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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.