other intangibles adjusted for certain deferred tax liabilities. Webster's 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: (Dollars in thousands) At December 31, 2018 Webster Financial Corporation CET1 risk-based capital Total risk-based capital Tier 1 risk-based capital Tier 1 leverage capital Webster Bank CET1 risk-based capital Total risk-based capital Tier 1 risk-based capital Tier 1 leverage capital At December 31, 2017 Webster Financial Corporation CET1 risk-based capital Total risk-based capital Tier 1 risk-based capital Tier 1 leverage capital Webster Bank CET1 risk-based capital Total risk-based capital Tier 1 risk-based capital Tier 1 leverage capital Dividend Restrictions Actual Adequately Capitalized Well Capitalized Amount Ratio Amount Ratio Amount Ratio Capital Requirements $ 2,284,978 2,722,194 2,430,015 2,430,015 $ 2,170,566 2,385,425 2,170,566 2,170,566 $ 2,093,116 2,517,848 2,238,172 2,238,172 $ 2,114,224 2,316,580 2,114,224 2,114,224 11.44% $ 13.63 12.16 9.02 898,972 1,598,172 1,198,629 1,077,303 4.5% $ 1,298,514 1,997,715 8.0 1,598,172 6.0 1,346,628 4.0 10.87% $ 11.95 10.87 8.06 898,317 1,597,008 1,197,756 1,076,712 4.5% $ 1,297,569 1,996,260 8.0 1,597,008 6.0 1,345,889 4.0 11.14% $ 13.40 11.91 8.63 845,389 1,502,914 1,127,186 1,036,817 4.5% $ 1,221,118 1,878,643 8.0 1,502,914 6.0 1,296,021 4.0 11.26% $ 12.34 11.26 8.14 844,693 1,501,677 1,126,258 1,038,442 4.5% $ 1,220,113 1,877,097 8.0 1,501,677 6.0 1,298,052 4.0 6.5% 10.0 8.0 5.0 6.5% 10.0 8.0 5.0 6.5% 10.0 8.0 5.0 6.5% 10.0 8.0 5.0 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. Dividends paid by Webster Bank to Webster Financial Corporation totaled $290 million and $120 million during the years ended December 31, 2018 and 2017, respectively. Cash Restrictions Webster Bank is required by Federal Reserve System regulations to hold cash reserve balances, on hand or with Federal Reserve Banks. Pursuant to this requirement, the Bank held $81.2 million and $82.3 million at December 31, 2018 and 2017, respectively. 97 Note 14: Earnings Per Common Share Reconciliation of the calculation of basic and diluted earnings per common share follows: (In thousands, except per share data) Earnings for basic and diluted earnings per common share: Net income Less: Preferred stock dividends Net income available to common shareholders Less: Earnings applicable to participating securities Earnings applicable to common shareholders Shares: Years ended December 31, 2018 2017 2016 $ 360,418 7,853 352,565 862 $ 351,703 $ 255,439 8,184 247,255 424 $ 246,831 $ 207,127 8,096 199,031 608 $ 198,423 Weighted-average common shares outstanding - basic 91,930 91,965 91,367 Effect of dilutive securities: Stock options and restricted stock Warrants Weighted-average common shares outstanding - diluted Earnings per common share: Basic Diluted 292 5 92,227 385 6 92,356 461 28 91,856 $ $ 3.83 3.81 $ 2.68 2.67 2.17 2.16 Potential common shares excluded from the effect of dilutive securities because they would have been anti-dilutive, are as follows: (In thousands) Stock options (shares with exercise price greater than market price) Restricted stock (due to performance conditions on non-participating shares) Years ended December 31, 2018 — 47 2017 — 58 2016 41 125 Refer to Note 11: Shareholders' Equity and Note 18: Share-Based Plans for further information relating to potential common shares excluded from the effect of dilutive securities. 98 Note 15: Derivative Financial Instruments Risk Management Objective of Using Derivatives Webster manages economic risks, including interest rate, liquidity, and credit risk 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 receipt or payment of, both future 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. The effective portion of the change in the fair value of derivatives which are designated as cash flow hedges, and that qualify for hedge accounting, is recorded to AOCL and is reclassified into earnings in the subsequent periods that the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of these derivatives, attributable to the difference in the effective date of the hedge and the effective date of the debt issuance, is recognized directly in earnings. During the periods presented, there was no ineffectiveness to be recognized in earnings. Certain fixed-rate obligations can be exposed to a change in fair value attributable to changes in benchmark interest rates. On occasion, interest rate swaps will be used to manage this exposure. 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 designated as a fair value hedge. 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 hedged item, is recognized in interest expense. During the periods presented, Webster did not have interest rate derivative financial instruments designated as fair value hedges and as a result, there was no impact to interest expense. 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 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. As a result, there is minimal impact on earnings, except for fee income earned in such transactions. All contracts eligible for clearing are cleared through 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 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 and 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. 99 Balance Sheet Impact of Derivative Instruments The following table presents the notional amounts and fair values of derivative positions: 111 184 28,423 28,423 2,245 — (In thousands) Designated as cash flow hedging instruments: Positions subject to a master netting agreement (1) Interest rate derivatives (2) Not designated as hedging instruments: Positions subject to a master netting agreement (1) Interest rate derivatives (2) Mortgage banking derivatives (3) Other Positions not subject to a master netting agreement (4) Interest rate derivatives Risk participation agreements Other Total not designated as hedging instruments At December 31, 2018 At December 31, 2017 Asset Derivatives Fair Value Notional Amounts Liability Derivatives Notional Amounts Fair Value Asset Derivatives Fair Value Notional Amounts Liability Derivatives Notional Amounts Fair Value $ 325,000 $ 3,050 $ — $ — $ 325,000 $ 2,770 $ — $ — 2,767,518 6,570 1,276,109 2,012 2,791,760 5,977 721,048 1,968 13,599 11,952 226 308 17,000 43,097 293 553 28,497 7,914 421 258 39,230 30,328 110 419 1,668,012 35,635 2,367,876 36,017 1,366,299 23,009 2,146,518 25,631 64,974 8,506 39 450 96,296 1,208 81 54 93,713 — 80 — 116,882 2,073 4,534,561 43,228 3,801,586 39,010 4,288,183 29,745 3,056,079 Gross derivative instruments, before netting $ 4,859,561 46,278 $ 3,801,586 39,010 $ 4,613,183 32,515 $ 3,056,079 Less: Legally enforceable master netting agreements Less: Cash collateral posted 2,495 4,936 2,495 — 2,245 6,704 Total derivative instruments, after netting $ 38,847 $ 36,515 $ 23,566 $ 26,178 (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 $1.9 billion and $1.9 billion for asset derivatives and $1.1 billion and $595 million for liability derivatives at December 31, 2018 and 2017, respectively, with related fair values of approximately zero. (3) Notional amounts include mandatory forward commitments of $17.0 million, while notional amounts do not include approved floating rate commitments of $6.7 million, at December 31, 2018. (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 Consolidated Balance Sheets. Income Statement Impact of Derivative Instruments The following table presents the effect on the income statement from derivative positions: (In thousands) Designated as cash flow hedging instruments: Interest rate derivatives (1) Not designated as hedging instruments: Interest rate derivatives (2) Risk participation agreements (2) Mortgage banking derivatives (3) Other (2) Total not designated as hedging instruments Years ended December 31, 2018 2017 2016 $ 6,557 $ 10,376 99 (378) 2,292 $ 12,389 $ $ $ 7,885 2,702 242 (2,062) (768) 114 $ $ $ 9,762 8,668 (361) 1,553 (67) 9,793 (1) The impact from interest rate derivatives designated as hedging instruments is included in interest expense on borrowings in the accompanying Consolidated Statements of Income. (2) The impact from these interest rate derivatives not designated as hedging instruments is included in other non-interest income in the accompanying Consolidated Statements of Income. (3) The impact from mortgage banking derivatives is included in mortgage banking activities in the accompanying Consolidated Statements of Income. 100 Amounts for the effective portion of changes in the fair value of derivatives qualifying for hedge accounting treatment are reclassified to interest expense as interest payments are made on Webster's variable-rate debt. Over the next twelve months, the Company estimates that $0.1 million will be reclassified from AOCL as an increase to interest income. Webster records gains and losses related to hedge terminations to AOCL. These balances are subsequently amortized to interest expense over the respective terms of the hedged debt instruments. At December 31, 2018, the remaining unamortized loss on the terminated cash flow hedges is $8.7 million. Over the next twelve months, the Company estimates that $3.9 million will be reclassified from AOCL as an increase to interest expense. Additional information about cash flow hedge activity impacting AOCL, and the related amounts reclassified to interest expense is provided in Note 12: Accumulated Other Comprehensive Loss, Net of Tax. Information about the valuation methods used to measure the fair value of derivatives is provided in Note 16: 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. 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 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 December 31, 2018 Gross Amount Relationship Offset Cash Collateral Offset At December 31, 2017 Net Amount Gross Amount Relationship Offset Cash Collateral Offset Net Amount 3,050 6,878 9,928 $ $ 88 2,407 2,495 $ $ 567 $ 2,395 4,369 4,936 102 $ 2,497 $ $ 2,770 6,222 8,992 $ $ 91 2,154 2,245 $ $ 2,679 4,025 6,704 $ $ — $ — $ — $ — $ — $ — $ — $ 2,566 2,566 2,495 — $ 2,495 $ — $ 71 71 2,387 2,245 — $ 2,387 $ 2,245 $ — $ — 43 43 — 142 142 (In thousands) Derivative instrument gains: Hedge accounting Non-hedge Accounting Total assets Derivative instrument losses: Hedge accounting Non-hedge Accounting Total liabilities 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. The Company had approximately $5.6 million in net margin collateral received from financial counterparties or the derivative clearing organization at December 31, 2018. The net is comprised of $39.5 million in initial margin posted at CME (clearing house), $28.3 million in CME margin received, and $5.6 million in dealer counterparty bi-lateral margin received. 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 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 Company's net current credit exposure relating to interest rate derivatives with Webster Bank customers was $35.6 million at December 31, 2018. 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 $35.5 million at December 31, 2018. 101 Note 16: 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, etc.), 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 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 unexpected. Available-for-Sale investment securities which include Agency CMO, Agency MBS, Agency CMBS, CMBS, CLO, single issuer-trust preferred, 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. 102 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 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: (In thousands) Originated loans held for sale At December 31, 2018 Unpaid Principal Balance Fair Value Difference Fair Value At December 31, 2017 Unpaid Principal Balance Difference $ 7,908 $ 8,227 $ (319) $ 20,888 $ 20,346 $ 542 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 $1.9 million as of December 31, 2018. 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 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 December 31, 2018, these alternative investments had a remaining unfunded commitment of $2.7 million. 103 Summaries of the fair values of assets and liabilities measured at fair value on a recurring basis are as follows: (In thousands) Financial assets held at fair value: U.S. Treasury Bills Agency CMO Agency MBS Agency CMBS CMBS CLO Single issuer-trust preferred Corporate debt Total available-for-sale investment securities Gross derivative instruments, before netting (1) Originated loans held for sale Investments held in Rabbi Trust Alternative investments Total financial assets held at fair value Financial liabilities held at fair value: Gross derivative instruments, before netting (1) (In thousands) Financial assets held at fair value: U.S. Treasury Bills Agency CMO Agency MBS Agency CMBS CMBS CLO Single issuer-trust preferred Corporate debt Total available-for-sale investment securities Gross derivative instruments, before netting (1) Originated loans held for sale Investments held in Rabbi Trust Alternative investments Total financial assets held at fair value Financial liabilities held at fair value: Gross derivative instruments, before netting (1) Level 1 Level 2 Level 3 NAV Total At December 31, 2018 $ 7,550 $ — $ — — — — — — — 7,550 758 — 4,307 — 234,923 1,481,089 566,237 445,581 112,771 — 50,579 2,891,180 45,520 7,908 — — 12,615 $ 2,944,608 $ — $ — — — — — — — — — — — — — $ 7,550 — $ 234,923 — 1,481,089 — 566,237 — 445,581 — 112,771 — — — 50,579 — 2,898,730 — 46,278 — 7,908 — 4,307 — 2,563 2,563 2,563 $ 2,959,786 588 $ 38,422 $ — $ — $ 39,010 Level 1 Level 2 Level 3 NAV Total At December 31, 2017 $ 1,247 $ — $ — — — — — — — 1,247 258 — 4,801 — 306,333 1,107,841 588,026 361,067 209,851 7,050 56,622 2,636,790 32,257 20,888 — — 6,306 $ 2,689,935 $ — $ — — — — — — — — — — — 7,460 7,460 $ — $ — — — — — — — — — — — 1,247 306,333 1,107,841 588,026 361,067 209,851 7,050 56,622 2,638,037 32,515 20,888 4,801 — 7,460 — $ 2,703,701 587 $ 27,836 $ — $ — $ 28,423 $ $ $ $ (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 15: Derivative Financial Instruments. 104 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. The following is a description of valuation methodologies used for assets measured on a non-recurring basis. At December 31, 2018, there were no significant Level 3 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. Alternative investments were adjusted by $0.1 million for the year ended December 31, 2018 to reflect observable price changes resulting in a carrying amount of $4.9 million at December 31, 2018. 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 as Level 3 of the fair value hierarchy. Other Real Estate Owned and Repossessed Assets. The total book value of OREO and repossessed assets was $6.9 million at December 31, 2018. OREO and repossessed assets 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. 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. 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, municipal bonds and notes, and private label MBS securities, 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. 105 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. Fair value of selected financial instruments and servicing assets amounts are as follows: (In thousands) Financial Assets: Level 2 At December 31, 2018 2017 Carrying Amount Fair Value Carrying Amount Fair Value Held-to-maturity investment securities Transferred loans held for sale $ 4,325,420 — $ 4,209,121 — $ 4,487,392 — $ 4,456,350 — Level 3 Loans and leases, net Mortgage servicing assets Financial Liabilities: Level 2 18,253,136 21,215 18,155,798 45,478 17,323,864 25,139 17,211,619 45,309 Deposit liabilities, other than time deposits Time deposits Securities sold under agreements to repurchase and other borrowings FHLB advances (1) Long-term debt (1) $ 18,662,299 3,196,546 581,874 1,826,808 226,021 $ 18,662,299 3,175,948 581,874 1,826,381 229,306 $ 18,525,321 2,468,408 643,269 1,677,105 225,767 $ 18,525,321 2,455,245 644,084 1,678,070 234,359 (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 10: Borrowings. 106 Note 17: Retirement Benefit Plans Defined benefit pension and other postretirement benefits Webster Bank offered a defined benefit noncontributory pension plan through December 31, 2007 for eligible employees who met certain minimum service and age requirements. Pension plan benefits are based upon employee earnings during the period of credited service. A supplemental defined benefit retirement plan (SERP) was also offered to certain employees who were at the Executive Vice President level or above through December 31, 2007. The SERP provides eligible participants with additional pension benefits. Webster Bank also provides other postretirement healthcare benefits to certain retired employees. The Webster Bank Pension Plan and the SERP were frozen as of December 31, 2007. No additional benefits have been accrued since that time. Employees hired on or after January 1, 2007 receive no qualified or supplemental retirement income under the plans. All other employees accrue no additional qualified or supplemental retirement income after January 1, 2008, and the amount of their qualified and supplemental retirement income will not exceed the amount of benefits determined as of December 31, 2007. There were $11.4 million and $122 thousand in company contributions to the SERP for the years ended December 31, 2018 and 2017, respectively. The mortality assumptions used in the pension liability assessment for the year ended December 31, 2018 were the RP-2014 adjusted to 2006 dataset mortality table projected to measurement date with Mercer's mortality improvement scale MMP-2017. The measurement date is December 31 for the Webster Bank Pension Plan, SERP, and other postretirement healthcare benefits. The following table sets forth changes in benefit obligation, changes in plan assets, and the funded status of the defined benefit pension and other postretirement benefits at December 31: (In thousands) Change in benefit obligation: Beginning balance Service cost Interest cost Actuarial loss (gain) Benefits paid and administrative expenses Ending balance (1) Change in plan assets: Beginning balance Actual return on plan assets Employer contributions Benefits paid and administrative expenses Ending balance Funded status of the plan at year end (2) Pension Plan SERP Other Benefits 2018 2017 2018 2017 2018 2017 $ 229,318 — 7,212 (18,499) (8,518) 209,513 $ 211,508 50 7,314 18,396 (7,950) 229,318 216,225 (15,735) — (8,518) 191,972 192,922 31,253 — (7,950) 216,225 $ (17,541) $ (13,093) $ $ 13,096 $ — 103 — (11,364) 1,835 — — 11,364 (11,364) — (1,835) $ $ 11,806 — 375 1,037 (122) 13,096 — — 122 (122) — (13,096) $ 3,094 $ — 78 (352) (208) 2,612 — — 208 (208) — (2,612) $ 3,852 — 92 (631) (219) 3,094 — — 219 (219) — (3,094) (1) The accumulated benefit obligation for the defined benefit pension and other postretirement benefits was $214.0 million and $245.5 million at December 31, 2018 and 2017, respectively. (2) The underfunded status amounts are included in accrued expense and other liabilities in the accompanying Consolidated Balance Sheets. The Company expects that $5.7 million in net actuarial loss will be recognized as a component of net periodic benefit cost in 2019. The components of AOCL related to the defined benefit pension and other postretirement benefits at December 31, 2018 and 2017 are summarized below: (In thousands) Net actuarial loss (gain) Prior service cost $ Total pre-tax amounts included in AOCL Deferred tax benefit Amounts included in accumulated AOCL, net of tax $ Pension Plan SERP Other Benefits 2018 64,523 $ — 64,523 14,623 49,900 $ 2017 59,433 — 59,433 13,407 46,026 $ $ 2018 2017 2018 2017 453 $ — 453 103 350 $ 3,299 — 3,299 744 2,555 $ $ (368) $ — (368) (83) (285) $ (16) — (16) (3) (13) 107 Expected future benefit payments for the defined benefit pension and other postretirement benefits are presented below: (In thousands) 2019 2020 2021 2022 2023 2024-2028 $ Pension Plan 8,636 9,011 9,740 10,416 10,468 57,158 $ SERP 130 133 133 133 131 650 $ Other Benefits 331 318 301 283 262 978 The components of the net periodic benefit cost (benefit) for the defined benefit pension and other postretirement benefits were as follows for the years ended December 31: (In thousands) Service cost Interest cost on benefit obligations Expected return on plan assets Amortization of prior service cost Recognized net loss Net periodic benefit cost (benefit) $ Pension Plan 2018 2017 2016 2018 SERP 2017 Other Benefits 2016 2018 2017 2016 $ — $ 50 $ 7,212 (12,716) — 4,862 (642) $ 7,314 (12,296) — 5,864 932 $ 45 8,441 (11,461) — 6,665 3,690 $ $ — $ 103 — — 2,846 2,949 $ — $ 375 — — 748 1,123 $ — $ — $ — $ — 125 389 — — 14 — 35 426 174 815 92 — — — 92 $ 78 — — — 78 $ $ Changes in funded status related to the defined benefit pension and other postretirement benefits and recognized as a component of OCI in the accompanying Consolidated Statements of Comprehensive Income as follows for the years ended December 31: Pension Plan SERP Other Benefits (In thousands) Net (gain) loss Amounts reclassified from AOCL Amortization of prior service cost $ 2018 9,952 $ (4,862) — 2017 2016 2018 (561) $ (715) $ — $ (5,864) — (6,665) — (2,846) — Total (gain) loss recognized in OCI $ 5,090 $ (6,425) $ (7,380) $ (2,846) $ 2017 1,037 $ (748) — 289 $ 2016 1,023 (426) — 597 2018 2017 2016 $ $ (352) $ — — (352) $ (631) $ — — (631) $ 60 (35) (14) 11 Fair Value Measurements The following is a description of the valuation methodologies used for the pension plan assets measured at fair value, including the general classification of such instruments pursuant to the valuation hierarchy: Registered investment companies. Exchange traded funds are quoted at market prices in an exchange and active market, which represent the net asset values of shares held by the plan at year end. Money market funds are shown at cost, which approximates fair value. The exchange traded fund is benchmarked against the Standard & Poor's 500 Index. Common collective trust funds. The net asset value (NAV), as provided by the trustee, is used as the fair value of the investments. The NAV is based on the fair value of the underlying investments held by the fund less its liabilities. Plan transactions (purchases and sales) may occur daily. Were the Plan to initiate a full redemption of the collective trust, the investment adviser reserves the right to temporarily delay withdrawal from the trust in order to ensure that securities liquidations will be carried out in an orderly business manner. The common collective trust funds performance are benchmarked against the Standard and Poor’s 500 Stock Index, the S&P 400 Mid Cap Index, the Russell 2000 Index, the MSCI ACWI ex U.S. Index, and the Barclays Capital U.S. Long Credit Index. 108 A summary of the fair value and hierarchy classification of financial assets of the pension plan is as follows: (In thousands) Registered investment companies: Exchange traded funds Cash and cash equivalents Common collective trust funds: Fixed Income funds Equity Funds Total 2018 2017 At December 31, Level 1 Level 2 Level 3 NAV Total Level 1 Level 2 Level 3 NAV Total $ 30,641 $ — $ — $ 1,695 — — — $ 30,641 1,695 — — — 107,753 51,883 $ 32,336 $ — $ — $ 159,636 $ 191,972 — 107,753 — 51,883 — — $ 37,848 $ — $ — $ 1,115 — — 107,430 — 69,832 — — — $ 38,963 $177,262 $ — $ — $ 37,848 1115 — — 107,430 — 69,832 — $216,225 All Level 3 assets of the pension plan were sold in 2017. The following table sets forth a summary of changes in the fair value of Level 3 assets of the pension plan: (In thousands) Beginning balance Employer contributions Unrealized gains relating to instruments still held at the reporting date Benefit payments, administrative expenses Asset sales Ending balance Asset Management Year ended December 31, 2017 $ $ 793 78 — (166) (705) — The following table presents the target allocation and the pension plan asset allocation for the periods indicated, by asset category: Fixed income investments Equity investments Cash and cash equivalents Total Target Allocation Percentage of Pension Plan assets 2019 2018 2017 55% 45 —% 100% 56% 43 1% 100% 50% 50 —% 100% The Retirement Plan Committee is a fiduciary under ERISA and is charged with the responsibility for directing and monitoring the investment management of the pension plan. To assist the Retirement Plan Committee in this function, it engages the services of investment managers and advisors who possess the necessary expertise to manage the pension plan assets within the established investment policy guidelines and objectives. The investment policy guidelines and objectives are reviewed at a minimum annually by the Retirement Plan Committee. The primary objective of the pension plan investment strategy is to provide long-term total return through capital appreciation and dividend and interest income. The Plan invests in registered investment companies and bank collective trusts. The volatility, as measured by standard deviation, of the pension plan assets should not exceed that of the Composite Index. The investment policy guidelines allow the pension plan assets to be invested in certain types of cash equivalents, fixed income securities, equity securities, mutual funds, and collective trusts. Investments in mutual funds and collective trust funds are substantially limited to funds with the securities characteristic of their assigned benchmarks. The pension plan investment strategy is designed to maintain a diversified portfolio, with a target average long-term rate of 6.00%, however, there is no certainty that the portfolio will perform to expectations. Asset allocations are monitored monthly, and the portfolio is rebalanced as needed. 109 Weighted-average assumptions used to determine benefit obligations at December 31 are as follows: Discount rate Rate of compensation increase Pension Plan SERP Other Benefits 2018 4.12% n/a 2017 3.50% n/a 2018 3.95% n/a 2017 3.30% n/a 2018 3.69% n/a 2017 3.00% n/a Weighted-average assumptions used to determine net periodic benefit cost for the years ended December 31 are as follows: Discount rate Expected long-term return on assets Rate of compensation increase Assumed healthcare cost trend Pension Plan 2018 3.50% 6.00% n/a n/a 2017 4.01% 6.50% n/a n/a 2016 4.20% 7.00% n/a n/a 2018 3.30% n/a n/a n/a SERP 2017 3.63% n/a n/a n/a 2016 3.75% n/a n/a n/a Other Benefits 2018 3.00% n/a n/a 7.00% 2017 3.27% n/a n/a 7.50% 2016 3.35% n/a n/a 8.25% The assumed healthcare cost-trend rate is 7.00% for 2018 and 2019, declining 1.0% each year thereafter until 2024 when the rate will be 4.60%. An increase of 1.0% in the assumed healthcare cost-trend rate for 2018 would have increased the net periodic postretirement benefit cost by $4 thousand and increased the accumulated benefit obligation by $111 thousand. A decrease of 1.0% in the assumed healthcare cost trend rate for 2018 would have decreased the net periodic postretirement benefit cost by $3 thousand and decreased the accumulated postretirement benefit obligation by $102 thousand. Multiple-employer plan Webster Bank, for the benefit of former employees of a bank acquired by the Company, is a sponsor of a multiple-employer pension plan that does not segregate the assets or liabilities of its employers participating in the plan. According to the plan administrator, as of July 1, 2018, the date of the latest actuarial valuation, Webster Bank’s portion of this plan was under-funded by $2.0 million. The following table sets forth contributions and funding status of Webster Bank's portion of this plan: (Dollars in thousands) Contributions by Webster Bank for the year ended December 31, Funded Status of the Plan at December 31, Plan Name Employer Identification Number Plan Number 2018 2017 2016 2018 2017 Pentegra Defined Benefit Plan for Financial Institutions 13-5645888 333 $679 $614 $690 At least 80 percent At least 80 percent Multi-employer accounting is applied to the Fund. As a multiple-employer pension plan, there are no collective bargained contracts affecting its contribution or benefit provisions. Any shortfall amortization basis is being amortized over seven years, as required by the Pension Protection Act. All benefit accruals were frozen as of September 1, 2004. The Company's contributions to this plan did not exceed more than 5% of total contributions in the plan for the years ended December 31, 2018, 2017, and 2016. Webster Bank Retirement Savings Plan Webster Bank provides an employee retirement savings plan governed by section 401(k) of the Internal Revenue Code. Webster Bank matches 100% of the first 2% and 50% of the next 6% of employees’ pre-tax contributions based on annual compensation. If a participant fails to make a pre-tax contribution election within 90 days of his or her date of hire, automatic pre-tax contributions will commence 90 days after his or her date of hire at a rate equal to 3% of compensation. Compensation and benefit expense included $12.4 million, $12.0 million, and $11.1 million for the years ended December 31, 2018, 2017, and 2016, respectively, for employer contributions. 110 Note 18: Share-Based Plans Stock compensation plans Webster maintains stock compensation plans under which restricted stock, restricted stock units, non-qualified stock options, incentive stock options, or stock appreciation rights may be granted to employees and directors. The Company believes these share awards better align the interests of its employees with those of its shareholders. Stock compensation cost is recognized over the required service vesting period for the awards, based on the grant-date fair value, net of estimated forfeitures, and is included as a component of compensation and benefits reflected in non-interest expense. The Plans have shareholder approval for up to 13.4 million shares of common stock. At December 31, 2018, there were 2.2 million common shares remaining available for grant, while no stock appreciation rights have been granted. The following table provides a summary of stock compensation expense and income tax benefit associated with stock compensation recognized in the accompanying Consolidated Statements of Income: (In thousands) Restricted stock Stock options Stock compensation expense Income tax benefit Years ended December 31, 2018 11,612 — 11,612 8,545 $ $ $ 2017 12,276 — 12,276 11,849 $ $ $ 2016 11,395 43 11,438 4,132 $ $ $ At December 31, 2018 there was $14.0 million of unrecognized stock compensation expense for restricted stock, expected to be recognized over a weighted-average period of 1.9 years. The following table provides a summary of the activity under the stock compensation plans for the year ended December 31, 2018: Balance at January 1, 2018 Granted Vested restricted stock awards (1) Forfeited Exercised options Balance at December 31, 2018 Unvested Restricted Stock Awards Outstanding Time-Based Performance-Based Stock Options Outstanding Number of Shares Weighted- Average Grant Date Fair Value Number of Shares Weighted- Average Grant Date Fair Value Number of Shares Weighted- Average Exercise Price 207,800 $ 43.16 78,916 $ 45.35 673,039 $ 18.75 151,833 171,269 10,923 — 58.34 45.54 52.94 — 75,707 71,357 13,847 — 55.82 46.50 51.19 — 177,441 53.05 69,419 54.43 — — — — — — 192,247 480,792 11.30 21.73 (1) Vested for purposes of recording compensation expense. Time-based restricted stock. Time-based restricted stock awards vest over the applicable service period ranging from 1 to 3 years. The number of time-based awards that may be granted to an eligible individual in a calendar year is limited to 100,000 shares. Compensation expense is recorded over the vesting period based on fair value, which is measured using the Company's common stock closing price at the date of grant. Performance-based restricted stock. Performance-based restricted stock awards vest after a 3 year performance period. The awards vest with a share quantity dependent on that performance, in a range from zero to 150%. The performance criteria for 50% of the shares granted in 2018 is based upon Webster's ranking for total shareholder return versus Webster's compensation peer group companies and the remaining 50% is based upon Webster's average of return on equity during the 3 year vesting period. The compensation peer group companies are utilized because they represent the financial institutions that best compare with Webster. The Company records compensation expense over the vesting period, based on a fair value calculated using the Monte-Carlo simulation model, which allows for the incorporation of the performance condition for the 50% of the performance-based shares tied to total shareholder return versus the compensation peer group, and based on a fair value of the market price on the date of grant for the remaining 50% of the performance-based shares tied to Webster's return on equity. Compensation expense is subject to adjustment based on management's assessment of Webster's return on equity performance relative to the target number of shares condition. The total fair value of restricted stock awards vested during the years ended December 31, 2018, 2017, and 2016 was $11.1 million, $12.7 million, and $11.6 million, respectively. 111 Stock options. Stock option awards have an exercise price equal to the market price of Webster Financial Corporation's stock on the date of grant. Each option grants the holder the right to acquire a share of Webster Financial Corporation common stock over a contractual life of up to 10 years. There have been no stock options granted since 2013. All awarded options have vested. There were 446,904 non-qualified stock options and 33,888 incentive stock options outstanding at December 31, 2018. Aggregate intrinsic value represents the total pretax intrinsic value (the difference between Webster's closing stock price on the last trading day of the year and the weighted-average exercise price, multiplied by the number of shares) that would have been received by the option holders had they all exercised their options at that time. At December 31, 2018, as all awarded options have vested, all of the outstanding options are exercisable, and the aggregate intrinsic value of these options was $13.3 million. The total intrinsic value of options exercised during the years ended December 31, 2018, 2017, and 2016 was $9.7 million, $11.1 million, and $6.4 million, respectively. The following table summarizes information for options, all of which are both outstanding and exercisable, at December 31, 2018: Range of Exercise Prices $ 5.14 - 12.85 $ 23.00 - 23.81 Weighted- Average Remaining Contractual Life (years) 0.5 3.7 3.4 Weighted- Average Exercise Price $ $ 7.42 23.34 21.73 Number of Shares 48,568 432,224 480,792 112 Note 19: 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. The Corporate Treasury unit 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 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. A charge related to additional FDIC premiums pertaining to prior periods' deposit insurance assessments and related interest is included in the Corporate and Reconciling category for the year ended December 31, 2018. See Note 1 to the Consolidated Financial Statements included in Item 1 of this report for additional information. Beginning in 2018, income tax expense is estimated for each reportable segment individually. The 2017 and 2016 income tax expense was estimated for all segments using the consolidated effective tax rate. This change in the estimate of income tax expense reflects an estimate of full profitability for each of the individual business segments based on the nature of their operations. The following table presents total assets for Webster's reportable segments and the Corporate and Reconciling category: (In thousands) At December 31, 2018 At December 31, 2017 Commercial Banking HSA Bank Total Assets Community Banking Corporate and Reconciling Consolidated Total $ 10,477,050 $ 70,826 $ 8,727,335 $ 8,335,104 $ 27,610,315 9,350,028 76,308 8,909,671 8,151,638 26,487,645 113 The following tables present the operating results, including all appropriate allocations, for Webster’s reportable segments and the Corporate and Reconciling category: (In thousands) Net interest income Provision for loan and lease losses Net interest income after provision for loan and lease losses Non-interest income Non-interest expense Income (loss) before income tax expense Income tax expense (benefit) Net income (In thousands) Net interest income (loss) Provision for loan and lease losses Net interest income (loss) after provision for loan and lease losses Non-interest income Non-interest expense Income (loss) before income tax expense Income tax expense (benefit) Net income (loss) (In thousands) Net interest income (loss) Provision for loan and lease losses Net interest income (loss) after provision for loan and lease losses Non-interest income Non-interest expense Income (loss) before income tax expense Income tax expense (benefit) Net income (loss) Year ended December 31, 2018 Commercial Banking $ 356,509 34,773 $ HSA Bank 143,255 — Community Banking $ 404,869 7,227 Corporate and Reconciling 2,048 — $ Consolidated Total 906,681 42,000 $ 321,736 64,765 174,054 212,447 52,262 160,185 Commercial Banking 322,393 38,518 283,875 55,194 154,037 185,032 51,438 133,594 $ $ $ 143,255 89,323 124,594 107,984 28,076 79,908 $ 397,642 109,669 384,599 122,712 24,420 98,292 $ 2,048 18,811 22,369 (1,510) (23,543) 22,033 $ 864,681 282,568 705,616 441,633 81,215 360,418 Year ended December 31, 2017 HSA Bank 104,704 — Community Banking $ 383,700 2,382 Corporate and Reconciling (14,510) — $ Consolidated Total 796,287 40,900 $ 104,704 77,378 113,143 68,939 19,165 49,774 $ 381,318 107,368 373,081 115,605 32,137 83,468 $ (14,510) 19,538 20,814 (15,786) (4,389) (11,397) $ 755,387 259,478 661,075 353,790 98,351 255,439 Year ended December 31, 2016 Commercial Banking HSA Bank Community Banking 287,596 37,455 $ $ 81,451 — 367,137 18,895 Corporate and Reconciling (17,671) — $ Consolidated Total 718,513 56,350 $ 250,141 57,253 138,379 169,015 53,649 115,366 $ 81,451 71,710 97,152 56,009 17,779 38,230 $ 348,242 110,197 369,132 89,307 28,348 60,959 $ (17,671) 25,318 18,528 (10,881) (3,453) (7,428) $ 662,163 264,478 623,191 303,450 96,323 207,127 $ $ $ $ $ 114 Note 20: 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 19: Segment Reporting: (In thousands) Major Revenue Streams Deposit service fees Wealth and investment services Other income Revenue from contracts with customers Non-interest income within the scope of other GAAP topics Year ended December 31, 2018 Commercial Banking HSA Bank Community Banking Corporate and Reconciling Consolidated Total $ 12,775 $ 85,809 $ 63,522 $ 10,145 — 22,920 41,845 — 3,514 89,323 — 22,732 2,133 88,387 21,282 77 (34) — 43 $ 162,183 32,843 5,647 200,673 18,768 81,895 Total non-interest income $ 64,765 $ 89,323 $ 109,669 $ 18,811 $ 282,568 (In thousands) Major Revenue Streams Deposit service fees Wealth and investment services Other income Revenue from contracts with customers Non-interest income within the scope of other GAAP topics Year ended December 31, 2017 Commercial Banking HSA Bank Community Banking Corporate and Reconciling Consolidated Total $ 12,203 $ 74,448 $ 64,194 $ 9,817 — 22,020 33,174 — 2,930 77,378 — 21,274 823 86,291 21,077 292 (36) — 256 $ 151,137 31,055 3,753 185,945 19,282 73,533 Total non-interest income $ 55,194 $ 77,378 $ 107,368 $ 19,538 $ 259,478 (In thousands) Major Revenue Streams Deposit service fees Wealth and investment services Other income Revenue from contracts with customers Non-interest income within the scope of other GAAP topics Year ended December 31, 2016 Commercial Banking HSA Bank Community Banking Corporate and Reconciling Consolidated Total $ 11,143 $ 66,162 $ 63,143 $ 9,150 — 20,293 36,960 — 2,858 69,020 2,690 19,842 872 83,857 26,340 237 (30) — 207 $ 140,685 28,962 3,730 173,377 25,111 91,101 Total non-interest income $ 57,253 $ 71,710 $ 110,197 $ 25,318 $ 264,478 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. 115 Note 21: Commitments and Contingencies Lease Commitments Webster is obligated under various non-cancelable operating leases for properties used as banking centers and other office facilities. Rental expense under the leases was $31.0 million, $31.1 million, and $30.4 million for the years ended December 31, 2018, 2017, and 2016, respectively, and is recorded as a component of occupancy expense in the accompanying Consolidated Statements of Income. Rental income from sub-leases on certain of these properties is netted as a component of occupancy expense, while rental income under various non-cancelable operating leases for properties owned is recorded as a component of other non-interest income in the accompanying Consolidated Statements of Income. Rental income was $0.7 million, $0.7 million, and $0.8 million for the years ended December 31, 2018, 2017, and 2016, respectively. The following table summarizes future minimum rental payments and receipts under lease agreements: (In thousands) 2019 2020 2021 2022 2023 Thereafter Total future minimum rental payments and receipts Credit-Related Financial Instruments At December 31, 2018 Rental Payments 30,889 30,049 28,274 24,498 21,231 78,882 213,823 $ $ Rental Receipts 805 667 547 493 427 1,403 4,342 $ $ 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. The following table summarizes the outstanding amounts of credit-related financial instruments with off-balance sheet risk: (In thousands) Commitments to extend credit Standby letter of credit Commercial letter of credit Total credit-related financial instruments with off-balance sheet risk At December 31, 2018 $ 5,840,585 189,040 21,181 $ 6,050,806 2017 $ 5,567,687 195,902 43,200 $ 5,806,789 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 they relate to. 116 These commitments subject the Company to potential exposure in excess of 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 Consolidated Balance Sheets. The following table provides a summary of activity in the reserve for unfunded credit commitments: (In thousands) Beginning balance Provision Ending balance Litigation Years ended December 31, 2018 2,362 144 2,506 $ $ 2017 2,287 75 2,362 $ $ 2016 2,119 168 2,287 $ $ Webster is involved in routine legal proceedings occurring in the ordinary course of business and is subject to loss contingencies related to such litigation and claims arising therefrom. Webster evaluates these contingencies based on information currently available, including advice of counsel and assessment of available insurance coverage. Webster establishes accruals for litigation and claims when a loss contingency is considered probable and the related amount is reasonably estimable. These accruals are 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 all matters. Based upon its current knowledge, after consultation with counsel and after taking into consideration its current litigation accruals, Webster believes that at December 31, 2018 any reasonably possible losses, in addition to amounts accrued, are not material to Webster’s consolidated financial condition. However, in light of the uncertainties involved in such actions and proceedings, 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. 117 Note 22: Parent Company Information Financial information for the Parent Company only is presented in the following tables: December 31, 2018 2017 $ 317,473 $ 181,085 150,000 150,000 2,633,848 2,585,955 36 3,252 12,003 — 2,939 13,252 $ 3,116,612 $ 2,933,231 $ 148,701 $ 148,447 77,320 2,664 — 1,412 77,320 2,616 575 2,315 230,097 231,273 2,886,515 2,701,958 $ 3,116,612 $ 2,933,231 Years ended December 31, 2018 2017 2016 $ 290,000 $ 120,000 $ 145,000 7,342 — 290 805 4,477 — 1,504 204 1,911 (2,410) 176 7,485 298,437 126,185 152,162 11,127 19,105 30,232 268,205 2,207 90,006 10,380 23,008 33,388 92,797 3,004 159,638 9,981 17,739 27,720 124,442 3,086 79,599 $ 360,418 $ 255,439 $ 207,127 Condensed Balance Sheets (In thousands) Assets: Cash and due from banks Intercompany debt securities Investment in subsidiaries Due from subsidiaries Alternative investments Other assets Total assets Liabilities and shareholders’ equity: Senior notes Junior subordinated debt Accrued interest payable Due to subsidiaries Other liabilities Total liabilities Shareholders’ equity Total liabilities and shareholders’ equity Condensed Statements of Income (In thousands) Operating Income: Dividend income from bank subsidiary Interest on securities and deposits Loss on sale of investment securities Alternative investments income Other non-interest income Total operating income Operating Expense: Interest expense on borrowings Non-interest expense Total operating expense Income before income tax benefit and equity in undistributed earnings of subsidiaries Income tax benefit Equity in undistributed earnings of subsidiaries Net income 118 Condensed Statements of Comprehensive Income (In thousands) Net income Other comprehensive income (loss), net of tax: Net unrealized gains on available for sale securities Net unrealized gains on derivative instruments Other comprehensive loss of subsidiaries and associated companies Other comprehensive income (loss), net of tax Comprehensive income Condensed Statements of Cash Flows (In thousands) Net cash provided by operating activities Investing activities: Proceeds from sale of available for sale securities Purchases of intercompany debt securities Proceeds from the sale of other assets Net cash provided by (used for) investing activities Financing activities: Preferred stock issued Preferred stock redeemed Cash dividends paid to common shareholders Cash dividends paid to preferred shareholders Exercise of stock options Excess tax benefits from stock-based compensation Common stock repurchased and acquired from stock compensation plan activity Common stock warrants repurchased Net cash used for financing activities Increase (decrease) in cash and due from banks Cash and due from banks at beginning of year Cash and due from banks at end of year Years ended December 31, 2018 2017 2016 $ 360,418 $ 255,439 $ 207,127 — 1,447 (40,568) (39,121) — 1,216 (106) 1,110 584 1,223 (694) 1,113 $ 321,297 $ 256,549 $ 208,240 Years ended December 31, 2018 2017 2016 $ 282,986 $ 115,957 $ 127,899 — — — — — — (114,959) (7,875) 2,173 — — — 7,581 7,581 145,056 (122,710) (94,630) (8,096) 8,259 — 1,089 (150,000) — (148,911) — — (89,522) (8,096) 11,762 3,204 (25,937) (23,279) (22,870) — — (163) (146,598) (95,400) (105,685) 136,388 181,085 28,138 152,947 (126,697) 279,644 $ 317,473 $ 181,085 $ 152,947 119 Note 23: Selected Quarterly Consolidated Financial Information (Unaudited) (In thousands, except per share data) Interest income Interest expense Net interest income Provision for loan and lease losses Non-interest income Non-interest expense Income before income tax expense Income tax expense Net income Earnings applicable to common shareholders Earnings per common share: Basic Diluted (In thousands, except per share data) Interest income Interest expense Net interest income Provision for loan and lease losses Non-interest income Non-interest expense Income before income tax expense Income tax expense Net income Earnings applicable to common shareholders Earnings per common share: Basic Diluted Note 24: Subsequent Events First Quarter Second Quarter Third Quarter Fourth Quarter 2018 $ 245,921 $ 260,491 $ 268,363 $ 31,753 214,168 11,000 68,747 171,615 100,300 20,075 35,481 225,010 10,500 68,374 180,459 102,425 20,743 37,991 230,372 10,500 72,284 178,783 113,373 13,700 80,225 $ 81,682 $ 99,673 $ 78,083 $ 79,489 $ 97,460 $ 96,666 $ 0.85 0.85 $ 0.87 0.86 $ 1.06 1.06 1.05 1.05 First Quarter Second Quarter Third Quarter Fourth Quarter 2017 $ 219,680 $ 226,789 $ 231,021 $ 27,016 192,664 10,500 63,042 163,784 81,422 21,951 29,002 197,787 7,250 64,551 164,419 90,669 29,090 30,117 200,904 10,150 65,846 161,823 94,777 30,281 59,471 $ 61,579 $ 64,496 $ 280,392 43,261 237,131 10,000 73,163 174,759 125,535 26,697 98,838 236,115 31,183 204,932 13,000 66,039 171,049 86,922 17,029 69,893 57,342 $ 59,485 $ 62,426 $ 67,710 $ 0.62 0.62 $ 0.65 0.64 $ 0.68 0.67 0.74 0.73 $ $ $ $ $ $ The Company has evaluated events from the date of the Consolidated Financial Statements and accompanying Notes thereto, December 31, 2018, through the issuance of this Annual Report on Form 10-K and determined that no significant events were identified requiring recognition or disclosure. 120 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None ITEM 9A. CONTROLS AND PROCEDURES Disclosure Controls and Procedures Under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, the Company has evaluated the effectiveness of the design and operation of Webster’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based upon that evaluation, management, including the Chief Executive Officer and Chief Financial Officer, concluded that Webster’s disclosure controls and procedures were effective as of the end of the period covered by this report. Internal Control over Financial Reporting Webster’s management has issued a report on its assessment of the effectiveness of Webster’s internal control over financial reporting as of December 31, 2018. Webster’s independent registered public accounting firm has issued a report, expressing an unqualified opinion, on the effectiveness of Webster’s internal control over financial reporting as of December 31, 2018. There were no changes made in Webster’s internal control over financial reporting that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. The reports of Webster’s management and of Webster’s independent registered public accounting firm follow. Management’s Report on Internal Control over Financial Reporting The management of Webster Financial Corporation and its Subsidiaries is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule13a-15(f) under the Securities Exchange Act of 1934, as amended). Our internal control over financial reporting is a process designed under the supervision of our Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external purposes in accordance with generally accepted accounting principles. A material weakness is defined as a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis. Management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2018 based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management concluded that the Company's internal control over financial reporting was effective as of December 31, 2018. KPMG LLP, the independent registered public accounting firm that audited the consolidated financial statements of the Corporation included in this Annual Report on Form 10-K, has issued an attestation report on the effectiveness of the Corporation's internal control over financial reporting as of December 31, 2018. The report, which expresses an unqualified opinion on the effectiveness of the Corporation's internal control over financial reporting as of December 31, 2018, is included below under the heading Report of Independent Registered Public Accounting Firm. /s/ John R. Ciulla John R. Ciulla President and Chief Executive Officer /s/ Glenn I. MacInnes Glenn I. MacInnes Executive Vice President and Chief Financial Officer March 1, 2019 121 KPMG LLP One Financial Plaza 755 Main Street Hartford, CT 06103 Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors Webster Financial Corporation: Opinion on Internal Control Over Financial Reporting We have audited Webster Financial Corporation and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2018 and 2017, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2018, and the related notes (collectively, the consolidated financial statements), and our report dated March 1, 2019 expressed an unqualified opinion on those consolidated financial statements. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Hartford, Connecticut March 1, 2019 Table of Contents ITEM 9B. OTHER INFORMATION Not applicable PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Executive Officers of the Registrant Webster’s executive officers are each appointed to serve for a one-year period. Information concerning their principal occupation during at least the last five years is set forth below. John R. Ciulla, 53, is President and Chief Executive Officer and a director of Webster Financial Corporation and Webster Bank. He was appointed as Chief Executive Officer and a director of Webster Financial Corporation in January 2018. Mr. Ciulla joined Webster in 2004 and has served in a variety of management positions at the Company, including Chief Credit Risk Officer and Senior Vice President, Commercial Banking, where he was responsible for several business units. He was promoted from Executive Vice President and Head of Middle Market Banking to lead Commercial Banking in January 2014 and to President in October 2015. Prior to joining Webster, he was Managing Director of The Bank of New York, where he worked from 1997 to 2004. Mr. Ciulla serves on the Federal Reserve System’s Federal Advisory Council as a representative of the Federal Reserve Bank of Boston. He also serves on the board of the Connecticut Business and Industry Association (CBIA) and was a former chairman, and is a member of the board of the Business Council of Fairfield County. Glenn I. MacInnes, 57, is Executive Vice President and Chief Financial Officer of Webster and Webster Bank. He joined Webster in 2011. Prior to joining Webster, Mr. MacInnes was Chief Financial Officer at New Alliance Bancshares for two years and was employed for 11 years at Citigroup in a series of senior positions, including Deputy CFO for Citibank North America and CFO of Citibank (West) FSB. Mr. MacInnes serves on the Board of Wellmore Behavioral Health, Inc. Daniel H. Bley, 50, is Executive Vice President and Chief Risk Officer of Webster and Webster Bank since August of 2010. Prior to joining Webster, Mr. Bley worked at ABN AMRO and Royal Bank of Scotland from 1990 to 2010, having served as Managing Director of Financial Institutions Credit Risk and Group Senior Vice President, Head of Financial Institutions and Trading Credit Risk Management. Mr. Bley currently serves on the Board of Directors of Junior Achievement of Greater Fairfield County. Bernard M. Garrigues, 60, is Executive Vice President and Chief Human Resources Officer of Webster and Webster Bank. Mr. Garrigues joined Webster in April 2014. Prior to joining Webster, Mr. Garrigues was with TIMEX Group in Middlebury, Connecticut, where he was the Chief Human Resources Officer having comprehensive global HR responsibility for several thousand employees in 22 countries. Previously, he worked 21 years for General Electric where he served as global head of HR with a number of GE businesses, including GE Commercial Finance, GE Capital Real Estate, GE Capital IT Solutions and Healthcare in both the United States and Europe. Mr. Garrigues is Six Sigma Green Belt certified, a published author, and a seasoned guest lecturer. Karen A. Higgins-Carter, 49, is Executive Vice President and Chief Information Officer of Webster and Webster Bank. Ms. Higgins-Carter joined Webster in July 2018. Prior to joining Webster, Ms. Higgins-Carter was Managing Director and Head of the Office of the Chief Information and Operations Officer for the Americas at Mitsubishi UFJ (MUFG) Financial Group from November 2016 to July 2018, where she was responsible for developing and leading the execution of the company’s IT strategic plan, IT governance, information risk management, communications, employee development and engagement. Prior to Mitsubishi UFJ, Ms. Higgins-Carter served as Technology General Manager at Bridgewater Associates from November 2014 to November 2016, and as Managing Director and Head of Consumer Risk Technology at JP Morgan Chase from June 2012 to August 2014. Nitin J. Mhatre, 48, is Executive Vice President, Head of Community Banking of Webster and Webster Bank. He joined Webster in October 2008 as Executive Vice President, Consumer Lending of Webster Bank and was appointed Executive Vice President, Consumer Finance in January 2009. He was promoted to his current position in August of 2013. Prior to joining Webster, Mr. Mhatre worked at Citigroup across multiple geographies including St. Louis, Missouri, Stamford, Connecticut, Guam, USA and India, in various capacities. In his most recent position, he was the Managing Director for the Home Equity Retail business for CitiMortgage based in Stamford, Connecticut. Mr. Mhatre is a board member of Consumer Bankers Association headquartered in Washington, D.C., and also serves on the board of Junior Achievement of Southwest New England. Christopher J. Motl, 48, is Executive Vice President, Head of Commercial Banking of Webster and Webster Bank. He joined Webster in 2004 and was responsible for establishing and growing the Sponsor and Specialty Banking Group and was most recently Executive Vice President and Director of Middle Market Banking. Prior to joining Webster, Mr. Motl worked at CoBank, where he was Vice President and Relationship Manager. Mr. Motl is on the board of Special Olympics of Connecticut and the Travelers Championship. 123 Brian R. Runkle, 50, is Executive Vice President of Bank Operations of Webster and Webster Bank. Mr. Runkle joined Webster in August 2016. Prior to joining Webster, Mr. Runkle served in several leadership roles at General Electric across the country from 1999 to 2016, including Managing Director, Risk for GE Capital. He is Six Sigma Master Black Belt certified. Mr. Runkle was a volunteer team leader and campaign member for United Way in Connecticut. Charles L. Wilkins, 57, is Executive Vice President of Webster and Webster Bank and Head of HSA Bank. He joined Webster in January 2014. Prior to joining Webster, he was President of his own consulting practice specializing in healthcare and financial services from June 2012 to December 2013. Harriet Munrett Wolfe, 65, is Executive Vice President, General Counsel and Corporate Secretary of Webster and Webster Bank. She joined Webster in March 1997 as Senior Vice President and Counsel, was appointed Secretary in June 1997, and General Counsel in September 1999. In January 2003, she was appointed Executive Vice President. Prior to this, Ms. Wolfe was in private practice. Ms. Wolfe serves as a board member of the University of Connecticut Foundation, Inc., and as a member of the Foundation's Audit Committee; she previously served as a member of the Executive Committee, and Chair of the Real Estate Committee. Albert J. Wang, 43, is Chief Accounting Officer of Webster and Webster Bank. He joined Webster in September 2017 and is responsible for Webster’s accounting, tax and financial reporting activities. Prior to joining Webster, Mr. Wang served as Executive Vice President and Chief Accounting Officer for the Banc of California from July 2016 to September 2017. Previously, Mr. Wang served in various leadership positions with Santander Bank from December 2010 to July 2016, most recently as Chief Accounting Officer. Mr. Wang’s earlier management roles included those at PricewaterhouseCoopers from June 2004 until December 2010, where he provided assurance and business advisory services to depository and lending institutions. Mr. Wang is a Certified Public Accountant with over 20 years of accounting and finance experience working with domestic and offshore companies. Corporate Governance Webster has adopted a Code of Business Conduct and Ethics that applies to all directors, officers and employees, including the principal executive officers, principal financial officer and principal accounting officer. The Company has also adopted corporate governance guidelines and charters for the Audit, Compensation, Nominating and Corporate Governance, Executive, and Risk Committees of the Board of Directors. The corporate governance guidelines and the charters of the Audit, Compensation, and Nominating and Corporate Governance Committees can be found on the Company's website (www.websterbank.com). A printed copy of any of these documents may be obtained without charge directly from the Company at the following address: Webster Financial Corporation 145 Bank Street Waterbury, Connecticut 06702 Attn: Investor Relations Telephone: (203) 578-2202 Additional information required under this item may be found under the sections captioned "Information as to Nominees" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy Statement, which will be filed with the Securities and Exchange Commission no later than 120 days after the close of the fiscal year ended December 31, 2018, and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION Information regarding compensation of executive officers and directors is omitted from this report and may be found in the Proxy Statement under the sections captioned "Compensation Discussion and Analysis" and "Compensation of Directors," and the information included therein is incorporated herein by reference. 124 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Stock-Based Compensation Plans Information regarding stock-based compensation plans as of December 31, 2018, is presented in the table below: Plan Category Plans approved by shareholders Plans not approved by shareholders Total Number of Shares to be Issued Upon Exercise of Outstanding Awards 480,792 — 480,792 Weighted-Average Exercise Price of Outstanding Awards $ 21.73 — 21.73 $ Number of Shares Available for Future Grants 2,183,879 — 2,183,879 Further information required by this Item is omitted herewith and may be found under the sections captioned "Stock Owned by Management" and "Principal Holders of Voting Securities of Webster" in the Proxy Statement and such information included therein is incorporated herein by reference. Additional information is presented in Note 18: Share-Based Plans in the Notes to Consolidated Financial Statements contained elsewhere in this report. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE Information regarding certain relationships and related transactions, and director independence is omitted from this report and may be found under the sections captioned "Certain Relationships," "Compensation Committee Interlocks and Insider Participation" and "Corporate Governance" in the Proxy Statement and the information included therein is incorporated herein by reference. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Information regarding principal accounting fees and services is omitted from this report and may be found under the section captioned "Auditor Fee Information" in the Proxy Statement and the information included therein is incorporated herein by reference. ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES Financial Statements PART IV The Company's consolidated financial statements, including the notes thereto, and the report of the independent registered public accounting firm thereon, are included in Part II - Item 8. Financial Statements and Supplementary Data of this Form 10-K. Financial Statement Schedules All financial statement schedules for the Company have been included in the consolidated financial statements, or the notes thereto, or have been omitted because they are either inapplicable or not required. Exhibits A list of exhibits to this Form 10-K is set forth below. 125 Exhibit Number Exhibit Description Exhibit Included Incorporated by Reference Form Exhibit Filing Date 3 3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 4 4.1 4.2 4.3 4.4 4.5 4.6 10 10.1 10.2 10.3 10.4 10.5 10.6 10.7 10.8 10.9 10.10 10.11 10.12 10.13 10.14 Certificate of Incorporation and Bylaws. Fourth Amended and Restated Certificate of Incorporation Certificate of Designations establishing the rights of the Company's 8.50% Series A Non-Cumulative Perpetual Convertible Preferred Stock Certificate of Designations establishing the rights of the Company's Fixed Rate Cumulative Perpetual Preferred Stock, Series B Certificate of Designations establishing the rights of the Company's Perpetual Participating Preferred Stock, Series C Certificate of Designations establishing the rights of the Company's Non- Voting Perpetual Participating Preferred Stock, Series D Certificate of Designations establishing the rights of the Company's 6.40% Series E Non-Cumulative Perpetual Preferred Stock Certificate of Designations establishing the rights of the Company's 5.25% Series F Non-Cumulative Perpetual Preferred Stock Bylaws, as amended effective June 9, 2014 Instruments Defining the Rights of Security Holders. Specimen common stock certificate Junior Subordinated Indenture, dated as of January 29, 1997, between the Company and The Bank of New York, as trustee, relating to the Company's Junior Subordinated Deferrable Interest Debentures Deposit Agreement, dated as of December 12, 2017, by and among the Company, Computershare Shareowner Services LLC, as Depositary, and the Holders of Depositary Receipts Senior Debt Indenture, dated as of February 11, 2014, between the Company and The Bank of New York Mellon, as trustee Supplemental Indenture, dated as of February 11, 2014, between the Company and The Bank of New York Mellon, as trustee, relating to the Company’s 4.375% Senior Notes due February 15, 2024 Form of specimen stock certificate for the Company's 5.25% Series F Non- Cumulative Perpetual Preferred Stock Material Contracts (1) Amended and Restated 1992 Stock Option Plan Amended and Restated Deferred Compensation Plan for Directors and Officers of Webster Bank effective January 1, 2005 Supplemental Retirement Plan for Employees of Webster Bank, as amended and restated effective January 1, 2005 Qualified Performance-Based Compensation Plan Employee Stock Purchase Plan Description of Arrangement for Directors Fees. Form of Change in Control Agreement, effective as of December 31, 2012, by and between Webster Financial Corporation and Glenn I. MacInnes Non-Competition Agreement, dated as of February 22, 2017, between Webster Bank, N.A., and Glenn I. MacInnes Non-Competition Agreement, dated as of April 3, 2017, between Webster Financial Corporation, and Daniel Bley Form of Change in Control Agreement, effective as of February 1, 2013, by and between Webster Financial Corporation and Daniel H. Bley, Nitin J. Mhatre and Harriet Munrett Wolfe Form of Non-Solicitation Agreement, effective as of February 1, 2013, by and between Webster Financial Corporation and Harriet Munrett Wolfe Change in Control Agreement, effective as of January 3, 2014, by and between Webster Financial Corporation and Charles L. Wilkins Non-Competition Agreement, dated as of April 3, 2017, between Webster Financial Corporation, and Charles Wilkins Change in Control Agreement, dated as of April 28, 2014, by and between Webster Financial Corporation and Bernard Garrigues 126 10-Q 8-K 8-K 8-K 8-K 8-A12B 8-A12B 8-K 10-K 10-K 8-K 8-K 8-K 3.1 3.1 3.1 3.1 3.2 3.3 3.3 3.1 8/9/2016 6/11/2008 11/24/2008 7/31/2009 7/31/2009 12/4/2012 12/12/2017 6/12/2014 4.1 10.41 3/10/2006 3/27/1997 4.1 12/12/2017 4.1 4.2 2/11/2014 2/11/2014 8-A12B 4.3 12/12/2017 DEF 14A 8-K 8-K DEF 14A DEF 14A 10-K 8-K 10-K 10-Q 10-K 10-K 10-K 10-Q 10-Q 10.1 10.2 10.1 A A 10.6 10.1 3/18/2016 12/21/2007 12/21/2007 3/15/2013 3/19/2010 3/1/2017 12/27/2012 10.20 3/1/2017 10.1 5/5/2017 10.13 2/28/2013 10.22 2/28/2013 10.13 2/28/2014 10.5 10.1 5/5/2017 8/6/2014 Incorporated by Reference Form 10-Q 10-K 10-Q 10-Q 10-Q 8-K 10-K 10-K 10-Q 10-Q Exhibit 10.2 Filing Date 8/6/2014 10.18 3/1/2018 10.2 10.3 10.4 10.1 10.23 10.24 10.25 5/5/2017 5/5/2017 5/5/2017 9/19/2017 3/1/2018 3/1/2018 8/3/2018 10.26 11/5/2018 Exhibit Description Exhibit Included Exhibit Number 10.15 10.16 10.17 10.18 10.19 10.20 10.21 10.22 10.23 10.24 21 23 31.1 31.2 32.1 32.2 Non-Solicitation Agreement, dated as of April 28, 2014, by and between Webster Financial Corporation and Bernard Garrigues Change in Control Agreement, dated as of February 26, 2018, by and between Webster Financial Corporation and John Ciulla Non-Competition Agreement, dated as of April 3, 2017, between Webster Financial Corporation, and John Ciulla Non-Competition Agreement, dated as of April 3, 2017, between Webster Financial Corporation, and Nitin Mhatre Non-Competition Agreement, dated as of April 3, 2017, between Webster Financial Corporation, and Christopher Motl Retirement and Advisory Services Agreement, dated as of September 17, 2017, by and between Webster Financial Corporation and James C. Smith Change in Control Agreement, dated as of February 26, 2018, by and between Webster Financial Corporation and Brian Runkle Non-Solicitation Agreement, dated as of February 26, 2018 by and between Webster Financial Corporation and Brian Runkle Change in Control Agreement, dated as of July 16, 2018, by and between Webster Financial Corporation and Karen Higgins-Carter Non-Solicitation Agreement, dated as of July 16, 2018, by and between Webster Financial Corporation and Karen Higgins-Carter Subsidiaries. Consent of KPMG LLP. Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, signed by the Chief Executive Officer. Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, signed by the Chief Financial Officer. Written statement pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by the Chief Executive Officer. Written statement pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by the Chief Financial Officer. 101.INS XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. 101.SCH XBRL Taxonomy Extension Schema Document 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF XBRL Taxonomy Extension Definitions Linkbase Document 101.LAB XBRL Taxonomy Extension Label Linkbase Document 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document X X X X X (2) X (2) X X X X 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. ITEM 16. FORM 10-K SUMMARY Not applicable 127 Pursuant to the requirements of Section 13 or 15(d) 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, on March 1, 2019. SIGNATURES WEBSTER FINANCIAL CORPORATION By /s/ John R. Ciulla John R. Ciulla President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 1, 2019. Signature: Title: /s/ John R. Ciulla John R. Ciulla /s/ Glenn I. MacInnes Glenn I. MacInnes /s/ Albert J. Wang Albert J. Wang /s/ James C. Smith James C. Smith /s/ John J. Crawford John J. Crawford /s/ William L. Atwell William L. Atwell /s/ Joel S. Becker Joel S. Becker /s/ Elizabeth E. Flynn Elizabeth E. Flynn /s/ E. Carol Hayles E. Carol Hayles /s/ Laurence C. Morse Laurence C. Morse /s/ Karen R. Osar Karen R. Osar /s/ Mark Pettie Mark Pettie /s/ Lauren C. States Lauren C. States President and Chief Executive Officer, and Director (Principal Executive Officer) Executive Vice President and Chief Financial Officer (Principal Financial Officer) Senior Vice President and Chief Accounting Officer (Principal Accounting Officer) Chairman of the Board of Directors Lead Director Director Director Director Director Director Director Director Director 128 EXHIBIT 31.1 I, John R. Ciulla, certify that: CERTIFICATION 1. I have reviewed this annual report on Form 10-K of Webster Financial Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. Date: March 1, 2019 /s/ John R. Ciulla John R. Ciulla President and Chief Executive Officer EXHIBIT 31.2 I, Glenn I. MacInnes, certify that: CERTIFICATION 1. I have reviewed this quarterly report on Form 10-K of Webster Financial Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. Date: March 1, 2019 /s/ Glenn I. MacInnes Glenn I. MacInnes Executive Vice President and Chief Financial Officer (Principal Financial Officer) CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 EXHIBIT 32.1 Pursuant to 18 U.S.C. § 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Webster Financial Corporation (the “Company”) hereby certifies that, to his knowledge on the date hereof: (a) the Form 10-K Report of the Company for the year ended December 31, 2018 filed on the date hereof with the Securities and Exchange Commission (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and (b) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: March 1, 2019 /s/ John R. Ciulla John R. Ciulla President and Chief Executive Officer Pursuant to Securities and Exchange Commission Release 33-8238, dated June 5, 2003, this certification is being furnished and shall not be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended or incorporated by reference in any registration statement of the Company filed under the Securities Act of 1933, as amended, except to the extent that the Company specifically incorporates it by reference. A signed original of this written statement required by Section 906 of the Sarbanes Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 EXHIBIT 32.2 Pursuant to 18 U.S.C. § 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Webster Financial Corporation (the “Company”) hereby certifies that, to his knowledge on the date hereof: (a) the Form 10-K Report of the Company for the year ended December 31, 2018 filed on the date hereof with the Securities and Exchange Commission (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and (b) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: March 1, 2019 /s/ Glenn I. MacInnes Glenn I. MacInnes Executive Vice President and Chief Financial Officer (Principal Financial Officer) Pursuant to Securities and Exchange Commission Release 33-8238, dated June 5, 2003, this certification is being furnished and shall not be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended or incorporated by reference in any registration statement of the Company filed under the Securities Act of 1933, as amended, except to the extent that the Company specifically incorporates it by reference. A signed original of this written statement required by Section 906 of the Sarbanes Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. C O M M I T T E D T O O U R C O R E V A L U E S We take personal responsibility for meeting our customers’ needs, respect the dignity of every individual, earn trust through ethical behavior, give of ourselves in the communities we serve, and work together to achieve outstanding results. “These values represent The Webster Way, and they are at the forefront of everything we do.” — J O H N R . C I U L L A, P R E S I D E N T A N D C E O The Webster Symbol is a registered trademark in the U.S. 

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