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Webster Financial
WBS
#1805
Rank
$11.79 B
Marketcap
๐Ÿ‡บ๐Ÿ‡ธ United States
Country
$73.13
Share price
1.54%
Change (1 day)
25.57%
Change (1 year)
๐Ÿฆ Banks๐Ÿ’ณ Financial services
Categories
  1. Webster Financial
  2. Quarterly Reports (10-Q)
  3. Financial Year FY2020 Q2

Webster Financial - 10-Q quarterly report FY2020 Q2


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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
_______________________________________________________________________________
FORM 10-Q
_________________________________________________________________________________________________________________________________________-___________________________________________________________________________________________________
☒ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ending June 30, 2020
or
☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from ____ to ____
Commission File Number: 001-31486
_______________________________________________________________________________________
WEBSTER FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
 ______________________________________________________________________________________
Delaware 06-1187536
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
145 Bank Street, Waterbury, Connecticut 06702
(Address and zip code of principal executive offices)
(203) 578-2202
(Registrant's telephone number, including area code)
______________________________________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading SymbolsName of Exchange on which registered
Common Stock, $0.01 par valueWBSNew York Stock Exchange
Depository Shares, each representing 1/1000th interest in a shareWBS PrFNew York Stock Exchange
 of 5.25% Series F Non-Cumulative Perpetual Preferred Stock
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ☒  Yes    ☐  No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒  Yes    ☐  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transaction period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).   ☐ Yes   ☒ No
The number of shares of common stock, par value $.01 per share, outstanding as of July 31, 2020 was 90,192,033.






INDEX
  Page No.
Forward-Looking Statements
ii
Key to Acronyms and Terms
iii
Item 1.
33
Item 2.
1
Item 3.
72
Item 4.
72
Item 1.
73
Item 1A.
73
Item 2.
74
Item 3.
74
Item 4.
74
Item 5.
74
Item 6.
75
EXHIBIT INDEX
75
SIGNATURES
76



i

WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by words such as "believes," "anticipates," "expects," "intends," "targeted," "continue," "remain," "will," "should," "may," "plans," "estimates" and similar references to future periods; however, such words are not the exclusive means of identifying such statements. References to the "Company," "Webster," "we," "our," or "us" mean Webster Financial Corporation and its consolidated subsidiaries.
Examples of forward-looking statements include, but are not limited to:
▪projections of revenues, expenses, income or loss, earnings or loss per share, allowance for credit losses, and other financial items;
▪statements of plans, objectives and expectations of Webster or its management or Board of Directors;
▪statements of future economic performance; and
▪statements of assumptions underlying such statements.
Forward-looking statements are based on Webster’s current expectations and assumptions regarding its business, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Webster’s actual results may differ materially from those contemplated by the forward-looking statements, which are neither statements of historical fact nor guarantees or assurances of future performance.
Factors that could cause our actual results to differ from those discussed in any forward-looking statements include, but are not limited to:
▪our ability to successfully execute our business plan and manage our risks;
▪local, regional, national and international economic conditions and the impact they may have on us and our customers;
▪volatility and disruption in national and international financial markets;
▪the potential adverse effects of the ongoing novel coronavirus (COVID-19) pandemic and any governmental or societal responses thereto, or other unusual and infrequently occurring events;
▪changes in the level of non-performing assets and charge-offs;
▪changes in estimates of future reserve requirements based upon the periodic review thereof under relevant regulatory and accounting requirements;
▪adverse conditions in the securities markets that lead to impairment in the value of our investment securities and goodwill;
▪inflation, changes in interest rates, and monetary fluctuations;
▪the timely development and acceptance of new products and services and the perceived value of those products and services by customers;
▪changes in deposit flows, consumer spending, borrowings, and savings habits;
▪our ability to implement new technologies and maintain secure and reliable technology systems;
▪performance by our counterparties and vendors;
▪our ability to increase market share and control expenses;
▪changes in the competitive environment among banks, financial holding companies, and other financial services providers;
▪changes in laws and regulations (including those concerning banking, taxes, dividends, securities, insurance, and healthcare) with which we and our subsidiaries must comply, including recent and potential legislative and regulatory changes in response to the COVID-19 pandemic such as the CARES Act and the rules and regulations that may be promulgated thereunder;
▪the effect of changes in accounting policies and practices applicable to us, including changes in estimates of expected credit losses resulting from our models and assumptions in connection with recently adopted accounting guidance;
▪legal and regulatory developments including the resolution of legal proceedings or regulatory or other governmental inquiries and the results of regulatory examinations or reviews; and
▪our ability to appropriately address social, environmental, and sustainability concerns that may arise from our business activities.
All forward-looking statements in this Quarterly Report on Form 10-Q speak only as of the date they are made. Factors or events that could cause the Company’s actual results to differ may emerge from time to time, and it is not possible for the Company to predict all of them. The Company undertakes no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments, or otherwise, except as may be required by law.
ii

WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
KEY TO ACRONYMS AND TERMS
ACLAllowance for credit losses
Agency CMO
Agency collateralized mortgage obligations
Agency MBS
Agency mortgage-backed securities
ALCO
Asset/Liability Committee
AOCI/AOCL
Accumulated other comprehensive income income (loss), net of tax
ASC
Accounting Standards Codification
ASU or the Update
Accounting Standards Update
Basel III
Capital rules under a global regulatory framework developed by the Basel Committee on Banking Supervision
CARES ActThe Coronavirus Aid, Relief, and Economic Security Act
CECLCurrent expected credit losses
CET1 capital
Common Equity Tier 1 Capital, defined by Basel III capital rules
CFPBConsumer Financial Protection Bureau
CLO
Collateralized loan obligation securities
CMBS
Commercial mortgage-backed securities
CME
Chicago Mercantile Exchange
CRACommunity Reinvestment Act
CVACredit valuation adjustments
DTADeferred tax asset
FASB
Financial Accounting Standards Board
FDIC
Federal Deposit Insurance Corporation
FHFAFederal Housing Finance Agency
FHLB
Federal Home Loan Bank
FICO
Fair Isaac Corporation
FRB
Federal Reserve Bank
FTP
Funds Transfer Pricing, a matched maturity funding concept
GAAP
U.S. Generally Accepted Accounting Principles
GDPGross domestic product
Holding Company
Webster Financial Corporation
HSAHealth savings account
HSA Bank
A division of Webster Bank, National Association
LGDLoss given default
LPLLPL Financial Holdings Inc.
MSLPMain Street Lending Program
NAVNet asset value
NIINet interest income
NOLNet operating loss
OCCOffice of the Comptroller of the Currency
OCI/OCLOther comprehensive income (loss)
OREOOther real estate owned
PDProbability of default
PPNRPretax, pre-provision net revenue
PPPSmall Business Administration Paycheck Protection Program
ROU assetRight-of-use asset
RPARisk participation agreement
SECUnited States Securities and Exchange Commission
SERPSupplemental defined benefit retirement plan
TDRTroubled debt restructuring, defined in ASC 310-40 "Receivables-Troubled Debt Restructurings by Creditors"
VIEVariable interest entity, defined in ASC 810-10 "Consolidation-Overall"
Webster Bank or the BankWebster Bank, National Association, a wholly-owned subsidiary of Webster Financial Corporation
Webster or the CompanyWebster Financial Corporation, collectively with its consolidated subsidiaries

iii

PART I – FINANCIAL INFORMATION
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company’s Consolidated Financial Statements and Notes thereto, for the year ended December 31, 2019, included in the Company's Annual Report on Form 10-K, filed with the United States Securities and Exchange Commission (SEC) on February 28, 2020, and in conjunction with the Condensed Consolidated Financial Statements and Notes thereto included in Item 1 of this report. Operating results for the three and six months ended June 30, 2020 are not necessarily indicative of results that may be attained during the full year ending December 31, 2020, or any future period.
Executive Summary
Nature of Operations
Webster Financial Corporation (the Holding Company) is a bank holding company and financial holding company under the Bank Holding Company Act, incorporated under the laws of Delaware in 1986 and headquartered in Waterbury, Connecticut. Webster Bank, National Association (Webster Bank) is the principal consolidated subsidiary of Webster Financial Corporation. Webster Bank and its HSA Bank division deliver a wide range of banking, investment, and financial services to individuals, families, and businesses.
Webster Bank serves consumer and business customers with mortgage lending, financial planning, trust, and investment services through a distribution network consisting of banking centers, ATMs, a customer care center, and a full range of web and mobile-based banking services throughout southern New England and Westchester County, New York. It also offers equipment financing, commercial real estate lending, asset-based lending, and treasury and payment solutions primarily in the eastern U.S. HSA Bank is a leading provider of health savings accounts (HSAs), while also delivering health reimbursement arrangements, and flexible spending and commuter benefit account administration services to employers and individuals in all 50 states.
COVID-19
The emergence of COVID-19, or the Coronavirus has caused significant disruptions to the U.S. economy and disrupted banking and other financial activity in the areas in which the Company operates. The broad impact and preventive measures taken to contain or mitigate the outbreak have, and are likely to continue to have, significant negative effects on the U.S. and global economy, employment levels, employee productivity, and financial market conditions. The pandemic may cause increasingly negative effects on the ability of our borrowers to repay outstanding loans, the value of collateral securing loans, demand for loans and other financial services products, and consumer discretionary spending. As a result of these and other consequences, the outbreak has adversely affected our business, results of operations and financial condition. The extent to which the outbreak will continue to impact our results will depend on future developments, which are highly uncertain and cannot be predicted at this time, and include the duration, severity and scope of the outbreak, the actions taken to contain or mitigate the outbreak, and the pace and extent of economic recovery in the United States and, in particular, in the states in which we operate.
Webster began taking the following actions to support its employees, customers, and the communities we serve through the following initiatives:
Support for Employees: Webster transitioned to a remote work environment, where possible, with 75% of employees currently working remotely, additional pay through the second quarter and future paid-time-off was provided for essential front line employees, no employees have been furloughed, zero-interest loans were made available to assist employees and their families, expanded recognition programs were launched, and extra cleaning and safety protocols have been put in place for all properties;

Support for Customers: Webster instituted a foreclosure moratorium for Webster-owned residential mortgages, modified branch activities and hours, increased deposit limits, waived penalties for early CD withdrawals, and waived or reduced certain fees. In addition, Webster continues to work with customers adversely impacted by COVID-19 through participation in the Main Street Lending Program (MSLP) and Small Business Administration Paycheck Protection Program (PPP) where it has funded $1.4 billion in PPP loans to over 10,000 customers. Webster continues to engage with its customers and provide accommodations through various loan modifications supporting over 2,000 customers; and

Support for Communities We Serve: Webster immediately provided more than $375 thousand in donations to Feeding America, American Red Cross, and United Way (CT, RI, MA, NY, WI) to satisfy urgent basic needs brought on by the pandemic, and also re-prioritized and expanded its existing philanthropic budget by an additional $250 thousand to support COVID-19 related activities.
1

Additional information regarding the effects and potential effects of the ongoing Coronavirus pandemic on Webster's business, operating results, and financial condition is described in this Management's Discussion and Analysis of Financial Condition and Results of Operations. Refer to "Use of Estimates" for information related to the potentially adverse impact of COVID-19 on accounting estimates which could affect the carrying value of certain assets and "Supervision and Regulation" for updated legal and regulatory matters that may have an impact on our business. Also, refer to Part II - Item 1A Risk Factors for an update to the Company's risk factors.
Results of Operations
The Company's financial position and results of operations as of and for the six months ended June 30, 2020 have been significantly impacted by the COVID-19 pandemic. The economic environment and uncertainty related to the pandemic contributed to the $116.0 million provision for credit losses recognized during this period, under the new CECL accounting standard adopted by the Company on January 1, 2020. While the Company has not experienced material charge-offs related to the COVID-19 pandemic to-date, the continued uncertainty regarding the severity and duration of the pandemic and related economic effects will continue to affect the Company’s estimate of its allowance for credit losses and resulting provision for credit losses. The Company’s interest income may also be negatively impacted in future periods as the Company continues to work with its affected borrowers to help them manage their financial position, by deferring payments, interest, and fees. Additionally, net interest margin has been reduced generally as a result of the low rate environment. These uncertainties and the economic environment will continue to affect earnings and growth projections which may result in deterioration of asset quality in the Company's loan and investment portfolios.
Selected financial highlights are presented in the following table:
 At or for the three months ended June 30,At or for the six months ended June 30,
(In thousands, except per share and ratio data)2020201920202019
Earnings:
Net interest income$224,407  $241,787  $455,208  $483,338  
Provision for credit losses40,000  11,900  116,000  20,500  
Total non-interest income60,076  75,853  133,454  144,465  
Total non-interest expense176,584  180,640  355,420  356,326  
Net income53,097  98,649  91,296  198,385  
Earnings applicable to common shareholders50,729  96,193  86,766  193,483  
Share Data:
Weighted-average common shares outstanding - diluted89,570  91,855  90,391  91,898  
Diluted earnings per common share$0.57  $1.05  $0.96  $2.11  
Dividends and dividend equivalents declared per common share0.40  0.40  0.80  0.73  
Dividends declared per preferred share328.13  328.13  656.25  656.25  
Book value per common share33.59  31.74  33.59  31.74  
Tangible book value per common share (non-GAAP)
27.40  25.63  27.40  25.63  
Selected Ratios:
Net interest margin2.99 %3.63 %3.11 %3.69 %
Return on average assets (annualized basis)
0.65  1.38  0.58  1.41  
Return on average common shareholders' equity (annualized basis)
6.79  13.47  5.77  13.74  
CET1 risk-based capital11.17  11.41  11.17  11.41  
Tangible common equity ratio (non-GAAP)
7.69  8.31  7.69  8.31  
Return on average tangible common shareholders' equity (annualized basis) (non-GAAP)
8.47  16.88  7.20  17.28  
Efficiency ratio (non-GAAP)
60.04  56.09  59.01  56.01  
Providing the non-GAAP (U.S. Generally Accepted Accounting Principles) financial measures identified in the preceding table provides investors with information useful in understanding the Company's financial performance, performance trends and financial position. These measures are used by management for internal planning and forecasting purposes, as well as by securities analysts, investors and other interested parties to compare peer company operating performance. Management believes that the presentation, together with the accompanying reconciliations provides a more 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.
2

The following tables reconcile the non-GAAP financial measures with financial measures defined by GAAP:
At June 30,
(Dollars and shares in thousands, except per share data)20202019
Tangible book value per common share (non-GAAP):
Shareholders' equity (GAAP)$3,174,779  $3,065,217  
Less: Preferred stock (GAAP)145,037  145,037  
         Goodwill and other intangible assets (GAAP)558,367  562,214  
Tangible common shareholders' equity (non-GAAP)$2,471,375  $2,357,966  
Common shares outstanding90,194  92,007  
Tangible book value per common share (non-GAAP)$27.40  $25.63  
Tangible common equity ratio (non-GAAP):
Tangible common shareholders' equity (non-GAAP)$2,471,375  $2,357,966  
Total Assets (GAAP)$32,708,617  $28,942,043  
Less: Goodwill and other intangible assets (GAAP)558,367  562,214  
Tangible assets (non-GAAP)$32,150,250  $28,379,829  
Tangible common equity ratio (non-GAAP)7.69 %8.31 %

Three months ended June 30,Six months ended June 30,
(Dollars in thousands)2020201920202019
Return on average tangible common shareholders' equity (non-GAAP):
Net income (GAAP)$53,097  $98,649  $91,296  $198,385  
Less: Preferred stock dividends (GAAP)1,969  1,969  3,938  3,938  
Add: Intangible assets amortization, tax-effected (GAAP)760  760  1,520  1,520  
Income adjusted for preferred stock dividends and intangible assets amortization (non-GAAP)$51,888  $97,440  $88,878  $195,967  
Income adjusted for preferred stock dividends and intangible assets amortization, annualized (non-GAAP)$207,552  $389,760  $177,756  $391,934  
Average shareholders' equity (non-GAAP)$3,155,368  $3,016,541  $3,174,446  $2,976,321  
Less: Average preferred stock (non-GAAP)145,037  145,037  145,037  145,037  
 Average goodwill and other intangible assets (non-GAAP)558,835  562,679  559,311  563,160  
Average tangible common shareholders' equity (non-GAAP)$2,451,496  $2,308,825  $2,470,098  $2,268,124  
Return on average tangible common shareholders' equity (non-GAAP)8.47 %16.88 %7.20 %17.28 %
Efficiency ratio (non-GAAP):
Non-interest expense (GAAP)$176,584  $180,640  $355,420  $356,326  
Less: Foreclosed property activity (GAAP)(217) (55) (467) (308) 
 Intangible assets amortization (GAAP)962  962  1,924  1,924  
 Other expense (non-GAAP) (1)
—  —  —  7  
Non-interest expense (non-GAAP)$175,839  $179,733  $353,963  $354,703  
Net interest income (GAAP)$224,407  $241,787  $455,208  $483,338  
Add: Tax-equivalent adjustment (non-GAAP)2,561  2,435  5,034  4,773  
 Non-interest income (GAAP)60,076  75,853  133,454  144,465  
 Other (non-GAAP) (2)
293  354  592  696  
 Customer derivative fair value adjustment (GAAP)5,511  —  5,511  —  
Less: Gain on sale of investment securities, net (GAAP)—  —  8  —  
Income (non-GAAP)$292,848  $320,429  $599,791  $633,272  
Efficiency ratio (non-GAAP)60.04 %56.09 %59.01 %56.01 %
(1)Other expense (non-GAAP) includes facility optimization charges.
(2)Other income (non-GAAP) includes low income housing tax credits.
3

Financial Performance Summary
Comparison to Prior Year Quarter
For the three months ended June 30, 2020, net income of $53.1 million decreased $45.6 million, or 46.2%, from the three months ended June 30, 2019, primarily due to an increase in the provision for credit losses of $28.1 million, which was driven by the impact of COVID-19 and, to a lesser extent, loan growth and higher credit provisioning due to the implementation of CECL.
Net interest income decreased $17.4 million, while non-interest income decreased $15.8 million, and non-interest expense decreased $4.1 million, resulting in a non-GAAP efficiency ratio of 60.0%.
Earnings applicable to common shareholders of $50.7 million and diluted earnings per share of $0.57 decreased for the three months ended June 30, 2020 compared to earnings applicable to common shareholders of $96.2 million and diluted earnings per share of $1.05 for the three months ended June 30, 2019.
Comparison to Prior Year to Date
For the six months ended June 30, 2020, net income of $91.3 million decreased $107.1 million, or 54.0%, from the six months ended June 30, 2019, primarily due to an increase in the provision for credit losses of $95.5 million, which was driven by the impact of COVID-19 and, to a lesser extent, loan growth and higher credit provisioning due to the implementation of CECL.
Net interest income decreased $28.1 million, while non-interest income decreased $11.0 million, and non-interest expense decreased $0.9 million, resulting in a non-GAAP efficiency ratio of 59.0%.
Earnings applicable to common shareholders of $86.8 million and diluted earnings per share of $0.96 decreased for the six months ended June 30, 2020 compared to earnings applicable to common shareholders of $193.5 million and diluted earnings per share of $2.11 for the six months ended June 30, 2019.
4

The following tables present daily average balances, interest, yield/rate, and net interest margin on a fully tax-equivalent basis:
 Three months ended June 30,
 20202019
(Dollars in thousands)Average
Balance		Interest Yield/ RateAverage
Balance		InterestYield/ Rate
Assets
Interest-earning assets:
Loans and leases$21,608,914  $197,317  3.63 %$19,030,278  $236,620  4.94 %
Investment securities (1)
8,579,213  56,465  2.69  7,472,731  56,501  3.01  
FHLB and FRB stock108,962  865  3.19  108,244  1,117  4.14  
Interest-bearing deposits99,467  5  0.02  50,131  309  2.44  
Securities8,787,642  57,335  2.66  7,631,106  57,927  3.02  
Loans held for sale24,266  184  3.03  23,210  145  2.49  
Total interest-earning assets30,420,822  $254,836  3.35 %26,684,594  $294,692  4.39 %
Non-interest-earning assets2,062,534  1,855,077  
Total Assets$32,483,356  $28,539,671  
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Demand deposits$5,823,655  $—  — %$4,266,938  $—  — %
Health savings accounts6,846,210  2,604  0.15  6,223,570  3,066  0.20  
Interest-bearing checking, money market and savings10,390,143  6,462  0.25  8,934,579  13,132  0.59  
Time deposits2,869,471  9,739  1.36  3,323,203  16,559  2.00  
Total deposits25,929,479  18,805  0.29  22,748,290  32,757  0.58  
Securities sold under agreements to repurchase and other borrowings1,577,881  980  0.25  788,194  3,904  1.96  
FHLB advances839,830  3,748  1.77  1,117,285  7,772  2.75  
Long-term debt (1)
570,679  4,335  3.31  527,713  6,037  4.62  
Total borrowings2,988,390  9,063  1.23  2,433,192  17,713  2.90  
Total interest-bearing liabilities28,917,869  $27,868  0.39 %25,181,482  $50,470  0.80 %
Non-interest-bearing liabilities410,119  341,648  
Total liabilities29,327,988  25,523,130  
Preferred stock145,037  145,037  
Common shareholders' equity3,010,331  2,871,504  
Total shareholders' equity3,155,368  3,016,541  
Total Liabilities and Shareholders' Equity$32,483,356  $28,539,671  
Tax-equivalent net interest income$226,968  $244,222  
Less: Tax-equivalent adjustments(2,561) (2,435) 
Net interest income$224,407  $241,787  
Net interest margin2.99 %3.63 %

(1)For purposes of yield/rate computation, unrealized gain (loss) balances on available-for-sale securities and senior fixed-rate notes hedges are excluded.
5

 Six months ended June 30,
 20202019
(Dollars in thousands)Average
Balance		InterestYield/ RateAverage
Balance		InterestYield/ Rate
Assets
Interest-earning assets:
Loans and leases$20,966,857  $414,235  3.93 %$18,771,166  $466,005  4.95 %
Investment securities (1)
8,449,480  114,873  2.77  7,391,290  113,455  3.05  
FHLB and FRB stock117,663  2,116  3.62  110,617  2,829  5.16  
Interest-bearing deposits83,887  196  0.46  52,737  638  2.41  
Securities8,651,030  117,185  2.76  7,554,644  116,922  3.08  
Loans held for sale23,281  359  3.08  18,358  293  3.19  
Total interest-earning assets29,641,168  $531,779  3.59 %26,344,168  $583,220  4.41 %
Non-interest-earning assets1,996,765  1,825,418  
Total Assets$31,637,933  $28,169,586  
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Demand deposits$5,170,280  $—  — %$4,229,611  $—  — %
Health savings accounts6,803,784  5,900  0.17  6,182,047  6,015  0.20  
Interest-bearing checking, money market and savings10,053,559  18,865  0.38  8,946,484  25,925  0.58  
Time deposits2,968,514  21,883  1.48  3,284,176  31,837  1.95  
Total deposits24,996,137  46,648  0.38  22,642,318  63,777  0.57  
Securities sold under agreements to repurchase and other borrowings1,437,403  4,710  0.65  693,178  6,656  1.91  
FHLB advances1,082,865  10,617  1.94  1,118,155  15,557  2.77  
Long-term debt (1)
560,964  9,562  3.66  389,210  9,119  4.72  
Total borrowings3,081,232  24,889  1.62  2,200,543  31,332  2.84  
Total interest-bearing liabilities28,077,369  $71,537  0.51 %24,842,861  $95,109  0.77 %
Non-interest-bearing liabilities386,118  350,404  
Total liabilities28,463,487  25,193,265  
Preferred stock145,037  145,037  
Common shareholders' equity3,029,409  2,831,284  
Total shareholders' equity3,174,446  2,976,321  
Total Liabilities and Shareholders' Equity$31,637,933  $28,169,586  
Tax-equivalent net interest income$460,242  $488,111  
Less: Tax-equivalent adjustments(5,034) (4,773) 
Net interest income$455,208  $483,338  
Net interest margin3.11 %3.69 %
(1)For purposes of yield/rate computation, unrealized gain (loss) balances on available-for-sale securities and senior fixed-rate notes hedges are excluded.
Net interest income (NII) and net interest margin are impacted by the level of interest rates, mix of assets earning and liabilities bearing those interest rates, and the volume of interest-earning assets and interest-bearing liabilities. These factors 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.
6

Net interest income is the difference between interest income on earning assets, such as loans and securities, and interest expense on liabilities, such as deposits and borrowings, which are used to fund those assets. Net interest income is the Company's largest source of revenue, representing 77.3% of total revenue for the six months ended June 30, 2020.
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 its Asset/Liability Committee (ALCO) and through related interest rate risk monitoring and management policies. ALCO meets at least monthly to make decisions on the investment securities and funding portfolios based on the economic outlook, its interest rate expectations, the portfolio risk position, and other factors.
Four main tools are used for managing interest rate risk:
•the size, duration and credit risk of the investment portfolio;
•the size and duration of the wholesale funding portfolio;
•interest rate contracts; and
•the pricing and structure of loans and deposits.
The federal funds rate target range was 0-0.25% at June 30, 2020 compared to 1.50-1.75% at December 31, 2019 and 2.25-2.50% at December 31, 2018. The benchmark 10-year U.S. Treasury rate decreased to 0.66% at June 30, 2020 from 1.92% at December 31, 2019. Refer to the "Asset/Liability Management and Market Risk" section for further discussion of Webster's interest rate risk position.
Net Interest Income
Comparison to Prior Year Quarter
Net interest income totaled $224.4 million for the three months ended June 30, 2020 compared to $241.8 million for the three months ended June 30, 2019, a decrease of $17.4 million. On a fully tax-equivalent basis, net interest income decreased $17.3 million when compared to the same period in 2019.
Net interest margin decreased 64 basis points to 2.99% for the three months ended June 30, 2020 from 3.63% for the three months ended June 30, 2019. The decrease was a result of asset sensitivity in a period during which the federal funds rate was reduced to near zero, with variable rate loan yields particularly impacted.
Comparison to Prior Year to Date
Net interest income totaled $455.2 million for the six months ended June 30, 2020 compared to $483.3 million for the six months ended June 30, 2019, a decrease of $28.1 million. On a fully tax-equivalent basis, net interest income increased $27.9 million when compared to the same period in 2019.
Net interest margin decreased 58 basis points to 3.11% for the six months ended June 30, 2020 from 3.69% for the six months ended June 30, 2019. The decrease was a result of asset sensitivity in a period during which the federal funds rate was reduced to near zero, with variable rate loan yields particularly impacted.
Changes in Net Interest Income
The following table presents the components of the change in net interest income attributable to changes in rate and volume, and reflects net interest income on a fully tax-equivalent basis:
Three months ended June 30,Six months ended June 30,
2020 vs. 2019
Increase (decrease) due to		2020 vs. 2019
Increase (decrease) due to
(In thousands)
Rate (1)
VolumeTotal
Rate (1)
VolumeTotal
Interest on interest-earning assets:
Loans and leases$(73,118) $33,816  $(39,302) $(106,153) $54,384  $(51,769) 
Loans held for sale(30) 70  40  (91) 158  67  
Securities (2)
(9,240) 8,647  (593) (16,484) 16,746  262  
Total interest income$(82,388) $42,533  $(39,855) $(122,728) $71,288  $(51,440) 
Interest on interest-bearing liabilities:
Deposits$(14,128) $176  $(13,952) $(17,853) $724  $(17,129) 
Borrowings(8,532) (117) (8,649) (14,794) 8,352  (6,442) 
Total interest expense$(22,660) $59  $(22,601) $(32,647) $9,076  $(23,571) 
Net change in net interest income$(59,728) $42,474  $(17,254) $(90,081) $62,212  $(27,869) 

(1)The change attributable to mix, a combined impact of rate and volume, is included with the change due to rate.
(2)Securities include investment securities, FHLB and FRB stock, and interest-bearing deposits.
7

Average loans and leases for the six months ended June 30, 2020 increased $2.2 billion compared to the average for the six months ended June 30, 2019. The loan and lease portfolio comprised 70.7% of the average interest-earning assets at June 30, 2020 compared to 71.3% of the average interest-earning assets at June 30, 2019. The loan and lease portfolio yield decreased 102 basis points to 3.93% for the six months ended June 30, 2020 compared to 4.95% for the six months ended June 30, 2019. The decrease in the yield on the average loan and lease portfolio is primarily due to the impact of variable-rate loans resetting lower and PPP loan activity at a lower yield.
Average securities for the six months ended June 30, 2020 increased $1.1 billion compared to the average for the six months ended June 30, 2019. The securities portfolio comprised 29.2% of the average interest-earning assets at June 30, 2020 compared to 28.7% of the average interest-earning assets at June 30, 2019. The securities portfolio yield decreased 32 basis points to 2.76% for the six months ended June 30, 2020 compared to 3.08% for the six months ended June 30, 2019. The decrease in yield on the securities portfolio is primarily due to lower yield on variable-rate securities, higher premium amortization, and yield from newly purchased securities less than that of securities maturing and paying down.
Average total deposits for the six months ended June 30, 2020 increased $2.4 billion compared to the average for the six months ended June 30, 2019. The increase was driven by transactional deposit products, which includes HSAs. The average cost of deposits decreased 19 basis points to 0.38% for the six months ended June 30, 2020 from 0.57% for the six months ended June 30, 2019. The average cost of deposits decreased due to deposit product mix and reductions in the federal funds rate. Higher cost time deposits decreased to 15.0% for the six months ended June 30, 2020 from 17.8% for the six months ended June 30, 2019, as a percentage of total interest-bearing deposits.
Average total borrowings for the six months ended June 30, 2020 increased $880.7 million compared to the average for the six months ended June 30, 2019. Average securities sold under agreements to repurchase and other borrowings increased $744.2 million, while average FHLB advances decreased $35.3 million. Average long-term debt increased $171.8 million, as a result of an underwritten public offering of $300 million senior fixed-rate notes completed on March 25, 2019. The average cost of borrowings decreased 122 basis points to 1.62% for the six months ended June 30, 2020 from 2.84% for the six months ended June 30, 2019. The decrease in the average cost of borrowings was largely a result of changes in the federal funds rate and borrowings mix.
Provision for Credit Losses
Comparison to Prior Year Quarter
The provision for credit losses was $40.0 million for the three months ended June 30, 2020, which increased $28.1 million compared to the three months ended June 30, 2019. The increase in provision for credit losses is primarily the result of the impact of COVID-19 on the allowance for credit losses and, to a lesser extent, loan growth and higher credit provisioning due to the implementation of CECL. Total net charge-offs was $16.4 million and $11.6 million for the three months ended June 30, 2020 and 2019, respectively.
Comparison to Prior Year to Date
The provision for credit losses was $116.0 million for the six months ended June 30, 2020, which increased $95.5 million compared to the six months ended June 30, 2019. The increase in provision for credit losses is primarily the result of the impact of COVID-19 on the allowance for credit losses and, to a lesser extent, loan growth and higher credit provisioning due to the implementation of CECL. Total net charge-offs was $24.2 million and $21.2 million for the six months ended June 30, 2020 and 2019, respectively.
Allowance for credit losses on loan and leases coverage increased to 1.64% at June 30, 2020 from 1.04% at December 31, 2019. See the sections captioned "Loans and Leases" through "Troubled Debt Restructurings" contained elsewhere in this report for further details.
8

Non-Interest Income
Three months ended June 30,Six months ended June 30,
 Increase (decrease)Increase (decrease)
(Dollars in thousands)20202019AmountPercent20202019AmountPercent
Deposit service fees$35,839  $43,118  $(7,279) (16.9)%$78,409  $86,142  $(7,733) (9.0)%
Loan and lease related fees6,968  6,558  410  6.3  13,464  14,377  (913) (6.4) 
Wealth and investment services7,102  8,309  (1,207) (14.5) 15,841  15,960  (119) (0.7) 
Mortgage banking activities4,205  932  3,273  351.2  7,098  1,696  5,402  318.5  
Increase in cash surrender value of life insurance policies3,624  3,650  (26) (0.7) 7,204  7,234  (30) (0.4) 
Gain on sale of investment securities, net—  —  —  n/m8  —  8  n/m
Other income2,338  13,286  (10,948) (82.4) 11,430  19,056  (7,626) (40.0) 
Total non-interest income$60,076  $75,853  $(15,777) (20.8) $133,454  $144,465  $(11,011) (7.6) 
Comparison to Prior Year Quarter
Total non-interest income for the three months ended June 30, 2020 was $60.1 million, a decrease of $15.8 million, or 20.8%, compared to $75.9 million for the three months ended June 30, 2019. The decrease was primarily attributable to lower deposit service fees and other income somewhat offset by higher mortgage banking activities.
Deposit service fees totaled $35.8 million for the three months ended June 30, 2020, compared to $43.1 million for the three months ended June 30, 2019. The decrease was primarily due to lower NSF, interchange, and debit card fees, as well as account service fees.
Mortgage banking activities totaled $4.2 million for the three months ended June 30, 2020, compared to $0.9 million for the three months ended June 30, 2019. The increase was a result of higher origination volume due to a lower mortgage interest rate environment.
Other income totaled $2.3 million for the three months ended June 30, 2020, compared to $13.3 million for the three months ended June 30, 2019. The decrease was primarily due to a $5.5 million customer derivative fair value adjustment and other decreases throughout miscellaneous fee income.
Comparison to Prior Year to Date
Total non-interest income for the six months ended June 30, 2020 was $133.5 million, a decrease of $11.0 million, or 7.6%, compared to $144.5 million for the six months ended June 30, 2019. The decrease was primarily attributable to lower deposit service fees and other income somewhat offset by higher mortgage banking activities.
Deposit service fees totaled $78.4 million for the six months ended June 30, 2020, compared to $86.1 million for the six months ended June 30, 2019. The decrease was primarily due to lower NSF, interchange, and debit card fees, as well as account service fees.
Mortgage banking activities totaled $7.1 million for the six months ended June 30, 2020, compared to $1.7 million for the six months ended June 30, 2019. The increase was a result of higher origination volume due to a lower mortgage interest rate environment.
Other income totaled $11.4 million for the six months ended June 30, 2020, compared to $19.1 million for the six months ended June 30, 2019. The decrease was primarily due to the customer derivative fair value adjustment and decreases throughout miscellaneous fee income, somewhat offset by an increase from customer derivative activity.
9

Non-Interest Expense
Three months ended June 30,Six months ended June 30,
 Increase (decrease)Increase (decrease)
(Dollars in thousands)20202019AmountPercent20202019AmountPercent
Compensation and benefits$99,731  $98,527  $1,204  1.2 %$201,618  $196,312  $5,306  2.7 %
Occupancy14,245  14,019  226  1.6  28,730  28,715  15  0.1  
Technology and equipment27,468  25,767  1,701  6.6  55,305  51,464  3,841  7.5  
Intangible assets amortization962  962  —  —  1,924  1,924  —  —  
Marketing3,286  4,243  (957) (22.6) 6,788  7,571  (783) (10.3) 
Professional and outside services6,158  5,634  524  9.3  11,821  11,682  139  1.2  
Deposit insurance5,015  4,453  562  12.6  9,740  8,883  857  9.6  
Other expense19,719  27,035  (7,316) (27.1) 39,494  49,775  (10,281) (20.7) 
Total non-interest expense$176,584  $180,640  $(4,056) (2.2) $355,420  $356,326  $(906) (0.3) 
Comparison to Prior Year Quarter
Total non-interest expense for the three months ended June 30, 2020 was $176.6 million, a decrease of $4.1 million, or 2.2%, compared to $180.6 million for the three months ended June 30, 2019. The decrease was primarily attributable to other expense partially offset by increases in compensation and benefits and technology and equipment.
Compensation and benefits totaled $99.7 million for the three months ended June 30, 2020, compared to $98.5 million for the three months ended June 30, 2019. The increase was a result of annual merit increases and other benefits partially offset by lower medical costs.
Technology and equipment totaled $27.5 million for the three months ended June 30, 2020, compared to $25.8 million for the three months ended June 30, 2019. The increase was a result of continued infrastructure investment.
Other expense totaled $19.7 million for the three months ended June 30, 2020, compared to $27.0 million for the three months ended June 30, 2019. The decrease was primarily due to lower pension costs, legal expenses, and variable operating expenses.
Comparison to Prior Year to Date
Total non-interest expense for the six months ended June 30, 2020 was $355.4 million, a decrease of $0.9 million, or 0.3%, compared to $356.3 million for the six months ended June 30, 2019. The decrease was primarily attributable to other expense partially offset by increases in compensation and benefits and technology and equipment.
Compensation and benefits totaled $201.6 million for the six months ended June 30, 2020, compared to $196.3 million for the six months ended June 30, 2019. The increase was a result of annual merit increases, temporary help, and other benefits partially offset by lower medical costs.
Technology and equipment totaled $55.3 million for the six months ended June 30, 2020, compared to $51.5 million for the six months ended June 30, 2019. The increase was a result of continued infrastructure investment.
Other expense totaled $39.5 million for the six months ended June 30, 2020, compared to $49.8 million for the six months ended June 30, 2019. The decrease was primarily due to lower pension costs, legal expenses, and variable operating expenses.
10

Income Taxes
Webster recognized income tax expense of $14.8 million, reflecting an effective tax rate of 21.8%, for the three months ended June 30, 2020, compared to $26.5 million, reflecting an effective tax rate of 21.1%, for the three months ended June 30, 2019.
The decrease in tax expense is due to a lower level of pre-tax income for the three months ended June 30, 2020 as compared to the same period in 2019. The increase in the effective tax rate for the three months ended June 30, 2020 as compared to the same period in 2019 primarily reflects the recognition of a higher level of net tax benefits specific to the 2019 period, partially offset by the effects of a lower level of pre-tax income estimated for 2020 as compared to 2019.
Webster recognized income tax expense of $25.9 million, reflecting an effective tax rate of 22.1%, for the six months ended June 30, 2020, compared to $52.6 million, reflecting an effective tax rate of 21.0%, for the six months ended June 30, 2019.
The decrease in tax expense is due to a lower level of pre-tax income for the six months ended June 30, 2020 as compared to the same period in 2019. The increase in the effective tax rate for the six months ended June 30, 2020 as compared to the same period in 2019 reflects the recognition of $0.2 million of net tax expense specific to the six months ended June 30, 2020, including tax deficiencies of $0.6 million from stock-based compensation, as compared to the recognition of $4.5 million of net tax benefits specific to the 2019 period, including $2.7 million of excess tax benefits from stock-based compensation.
During July 2020, the Company made U.S. tax payments totaling $43.5 million.
For additional information related to income taxes, including deferred tax assets (DTAs), refer to the section captioned "Use of Estimates" elsewhere in this Item, and Note 9: Income Taxes in the Notes to Consolidated Financial Statements contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2019.
11

Segment Reporting
Webster’s operations are organized into three reportable segments that represent its primary businesses - Commercial Banking, HSA Bank (a division of Webster Bank, National Association), and Community Banking. These segments reflect how executive management responsibilities are assigned, the type of customer served, how products and services are provided, and how discrete financial information is currently evaluated by executive management. Segments are evaluated using pre-tax, pre-provision net revenue (PPNR). Certain Corporate Treasury activities, along with the amounts required to reconcile profitability metrics to amounts reported in accordance with GAAP, are included in the Corporate and Reconciling category. Refer to Note 16: Segment Reporting in the Notes to Condensed Consolidated Financial Statements contained elsewhere in this report for a reconciliation of segment information to amounts reported in accordance with GAAP and for a description of segment reporting methodology. To better align segment results with key measurements used to review segment performance, the funds transfer pricing calculation was refined to reflect the allocation of capital credit to net interest income. Prior period amounts were revised accordingly.
Commercial Banking is comprised of Commercial Banking and Private Banking operating segments.
Commercial Banking provides commercial and industrial lending and leasing, commercial real estate lending, and treasury and payment solutions. Specifically, Webster Bank deploys lending through middle market, commercial real estate, equipment financing, asset-based lending and specialty lending units. These groups utilize a relationship approach model throughout its footprint when providing lending, deposit, and cash management services to middle market companies. In addition, Commercial Banking serves as a referral source to the other lines of business.
Private Banking provides asset management, financial planning services, trust services, loan products, and deposit products for high net worth clients, not-for-profit organizations, and business clients. 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 generates net interest income and other ancillary fees.
HSA Bank offers comprehensive consumer directed healthcare solutions that include, HSAs, health reimbursement accounts, flexible spending accounts, and other financial solutions. HSAs 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. HSAs are offered through employers for the benefit of their employees or directly to individual consumers and are distributed nationwide directly as well as through national and regional insurance carriers, benefit consultants and financial advisors.
HSA Bank deposits provide long duration low-cost funding that is used to minimize the Company’s use of wholesale funding in support of the Company’s loan growth. In addition, non-interest revenue is generated predominantly through service fees and interchange income.
Community Banking is comprised of Personal Banking and Business Banking operating segments.
Through a distribution network, consisting of 157 banking centers and 306 ATMs, a customer care center, and a full range of web and mobile-based banking services, Community Banking 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 and, or, loans, unsecured consumer loans, and credit card products. In addition, investment and securities-related services, including brokerage and investment advice are offered through a strategic partnership with LPL Financial Holdings Inc. (LPL), a broker dealer registered with the SEC, a registered investment advisor under federal and applicable state laws, a member of the Financial Industry Regulatory Authority, and a member of the Securities Investor Protection Corporation. Webster Bank has employees located throughout its banking center network, who, through LPL, are registered representatives.
Business Banking offers credit, deposit, and cash flow management products to businesses and professional service firms with annual revenues of up to $25 million. This group builds broad customer relationships through business bankers and business certified banking center managers, supported by a team of customer care center bankers and industry and product specialists.
12

Commercial Banking
Operating Results:
Three months ended June 30,Six months ended June 30,
(In thousands)2020201920202019
Net interest income$104,862  $100,216  $204,178  $198,558  
Non-interest income14,725  14,645  27,964  28,656  
Non-interest expense44,694  46,196  91,238  90,814  
Pre-tax, pre-provision net revenue$74,893  $68,665  $140,904  $136,400  
Comparison to Prior Year Quarter
Pre-tax, pre-provision net revenue increased $6.2 million, or 9.1%, for the three months ended June 30, 2020 as compared to the same period in 2019. Net interest income increased $4.6 million, as a result of loan and deposit growth, which was partially offset by the lower rate environment. Non-interest income increased $0.1 million. Non-interest expense decreased $1.5 million, primarily due to a significant reduction of travel and entertainment spend.
Comparison to Prior Year to Date
Pre-tax, pre-provision net revenue increased $4.5 million, or 3.3%, for the six months ended June 30, 2020 as compared to the same period in 2019. Net interest income increased $5.6 million, as a result of loan growth, which was partially offset by the lower rate environment. Non-interest income decreased $0.7 million and non-interest expense increased $0.4 million.
Selected Balance Sheet and Off-Balance Sheet Information:
(In thousands)At June 30,
2020		At December 31,
2019
Loans and leases$12,485,078  $11,499,573  
Deposits5,400,036  4,382,051  
Assets under administration/management (off-balance sheet)2,181,697  2,304,350  
Loans and leases increased $985.5 million at June 30, 2020 compared to December 31, 2019. Loan originations in the six months ended June 30, 2020 and 2019 were $2.1 billion and $1.8 billion, respectively. The loan growth was primary related to new originations in the middle market and PPP loans.
Deposits increased $1.0 billion at June 30, 2020 compared to December 31, 2019. The increase was primarily driven by PPP funding, and also the liquidity needs of business clients and municipalities.
The Private Banking operating segment had assets under administration of approximately $523.6 million and $539.7 million and assets under management of $1.7 billion and $1.8 billion at June 30, 2020 and December 31, 2019, respectively. These balances were lower as a result of a decline in market value.
13

HSA Bank
Operating Results:
Three months ended June 30,Six months ended June 30,
(In thousands)2020201920202019
Net interest income$39,334  $44,013  $82,007  $87,111  
Non-interest income23,103  24,979  49,486  50,556  
Non-interest expense34,020  34,253  71,098  67,775  
Pre-tax net revenue$28,417  $34,739  $60,395  $69,892  
Comparison to Prior Year Quarter
Pre-tax net revenue decreased $6.3 million, or 18.2%, for the three months ended June 30, 2020 as compared to the same period in 2019. Net interest income decreased $4.7 million, due to a decline in deposit spreads, partially offset by a growth in deposits. Non-interest income decreased $1.9 million, due to a decline in interchange revenue as a result of COVID-19. Non-interest expense decreased $0.2 million, primarily due to reduced postage and statement rendering and travel expenses, partially offset by account growth. Net accounts grew 32 thousand to 3.0 million compared to a year ago.
Comparison to Prior Year to Date
Pre-tax net revenue decreased $9.5 million, or 13.6%, for the six months ended June 30, 2020 as compared to the same period in 2019. Net interest income decreased $5.1 million, due to a decline in deposit spreads, partially offset by a growth in deposits. Non-interest income decreased $1.1 million, due to a decline in interchange revenue as a result of COVID-19. Non-interest expense increased $3.3 million, primarily due to annual merit increases and account growth. Net accounts grew 32 thousand to 3.0 million compared to a year ago.
Selected Balance Sheet and Off-Balance Sheet Information:
(In thousands)At June 30,
2020		At December 31,
2019
Deposits$6,786,845  $6,416,135  
Assets under administration, through linked brokerage accounts (off-balance sheet)2,249,176  2,070,910  
Total footings$9,036,021  $8,487,045  
Deposits increased $370.7 million at June 30, 2020 compared to December 31, 2019, due to a 22 thousand net account increase and organic growth in existing account balances. Deposit growth was partially offset by the exit of third-party-administrator accounts in the second quarter.
HSA Bank deposits accounted for 25.8% and 27.5% of total deposits at June 30, 2020 and December 31, 2019, respectively.
Assets under administration, through linked brokerage accounts, increased $178.3 million at June 30, 2020 compared to December 31, 2019, primarily due to new account growth partially offset by market value declines.
14

Community Banking
Operating Results:
Three months ended June 30,Six months ended June 30,
(In thousands)2020201920202019
Net interest income$104,870  $107,838  $204,340  $214,128  
Non-interest income23,405  27,675  51,025  53,057  
Non-interest expense93,686  96,166  192,653  191,241  
Pre-tax, pre-provision net revenue$34,589  $39,347  $62,712  $75,944  
Comparison to Prior Year Quarter
Pre-tax, pre-provision net revenue decreased $4.8 million, or 12.1%, for the three months ended June 30, 2020 as compared to the same period in 2019. Net interest income decreased $3.0 million, primarily due to declining interest rate spreads on deposits, partially offset by balance growth in loan and deposit portfolios. Non-interest income decreased $4.3 million, driven by lower deposit related service charges which were partially offset by higher deposit balances. Fees from investment services also declined related to lower transaction volumes and decreased asset valuations. These decreases were partially offset by increased fee income from mortgage banking and interest rate hedging activities. Non-interest expense decreased $2.5 million, resulting from lower deposit and loan operations costs, marketing expenses, employee related expenses, and sales activity related expenses. These expense saves were partially offset by continued investments in technology.
Comparison to Prior Year to Date
Pre-tax, pre-provision net revenue decreased $13.2 million, or 17.4%, for the six months ended June 30, 2020 as compared to the same period in 2019. Net interest income decreased $9.8 million, primarily due to declining interest rate spreads on loans and deposits, partially offset by balance growth in loan and deposit portfolios. Non-interest income decreased $2.0 million, primarily driven by lower deposit related service charges and decreased loan servicing income. These decreases were partially offset by higher deposit balances and increased fee income from mortgage banking and interest rate hedging activities. Non-interest expense increased $1.4 million, primarily due to higher employee related expenses, continued investments in technology, and other corporate overhead, partially offset by decreased deposit and loan operations costs, marketing expenses, sales activity related expenses, and card processing costs.
Selected Balance Sheet and Off-Balance Sheet Information:
(In thousands)At June 30,
2020		At December 31,
2019
Loans$9,317,390  $8,537,341  
Deposits14,172,987  12,527,903  
Assets under administration (off-balance sheet)3,557,019  3,712,311  
Loans increased $780.0 million at June 30, 2020 compared to December 31, 2019. The increase is due to the originations of PPP loans by Business Banking, partially offset by lower residential mortgage balances due to increased refinancing activity and the continuing net paydowns in the home equity portfolio.
Loan originations in the six months ended June 30, 2020 and 2019 were $2.1 billion and $0.8 billion, respectively. The increase was driven by the originations of the PPP loans and increased residential mortgage originations, partially offset by a decline in home equity originations.
Deposits increased $1.6 billion at June 30, 2020 compared to December 31, 2019 resulting from higher balances in business and consumer transactional accounts coupled with increases in savings and money market products. The balance increases were driven by proceeds from the PPP loans, CARES Act stimulus payments, deferred income tax deadline, and the shifting of deposits from maturing certificates of deposit, which declined during the period.
Additionally, at June 30, 2020 and December 31, 2019, Webster Bank's investment services division had assets under administration through its strategic partnership with LPL of $3.6 billion and $3.7 billion, respectively. These balances were lower as a result of market value declines.
15

Financial Condition
At June 30, 2020, total assets of $32.7 billion increased by $2.3 billion compared to December 31, 2019, primarily driven by increases of $1.8 billion in loans, $440.7 million in investment securities, and $253.5 million in accrued interest receivable and other assets. Total liabilities of $29.5 billion increased by $2.4 billion compared to December 31, 2019, primarily reflecting increases of $1.7 billion in demand deposits, $913.2 million in interest-bearing deposits, and $370.7 million in HSAs. Total shareholders' equity of $3.2 billion decreased by $33.0 million compared to December 31, 2019. The decrease in shareholders' equity reflects a $76.6 million decrease in connection with the common stock repurchase program, a $51.2 million cumulative effect of change in accounting principles in connection with the adoption of CECL, and $73.0 million and $3.9 million in dividends paid to common and preferred shareholders, respectively, partially offset by $91.3 million in net income and $77.5 million for other comprehensive income.
Book value was $33.59 per common share as of June 30, 2020, compared with $33.28 per common share as of December 31, 2019. On July 21, 2020, the Board of Directors declared a quarterly cash dividend to shareholders, maintaining it at $0.40 per common share. Given the current economic forecast, anticipated earnings, and capital position, the Company anticipates continuation of the dividend at its current level. The Company will continue to monitor its ability to pay dividends at this level.
As of June 30, 2020, both the Company and the Bank were considered well-capitalized, meeting all capital requirements under the Basel III Capital Rules. In accordance with regulatory capital rules, the Company elected an option to delay the impact of CECL on its regulatory capital over a two-year deferral and subsequent three-year transition period ending December 31, 2024. Therefore, capital ratios and amounts as of June 30, 2020 exclude the impact of the increased allowance for credit losses on loans and leases, held-to-maturity debt securities and unfunded loan commitments attributed to the adoption of CECL. This resulted in a 30, 29, 29, and 22 basis point benefit to the Company's CET1 risk based capital, total risk based capital, tier 1 risk based capital, and tier 1 leverage capital, respectively, at June 30, 2020. The Company's capital ratios remain strong, in excess of well capitalized even without the benefit of the CECL impact delay.
Refer to the selected financial highlights under the "Results of Operations" section and Note 11: Regulatory Matters in the Notes to Condensed Consolidated Financial Statements contained elsewhere in this report for information on regulatory capital levels and ratios.
Investment Securities
Webster Bank's investment securities are managed within regulatory guidelines and corporate policy, which include limitations on aspects such as concentrations in and type of investments as well as minimum risk ratings per type of security. The Office of the Comptroller of the Currency (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, Webster Financial Corporation (the Holding Company) also may directly hold investment securities from time-to-time. At June 30, 2020, the Company had no holdings in obligations of individual states, counties, or municipalities which exceeded 10% of consolidated shareholders’ equity.
Webster maintains, through its Corporate Treasury function, investment securities that are primarily used to provide a source of liquidity for operating needs, to generate interest income, and as a means to manage interest-rate risk. Investment securities are classified into two major categories, available-for-sale which currently consists of agency collateralized mortgage obligations (Agency CMO); agency mortgage-backed securities (Agency MBS); agency commercial mortgage-backed securities (Agency CMBS); non-agency commercial mortgage-backed securities (CMBS); collateralized loan obligation securities (CLO); and corporate debt, and held-to-maturity which currently consists of Agency CMO; Agency MBS; Agency CMBS; municipal bonds and notes; and CMBS. Investment securities had a carrying value and an average risk weighting for regulatory purposes of $8.7 billion and 14%, respectively, at June 30, 2020 and $8.2 billion and 16%, respectively, at December 31, 2019.
Available-for-sale investment securities increased by $257.8 million, primarily due to Agency CMBS net purchase activity. The tax-equivalent yield in the portfolio was 2.62% for the six months ended June 30, 2020 compared to 3.03% for the six months ended June 30, 2019. Available-for-sale investment securities are evaluated for credit losses on a quarterly basis. Unrealized losses on these securities are attributable to factors other than credit loss and therefore no ACL has been recorded. Further, the Company does not have the intent to sell these investment securities, and it is more likely than not that it will not be required to sell these securities before the recovery of their cost basis. Gross unrealized loss on available-for-sale investment securities was $22.8 million at June 30, 2020.
Held-to-maturity investment securities increased by $183.2 million, primarily due to Agency CMBS net purchase activity partially offset by net principal paydowns for Agency MBS. The tax-equivalent yield in the portfolio was 2.85% for the six months ended June 30, 2020 compared to 3.06% for the six months ended June 30, 2019. Held-to-maturity investment securities are evaluated for credit losses on a quarterly basis under CECL. The ACL on investment securities held-to-maturity was $309 thousand at June 30, 2020. Gross unrealized loss on held-to-maturity investment securities was $296 thousand at June 30, 2020.
16

The following table summarizes the amortized cost and fair value of investment securities:
 At June 30, 2020At December 31, 2019
(In thousands)Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Fair ValueAmortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Fair Value
Available-for-sale:
Agency CMO$182,484  $7,339  $(220) $189,603  $184,500  $2,218  $(917) $185,801  
Agency MBS1,512,525  75,054  (343) 1,587,236  1,580,743  35,456  (4,035) 1,612,164  
Agency CMBS827,782  27,131  —  854,913  587,974  513  (6,935) 581,552  
CMBS472,418  433  (16,597) 456,254  432,085  38  (252) 431,871  
CLO86,705  6  (2,228) 84,483  92,628  45  (468) 92,205  
Corporate debt14,544  —  (3,409) 11,135  23,485  —  (1,245) 22,240  
Available-for-sale$3,096,458  $109,963  $(22,797) $3,183,624  $2,901,415  $38,270  $(13,852) $2,925,833  
Held-to-maturity:
Agency CMO$138,529  $3,469  $(223) $141,775  $167,443  $1,123  $(1,200) $167,366  
Agency MBS2,766,764  148,003  (73) 2,914,694  2,957,900  60,602  (8,733) 3,009,769  
Agency CMBS1,585,929  60,543  —  1,646,472  1,172,491  6,444  (5,615) 1,173,320  
Municipal bonds and notes (1)
752,537  49,298  —  801,835  740,431  32,709  (21) 773,119  
CMBS233,367  7,416  —  240,783  255,653  2,278  (852) 257,079  
Held-to-maturity$5,477,126  $268,729  $(296) $5,745,559  $5,293,918  $103,156  $(16,421) $5,380,653  
(1)The amortized cost balance at June 30, 2020 in the table above excludes an allowance for credit losses on investment securities held-to-maturity of $309 thousand.
Webster Bank has the ability to use its investment securities, as well as interest-rate financial instruments within internal policy guidelines, to hedge and manage interest-rate risk as part of its asset/liability strategy. See Note 13: Derivative Financial Instruments in the Notes to Condensed Consolidated Financial Statements contained elsewhere in this report for additional information concerning derivative financial instruments.
17

Loans and Leases
The following table provides the composition of loans and leases:
 At June 30, 2020At December 31, 2019
(Dollars in thousands)Amount%Amount%
Commercial non-mortgage$7,070,220  32.4  $5,313,989  26.5  
Asset-based943,187  4.3  1,049,978  5.2  
Commercial real estate6,217,065  28.5  5,959,969  29.7  
Equipment financing587,224  2.7  533,048  2.7  
Residential4,890,550  22.5  4,944,480  24.7  
Home equity1,908,289  8.8  1,998,631  10.0  
Other consumer202,449  0.9  219,266  1.1  
Net deferred fees/costs and net premiums/discounts (1)
(16,467) (0.1) 17,625  0.1  
Total loans and leases$21,802,517  100.0  $20,036,986  100.0  
(1)The change in balances is primarily a result of deferred fees associated with PPP loan activity.
Total commercial non-mortgage and asset-based loans were $8.0 billion at June 30, 2020, an increase of $1.6 billion from December 31, 2019. The net increase is primarily related to PPP loan originations of $1.4 billion.
Commercial real estate loans were $6.2 billion at June 30, 2020, an increase of $257.1 million from December 31, 2019. The increase is a result of originations of $571.1 million, partially offset by loan payments.
Equipment financing was $587.2 million at June 30, 2020, an increase of $54.2 million from December 31, 2019. The increase is a result of originations of $143.9 million, partially offset by premium/fee amortization and higher prepayments.
Residential loans were $4.9 billion at June 30, 2020, a decrease of $53.9 million from December 31, 2019. The net decrease is a result of premium/fee amortization and higher prepayments, essentially offset by originations of $593.0 million.
Total home equity and other consumer loans were $2.1 billion at June 30, 2020, a decrease of $107.2 million from December 31, 2019. The decrease is primarily due to continued net principal paydowns within the home equity lines.
Credit Policies and Procedures
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. The Company has implemented additional monitoring procedures in connection with COVID-19.
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, current and projected cash flows are examined to determine the ability of the borrower to repay obligations as agreed. All transactions are appraised to determine market value. 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. Management periodically utilizes third-party experts to provide insight and guidance about economic conditions and trends affecting its commercial real estate loan portfolio.
Consumer loans are subject to policies and procedures developed to manage the risk characteristics of the portfolio. Policies and procedures, coupled with relatively small individual loan amounts and predominately collateralized structures, spread across many different borrowers, minimize risk. Trend and outlook reports are reviewed by management on a regular basis, with policies and procedures modified, or developed, as needed. 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 Consumer Financial Protection Bureau (CFPB) rules.
18

Loan Modifications
Webster works with customers to modify loan agreements when borrowers are experiencing financial difficulty. Webster will modify a loan to minimize the risk of loss and achieve the best possible outcome for both the borrower and the Company. Loan modifications can take various forms including payment deferral, rate reduction, covenant waiver, term extension, or other action. Depending on the nature of modification, it may, or may not, be accounted for as a troubled debt restructuring (TDR).
COVID-19 Modification Activities
The Company has accommodated over 2,000 customers impacted by COVID-19 through payment-related deferrals, covenant relief, borrowing base adjustments, additional liquidity, and other modifications. As of June 30, 2020, loan balances associated with these modifications, in their active period, totaled $2.3 billion. This balance includes all loans associated with a customer relationship where at least one loan has been modified. A significant portion of the loan balances associated with these modifications would not be considered a TDR based on the nature of the modification. Certain other modifications that would otherwise be considered a TDR are subject to TDR accounting relief through the CARES Act and Interagency Statement. The Company continues to actively monitor customer relationships associated with these modified loans. The impact of these modifications is reflected in our allowance for credit losses on loans and leases.
The CARES Act and Interagency Statement
In response to the COVID-19 pandemic, financial institutions were provided relief from certain TDR accounting and disclosure requirements for qualifying loan modifications. Specifically, Section 4013 of the CARES Act provided temporary relief from certain GAAP requirements for modifications related to COVID-19. In addition, a group of banking regulatory agencies issued a revised interagency statement that offers practical expedients for evaluating whether COVID-19 loan modifications are TDRs.
As of June 30, 2020, loan balances, associated with loan modifications designated in connection with these relief provisions, totaled $735.0 million. These modifications represent payment deferrals, generally three to six months in length. The Company will continue to evaluate the effectiveness of the loan modification program as the deferral periods end. For additional information on the accounting for loan modifications under Section 4013 of the CARES Act and the revised interagency statement refer to Note 1: Summary of Significant Accounting Policies in the Notes to the Condensed Consolidated Financial Statements contained elsewhere in this report.
Troubled Debt Restructurings
A modified loan is considered a TDR when two conditions are met: (i) the borrower is experiencing financial difficulties; and (ii) the modification constitutes a concession. Modified terms are dependent upon the financial position and needs of the individual borrower. The Company considers all aspects of the restructuring in determining whether a concession has been granted, including the debtor's ability to access market rate funds. In general, a concession exists when the modified terms of the loan are more attractive to the borrower than standard market terms. Common modifications include material changes in covenants, pricing, and forbearance. Loans for which the borrower has been discharged under Chapter 7 bankruptcy are considered collateral dependent TDRs and thus, impaired at the date of discharge and charged down to the fair value of collateral less cost to sell.
The Company’s policy is to place consumer loan TDRs, except those that were performing prior to TDR status, on non-accrual status for a minimum period of six months. Commercial TDRs are evaluated on a case-by-case basis for determination of accrual status. Loans qualify for return to accrual status once they have demonstrated performance with the restructured terms of the loan agreement for a minimum of six months. Generally, a TDR is classified and reported as a TDR for the remaining life of the loan. TDR classification may be removed if the loan was restructured under market conditions and the borrower demonstrates compliance with the modified terms for a minimum of six months. 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 credit loss on the contractual terms specified by the loan agreement.
19

The following tables provide information for TDRs:
Six months ended June 30,
(In thousands)20202019
Beginning balance$237,438  $230,414  
Additions52,385  39,551  
Paydowns/draws(23,997) (20,639) 
Charge-offs(3,084) (5,616) 
Transfers to OREO(1,296) (643) 
Ending balance$261,446  $243,067  

(In thousands)At June 30,
2020		At December 31,
2019
Accrual status $147,950  $136,449  
Non-accrual status 113,496  100,989  
Total TDRs $261,446  $237,438  
Specific reserves for TDRs included in the balance of ACL on loans and leases$15,027  $12,956  
Additional funds committed to borrowers in TDR status 15,547  4,856  
Overall, TDR balances increased $24.0 million at June 30, 2020 compared to December 31, 2019. While these balances exclude designated loan modifications in connection with Section 4013 of the CARES Act and Interagency Statements, specific reserves for TDRs increased from year end reflective of management’s current assessment of reserve requirements.
Past Due Loans and Leases
The following table provides information regarding loans and leases past due 30 days or more and accruing income:
At June 30, 2020At December 31, 2019
(Dollars in thousands)Amount
% (1)
Amount
% (1)
Commercial non-mortgage$7,514  0.11  $2,697  0.05  
Commercial real estate2,363  0.04  1,700  0.03  
Equipment financing6,445  1.10  5,785  1.09  
Residential 15,445  0.32  13,598  0.28  
Home equity6,345  0.33  13,761  0.69  
Other consumer1,512  0.75  5,074  2.31  
Loans and leases past due 30-89 days39,624  0.18  42,615  0.21  
Commercial non-mortgage loans and leases past due 90 days and accruing198  —  —  —  
Total39,822  0.18  42,615  0.21  
Net deferred fees/costs and net premiums/discounts93  92  
Total loans and leases past due 30 days or more and accruing income$39,915  $42,707  
(1)Represents the principal balance of loans and leases past due 30 days or more and accruing income as a percentage of the outstanding principal balance within the comparable loan and lease category.
The balance of loans and leases past due 30 days or more and accruing income decreased $2.8 million at June 30, 2020 compared to December 31, 2019. The ratio of loans and leases past due 30 days or more and accruing income as a percentage of loans and leases decreased to 0.18% at June 30, 2020 as compared to 0.21% at December 31, 2019.
20

Non-performing Assets
The following table provides information regarding non-performing assets:
 At June 30, 2020At December 31, 2019
(Dollars in thousands)Amount
% (1)
Amount
% (1)
Commercial non-mortgage$67,547  0.96  $59,360  1.12  
Asset-based138  0.01  139  0.01  
Commercial real estate15,889  0.26  11,554  0.19  
Equipment financing7,793  1.33  5,433  1.02  
Residential46,500  0.95  43,100  0.87  
Home equity33,971  1.78  30,130  1.51  
Other consumer1,216  0.60  1,190  0.54  
Total non-accrual loans and leases173,054  0.79  150,906  0.75  
Net deferred fees/costs and net premiums/discounts139  153  
Amortized cost of non-accrual loans and leases (2)
$173,193  $151,059  
Total non-accrual loans and leases$173,054  $150,906  
Foreclosed and repossessed assets:
Commercial non-mortgage
272  271  
Residential and consumer5,055  6,203  
Total foreclosed and repossessed assets5,327  6,474  
Total non-performing assets$178,381  $157,380  
(1)Represents the principal balance of non-accrual loans and leases as a percentage of the outstanding principal balance within the comparable loan and lease category.
(2)Includes non-accrual TDRs of $113.5 million at June 30, 2020 and $101.0 million at December 31, 2019.
Non-performing assets increased $21.0 million at June 30, 2020 compared to December 31, 2019. Overall non-performing assets as a percentage of total assets was 0.55% at June 30, 2020 as compared to 0.52% at December 31, 2019.
The following table provides detail of non-performing loan and lease activity:
Six months ended June 30,
(In thousands)20202019
Beginning balance$150,906  $154,750  
Additions62,952  59,345  
Paydowns, net of draws(9,874) (25,102) 
Charge-offs(25,880) (19,920) 
Other (1)
(5,050) (21,017) 
Ending balance$173,054  $148,056  
(1)Other typically includes loans transferred to OREO, or loans held for sale. The 2019 amount also includes a commercial loan of $14.8 million which was sold during the period.
21

Asset Quality
The Company manages asset quality leveraging established risk tolerance levels through its underwriting standards, servicing, and portfolio management of loans and leases. 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 June 30,
2020		At December 31, 2019
Non-performing loans and leases as a percentage of loans and leases 0.79 %0.75 %
Non-performing assets as a percentage of loans and leases plus other real estate owned (OREO)0.82  0.79  
Non-performing assets as a percentage of total assets 0.55  0.52  
ACL on loans and leases as a percentage of non-performing loans and leases207.17  138.56  
ACL on loans and leases as a percentage of loans and leases1.64  1.04  
Net charge-offs as a percentage of average loans and leases (1)
0.23  0.21  
Ratio of ACL on loans and leases to net charge-offs (1)
7.40x5.09x
(1)Calculated for the June 30, 2020 period based on the year-to-date net charge-offs, annualized.
The ratios as calculated above, include the impact of PPP loans totaling $1.4 billion for which there was no allowance for credit losses recorded at June 30, 2020.
The economic environment and uncertainty related to the pandemic could result in severe deterioration of asset quality, particularly in sectors disproportionately impacted from COVID-19 and the related economic slowdown, such as retail, transportation, leisure, construction, restaurants, hotels, and oil. At June 30, 2020, commercial loans with exposure to these sectors totaled $2.5 billion, or approximately 11.6% of total loans.
Potential Problem Loans and Leases
Potential problem loans and leases are defined by management as certain loans and leases that, for:
•the commercial portfolio are performing loans and leases that are classified as Substandard and have a well-defined weakness that could jeopardize the full repayment of the debt; and
•the consumer portfolio are performing loans that are 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 restructurings (TDRs). Certain loans with modifications related to COVID-19 are not reflected as potential problem loans and are not reported as TDRs due to relief provisions of the CARES Act and Interagency Statements as discussed elsewhere in this document. As there are many uncertainties related to the pandemic there is a risk that some of these modified loans may become potential problem loans.
Management monitors potential problem loans and leases due to a higher degree of risk associated with those loans and leases. The current expectation of lifetime losses is included in the ACL on loans and leases, 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 $244.6 million at June 30, 2020 compared to $216.7 million at December 31, 2019.
22

Allowance for Credit Losses on Loans and Leases
On January 1, 2020, the Company adopted a new accounting standard which introduced the CECL impairment model that applies to most financial assets measured at amortized cost and certain other instruments including the Company’s loans, net investment in leases, off-balance sheet credit exposures, and held-to-maturity debt securities. CECL requires the measurement of expected credit losses over the life of the instrument to be recognized at purchase or origination, and also requires consideration of a broader range of reasonable and supportable information including economic forecasts.
Methodology
The Company's policy for ACL on loans and leases is considered a critical accounting policy. The ACL on loans and leases is a contra-asset account that offsets the amortized cost basis of loans and leases for the credit losses expected to occur over the life of the asset. Executive management reviews and advises on the adequacy of the reserve which is maintained at a level management deems sufficient to cover expected losses within the loan and lease portfolios.
The ACL on loans and leases is determined using the CECL model which requires recognition of expected lifetime credit losses at the purchase or origination of an asset. Expected losses are determined through pooled, collective assessment of loans and leases with similar risk characteristics. If the risk characteristics of a loan or lease change and no longer match that of the collective assessment pool it is removed and individually assessed for credit impairment. Management applies significant judgments and assumptions that influence the loss estimate and ACL on loan and lease balances.
Collectively Assessed Loans and Leases. Collectively assessed loans and leases are segmented based on the commercial and consumer portfolios and expected losses are determined using Probability of Default/Loss Given Default (PD/LGD) models. The Company’s PD/LGD calculations are predictive models that measure the current risk profile of the loan pools and which consider forecasts of future macroeconomic conditions, historical loss information, and other qualitative factors, that together determine the overall reserve requirement for collectively assessed loans and leases.
Forecasted economic scenarios are sourced from a third party and data from the baseline forecast scenario is an input to the modeled loss calculation. Macroeconomic variables are used as inputs to the PD/LGD models and are selected based on the correlation of the variables to credit losses for each class of financing receivable as follows: the commercial model uses unemployment, gross domestic product (GDP), and retail sales; the residential model uses the Case Shiller Home Price Index; home equity loan and line of credit models use interest rate spreads between U.S. Treasuries and corporate bonds and the home equity loan model also uses the Federal Housing Finance Agency (FHFA) home price index; personal loan and credit line models use the Case Shiller and FHFA home price indices.
Changes in forecasts of macroeconomic variables will impact expectations of lifetime credit losses calculated by the PD/LGD models. However, the impact of changes in macroeconomic forecasts may be different for each portfolio and will reflect the credit quality and nature of the underlying assets at that time. To further refine the expected loss estimate, non-economic qualitative factors are used as inputs to the modeled loss calculation including: credit concentration, credit quality trends, the quality of internal loan reviews, the nature and volume of portfolio growth, staffing levels, and underwriting exceptions. Management may apply additional qualitative adjustments to reflect their assessment of other relevant facts and circumstances that impact expected credit losses.
These economic and qualitative inputs are used to forecast expected losses over a reasonable and supportable forecast period. The Company uses a 2-year reasonable and supportable forecast period, after which, loss rates revert to historical loss rates on a linear basis over a 1-year reversion period. Historical loss rates are based on approximately 10 years of recently available data and are updated annually.
The collective assessment calculation includes expectations of prepayments and expected recoveries. Extensions, renewals, and modifications are not included in the collective assessment; however, if there is a reasonable expectation of a TDR, the loan is removed from the collective assessment pool and is individually assessed.
Individually Assessed Loans and Leases. When loans and leases no longer match the risk characteristics of the collective assessment pool, they are removed from the collectively assessed population and individually assessed for credit losses. Generally, all non-accrual loans, TDRs, potential TDRs, loans with a charge-off, and collateral dependent loans when the borrower is experiencing financial difficulty, are individually assessed.
Individual assessment for collateral dependent commercial loans facing financial difficulty is based on the fair value of the collateral less estimated cost to sell, or the present value of the expected cash flows from the operation of the collateral, or a scenario weighted approach of both of these methods. If a loan is not collateral dependent, the individual assessment is based on a discounted cash flow approach.
23

For collateral dependent commercial 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.
Individual assessments for residential and home equity loans are based on a discounted cash flow approach or the fair value of collateral less the estimated costs to sell. Other consumer loans are individually assessed using a loss factor approach based on historical loss rates. 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 obtaining a new appraisal or other internal valuation method. Fair value is also reassessed, with any excess amount charged off, for residential and home equity loans that reach 180 days past due per Federal Financial Institutions Examination Council guidelines.
A fair value shortfall relative to the amortized cost balance is reflected as an impairment reserve within the ACL on loans and leases. 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 ACL on loans and leases. Any individually assessed loan for which no specific valuation allowance was necessary at June 30, 2020 and December 31, 2019 is the result of either sufficient cash flow or sufficient collateral coverage relative to the amortized cost. If the credit quality subsequently improves the allowance is reversed up to a maximum of the previously recorded credit losses.
The ACL on loans and leases represents the total of estimated losses calculated through collective and individual assessments. 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. While actual future conditions and losses realized may vary significantly from present judgments and assumptions, management believes the ACL on loans and leases is adequate as of June 30, 2020.
Allowance for Credit Losses on Loans and Leases Balances and Ratios
The Company adopted the CECL accounting standard on January 1, 2020, with a cumulative effect adjustment recorded upon adoption which increased the ACL on loans and leases by $57.6 million. Upon adoption, the allowance reflects expected lifetime credit losses of the portfolio.
The COVID-19 pandemic has caused significant changes to expectations of economic activity and borrower risk. The Company's ACL calculation reflects management's best estimate of expected lifetime credit losses as of period end, including current forecasts of macro-economic activity and borrower risk ratings. Borrower risk ratings reflect an increase in payment accommodation requests related to COVID-19. Declining economic forecasts and increased borrower credit risk contributed to the reserve increase in the current quarter. The length and depth of the economic downturn remains highly uncertain and further changes to forecasts will impact loss provisioning in future periods.
At June 30, 2020 the ACL on loans and leases was $358.5 million compared to $209.1 million at December 31, 2019. The increase of $149.4 million in the reserve at June 30, 2020 compared to December 31, 2019 is primarily due to the adoption of CECL, the impact of COVID-19, and loan growth. ACL on loans and leases as a percentage of loans and leases, also known as the reserve coverage, increased to 1.64% at June 30, 2020 from 1.04% at December 31, 2019, reflecting lifetime credit losses under CECL and the impact of COVID-19. ACL on loans and leases as a percentage of non-performing loans and leases increased to 207.17% at June 30, 2020 from 138.56% at December 31, 2019.
For information on the impact of adoption of the CECL model, refer to Note 1: Summary of Significant Accounting Policies in the notes to the Condensed Consolidated Financial Statements contained elsewhere in this report.
24

The following table provides a portfolio segment allocation of the ACL on loans and leases:
At June 30, 2020At December 31, 2019
(Dollars in thousands)
Amount (1)
% (1) (2)
Amount (1)
% (1) (2)
Commercial portfolio$291,520  1.98  $161,669  1.26  
Consumer portfolio67,002  0.95  47,427  0.66  
Total ACL on loans and leases$358,522  1.64  $209,096  1.04  
(1)The Company adopted the CECL accounting standard on January 1, 2020. The ACL on loans and leases was calculated in accordance with applicable GAAP for their respective periods.
(2)Percentage represents allocated ACL on loans and leases to total loans and leases within the comparable category. The allocation of a portion of the ACL on loans and leases to one category of loans and leases does not preclude its availability to absorb losses in other categories.
The following table provides detail of activity in the ACL on loans and leases:
At or for the three months ended June 30,At or for the six months ended June 30,
(In thousands)2020201920202019
Beginning balance$334,931  $211,389  $209,096  $212,353  
Adoption of ASU No. 2016-13 (CECL)—  —  57,568  —  
Provision (1)
40,003  11,900  116,088  20,500  
Charge-offs:
Commercial non-mortgage(14,727) (5,218) (20,166) (12,851) 
Asset-based—  —  —  —  
Commercial real estate—  (2,473) (30) (3,446) 
Equipment financing(567) (439) (672) (643) 
Residential(194) (2,154) (1,705) (2,405) 
Home equity(490) (1,165) (1,351) (2,464) 
Other consumer(2,096) (2,933) (4,311) (5,607) 
Total charge-offs(18,074) (14,382) (28,235) (27,416) 
Recoveries:
Commercial non-mortgage249  453  758  1,011  
Asset-based10  —  13  229  
Commercial real estate2  33  5  39  
Equipment financing22  11  71  22  
Residential83  295  318  473  
Home equity817  1,144  1,855  2,830  
Other consumer479  828  985  1,630  
Total recoveries1,662  2,764  4,005  6,234  
Net charge-offs(16,412) (11,618) (24,230) (21,182) 
Ending balance$358,522  $211,671  $358,522  $211,671  
(1)The Company adopted the new accounting standard for credit losses on January 1, 2020. For periods subsequent to adoption ACL on loans and leases is calculated under the CECL methodology. The prior periods allowance balances and provision amount follows applicable GAAP for those periods.
The following table provides a summary of net charge-offs to average loans and leases by portfolio segment:
Three months ended June 30,Six months ended June 30,
2020201920202019
(Dollars in thousands)Amount
% (1)
Amount
% (1)
Amount
% (1)
Amount
% (1)
Commercial portfolio$15,011  0.41$7,633  0.25$20,021  0.29$15,639  0.26
Consumer portfolio1,401  0.083,985  0.234,209  0.125,543  0.16
Net charge-offs$16,412  0.30$11,618  0.24$24,230  0.23$21,182  0.23
(1)Net charge-offs to average loans and leases, percentage calculated based on period-to-date activity, annualized.
Net charge-offs increased $3.0 million for the six months ended June 30, 2020 as compared to the same period in 2019.
25

Sources of Funds and Liquidity
Sources of Funds. The primary source of Webster Bank’s cash flow for use in lending and meeting its general operational needs is deposits. Operating activities, such as loan and mortgage-backed securities repayments, and other investment securities sale proceeds and maturities, also provide cash flows. While scheduled loan and investment securities repayments are a relatively stable source of funds, loan and investment securities prepayments and deposit inflows are influenced by prevailing interest rates and local economic conditions and are inherently uncertain. Additional sources of funds are provided by FHLB advances or other borrowings.
Federal Home Loan Bank and Federal Reserve Bank Stock. Webster Bank is a member of the FHLB System, which consists of eleven district Federal Home Loan Banks, each subject to the supervision and regulation of the Federal Housing Finance Agency. An activity-based capital stock investment in the FHLB of Boston 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 $34.6 million at June 30, 2020 compared to $89.3 million at December 31, 2019 for its membership and for outstanding advances and other extensions of credit. On May 4, 2020, the FHLB paid a quarterly cash dividend equal to an annual yield of 5.06%.
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. Webster Bank held $59.9 million and $59.8 million of FRB capital stock at June 30, 2020 and December 31, 2019, respectively. On June 30, 2020, the FRB paid a semi-annual dividend equal to an annual yield of 0.832%.
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 Federal Deposit Insurance Corporation (FDIC) regulations. Webster Bank’s Retail Pricing Committee and its Commercial and Institutional Loan and Liability Pricing Committee meet regularly to determine pricing and marketing initiatives.
Total deposits were $26.4 billion at June 30, 2020 compared to $23.3 billion at December 31, 2019. The increase is predominately related to an increase in transactional accounts of $3.1 billion, primarily due to customer PPP loan funding pending utilization and other stimulus effects, and HSAs increased $370.7 million due to account and balance growth. See Note 8: Deposits in the Notes to Condensed Consolidated Financial Statements contained elsewhere in this report for additional information.
Borrowings. Borrowings primarily consist of FHLB advances which are utilized as a source of funding for liquidity and interest rate risk management purposes. At June 30, 2020 and December 31, 2019, FHLB advances totaled $0.5 billion and $1.9 billion, respectively. Webster Bank had additional borrowing capacity from the FHLB of approximately $4.2 billion and $2.9 billion at June 30, 2020 and December 31, 2019, respectively. The Bank also had additional borrowing capacity at the FRB of approximately $1.3 billion and $0.9 billion at June 30, 2020 and December 31, 2019, respectively. Unpledged investment securities of $5.0 billion at June 30, 2020 could have been used to increase borrowing capacity by approximately $4.6 billion at the FHLB or $4.8 billion at the FRB, or alternatively, could have been used for collateral on borrowings such as repurchase agreements.
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. Webster Bank may also utilize term and overnight Fed funds to meet short-term liquidity needs. In addition, to bolster the effectiveness of the PPP, the Federal Reserve began supplying liquidity to participating financial institutions through the Paycheck Protection Program Liquidity Facility which extends credit to eligible financial institutions that originate PPP loans, taking the loans as collateral at face value. The Company began utilizing this facility in the second quarter 2020. At June 30, 2020 and December 31, 2019, collectively these borrowings totaled $1.7 billion and $1.0 billion, respectively.
Long-term debt, which consists of senior fixed-rate notes maturing in 2024 and 2029, and junior subordinated notes maturing in 2033 totaled $0.6 billion and $0.5 billion at June 30, 2020 and December 31, 2019, respectively. The Company terminated the receive fixed/pay floating swaps on $0.3 billion of senior fixed-rate notes in March 2020.
Total borrowed funds were $2.8 billion at June 30, 2020 compared to $3.5 billion at December 31, 2019. Borrowings represented 8.5% and 11.6% of total assets at June 30, 2020 and December 31, 2019, respectively. The decrease is due to deposit growth exceeding loan and securities growth. For additional information, see Note 9: Borrowings in the Notes to Condensed Consolidated Financial Statements contained elsewhere in this report.
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Liquidity. Webster meets its cash flow requirements at an efficient cost under various operating environments through proactive liquidity management at both the Holding Company and Webster Bank. Liquidity comes from a variety of cash flow sources such as operating activities, including principal and interest payments on loans and securities, or financing activities, including unpledged investment securities, which can be sold or utilized to secure funding, and new deposits. Webster is committed to maintaining a strong, increasing base of core deposits, consisting of demand, checking, savings, health savings, and money market accounts, to support growth in its loan and lease portfolio. Liquidity is reviewed and managed in order to maintain stable, cost effective funding to promote overall balance sheet strength.
Holding Company Liquidity. The primary source of liquidity at the Holding Company is dividends from Webster Bank. Webster Bank did not pay a dividend to the Holding Company during the six months ended June 30, 2020. To a lesser extent, public offerings, investment income, and net proceeds from investment sales may provide additional liquidity. The main uses of liquidity are the payment of principal and interest to holders of senior notes and junior subordinated debt, the payment of dividends to preferred and common shareholders, repurchases of its common stock, and purchases of investment securities. There are certain restrictions on the payment of dividends by Webster Bank to the Holding Company, which are described in the section captioned "Supervision and Regulation" in Item 1 of Webster’s 2019 Form 10-K. At June 30, 2020, $240.3 million of retained earnings are available for the payment of dividends by Webster Bank to the Holding Company.
The Company has a common stock repurchase program authorized by the Board of Directors, with $123.4 million of remaining repurchase authority at June 30, 2020. 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 six months ended June 30, 2020, a total of 2,177,208 shares of common stock were repurchased for approximately $79.8 million, of which 2,104,195 shares were purchased under the common stock repurchase program at a cost of approximately $76.6 million, and 73,013 shares were purchased, at market prices, for a cost of approximately $3.2 million, relating to stock compensation plan activity. Given the current economic environment, the Company does not expect to continue repurchases under the common stock repurchase program until further notice.
The Holding Company has sufficient cash on hand to cover expected funding requirements. The liquidity position of the Company is continuously monitored, and adjustments are made to 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 Liquidity. Webster Bank's primary source of funding is core deposits. The primary use of this funding is for loan funding. Including time deposits, Webster Bank had a loan to total deposit ratio of 82.7% and 85.9% at June 30, 2020 and December 31, 2019, respectively, well positioned within the northeast region and the Company's peer group.
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 June 30, 2020. Webster Bank's latest OCC Community Reinvestment Act (CRA) rating was Outstanding. The Company has a detailed liquidity contingency plan designed to respond to liquidity concerns in a prompt and comprehensive manner. The plan is designed to provide early detection of potential problems and details specific actions required to address liquidity stress scenarios.
Applicable OCC regulations require Webster Bank, as a commercial bank, to satisfy certain minimum leverage and risk-based capital requirements. As an OCC regulated commercial institution, it is also subject to a minimum tangible capital requirement. As of June 30, 2020, Webster Bank was in compliance with all applicable capital requirements and exceeded the FDIC requirements for a well-capitalized institution. See Note 11: Regulatory Matters in the Notes to Condensed Consolidated Financial Statements contained elsewhere in this report for a further discussion of regulatory requirements applicable to the Holding Company and Webster Bank.
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 additional information, refer to Note 2: Variable Interest Entities and Note 18: Commitments and Contingencies in the Notes to Condensed Consolidated Financial Statements contained elsewhere in this report.
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Asset/Liability Management and Market Risk
An effective asset/liability management process must balance the risks and rewards from both short and long-term interest rate risks in determining management strategy and action. To facilitate and manage this process, interest rate sensitivity is monitored on an ongoing basis by the Company's ALCO. The impact has not been calculated for scenarios which would require negative interest rates.
The following table summarizes the estimated impact that gradual parallel changes in interest rates of 100 and 200 basis points might have on net interest income over a twelve month period, starting June 30, 2020 and December 31, 2019 for each subsequent twelve month period as compared to NII assuming no change in interest rates:
NII-200bp-100bp+100bp+200bp
June 30, 2020n/an/a1.9%4.2%
December 31, 2019n/a(4.7)%2.7%4.8%
The following table summarizes the estimated impact that gradual parallel changes in interest rates of 100 and 200 basis points might have on PPNR over a twelve month period, starting June 30, 2020 and December 31, 2019 for each subsequent twelve month period as compared to PPNR assuming no change in interest rates:
PPNR-200bp-100bp+100bp+200bp
June 30, 2020n/an/a3.1%7.4%
December 31, 2019n/a(7.7)%4.1%7.1%
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 June 30, 2020 and December 31, 2019 assumed a Fed Funds rate of 0.25% and 1.75%, respectively. Asset sensitivity for both NII and PPNR was lower as of June 30, 2020 when compared to December 31, 2019, for the majority of scenarios. This lower asset sensitivity is primarily due to the reduction of both the short-term and long-term market rates since December 31, 2019 which lengthens duration of loans with floors and shortens duration on prepayable assets. Due to the lower rate environment as of June 30, 2020 we do not run standard scenarios with negative interest rate assumptions to model the down rate scenarios that were modeled as of December 31, 2019.
Webster can also hold futures, options, and forward foreign currency contracts to minimize the price volatility of certain assets and liabilities. Changes in the market value of these positions are recognized in earnings.
The following table summarizes the estimated impact that yield curve twists or immediate non-parallel changes in interest rates might have on NII for the subsequent twelve month period starting June 30, 2020 and December 31, 2019:
Short End of the Yield CurveLong End of the Yield Curve
NII-100bp-50bp+50bp+100bp-100bp-50bp+50bp+100bp
June 30, 2020n/an/a0.3%1.1%n/a(1.5)%1.6%3.2%
December 31, 2019(5.1)%(2.5)%1.0 %2.1 %(4.7)%(2.2)%1.7 %2.9 %
The following table summarizes the estimated impact that immediate non-parallel changes in interest rates might have on PPNR for the subsequent twelve month period starting June 30, 2020 and December 31, 2019:
Short End of the Yield CurveLong End of the Yield Curve
PPNR-100bp-50bp+50bp+100bp-100bp-50bp+50bp+100bp
June 30, 2020n/an/a0.2%1.4%n/a(3.0)%3.3%6.5%
December 31, 2019(7.9)%(3.8)%1.1%2.4%(8.1)%(3.9)%3.0%5.1%
The non-parallel scenarios are modeled with the short end of the yield curve moving up or down 50 and 100 basis points, while the long end of the yield curve remains unchanged and vice versa. The short end of the yield curve is defined as terms of less than eighteen months, and the long end as terms of greater than eighteen months. The results above reflect the annualized impact of immediate rate changes.
Sensitivity to the short end of the yield curve for NII and PPNR decreased as of June 30, 2020 when compared to December 31, 2019 due to floors on loans. As rates rise, not all loans will immediately lift off their floors. NII and PPNR were more sensitive to changes in the long end of the yield curve as of June 30, 2020 when compared to December 31, 2019 due to increased forecast prepayment speeds resulting from decreases in the long end of the yield curve which shortens asset duration for MBS and residential mortgages. Due to the lower rate environment as of June 30, 2020 we do not run standard scenarios with negative interest rate assumptions to model the down rate scenarios that were modeled as of December 31, 2019.
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The following table summarizes the estimated economic value of assets, liabilities, and off-balance sheet contracts at June 30, 2020 and December 31, 2019 and the projected change to economic values if interest rates instantaneously increase or decrease by 100 basis points:
(Dollars in thousands)Book
Value		Estimated
Economic
Value		Estimated Economic Value Change
-100 bp+100 bp
June 30, 2020
Assets$32,708,617  $32,715,483  n/a$(685,909) 
Liabilities29,533,838  29,812,710  n/a(976,880) 
Net$3,174,779  $2,902,773  n/a$290,971  
Net change as % base net economic valuen/a10.0 %
December 31, 2019
Assets$30,389,344  $29,984,052  $598,578  $(720,572) 
Liabilities27,181,574  26,226,758  839,154  (708,815) 
Net$3,207,770  $3,757,294  $(240,576) $(11,757) 
Net change as % base net economic value(6.4)%(0.3)%
Changes in economic value can be best described using duration. Duration is a measure of the price sensitivity of financial instruments for small changes in interest rates. For fixed-rate instruments, it can also be thought of as the weighted-average expected time to receive future cash flows. For floating-rate instruments, it can be thought of as the weighted-average expected time until the next rate reset. The longer the duration, the greater the price sensitivity for given changes in interest rates. Floating-rate instruments may have durations as short as one day and, therefore, have very little price sensitivity due to changes in interest rates. Increases in interest rates typically reduce the value of fixed-rate assets as future discounted cash flows are worth less at higher discount rates. A liability's value decreases for the same reason in a rising rate environment. A reduction in value of a liability is a benefit to Webster.
Duration gap is the difference between the duration of assets and the duration of liabilities. A duration gap near zero implies that the balance sheet is matched and would exhibit no change in estimated economic value for a small change in interest rates. Webster's duration gap was negative 1.5 years at June 30, 2020 and negative 0.8 years at December 31, 2019. 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. As of June 30, 2020, long-term rates have fallen by over 100 basis points when compared to December 31, 2019. This lower starting point shortens asset duration by increasing residential loan and MBS prepayment speeds.
These estimates assume that management does not take any additional 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 June 30, 2020 represents a reasonable level of risk given the current interest rate outlook. Management, as always, is prepared to take additional action in the event that interest rates do change rapidly.
For a detailed description of the Company's asset/liability management process, refer to the section captioned "Asset/Liability Management and Market Risk" in Item 7. Management's Discussion And Analysis Of Financial Condition And Results Of Operations included in its Form 10-K for the year ended December 31, 2019.
Impact of Inflation and Changing Prices
The Condensed Consolidated Financial Statements and related data presented herein have been prepared in accordance with GAAP, which requires the measurement of financial position and operating results principally in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation.
Unlike most industrial companies, substantially all of the assets and liabilities of a banking institution are monetary in nature. As a result, interest rates have a more significant impact on Webster's performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the price of goods and services.
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Use of Estimates
Economic and market assumptions are key factors in developing estimates. Declining economic activity and volatile market conditions related to the COVID-19 pandemic have impacted and may continue to impact our accounting estimates, particularly those described below. Actual results could differ significantly from our assumptions resulting in material changes for impacted accounting estimates in future periods.
Allowance for credit losses. Our credit loss allowances under the CECL model reflect our estimate of lifetime credit losses on loans and leases, held-to-maturity debt securities, and unfunded commitments. In addition, when the amortized cost of an available-for-sale debt security exceeds its fair value, an expected credit loss is measured using a discounted cash flow approach recognized through our credit loss allowances. The recorded allowances may be insufficient if the impact of COVID-19 is prolonged resulting in decreases in housing activity, employment levels, and economic activity beyond current estimated levels. Refer to the Allowance for Credit Losses on Loans and Leases section of Management’s Discussion and Analysis within this document for further discussion on the methodology for calculating the allowance for credit losses on loans and leases, the most material of our allowances.
Deferred tax assets. As of June 30, 2020, we had $68.6 million of DTAs attributable to state and local tax net operating loss (NOL) and credit carryforwards available to offset taxable income in future periods and reduce our income taxes payable in those future periods. The NOL and credit carryforwards are subject to expiration if they are not used within certain periods and our $38.2 million valuation allowance represents the portion of the $68.6 million estimated to expire unused between the years 2025 and 2031. Of the $30.4 million of DTAs, net of the $38.2 million valuation allowance, $6.3 million is scheduled to expire within the next four years, including $6.0 million in 2024, and $24.1 million is scheduled to expire between 2025 and 2032. We regularly assess all available positive and negative evidence to determine the appropriate level of our valuation allowance. To help determine whether the level of our valuation allowance is appropriate we must forecast our expected future results of operations. The continued economic decline and market volatility as a result of COVID-19 has increased the uncertainty inherent in such expectations, and in the realizability of our DTAs. At this time, we consider it more-likely-than-not that we will generate sufficient taxable income in future periods to realize our net DTAs. However, it is possible that some or all of our NOL or credit carryforwards could expire unused if the economic decline is prolonged and negatively affects our current expectation that sufficient taxable income will more-likely-than-not be generated in future periods over the longer term or that, as a result of market and interest-rate volatility, it is possible we could utilize more NOL or credit carryforwards and realize more DTAs than we have estimated. If we were to conclude that a significant portion of our net DTAs is not more-likely-than-not to be realized, the associated valuation allowance would increase, the recognition of which may have a material adverse effect on our financial position and results of operations.
Goodwill. The net carrying amount of goodwill at June 30, 2020 was $538.4 million, comprised of $516.6 million in Community Banking and $21.8 million in HSA Bank. We evaluate goodwill for impairment at least annually in the fourth quarter of each year, but more frequently when there are indications that the fair value of a reporting unit is below its carrying value. We have assessed whether current circumstances indicate that the fair value of any of our reporting units is less than carrying value as of June 30, 2020. Our assessment considered current macro-economic conditions, fiscal and monetary policy actions taken to stabilize the economy, industry and market developments, expected future cash flows of the reporting units, forecasted growth rates, performance of the Company's stock, and other relevant considerations. Based on our assessment, it is more likely than not that the fair value of each reporting unit exceeds its carrying value. This assessment included assumptions that are rapidly changing and are increasingly difficult to predict due to the pandemic. Future declines to economic forecasts may require us to record charges related to the impairment of our goodwill which may have an adverse effect on our results of operations.
Right-of-use (ROU) lease assets. For leases where we are the lessee, an ROU lease asset is recorded within property, plant and equipment on the consolidated balance sheet. As of June 30, 2020, ROU lease assets were $151.8 million and represent the present value of future minimum lease payments adjusted for the effect of uneven lease payments. ROU lease assets are tested for impairment when circumstances indicate that the carrying amount may not be recoverable. Our ROU lease assets primarily represent real estate including retail banking center locations and office space. If the impact of COVID-19 continues to cause any of those locations to be underutilized over an extended period of time, we may be required to write-down the carrying value. Recording an impairment of these assets may have a material adverse effect on our results of operations and, to a lesser effect, regulatory capital ratios.
Investments in equity securities. Our equity investments include tax credit finance investments, Small Business Investment Companies, and other strategic direct investments. As of June 30, 2020, equity investments represented $70.1 million recorded within accrued interest receivable and other assets on the consolidated balance sheet. Equity investments are subject to various impairment standards depending on the nature of the investment. If our equity investments experience significant losses or we are otherwise required to record an impairment to these investments, there may be a material adverse effect on our financial position, results of operations, and, to a lesser effect, regulatory capital ratios.
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Application of Critical Accounting Policies and Accounting Estimates
The Company’s significant accounting policies are described in Note 1 to the Consolidated Financial Statements included in its 2019 Annual Report on Form 10-K. Modifications to significant accounting policies, if made during the year, are described in Note 1 to the Condensed Consolidated Financial Statements included in Item 1 of this report. The preparation of the Condensed Consolidated Financial Statements in accordance with GAAP and practices generally applicable to the financial services industry requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses, and to disclose contingent assets and liabilities. Actual results could differ from those estimates.
Management has identified the Company's most critical accounting policies as:
•allowance for credit losses on loans and leases; and
•realizability of deferred tax assets.
These particular accounting policies are considered most critical in that they are important to the Company’s financial condition and results, and they require management’s subjective and complex judgment as a result of the need to make estimates about the effects of matters that are inherently uncertain.
Accounting policies and estimates, including the nature of the estimates and types of assumptions used, are described throughout Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Webster's 2019 Form 10-K, and Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, of this report.
Recently Issued Accounting Standards Updates
Refer to Note 1: Summary of Significant Accounting Policies in the Notes to Condensed Consolidated Financial Statements contained elsewhere in this report for a summary of recently issued ASUs and the expected impact on the Company's financial statements.
Supervision and Regulation
The following information is intended to update, and should be read in conjunction with, the information contained under the caption “Supervision and Regulation” in both the Company’s Annual Report on Form 10-K and the supplemental disclosure related thereto contained its Quarterly Report on Form 10-Q for the quarter ended March 31, 2020.
CARES Act
The CARES Act, signed into law by the President on March 27, 2020, provided approximately $2.2 trillion in direct economic relief in response to the public health and economic impacts of COVID-19. Many of the CARES Act’s programs are dependent upon the direct involvement of U.S. financial institutions like the Company and Webster Bank. These programs have been implemented through rules and guidance adopted by federal departments and agencies, including the U.S. Department of Treasury, the Federal Reserve, and other federal bank regulatory authorities, including those with direct supervisory jurisdiction over the Company and Webster Bank. Furthermore, as the COVID-19 pandemic evolves, federal regulatory authorities continue to issue additional guidance with respect to the implementation, lifecycle, and eligibility requirements for the various CARES Act programs as well as industry-specific recovery procedures for COVID-19. In addition, it is possible that Congress will enact supplementary COVID-19 response legislation, including new bills comparable in scope to the CARES Act, prior to the end of 2020.
Set forth below is a brief overview of select provisions of the CARES Act and other regulations and supervisory guidance related to the COVID-19 pandemic that are applicable to the operations and activities of the Company and its subsidiaries, including Webster Bank. The following description is qualified in its entirety by reference to the full text of the CARES Act and the statutes, regulations, and policies described herein. Future legislation and/or amendments to the provisions of the CARES Act or changes to any of the statutes, regulations, or regulatory policies applicable to the Company and its subsidiaries could have a material effect on the Company. Such legislation and related regulations and supervisory guidance will be implemented over time and will remain subject to review by Congress and the implementing regulations issued by federal regulatory authorities. The Company continues to assess the impact of the CARES Act, the potential impact of new COVID-19 legislation, and other statutes, regulations, and supervisory guidance related to the COVID-19 pandemic.
Paycheck Protection Program. The CARES Act amended the SBA’s loan program, in which Webster Bank participates, to create a guaranteed, unsecured loan program, the PPP, to fund operational costs of eligible businesses, organizations and self-employed persons during COVID-19. On June 5, 2020, the President signed the Paycheck Protection Program Flexibility Act into law, which among other things, gave borrowers additional time and flexibility to use PPP loan proceeds. Shortly thereafter, and due to the evolving impact of the COVID-19 pandemic, the President signed additional legislation authorizing the SBA to resume accepting PPP applications on July 6, 2020 and extending the PPP application deadline to August 8, 2020. It is anticipated that additional revisions to the SBA’s interim final rules on forgiveness and loan review procedures will be forthcoming to address these and related changes. As a participating lender in the PPP, Webster Bank continues to monitor legislative, regulatory, and supervisory developments related thereto.
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Troubled Debt Restructuring and Loan Modifications for Affected Borrowers. The CARES Act permits banks to suspend requirements under GAAP for loan modifications to borrowers affected by COVID-19 that would otherwise be characterized as TDRs and suspend any determination related thereto if (i) the loan modification is made between March 1, 2020 and the earlier of December 31, 2020 or 60 days after the end of the COVID-19 emergency declaration and (ii) the applicable loan was not more than 30 days past due as of December 31, 2019. Federal bank regulatory authorities also issued guidance to encourage banks to make loan modifications for borrowers affected by COVID-19 and to assure banks that they will not be criticized by examiners for doing so. The Company is applying this guidance to qualifying loan modifications. For additional information, see Note 1: Summary of Significant Accounting Policies in the Notes to Condensed Consolidated Financial Statements contained elsewhere in this report.
Federal Reserve Programs and Other Recent Initiatives
Main Street Lending Program. The CARES Act encouraged the Federal Reserve, in coordination with the Secretary of the Treasury, to establish or implement various programs to help midsize businesses, nonprofits, and municipalities. On April 9, 2020, the Federal Reserve proposed the creation of the MSLP to implement certain of these recommendations. On June 15, 2020, the Federal Reserve Bank of Boston opened the MSLP for lender registration. The MSLP supports lending to small and medium-sized businesses that were in sound financial condition before the onset of the COVID-19 pandemic. The MSLP operates through three facilities: the Main Street New Loan Facility, the Main Street Priority Loan Facility, and the Main Street Expanded Loan Facility. The Federal Reserve is currently working to refine the MSLP’s operational infrastructure and facilities and is expected to release further rules and operational guidance. The Bank has registered as a lender under the MSLP and continues to monitor developments related thereto.
Temporary Regulatory Capital Relief related to Impact of CECL. Concurrent with enactment of the CARES Act, the federal bank regulatory authorities issued an interim final rule that delays the estimated impact on regulatory capital resulting from the adoption of CECL. The interim final rule provides banking organizations that implement CECL before the end of 2020 the option to delay for two years the estimated impact of CECL on regulatory capital relative to regulatory capital determined under the prior incurred loss methodology, followed by a three-year transition period to phase out the aggregate amount of capital benefit provided during the initial two-year delay. The Company has elected this capital relief and delayed the regulatory capital impact of adopting CECL during the first quarter of 2020. As a result, capital ratios and amounts as of June 30, 2020 exclude the impact of the increased allowance for credit losses on loans, held-to-maturity debt securities, and unfunded loan commitments attributed to the adoption of CECL, adjusted for an approximation of the after-tax provision for credit losses attributable to CECL relative to the incurred loss methodology during the deferral period.
Supervisory Developments. On June 25, 2020, the Federal Reserve announced that it would take several actions to ensure large banks remain resilient despite the ongoing economic impact of COVID-19. Specifically, in the third quarter, the Federal Reserve will require large banks to preserve capital by suspending share repurchases, capping dividend payments, and allowing dividends according to a formula based on recent income. The Company and Webster Bank continue to monitor these developments to assess what effect, if any, they will have, but does not anticipate any material impact at this time.
Modification of the Volcker Rule. Also on June 25, 2020, the Federal Reserve, along with the Commodity Futures Trading Commission, FDIC, the Office of the Comptroller of the Currency, and the SEC issued a final rule modifying the Volcker Rule’s prohibition on banking entities investing in or sponsoring hedge funds or private equity funds, commonly known as covered funds. The Volcker Rule generally prohibits banking entities from engaging in proprietary trading and from acquiring or retaining ownership interests in, sponsoring or having certain relationships with a hedge fund or private equity fund. The final rule modifies three areas of the Volcker Rule by: (i) streamlining the covered funds portion of the rule; (ii) addressing the extraterritorial treatment of certain foreign funds; and (iii) permitting banking entities to offer financial services and engage in other activities that do not raise concerns that the Volcker Rule was intended to address. The new rule becomes effective October 1, 2020. The Company and Webster Bank are currently reviewing this new rule to determine what effect, if any, it will have, but does not anticipate any material impact at this time.

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ITEM 1. FINANCIAL STATEMENTS
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30,
2020		December 31,
2019
(In thousands, except share data)(Unaudited)
Assets:
Cash and due from banks$198,680  $185,341  
Interest-bearing deposits104,444  72,554  
Investment securities available-for-sale, at fair value3,183,624  2,925,833  
Investment securities held-to-maturity (fair value of $5,745,559 and $5,380,653)
5,477,126  5,293,918  
Allowance for credit losses on investment securities held-to-maturity(309) —  
Investment securities held-to-maturity, net5,476,817  5,293,918  
Federal Home Loan Bank and Federal Reserve Bank stock94,495  149,046  
Loans held for sale (valued under fair value option $46,446 and $35,750)
46,446  36,053  
Loans and leases21,802,517  20,036,986  
Allowance for credit losses on loans and leases(358,522) (209,096) 
Loans and leases, net21,443,995  19,827,890  
Deferred tax assets, net77,145  61,975  
Premises and equipment, net258,392  270,413  
Goodwill538,373  538,373  
Other intangible assets, net19,994  21,917  
Cash surrender value of life insurance policies557,325  550,651  
Accrued interest receivable and other assets708,887  455,380  
Total assets$32,708,617  $30,389,344  
Liabilities and shareholders' equity:
Deposits:
Non-interest-bearing$6,193,757  $4,446,463  
Interest-bearing20,162,240  18,878,283  
Total deposits26,355,997  23,324,746  
Securities sold under agreements to repurchase and other borrowings1,688,805  1,040,431  
Federal Home Loan Bank advances523,321  1,948,476  
Long-term debt570,029  540,364  
Operating lease liabilities170,731  174,396  
Accrued expenses and other liabilities224,955  153,161  
Total liabilities29,533,838  27,181,574  
Shareholders’ equity:
Preferred stock, $0.01 par value; Authorized - 3,000,000 shares:
Series F issued and outstanding (6,000 shares)
145,037  145,037  
Common stock, $0.01 par value; Authorized - 200,000,0000 shares:
Issued (93,686,311 shares)
937  937  
Paid-in capital1,103,756  1,113,250  
Retained earnings2,024,487  2,061,352  
Treasury stock, at cost (3,492,707 and 1,659,749 shares)
(140,883) (76,734) 
Accumulated other comprehensive income (loss), net of tax41,445  (36,072) 
Total shareholders' equity3,174,779  3,207,770  
Total liabilities and shareholders' equity$32,708,617  $30,389,344  
See accompanying Notes to Condensed Consolidated Financial Statements.
33

WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three months ended June 30,Six months ended June 30,
(In thousands, except per share data)2020201920202019
Interest Income:
Interest and fees on loans and leases$196,521  $235,949  $412,708  $464,713  
Taxable interest and dividends on investments50,069  50,634  102,691  102,510  
Non-taxable interest on investment securities5,501  5,529  10,987  10,931  
Loans held for sale184  145  359  293  
Total interest income252,275  292,257  526,745  578,447  
Interest Expense:
Deposits18,805  32,757  46,648  63,777  
Securities sold under agreements to repurchase and other borrowings980  3,904  4,710  6,656  
Federal Home Loan Bank advances3,748  7,772  10,617  15,557  
Long-term debt4,335  6,037  9,562  9,119  
Total interest expense27,868  50,470  71,537  95,109  
Net interest income224,407  241,787  455,208  483,338  
Provision for credit losses40,000  11,900  116,000  20,500  
Net interest income after provision for credit losses184,407  229,887  339,208  462,838  
Non-interest Income:
Deposit service fees35,839  43,118  78,409  86,142  
Loan and lease related fees6,968  6,558  13,464  14,377  
Wealth and investment services7,102  8,309  15,841  15,960  
Mortgage banking activities4,205  932  7,098  1,696  
Increase in cash surrender value of life insurance policies3,624  3,650  7,204  7,234  
Gain on sale of investment securities, net—  —  8  —  
Other income2,338  13,286  11,430  19,056  
Total non-interest income60,076  75,853  133,454  144,465  
Non-interest Expense:
Compensation and benefits99,731  98,527  201,618  196,312  
Occupancy14,245  14,019  28,730  28,715  
Technology and equipment27,468  25,767  55,305  51,464  
Intangible assets amortization962  962  1,924  1,924  
Marketing3,286  4,243  6,788  7,571  
Professional and outside services6,158  5,634  11,821  11,682  
Deposit insurance5,015  4,453  9,740  8,883  
Other expense19,719  27,035  39,494  49,775  
Total non-interest expense176,584  180,640  355,420  356,326  
Income before income tax expense67,899  125,100  117,242  250,977  
Income tax expense14,802  26,451  25,946  52,592  
Net income53,097  98,649  91,296  198,385  
Preferred stock dividends and other(2,368) (2,456) (4,530) (4,902) 
Earnings applicable to common shareholders$50,729  $96,193  $86,766  $193,483  
Earnings per common share:
Basic$0.57  $1.05  $0.96  $2.11  
Diluted0.57  1.05  0.96  2.11  
See accompanying Notes to Condensed Consolidated Financial Statements.

34

WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
 Three months ended June 30,Six months ended June 30,
(In thousands)2020201920202019
Net income$53,097  $98,649  $91,296  $198,385  
Other comprehensive income, net of tax:
Investment securities available-for-sale61,914  34,409  46,225  61,968  
Derivative instruments3,601  186  29,833  382  
Defined benefit pension and other postretirement benefit plans730  1,056  1,459  2,112  
Other comprehensive income, net of tax66,245  35,651  77,517  64,462  
Comprehensive income$119,342  $134,300  $168,813  $262,847  
See accompanying Notes to Condensed Consolidated Financial Statements.

35

WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited)
At or for the three months ended June 30, 2020
(In thousands, except per share data)Preferred StockCommon
Stock		Paid-In
Capital		Retained
Earnings		Treasury
Stock, at cost		Accumulated
Other
Comprehensive
Income, Net of Tax		Total
Shareholders'
Equity
Balance at March 31, 2020$145,037  $937  $1,101,324  $2,009,541  $(141,797) $(24,800) $3,090,242  
Cumulative effect of changes in accounting principles—  —  —  —  —  —  —  
Net income—  —  —  53,097  —  —  53,097  
Other comprehensive income, net of tax—  —  —  —  —  66,245  66,245  
Common stock dividends/equivalents $0.40 per share
—  —  —  (36,182) —  —  (36,182) 
Series F preferred stock dividends $328.125 per share
—  —  —  (1,969) —  —  (1,969) 
Stock-based compensation—  —  2,432  —  973  —  3,405  
Exercise of stock options—  —  —  —  —  —  —  
Common shares acquired from stock compensation plan activity—  —  —  —  (59) —  (59) 
Common stock repurchase program—  —  —  —  —  —  —  
Balance at June 30, 2020$145,037  $937  $1,103,756  $2,024,487  $(140,883) $41,445  $3,174,779  
At or for the three months ended June 30, 2019
(In thousands, except per share data)Preferred StockCommon
Stock		Paid-In
Capital		Retained
Earnings		Treasury
Stock, at cost		Accumulated
Other
Comprehensive
Loss, Net of Tax		Total
Shareholders'
Equity
Balance at March 31, 2019$145,037  $937  $1,113,107  $1,895,870  $(86,855) $(101,841) $2,966,255  
Cumulative effect of changes in accounting principles—  —  —  —  —  —  —  
Net income—  —  —  98,649  —  —  98,649  
Other comprehensive income, net of tax—  —  —  —  —  35,651  35,651  
Common stock dividends/equivalents $0.40 per share
—  —  —  (36,892) —  —  (36,892) 
Series F preferred stock dividends $328.125 per share
—  —  —  (1,969) —  —  (1,969) 
Stock-based compensation—  —  1,528  275  1,637  —  3,440  
Exercise of stock options—  —  (742) —  959  —  217  
Common shares acquired from stock compensation plan activity—  —  —  —  (134) —  (134) 
Common stock repurchase program—  —  —  —  —  —  —  
Balance at June 30, 2019$145,037  $937  $1,113,893  $1,955,933  $(84,393) $(66,190) $3,065,217  
At or for the six months ended June 30, 2020
(In thousands, except per share data)Preferred
Stock		Common
Stock		Paid-In
Capital		Retained
Earnings		Treasury
Stock, at cost		Accumulated
Other
Comprehensive
Income, Net of Tax		Total
Shareholders'
Equity
Balance at December 31, 2019$145,037  $937  $1,113,250  $2,061,352  $(76,734) $(36,072) $3,207,770  
Cumulative effect of changes in accounting principles—  —  —  (51,213) —  —  (51,213) 
Net income—  —  —  91,296  —  —  91,296  
Other comprehensive income, net of tax—  —  —  —  —  77,517  77,517  
Common stock dividends/equivalents $0.80 per share
—  —  —  (73,010) —  —  (73,010) 
Series F preferred stock dividends $656.250 per share
—  —  —  (3,938) —  —  (3,938) 
Stock-based compensation—  —  (9,389) —  15,403  —  6,014  
Exercise of stock options—  —  (105) —  223  —  118  
Common shares acquired from stock compensation plan activity—  —  —  —  (3,219) —  (3,219) 
Common stock repurchase program—  —  —  —  (76,556) —  (76,556) 
Balance at June 30, 2020$145,037  $937  $1,103,756  $2,024,487  $(140,883) $41,445  $3,174,779  
At or for the six months ended June 30, 2019
(In thousands, except per share data)Preferred
Stock		Common
Stock		Paid-In
Capital		Retained
Earnings		Treasury
Stock, at cost		Accumulated
Other
Comprehensive
Loss, Net of Tax		Total
Shareholders'
Equity
Balance at December 31, 2018$145,037  $937  $1,114,394  $1,828,303  $(71,504) $(130,652) $2,886,515  
Cumulative effect of changes in accounting principles—  —  —  (515) —  —  (515) 
Net income—  —  —  198,385  —  —  198,385  
Other comprehensive income, net of tax—  —  —  —  —  64,462  64,462  
Common stock dividends/equivalents $0.73 per share
—  —  —  (67,481) —  —  (67,481) 
Series F preferred stock dividends $656.250 per share
—  —  —  (3,938) —  —  (3,938) 
Stock-based compensation—  —  1,528  1,179  3,709  —  6,416  
Exercise of stock options—  —  (2,029) —  2,650  —  621  
Common shares acquired from stock compensation plan activity—  —  —  —  (6,245) —  (6,245) 
Common stock repurchase program—  —  —  —  (13,003) —  (13,003) 
Balance at June 30, 2019$145,037  $937  $1,113,893  $1,955,933  $(84,393) $(66,190) $3,065,217  
See accompanying Notes to Condensed Consolidated Financial Statements.
36

WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 Six months ended June 30,
(In thousands)20202019
Operating Activities:
Net income$91,296  $198,385  
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses116,000  20,500  
Deferred tax (benefit) expense(27,020) 514  
Depreciation and amortization18,110  18,884  
Amortization of premiums/discounts, net27,996  22,785  
Stock-based compensation6,014  6,416  
Gain on sale, net of write-down, on foreclosed and repossessed assets(664) (635) 
Loss on sale, net of write-down, on premises and equipment256  482  
Gain on the sale of investment securities, net(8) —  
Increase in cash surrender value of life insurance policies(7,204) (7,234) 
Gain from life insurance policies(348) (3,412) 
Mortgage banking activities(7,098) (1,696) 
Proceeds from sale of loans held for sale170,168  63,464  
Origination of loans held for sale(175,228) (74,076) 
Net change in right-of-use lease assets3,395  (888) 
Net increase in derivative contract assets net of liabilities(256,780) (115,498) 
Net decrease (increase) in accrued interest receivable and other assets14,755  (28,485) 
Net increase (decrease) in accrued expenses and other liabilities67,239  (1,545) 
Net cash provided by operating activities40,879  97,961  
Investing Activities:
Purchases of available-for-sale investment securities(479,330) (255,885) 
Proceeds from available-for-sale investment securities maturities/principle repayments266,704  251,957  
Proceeds from sales of available for sale investment securities8,963  —  
Purchases of held-to-maturity investment securities(529,233) (567,118) 
Proceeds from held-to-maturity investment securities maturities/principle repayments382,903  242,511  
Net proceeds from Federal Home Loan Bank stock54,551  30,915  
Alternative investments capital call, net(1,103) (3,316) 
Net increase in loans(1,797,719) (847,143) 
Proceeds from loans not originated for sale3,606  20,012  
Proceeds from life insurance policies1,019  2,270  
Proceeds from the sale of foreclosed and repossessed assets4,667  8,191  
Additions to premises and equipment(7,817) (12,698) 
Net cash used for investing activities(2,092,789) (1,130,304) 
See accompanying Notes to Condensed Consolidated Financial Statements.
37

WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited), continued
 Six months ended June 30,
(In thousands)20202019
Financing Activities:
Net increase in deposits3,030,321  738,802  
Proceeds from Federal Home Loan Bank advances3,450,000  3,700,000  
Repayments of Federal Home Loan Bank advances(4,875,155) (4,100,152) 
Net increase in securities sold under agreements to repurchase and other borrowings648,374  375,046  
Issuance of long-term debt—  300,000  
Debt issuance costs—  (3,642) 
Dividends paid to common shareholders(72,806) (67,165) 
Dividends paid to preferred shareholders(3,938) (3,938) 
Exercise of stock options118  621  
Common stock repurchase program(76,556) (13,003) 
Common shares purchased related to stock compensation plan activity(3,219) (6,245) 
Net cash provided by financing activities2,097,139  920,324  
Net increase (decrease) in cash and cash equivalents45,229  (112,019) 
Cash and cash equivalents at beginning of period257,895  329,499  
Cash and cash equivalents at end of period$303,124  $217,480  
Supplemental disclosure of cash flow information:
Interest paid$77,757  $87,129  
Income taxes paid11,353  69,759  
Noncash investing and financing activities:
Transfer of loans and leases to foreclosed properties and repossessed assets$2,857  $5,880  
Transfer of loans from loans and leases to loans-held-for-sale3,036  15,438  
Right-of-use lease assets recorded upon ASU adoption—  157,234  
Lessee operating lease liabilities recorded upon ASU adoption—  178,208  

See accompanying Notes to Condensed Consolidated Financial Statements.
38

Note 1: Summary of Significant Accounting Policies
Nature of Operations
Webster Financial Corporation (the Holding Company) is a bank holding company and financial holding company under the Bank Holding Company Act, incorporated under the laws of Delaware in 1986 and headquartered in Waterbury, Connecticut. Webster Bank, National Association (Webster Bank) is the principal consolidated subsidiary of Webster Financial Corporation. Webster Bank and its HSA Bank division deliver a wide range of banking, investment, and financial services to individuals, families, and businesses.
Webster Bank serves consumer and business customers with mortgage lending, financial planning, trust, and investment services through a distribution network consisting of banking centers, ATMs, a customer care center, and a full range of web and mobile-based banking services throughout southern New England and Westchester County, New York. It also offers equipment financing, commercial real estate lending, asset-based lending, and treasury and payment solutions primarily in the eastern U.S. HSA Bank is a leading provider of HSAs, while also delivering health reimbursement arrangements, and flexible spending and commuter benefit account administration services to employers and individuals in all 50 states.
Basis of Presentation
The accounting and reporting policies of the Company that materially affect its financial statements conform with U.S. GAAP. The accompanying unaudited Condensed Consolidated Financial Statements of the Company have been prepared in conformity with the instructions for Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all the information and notes required by GAAP for complete financial statements and should be read in conjunction with the Company's Consolidated Financial Statements, and related Notes, for the year ended December 31, 2019, included in our Form 10-K filed with the SEC. There have been no changes to the Company's significant accounting policies from those described within that Form 10-K, except as described within the Recently Adopted Accounting Standards Updates section of this note.
Certain prior period amounts have been reclassified to conform to the current year's presentation. These reclassifications had an immaterial effect on the Company's consolidated financial statements.
Use of Estimates
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as well as income and expense during the reporting period. Economic and market assumptions are key factors in developing estimates. Declining economic activity and volatile market conditions related to the COVID-19 pandemic have impacted and may continue to impact accounting estimates. Actual results could differ significantly from assumptions previously used resulting in material changes for impacted accounting estimates in future periods. Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for the full year or any future period.
Loan Modifications Under the CARES Act and Interagency Statement
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) Section 4013, and the Revised Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus.
On March 27, 2020, the CARES Act, which provides relief from certain requirements under GAAP, was signed into law. Section 4013 of the CARES Act gives entities temporary relief from the accounting and disclosure requirements for troubled debt restructurings (TDRs) under ASC 310-40 in certain situations.
In addition, on April 7, 2020, certain regulatory banking agencies issued an interagency statement that offers practical expedients for evaluating whether loan modifications in response to the COVID-19 pandemic are TDRs. The interagency statement was originally issued on March 22, 2020, but was revised to address the relationship between their original TDR guidance and the guidance in Section 4013 of the CARES Act.
To qualify for TDR accounting and disclosure relief under the CARES Act, the applicable loan must not have been more than 30 days past due as of December 31, 2019, and the modification must be executed during the period beginning on March 1, 2020, and ending on the earlier of December 31, 2020, or the date that is 60 days after the termination date of the national emergency declared by the president on March 13, 2020, under the National Emergencies Act related to the outbreak of COVID-19. The CARES Act applies to modifications made as a result of COVID-19 including: forbearance agreements, interest rate modifications, repayment plans, and other arrangements to defer or delay payment of principal or interest.
The interagency statement does not require the modification to be completed within a certain time period if it is related to COVID-19 and the loan was not more than 30 days past due as of the date of the Company’s implementation of its modification programs. Moreover, the interagency statement applies to short-term modifications including payment deferrals, fee waivers, extensions of repayment terms, or other insignificant payment delays as a result of COVID-19.
39

The Company continues to apply section 4013 of the CARES Act and the interagency statement in connection with applicable modifications. For modifications that qualify under either the CARES Act or the interagency statement, TDR accounting and reporting is suspended through the period of the modification; however, the Company will continue to apply its existing non-accrual policies including consideration of the loan's past due status which is determined on the basis of the contractual terms of the loan. Once a loan has been contractually modified, the past due status is generally based on the updated terms including payment deferrals.
Recently Adopted Accounting Standards Updates
Effective January 1, 2020, the following new accounting guidance was adopted by the Company:
ASU No. 2020-04, Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting.
The Update provides optional expedients and exceptions available to contracts, hedging relationships, and other transactions affected by reference rate reform. In addition to expedients for contract modifications, the Update allows for a one-time transfer or sale of held-to-maturity securities that reference an eligible rate. The Company will consider this one-time securities transfer along with other expedients available under the Update as the Company proceeds with reference rate reform activities. For additional information on reference rate reform refer to the risk factors previously disclosed in Webster's Annual Report on Form 10-K for the year ended December 31, 2019.
The Update became effective during the first quarter 2020, and applies to contract modifications and amendments made as of the beginning of the reporting period including the Update issuance date, March 12, 2020, and applies through December 31, 2022. The adoption of this guidance did not have a material effect on the Company's consolidated financial statements.
ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments.
The Update amends guidance on credit losses, hedge accounting, and recognition and measurement of financial instruments. The changes provide clarifications and codification improvements in relation to recently issued accounting updates. The amendments to the guidance on credit losses are considered in the paragraphs below related to our adoption of ASU 2016-13, and has been adopted concurrently with those Updates.
The Company adopted the Update during the first quarter 2020 on a prospective basis. The adoption of this guidance did not have a material effect on the Company's 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.
The Company adopted the Update during the first quarter 2020 on a prospective basis to all implementation costs incurred after the date of adoption. The adoption of this guidance did not have a material effect on the Company's 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 for fair value measurements. The updated guidance no longer requires entities to disclose the amount and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy. However, it requires public companies to disclose changes in unrealized gains and losses for the period included in other comprehensive income (OCI) for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 measurements.
The Company adopted the Update during the first quarter 2020 on a prospective basis. The adoption of this guidance did not have a material effect on the Company's consolidated financial statements.
40

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 fair value of a reporting unit, up to but not exceeding the amount of goodwill allocated to the reporting unit.
The Update changes current guidance by eliminating the second step of the goodwill impairment analysis which involves calculating the implied fair value of goodwill determined in the same manner as the amount of goodwill recognized in a business combination upon acquisition. Entities still have the option to first perform a qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary.
The Company adopted the Update during the first quarter 2020 on a prospective basis. The adoption of this guidance did not have a material effect on the Company's 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.
The Updates replace the existing incurred loss approach for recognizing credit losses with a new credit loss methodology known as the current expected credit loss (CECL) model. The CECL methodology requires earlier recognition of credit losses using a lifetime credit loss measurement approach for financial assets carried at amortized cost. The Updates also revised the accounting for credit losses on available-for-sale debt securities, which is outside the scope of the CECL methodology.
The CECL accounting model applies to all assets measured at amortized cost including loans, net investments in leases, off balance sheet credit exposures, and held-to-maturity debt securities. CECL requires recognition of credit losses at purchase or origination using a lifetime credit loss measurement approach. The allowance for credit losses is based on the composition, characteristics, and credit quality of the loan and securities portfolios as of the reporting date and includes consideration of current economic conditions and reasonable and supportable forecasts at that date. The CECL methodology also requires consideration of a broader range of reasonable and supportable information to determine the allowance for credit losses including economic forecasts.
Allowance for credit losses on loans and leases. Under CECL the Company determines its allowance for credit losses on loans and leases collectively, using pools of assets with similar risk characteristics. Loans that no longer match the risk profile of the pool are individually assessed for credit losses. Collective assessments are performed based on two portfolio segments, commercial loans and leases, and consumer loans. Expected losses within the commercial and consumer portfolios are collectively assessed using PD/LGD models based on the portfolio or class of financing receivable.
The Company’s lifetime credit loss models are based on historical data and incorporate forecasts of macroeconomic variables, expected prepayments and recoveries. Outside of the model, non-economic qualitative factors are applied to further refine the expected loss calculation for each portfolio. A two year reasonable and supportable forecast period is currently used for all loan and lease portfolios. The expected loss models revert to historical loss rates on a linear basis over a one year period.
When the risk characteristics of a loan no longer match the characteristics of the collective pool, the loan is removed from the pool and individually assessed for credit losses. Generally, all non-accrual loans, TDRs, potential TDRs, loans with a charge-off, and collateral dependent loans are individually assessed.
The individual assessment for credit impairment is generally based on a discounted cash flow approach unless the asset is collateral dependent. A loan is considered collateral dependent when repayment is expected to be provided substantially through the operation or sale of the collateral and the borrower is experiencing financial difficulty. Collateral dependent loans are individually assessed and the expected credit loss is based on the fair value of the collateral. The fair value is reduced for estimated costs to sell if the value of the collateral is expected to be realized through sale.
The Company has elected to present accrued interest receivable separately from the amortized cost basis on the balance sheet and is not estimating an allowance for credit loss on accrued interest. This election applies to loans and leases as well as debt securities. The Company's non-accrual policies have not changed as a result of adopting the Updates.
Allowance for credit losses on investment securities held-to-maturity. Held-to-maturity debt securities follow the CECL accounting model. Expected losses are calculated on a pooled basis using statistical models which include forecasted scenarios of future economic conditions. The forecasts revert to long-run loss rates implicitly through the economic scenario, generally over three years. If the risk of an held-to-maturity debt security no longer matches the collective assessment pool, it is removed and individually assessed for credit deterioration. A zero credit loss assumption is maintained for U.S. Treasuries and agency-backed securities in both the held-to-maturity and available-for-sale portfolios. The zero loss assumption is re-considered on a quarterly basis to ensure it is still appropriate.
Securities 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 security 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.
41

Allowance for credit losses on unfunded loan commitments. Accounting for unfunded loan commitments also follows the CECL model, with an allowance recorded on commitments that are not unconditionally cancellable by the Company. The calculation of the allowance includes the probability of funding to occur and a corresponding estimate of expected lifetime credit losses on amounts assumed to be funded. The allowance for credit losses on unfunded loan commitments is included in accrued expenses and other liabilities on the consolidated balance sheet and the related credit expense is recorded in other non-interest expense in the consolidated statements of income.
Accounting for available-for-sale debt securities. The Updates revised the accounting for available-for-sale debt securities by eliminating the other-than-temporary impairment model, and requiring credit losses be presented as an allowance rather than a direct write-down of available-for-sale debt securities under certain circumstances. Available-for-sale debt securities continue to be recorded at fair value with changes in fair value reflected in OCI. When the fair value of an available-for-sale debt security falls below the amortized cost basis it is evaluated to determine if any of the decline in value is attributable to credit loss. Decreases in fair value attributable to credit loss are recorded directly to earnings with a corresponding allowance for credit losses, limited to the amount that the fair value is less than the amortized cost basis. If the credit quality subsequently improves the allowance is reversed up to a maximum of the previously recorded credit losses. Available-for-sale debt securities follow the same non-accrual policy as held-to-maturity debt securities. When the Company intends to sell an impaired available-for-sale debt security, or if it is more likely than not that the Company will be required to sell the security prior to recovering the amortized cost basis, the entire fair value adjustment will immediately be recognized in earnings with no corresponding allowance for credit losses.
Impact of Adoption. The Company adopted the Updates during the first quarter 2020, using the modified retrospective method. Upon adoption, the Company recorded an increase in its allowance for credit losses as a cumulative effect adjustment. This adjustment, net of tax, reduced the Company's beginning total shareholders' equity at January 1, 2020. Upon adoption, the Company's allowance for credit losses reflected all credit losses expected over the lifetime of the Company's financial assets held at amortized cost. The total increase in allowance and corresponding decrease in equity did not have a material impact to the Company's regulatory capital amounts and ratios. Periods prior to January 1, 2020, are reported in accordance with previously applicable GAAP.
The impact of the January 1, 2020, adoption entry is summarized in the table below:

December 31, 2019January 1, 2020
(In thousands)Pre-ASC 326 AdoptionImpact of AdoptionReported Under ASC 326
Assets:
Allowance for credit losses on investment securities held-to-maturity$—  $(397) $(397) 
Allowance for credit losses on loans and leases(209,096) (57,568) (266,664) 
Deferred tax assets, net61,975  15,891  77,866  
Liabilities and shareholders' equity:
Accrued expenses and other liabilities153,161  9,139  162,300  
Retained earnings2,061,352  (51,213) 2,010,139  
For additional information on accounting for credit losses refer to Note 3: Investment Securities and Note 4: Loans and Leases.
Accounting Standards Issued But Not Yet Adopted
The following new accounting guidance, applicable to the Company, has been issued by the Financial Accounting Standards Board (FASB) but is pending adoption:
ASU No. 2019-12, Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes.
The Update provides simplification to the accounting for income taxes related to a variety of topics and makes minor codification improvements. Changes include a requirement that the effects of an enacted change in tax law be reflected in the computation of the annual effective tax rate in the first interim period that includes the enactment date of the new legislation.
The Update 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. 2018-14, Compensation-Retirement Benefits - Defined Benefit Plan - General (Subtopic 715-20) - Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans.
The Update modifies disclosure requirements for employers that sponsor defined benefit pension and other postretirement plans.
The Update 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.
42

Note 2: Variable Interest Entities
The Company has an investment interest in the following entities that meet the definition of a variable interest entity (VIE).
Consolidated
Rabbi Trust. The Company established a Rabbi Trust to meet the obligations due under its Deferred Compensation Plan for Directors and Officers and to mitigate the expense volatility of the aforementioned plan. The funding of the Rabbi Trust and the discontinuation of the Deferred Compensation Plan for Directors and Officers occurred during 2012.
Invested assets in the Rabbi Trust primarily consist of mutual funds that invest in equity and fixed income securities. The Company is considered the primary beneficiary of the Rabbi Trust as it has the power to direct the activities of the Rabbi Trust that significantly affect the VIE's economic performance and it has the obligation to absorb losses of the VIE that could potentially be significant to the VIE.
The Company consolidates the invested assets of the trust along with the total deferred compensation obligations and includes them in accrued interest receivable and other assets, and accrued expenses and other liabilities, respectively, on the consolidated balance sheet. 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 consolidated income statement. Refer to Note 14: Fair Value Measurements for additional information.
Non-Consolidated
Tax Credit - Finance Investments. The Company makes non-marketable equity investments in entities that finance affordable housing and other community development projects and provide a return primarily through the realization of tax benefits. In most instances the investments require the funding of capital commitments in the future. While the Company's investment in an entity may exceed 50% of its outstanding equity interests, the entity is not consolidated as Webster is not involved in its management. For these investments, the Company determined it is not the primary beneficiary due to its inability to direct the activities that most significantly impact the economic performance of the VIEs. The Company applies the proportional amortization method to account for its investments in qualified affordable housing projects.
At June 30, 2020 and December 31, 2019, the aggregate carrying value of the Company's tax credit-finance investments was $39.9 million and $42.5 million, respectively, which represents the Company's maximum exposure to loss. At June 30, 2020 and December 31, 2019, unfunded commitments have been recognized, totaling $14.4 million and $15.1 million, respectively, and are included in accrued expenses and other liabilities on the consolidated balance sheet.
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 on the consolidated balance sheet, and the related interest expense is reported as interest expense on long-term debt in the consolidated income statement.
Other Non-Marketable Investments. The Company invests in various alternative investments in which it holds a variable interest. These investments are non-public entities which cannot be redeemed since the Company’s investment is distributed as the underlying equity is liquidated. For these investments, the Company has determined it is not the primary beneficiary due to its inability to direct the activities that most significantly impact the economic performance of the VIEs.
At June 30, 2020 and December 31, 2019, the aggregate carrying value of the Company's other non-marketable investments in VIEs was $24.7 million and $21.8 million, respectively, and the total exposure of the Company's other non-marketable investments in VIEs, including unfunded commitments, was $70.1 million and $64.2 million, respectively. Refer to Note 14: Fair Value Measurements for additional information.
The Company's equity interests in Other Non-Marketable Investments, as well as Tax Credit-Finance Investments and Webster Statutory Trust, are included in accrued interest receivable and other assets in the consolidated balance sheet. For a description of the Company's accounting policy regarding the consolidation of VIEs, refer to Note 1 to the Consolidated Financial Statements included in its Form 10-K, for the year ended December 31, 2019.
43

Note 3: Investment Securities
Held-to-Maturity Securities
A summary of the amortized cost, fair value, and allowance for credit losses on investment securities held-to-maturity is presented below:
At June 30, 2020
(In thousands)
Amortized
Cost (1)
Unrealized
Gains		Unrealized
Losses		Fair Value
Allowance (2)
Net Carrying Value
Agency CMO$138,529  $3,469  $(223) $141,775  $—  $138,529  
Agency MBS2,766,764  148,003  (73) 2,914,694  —  2,766,764  
Agency CMBS1,585,929  60,543  —  1,646,472  —  1,585,929  
Municipal bonds and notes752,537  49,298  —  801,835  309  752,228  
CMBS233,367  7,416  —  240,783  —  233,367  
Held-to-maturity securities$5,477,126  $268,729  $(296) $5,745,559  $309  $5,476,817  

At December 31, 2019
(In thousands)
Amortized
Cost (1)
Unrealized
Gains		Unrealized
Losses		Fair Value
Allowance (2)
Net Carrying Value
Agency CMO$167,443  $1,123  $(1,200) $167,366  $—  $167,443  
Agency MBS2,957,900  60,602  (8,733) 3,009,769  —  2,957,900  
Agency CMBS1,172,491  6,444  (5,615) 1,173,320  —  1,172,491  
Municipal bonds and notes740,431  32,709  (21) 773,119  —  740,431  
CMBS255,653  2,278  (852) 257,079  —  255,653  
Held-to-maturity securities$5,293,918  $103,156  $(16,421) $5,380,653  $—  $5,293,918  

(1)Amortized cost excludes accrued interest receivable of $21.8 million at both June 30, 2020 and December 31, 2019, which is included in accrued interest and other assets in the consolidated balance sheet.
(2)The Company adopted the new accounting standard for credit losses on January 1, 2020. For periods subsequent to adoption Allowance is calculated under the CECL methodology and the resulting provision includes expected credit losses on held-to-maturity securities. The prior period did not have an allowance under applicable GAAP for that period.
Agency securities represent obligations issued by a U.S. government-sponsored enterprise or other federally-related entity and are either explicitly or implicitly guaranteed and therefore, assumed to be zero loss. Securities with unrealized losses and no allowance are considered to be of high credit quality, and therefore, no credit loss as of June 30, 2020. The current unrealized loss position of certain agency securities and non-agency CMBS with no credit loss allowance can be attributed to the changing interest rate environment. An allowance for credit losses on investment securities held-to-maturity of $397 thousand was recorded for certain Municipal bonds and notes to account for expected lifetime credit loss upon adoption of the new accounting standard for credit losses. Expected lifetime credit loss on investment securities held-to-maturity is primarily attributed to securities not rated.
The following table summarizes the activity in the allowance for credit losses on investment securities held-to-maturity:

Three months endedSix months ended
June 30, 2020June 30, 2020
(In thousands)Municipal bonds and notesMunicipal bonds and notes
Balance beginning of period$312  $—  
Adoption of ASU No. 2016-13 (CECL)—  397  
Recovery of credit losses(3) (88) 
Balance end of period$309  $309  
44

Credit Quality Information
The Company monitors the credit quality of held-to-maturity debt securities through credit ratings by Standard & Poor's Rating Services (S&P), Moody's Investor Services (Moody's), Fitch Ratings, Inc., Kroll Bond Rating Agency, or DBRS Inc. Credit ratings express opinions about the credit quality of a security. Investment grade securities are rated BBB- or higher by S&P, or Baa3 or higher by Moody's, and generally considered by the rating agencies and market participants to be of low credit risk. Conversely, securities rated below investment grade, labeled as speculative grade by the rating agencies, are considered to have distinctively higher credit risk than investment grade securities. Securities shown below that are not rated are backed by U.S. Treasury obligations, and credit quality indicators are updated at each quarter end.
The following table summarizes credit ratings for amortized cost of held-to-maturity debt securities according to their lowest public credit rating as of June 30, 2020:
Investment Grade
(In thousands)AaaAa1Aa2Aa3A1A2A3Baa2Not Rated
Agency CMOs$—  $138,529  $—  $—  $—  $—  $—  $—  $—  
Agency MBS—  2,766,764  —  —  —  —  —  —  —  
Agency CMBS—  1,585,929  —  —  —  —  —  —  —  
Municipal bonds and notes210,126  165,467  201,773  117,544  42,227  8,667  2,066  285  4,382  
CMBS233,367  —  —  —  —  —  —  —  —  
Total held-to-maturity$443,493  $4,656,689  $201,773  $117,544  $42,227  $8,667  $2,066  $285  $4,382  
As of June 30, 2020, none of the held-to-maturity investment securities were in non-accrual status.
Contractual Maturities
The amortized cost and fair value of held-to-maturity debt securities by contractual maturity are set forth below:
At June 30, 2020
(In thousands)Amortized
Cost		Fair
Value
Due in one year or less$1,085  $1,089  
Due after one year through five years5,833  6,130  
Due after five through ten years264,751  277,660  
Due after ten years5,205,457  5,460,680  
Total held-to-maturity debt securities$5,477,126  $5,745,559  
For the maturity schedule above, investment securities 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 repay obligations with or without prepayment penalties.
45

Available-for-Sale Securities
A summary of the amortized cost and fair value of available-for-sale securities is presented below:
 At June 30, 2020
(In thousands)
Amortized
Cost(1)
Unrealized
Gains		Unrealized
Losses
Fair Value(2)
Agency CMO$182,484  $7,339  $(220) $189,603  
Agency MBS1,512,525  75,054  (343) 1,587,236  
Agency CMBS827,782  27,131  —  854,913  
CMBS472,418  433  (16,597) 456,254  
CLO86,705  6  (2,228) 84,483  
Corporate debt14,544  —  (3,409) 11,135  
Available-for-sale securities$3,096,458  $109,963  $(22,797) $3,183,624  
At December 31, 2019
(In thousands)
Amortized
Cost(1)
Unrealized
Gains		Unrealized
Losses
Fair Value(2)
Agency CMO$184,500  $2,218  $(917) $185,801  
Agency MBS1,580,743  35,456  (4,035) 1,612,164  
Agency CMBS587,974  513  (6,935) 581,552  
CMBS432,085  38  (252) 431,871  
CLO92,628  45  (468) 92,205  
Corporate debt23,485  —  (1,245) 22,240  
Available-for-sale securities$2,901,415  $38,270  $(13,852) $2,925,833  
(1)Amortized cost excludes accrued interest receivable of $7.7 million and $8.1 million at June 30, 2020 and December 31, 2019, respectively, which is included in accrued interest and other assets in the consolidated balance sheet.
(2)Fair value represents net carrying value as there is no allowance for credit losses recorded on investment securities available-for-sale, as the securities are high credit quality, investment grade.
Fair Value and Unrealized Losses
The following tables provide information on fair value and unrealized losses for the individual available-for-sale securities with an unrealized loss, for which an allowance for credit losses on investment securities available-for-sale has not been recorded, aggregated by classification and length of time that the individual investment securities have been in a continuous unrealized loss position:
 At June 30, 2020
 Less Than Twelve MonthsTwelve Months or LongerTotal
(Dollars in thousands)Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses		# of
Holdings		Fair
Value		Unrealized
Losses
Agency CMO$13,657  $(118) $9,339  $(102) 3$22,996  $(220) 
Agency MBS28,377  (149) 13,154  (194) 2741,531  (343) 
Agency CMBS—  —  —  —  ——  —  
CMBS424,793  (16,204) 7,107  (393) 40431,900  (16,597) 
CLO64,791  (1,509) 17,982  (719) 482,773  (2,228) 
Corporate debt3,480  (779) 7,655  (2,630) 311,135  (3,409) 
Available-for-sale in unrealized loss position$535,098  $(18,759) $55,237  $(4,038) 77$590,335  $(22,797) 

 At December 31, 2019
 Less Than Twelve MonthsTwelve Months or LongerTotal
(Dollars in thousands)Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses		# of
Holdings		Fair
Value		Unrealized
Losses
Agency CMO$36,447  $(352) $32,288  $(565) 9$68,735  $(917) 
Agency MBS41,408  (193) 299,674  (3,842) 79341,082  (4,035) 
Agency CMBS174,406  (1,137) 357,717  (5,798) 34532,123  (6,935) 
CMBS355,260  (232) 7,480  (20) 29362,740  (252) 
CLO—  —  43,232  (468) 243,232  (468) 
Corporate debt—  —  22,240  (1,245) 422,240  (1,245) 
Available-for-sale in unrealized loss position$607,521  $(1,914) $762,631  $(11,938) 157$1,370,152  $(13,852) 
46

Unrealized losses on available-for-sale debt securities presented in the previous table have not been recognized in the consolidated statements of income because the securities are high credit quality, investment grade securities that the Company does not intend to sell and will not be required to sell prior to their anticipated recovery, and the decline in fair value is attributable to factors other than credit losses. Fair value is expected to recover as the securities approach maturity. As of June 30, 2020, none of the available-for-sale investment securities were in non-accrual status.
Contractual Maturities
The amortized cost and fair value of available-for-sale debt securities by contractual maturity are set forth below:
At June 30, 2020
(In thousands)Amortized
Cost		Fair
Value
Due in one year or less$—  $—  
Due after one year through five years1,705  1,710  
Due after five through ten years264,913  255,748  
Due after ten years2,829,840  2,926,166  
Total available-for-sale debt securities$3,096,458  $3,183,624  
For the maturity schedule above, investment securities 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 repay obligations with or without prepayment penalties.
Sales of Available-for Sale Investment Securities
For the six months ended June 30, 2020, proceeds from sales of available-for-sale securities were $9.0 million, which resulted in realized gains of $8.0 thousand. There were no sales during the three months ended June 30, 2020, or the three and six months ended June 30, 2019.
Other Information
At June 30, 2020, the Company had a carrying value of $1.3 billion in callable debt securities in its CMBS, CLO, and municipal bond portfolios. The Company considers this prepayment risk in the evaluation of its interest rate risk profile.
Investment securities with a carrying value totaling $3.6 billion at June 30, 2020 and $2.7 billion at December 31, 2019 were pledged to secure public funds, trust deposits, repurchase agreements, and for other purposes, as required or permitted by law.
47

Note 4: Loans and Leases
The following table summarizes loans and leases:
(In thousands)At June 30,
2020		At December 31, 2019
Commercial non-mortgage$7,014,407  $5,296,611  
Asset-based940,524  1,046,886  
Commercial real estate6,207,314  5,949,339  
Equipment financing591,838  537,341  
Total commercial portfolio14,754,083  12,830,177  
Residential4,921,573  4,972,685  
Home equity1,924,013  2,014,544  
Other consumer202,848  219,580  
Total consumer portfolio7,048,434  7,206,809  
Loans and leases (1) (2) (3)
$21,802,517  $20,036,986  
(1)Loan balances include net deferred fees/costs and net premiums/discounts of $(16.5) million and $17.6 million at June 30, 2020 and December 31, 2019, respectively.
(2)At June 30, 2020 the Company had pledged $8.0 billion of eligible loans as collateral to support borrowing capacity at the Federal Home Loan Bank (FHLB) of Boston and the Federal Reserve Bank (FRB) of Boston.
(3)Loan balances exclude accrued interest receivable of $55.5 million and $59.0 million at June 30, 2020 and December 31, 2019, respectively, which is included in accrued interest and other assets in the consolidated balance sheet.
Equipment financing includes net investment in leases of $226.8 million, with total undiscounted cash flows, primarily due within the next five years, amounting to $246.0 million, at June 30, 2020. This lessor activity resulted in interest income of $1.8 million and $1.5 million for the three months ended June 30, 2020 and 2019, respectively, and $3.4 million and $2.9 million for the six months ended June 30, 2020 and 2019, respectively.
Loans and Leases Aging
The following tables summarize the aging of loans and leases:
 At June 30, 2020
(In thousands)30-59 Days
Past Due and
Accruing		60-89 Days
Past Due and
Accruing		90 or More Days Past Due
and Accruing		Non-accrualTotal Past Due and Non-accrualCurrentTotal Loans
and Leases
Commercial non-mortgage$6,931  $579  $—  $67,542  $75,052  $6,939,355  $7,014,407  
Asset-based—  —  —  138  138  940,386  940,524  
Commercial real estate1,206  1,165  198  15,902  18,471  6,188,843  6,207,314  
Equipment financing5,590  855  —  7,793  14,238  577,600  591,838  
Residential7,445  8,064  —  46,579  62,088  4,859,485  4,921,573  
Home equity4,603  1,764  —  34,022  40,389  1,883,624  1,924,013  
Other consumer845  670  —  1,217  2,732  200,116  202,848  
Total$26,620  $13,097  $198  $173,193  $213,108  $21,589,409  $21,802,517  

 At December 31, 2019
(In thousands)30-59 Days
Past Due and
Accruing		60-89 Days
Past Due and
Accruing		90 or More Days Past Due
and Accruing		Non-accrualTotal Past Due and Non-accrualCurrentTotal Loans
and Leases
Commercial non-mortgage$2,094  $617  $—  $59,369  $62,080  $5,234,531  $5,296,611  
Asset-based—  —  —  139  139  1,046,747  1,046,886  
Commercial real estate1,256  454  —  11,563  13,273  5,936,066  5,949,339  
Equipment financing5,493  292  —  5,433  11,218  526,123  537,341  
Residential7,166  6,441  —  43,193  56,800  4,915,885  4,972,685  
Home equity8,267  5,551  —  30,170  43,988  1,970,556  2,014,544  
Other consumer4,269  807  —  1,192  6,268  213,312  219,580  
Total$28,545  $14,162  $—  $151,059  $193,766  $19,843,220  $20,036,986  
48

The following table provides additional detail related to loans and leases on non-accrual status:
At June 30, 2020At December 31, 2019
(In thousands)NonaccrualNonaccrual With No AllowanceNonaccrualNonaccrual With No Allowance
Commercial non-mortgage$67,542  $29,385  $59,369  $13,584  
Asset-based138  —  139  —  
Commercial real estate15,902  3,817  11,563  4,717  
Equipment financing7,793  3,881  5,433  2,159  
Total commercial portfolio91,375  37,083  76,504  20,460  
Residential46,579  34,913  43,193  19,271  
Home equity34,022  27,230  30,170  15,195  
Other consumer1,217  66  1,192  —  
Total consumer portfolio81,818  62,209  74,555  34,466  
Total $173,193  $99,292  $151,059  $54,926  
Interest on non-accrual residential and home equity loans that would have been recorded as additional interest income had the loans been current in accordance with the original terms totaled $3.8 million and $3.4 million for the three months ended June 30, 2020 and 2019, respectively, and $6.8 million and $6.1 million for the six months ended June 30, 2020 and 2019, respectively.
Refer to Note 1 to the Consolidated Financial Statements included in the Company's Form 10-K, for the year ended December 31, 2019, for details of non-accrual policies.
Allowance for Credit Losses on Loans and Leases
The following tables summarize the activity in, as well as the loan and lease balances that were evaluated for, ACL on loans and leases:

At or for the three months ended June 30, 2020At or for the three months ended June 30, 2019
(In thousands)Commercial PortfolioConsumer PortfolioTotalCommercial PortfolioConsumer PortfolioTotal
ACL on loans and leases:
Balance, beginning of period$261,926  $73,005  $334,931  $164,057  $47,332  $211,389  
Adoption of ASU No. 2016-13 (CECL)
—  —  —  —  —  —  
Provision charged to expense44,605  (4,602) 40,003  7,920  3,980  11,900  
Charge-offs(15,294) (2,780) (18,074) (8,130) (6,252) (14,382) 
Recoveries283  1,379  1,662  497  2,267  2,764  
Balance, end of period291,520  67,002  358,522  164,344  $47,327  211,671  


 At or for the six months ended June 30, 2020At or for the six months ended June 30, 2019
(In thousands)Commercial PortfolioConsumer PortfolioTotalCommercial PortfolioConsumer PortfolioTotal
ACL on loans and leases:
Balance, beginning of period$161,669  $47,427  $209,096  $164,073  $48,280  $212,353  
Adoption of ASU No. 2016-13 (CECL)
34,024  23,544  57,568  —  —  —  
Provision charged to expense115,848  240  116,088  15,910  4,590  20,500  
Charge-offs(20,868) (7,367) (28,235) (16,940) (10,476) (27,416) 
Recoveries847  3,158  4,005  1,301  4,933  6,234  
Balance, end of period$291,520  $67,002  $358,522  $164,344  $47,327  $211,671  
Individually evaluated for impairment$15,271  $4,484  $19,755  $9,520  $5,261  $14,781  
Collectively evaluated for impairment$276,249  $62,518  $338,767  $154,824  $42,066  $196,890  
Loan and lease balances:
Individually evaluated for impairment$165,010  $158,146  $323,156  $115,747  $137,500  $253,247  
Collectively evaluated for impairment14,589,073  6,890,288  21,479,361  12,134,141  6,882,495  19,016,636  
Loans and leases$14,754,083  $7,048,434  $21,802,517  $12,249,888  $7,019,995  $19,269,883  
49

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 Company's credit risk grading system has not changed with the adoption of CECL. 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. A (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.
For residential and consumer loans, the most relevant credit characteristic is FICO score. FICO scores are a widely used credit score and range from 300 to 850. A lower FICO score is indicative of higher credit risk. FICO scores are updated at least quarterly.

50

The following table summarizes commercial, commercial real estate, and equipment financing loans and leases segregated by origination year and risk rating exposure under the Composite Credit Risk Profile grades as of June 30, 2020:
(In thousands)20202019201820172016PriorRevolving Loans Amortized Cost BasisTotal
Commercial non-mortgage
Pass$2,091,770  $1,315,532  $1,075,646  $579,143  $290,622  $301,222  $1,044,939  $6,698,874  
Special mention—  14,107  7,308  1,967  —  2,287  4,075  29,744  
Substandard1,358  29,551  39,811  78,633  30,377  45,159  57,353  282,242  
Doubtful—  3,378  —  169  —  —  —  3,547  
Total commercial non-mortgage2,093,128  1,362,568  1,122,765  659,912  320,999  348,668  1,106,367  7,014,407  
Asset-based
Pass274  22,033  23,192  13,746  11,460  24,119  788,588  883,412  
Special mention—  2,000  825  —  —  1,069  24,310  28,204  
Substandard—  —  —  —  —  —  28,908  28,908  
Total asset-based274  24,033  24,017  13,746  11,460  25,188  841,806  940,524  
Commercial real estate
Pass482,416  1,475,625  1,329,814  668,039  632,735  1,444,747  31,845  6,065,221  
Special mention—  754  33,222  17,137  26,514  2,847  —  80,474  
Substandard426  —  1,053  15,336  2,359  42,445  —  61,619  
Total commercial real estate482,842  1,476,379  1,364,089  700,512  661,608  1,490,039  31,845  6,207,314  
Equipment financing
Pass177,753  169,602  90,000  38,268  60,434  31,716  —  567,773  
Special mention920  555  1,094  —  772  41  —  3,382  
Substandard279  1,424  5,886  2,672  4,795  5,627  —  20,683  
Total equipment financing178,952  171,581  96,980  40,940  66,001  37,384  —  591,838  
Total commercial portfolio$2,755,196  $3,034,561  $2,607,851  $1,415,110  $1,060,068  $1,901,279  $1,980,018  $14,754,083  
The following table summarizes residential and consumer loans segregated by origination year and risk rating exposure under FICO score groupings as of June 30, 2020:
(In thousands)20202019201820172016PriorRevolving Loans Amortized Cost BasisTotal
Residential
800+$131,201  $346,512  $85,148  $270,790  $359,629  $1,032,865  $—  $2,226,145  
740-799255,226  391,122  84,278  152,587  193,526  554,884  —  1,631,623  
670-73994,849  166,948  54,617  91,176  81,916  289,242  —  778,748  
580-6696,538  19,604  9,155  11,973  20,381  111,678  —  179,329  
579 and below—  23,675  411  4,697  3,328  73,617  —  105,728  
Total residential487,814  947,861  233,609  531,223  658,780  2,062,286  —  4,921,573  
Home equity
800+13,198  18,228  31,456  19,685  20,041  69,363  579,333  751,304  
740-79916,594  16,778  23,242  12,679  14,740  55,107  435,724  574,864  
670-7397,495  12,065  13,307  11,618  9,624  49,345  307,414  410,868  
580-669568  3,124  3,189  2,217  1,682  22,513  101,626  134,919  
579 and below101  377  903  1,316  868  9,764  38,729  52,058  
Total home equity37,956  50,572  72,097  47,515  46,955  206,092  1,462,826  1,924,013  
Other consumer
800+1,483  3,886  2,275  690  168  193  7,299  15,994  
740-79910,882  20,328  11,995  1,993  708  431  3,970  50,307  
670-73923,238  56,607  24,674  5,737  2,475  1,198  5,708  119,637  
580-6692,603  4,859  2,254  821  363  318  1,791  13,009  
579 and below1,043  624  315  91  58  227  1,543  3,901  
Total other consumer39,249  86,304  41,513  9,332  3,772  2,367  20,311  202,848  
Total consumer portfolio565,019  1,084,737  347,219  588,070  709,507  2,270,745  1,483,137  7,048,434  
Total commercial portfolio2,755,196  3,034,561  2,607,851  1,415,110  1,060,068  1,901,279  1,980,018  14,754,083  
Total loans and leases$3,320,215  $4,119,298  $2,955,070  $2,003,180  $1,769,575  $4,172,024  $3,463,155  $21,802,517  

51

Individually Assessed Loans and Leases
The following tables summarize individually assessed loans and leases:
 At June 30, 2020
(In thousands)Unpaid
Principal
Balance		Amortized CostAmortized Cost No AllowanceAmortized Cost With AllowanceRelated
Valuation
Allowance
Commercial non-mortgage$174,593  $129,552  $64,967  $64,585  $12,080  
Asset-based464  138  —  138  3  
Commercial real estate33,694  27,526  13,838  13,688  3,061  
Equipment financing7,233  7,794  3,881  3,913  127  
Residential120,304  106,772  68,597  38,175  3,304  
Home equity114,326  50,157  38,277  11,880  1,022  
Other consumer2,870  1,217  66  1,151  158  
Total$453,484  $323,156  $189,626  $133,530  $19,755  

 At December 31, 2019
(In thousands)Unpaid
Principal
Balance		Amortized CostAmortized Cost No AllowanceAmortized Cost With AllowanceRelated
Valuation
Allowance
Commercial non-mortgage$140,096  $102,254  $29,739  $72,515  $7,862  
Asset-based465  139  —  139  5  
Commercial real estate29,292  23,297  14,818  8,479  1,143  
Equipment financing5,591  5,433  2,159  3,274  418  
Residential98,790  90,096  56,231  33,865  3,618  
Home equity38,503  35,191  27,672  7,519  1,203  
Other consumer (1)
—  —  —  —  —  
Total$312,737  $256,410  $130,619  $125,791  $14,249  
(1)Partially charged-off other consumer loans were included in collectively evaluated for impairment at December 31, 2019.
The following table summarizes average amortized cost and interest income recognized for individually assessed loans and leases:
Three months ended June 30,Six months ended June 30,
2020201920202019
(In thousands)Average
Amortized Cost		Accrued
Interest
Income		Cash Basis Interest Income Average
Amortized Cost		Accrued
Interest
Income		Cash Basis Interest Income Average
Amortized Cost		Accrued
Interest
Income		Cash Basis Interest Income Average
Amortized Cost		Accrued
Interest
Income		Cash Basis Interest Income
Commercial non-mortgage$136,483  $875  $—  $106,753  $844  $—  $115,903  $1,928  $—  $98,511  $1,764  $—  
Asset-based138  —  —  201  —  —  139  —  —  204  —  —  
Commercial real estate26,017  169  —  13,070  61  —  25,411  315  —  12,354  134  —  
Equipment financing8,373  —  —  4,451  —  —  6,613  —  —  5,132  —  —  
Residential121,488  781  230  101,245  912  282  113,806  1,611  860  101,850  1,820  546  
Home equity50,573  309  413  38,092  287  241  43,863  700  1,243  38,238  556  521  
Other consumer1,121  —  —  —  —  —  609  17  —  —  —  —  
Total$344,193  $2,134  $643  $263,812  $2,104  $523  $306,344  $4,571  $2,103  $256,289  $4,274  $1,067  
Collateral Dependent Loans and Leases. A loan is considered collateral dependent when the borrower is experiencing financial difficulty and it is expected to be repaid substantially through the sale or operation of the collateral. A collateral dependent loan is individually assessed based on the fair value of the collateral, less costs to sell, as of the reporting date. Commercial non-mortgage, asset based, and equipment financing are collateralized by equipment, inventory, receivables, or other non-real estate assets. Commercial real estate, residential, and home equity are collateralized by real estate. Collateral value on collateral dependent loans and leases was $143.6 million at June 30, 2020 and $109.8 million at December 31, 2019.
The following table summarizes whether, or not, individually assessed loans and leases are collateral dependent:
June 30, 2020December 31, 2019
(In thousands)Collateral DependentNot Considered Collateral DependentTotalCollateral DependentNot Considered Collateral DependentTotal
Commercial non-mortgage$16,028  $113,524  $129,552  $10,682  $91,572  $102,254  
Asset-based—  138  138  —  139  139  
Commercial real estate19,146  8,380  27,526  14,097  9,200  23,297  
Equipment financing—  7,794  7,794  —  5,433  5,433  
Residential37,708  69,064  106,772  17,635  72,461  90,096  
Home equity30,493  19,664  50,157  17,136  18,055  35,191  
Other consumer—  1,217  1,217  —  —  —  
Total amortized cost of CDA$103,375  $219,781  $323,156  $59,550  $196,860  $256,410  
52

Troubled Debt Restructurings
The following table summarizes information for TDRs:
(In thousands)At June 30,
2020		At December 31, 2019
Accrual status$147,950  $136,449  
Non-accrual status113,496  100,989  
Total TDRs$261,446  $237,438  
Specific reserves for TDRs included in the balance of ACL on loans and leases$15,027  $12,956  
Additional funds committed to borrowers in TDR status15,547  4,856  
The portion of TDRs deemed to be uncollectible, $1.9 million and $4.2 million for the three months ended June 30, 2020 and 2019, respectively, and $3.1 million and $5.6 million for the six months ended June 30, 2020 and 2019, respectively, were charged off.
The following table provides information on the type of concession for loans and leases modified as TDRs:
Three months ended June 30,Six months ended June 30,
2020201920202019
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)
Number of
Loans and
Leases
Post-
Modification
Recorded
Investment(1)
(Dollars in thousands)
Commercial non-mortgage
Extended Maturity4$403  4  $69  6$507  6$193  
Adjusted Interest Rate——  1  100  ——  1100  
Maturity/Rate Combined——  2  46  5274  371  
Other (2)
1312,985  4  12,029  2340,122  1934,056  
Commercial real estate
Extended Maturity172  —  —  172  ——  
Maturity/Rate Combined——  —  —  1278  ——  
Other (2)
——  —  —  ——  22,636  
Residential
Extended Maturity187  3  421  2351  4940  
Maturity/Rate Combined2255  8  1,397  5698  131,848  
Other (2)
173,062  2  281  203,675  4542  
Consumer
Extended Maturity2157  2  225  2157  4370  
Maturity/Rate Combined——  2  110  113  2110  
Other (2)
634,399  6  466  745,512  191,220  
Total TDRs103$21,420  34  $15,144  140$51,659  77$42,086  
(1)Post-modification balances approximate pre-modification balances. The aggregate amount of charge-offs as a result of the restructurings was not significant.
(2)Other includes covenant modifications, forbearance, loans discharged under Chapter 7 bankruptcy, or other concessions.
There were no significant amounts of loans and leases modified as TDRs within the previous 12 months and for which there was a payment default for the three and six months ended June 30, 2020 and 2019.
TDRs in commercial, commercial real estate, and equipment financing segregated by risk rating exposure is as follows:

(In thousands)At June 30, 2020At December 31, 2019
(1) - (6) Pass$3,362  $3,952  
(7) Special Mention—  63  
(8) Substandard131,498  104,277  
(9) Doubtful3,547  3,860  
Total$138,407  $112,152  

53

Note 5: Transfers of Financial Assets
The Company sells financial assets in the normal course of business, primarily residential mortgage loans sold to government-sponsored enterprises through established programs and securitizations. Residential mortgage origination fees, adjustments for changes in fair value, and gain or loss on loans sold are included as mortgage banking activities in the consolidated statement 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 the 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. 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 consolidated income statement.
The following table provides a summary of activity in the reserve for loan repurchases:
 Three months ended June 30,Six months ended June 30,
(In thousands)2020201920202019
Beginning balance$633  $676  $508  $674  
Provision charged to expense27  1,813  49  1,820  
(Charge-offs/settlements, net) recoveries, net(5) (1,805) 98  (1,810) 
Ending balance$655  $684  $655  $684  
The following table provides information for mortgage banking activities:
 Three months ended June 30,Six months ended June 30,
(In thousands)2020201920202019
Residential mortgage loans held for sale:
Proceeds from sale$94,574  $42,851  $170,168  $63,464  
Loans sold with servicing rights retained89,687  39,465  161,778  56,813  
Net gain on sale2,824  700  5,343  858  
Ancillary fees824  320  1,225  581  
Fair value option adjustment557  (88) 530  257  
Additionally, loans not originated for sale were sold approximately at carrying value for cash proceeds of $3.6 million, resulting in a gain of approximately $256 thousand, for certain commercial loans for the six months ended June 30, 2020, and $4.0 million for certain residential loans and $16.1 million, resulting in a gain of approximately $615 thousand, for certain commercial loans for the six months ended June 30, 2019.
The Company services residential mortgage loans for other entities totaling $2.4 billion at both June 30, 2020 and December 31, 2019.
The following table presents the changes in carrying value for mortgage servicing assets:
Three months ended June 30,Six months ended June 30,
(In thousands)2020201920202019
Beginning balance$16,391  $19,785  $17,484  $21,215  
Additions779  791  1,968  1,253  
Amortization(1,669) (1,864) (3,376) (3,756) 
Valuation allowance(575) —  (1,150) —  
Ending balance$14,926  $18,712  $14,926  $18,712  
Loan servicing fees, net of mortgage servicing rights amortization, were $0.3 million and $0.4 million for the three months ended June 30, 2020, and $0.8 million and $0.9 million for the six months ended June 30, 2020 and 2019, respectively, and are included as a component of loan related fees in the consolidated statement of income.
Refer to Note 14: Fair Value Measurements for additional information on loans held for sale and mortgage servicing assets.
54

Note 6: Leasing
The Company enters into leases, as lessee, primarily for office space, banking centers, and certain other operational assets. These leases are generally classified as operating leases, however, an insignificant amount are classified as finance leases. The Company's operating leases generally have lease terms for periods of 5 to 20 years with various renewal options. The Company does not have any material sub-lease agreements.
The following table summarizes lessee information related to the Company’s operating ROU assets and lease liability:
At June 30, 2020
(In thousands)Operating LeasesConsolidated Balance Sheet Line Item Location
ROU lease assets $151,805  Premises and equipment, net
Lease liabilities170,731  Operating lease liabilities
The components of operating lease cost and other related information are as follows:
At or for the three months ended June 30,At or for the six months ended June 30,
(In thousands)2020201920202019
Lease Cost:
Operating lease costs$7,407  $7,487  $14,831  $14,872  
Variable lease costs1,493  1,068  2,920  2,321  
Sublease income(142) (155) (287) (295) 
Total operating lease cost$8,758  $8,400  $17,464  $16,898  
Other Information:
Cash paid for amounts included in the measurement of lease liabilities$7,778  $7,738  $15,536  $15,411  
ROU lease assets obtained in exchange for new operating lease liabilities30  6,296  8,696  12,934  
The undiscounted scheduled maturities reconciled to total operating lease liabilities are as follows:
(In thousands)At June 30, 2020
Remainder of 2020$13,089  
202130,955  
202227,803  
202324,880  
202421,432  
Thereafter79,784  
Total operating lease liability payments197,943  
Less: Present value adjustment27,212  
Lease liabilities$170,731  
Weighted-average remaining lease term - operating leases, in years8.24
Weighted-average discount rate - operating leases3.26 %
See Note 4: Loans and Leases for information relating to leases included within the equipment financing portfolio in which the Company is lessor.
55

Note 7: Goodwill and Other Intangible Assets
There has been no change during 2020 in the carrying amounts for goodwill. For additional information on goodwill refer to the Company's Annual Report on Form 10-K for the year ended December 31, 2019.
Other intangible assets by reportable segment consisted of the following:
 At June 30, 2020At December 31, 2019
(In thousands)Gross Carrying
Amount		Accumulated
Amortization		Net Carrying
Amount		Gross Carrying
Amount		Accumulated
Amortization		Net Carrying
Amount
HSA Bank - Core deposits$22,000  $14,189  $7,811  $22,000  $13,073  $8,927  
HSA Bank - Customer relationships21,000  8,817  12,183  21,000  8,010  12,990  
Total other intangible assets$43,000  $23,006  $19,994  $43,000  $21,083  $21,917  
At June 30, 2020, the remaining estimated aggregate future amortization expense for other intangible assets is as follows:
(In thousands) 
Remainder of 2020$1,924  
20213,847  
20223,847  
20233,847  
20241,615  
Thereafter4,914  

Note 8: Deposits
A summary of deposits by type follows:
(In thousands)At June 30,
2020		At December 31,
2019
Non-interest-bearing:
Demand$6,193,757  $4,446,463  
Interest-bearing:
Health savings accounts6,786,845  6,416,135  
Checking3,280,125  2,689,734  
Money market2,686,650  2,312,840  
Savings4,742,573  4,354,809  
Time deposits2,666,047  3,104,765  
Total interest-bearing$20,162,240  $18,878,283  
Total deposits$26,355,997  $23,324,746  
Time deposits and interest-bearing checking, included in above balances, obtained through brokers$718,404  $652,151  
Time deposits, included in above balance, that exceed the FDIC limit519,812  661,334  
Deposit overdrafts reclassified as loan balances791  1,721  
The scheduled maturities of time deposits are as follows:
(In thousands)At June 30,
2020
Remainder of 2020$1,753,705  
2021717,029  
2022107,744  
202338,726  
202422,333  
Thereafter26,510  
Total time deposits$2,666,047  

56

Note 9: Borrowings
Total borrowings of $2.8 billion at June 30, 2020 and $3.5 billion at December 31, 2019 are described in detail below.
The following table summarizes securities sold under agreements to repurchase and other borrowings:
At June 30,
2020		At December 31,
2019
(Dollars in thousands)AmountRateAmountRate
Securities sold under agreements to repurchase (1):
Original maturity of one year or less$312,691  0.20 %$240,431  0.19 %
Original maturity of greater than one year, non-callable200,000  0.68  200,000  1.78  
Total securities sold under agreements to repurchase512,691  0.39  440,431  0.91  
Fed funds purchased740,000  0.08  600,000  1.59  
Paycheck Protection Program Liquidity Facility436,114  0.35  —  —  
Securities sold under agreements to repurchase and other borrowings$1,688,805  0.24  $1,040,431  1.30  
(1)The Company has right of offset with respect to all repurchase agreement assets and liabilities. Total securities sold under agreements to repurchase are presented as gross transactions, as only liabilities are outstanding for the periods presented.
Repurchase agreements are used as a source of borrowed funds and are collateralized by U.S. Government agency mortgage-backed securities. Repurchase agreement counterparties are limited to primary dealers in government securities and commercial/municipal customers through the Corporate Treasury function. To bolster the effectiveness of the PPP, the Federal Reserve began supplying liquidity to participating financial institutions through the Paycheck Protection Program Liquidity Facility which extends credit to eligible financial institutions that originate PPP loans, taking the loans as collateral at face value. The Company began utilizing this facility in the second quarter 2020.
The following table provides information for FHLB advances:
At June 30, 2020At December 31, 2019
(Dollars in thousands)AmountWeighted-
Average Contractual Coupon Rate		AmountWeighted-
Average Contractual Coupon Rate
Maturing within 1 year$265,000  1.35 %$1,690,000  1.79 %
After 1 but within 2 years150,000  1.24  200,000  2.53  
After 2 but within 3 years120  —  130  —  
After 3 but within 4 years222  2.95  229  2.95  
After 4 but within 5 years100,000  1.50  50,000  1.59  
After 5 years7,979  2.66  8,117  2.66  
FHLB advances$523,321  1.37  $1,948,476  1.87  
Aggregate carrying value of assets pledged as collateral$7,168,851  $7,318,748  
Remaining borrowing capacity 4,166,323  2,937,644  
Webster Bank is in compliance with FHLB collateral requirements for the periods presented. Eligible collateral, primarily certain residential and commercial real estate loans, has been pledged to secure FHLB advances.
The following table summarizes long-term debt:
(Dollars in thousands)At June 30,
2020		At December 31,
2019
4.375%Senior fixed-rate notes due February 15, 2024$150,000  $150,000  
4.100%
Senior fixed-rate notes due March 25, 2029 (1)
346,841  317,486  
Junior subordinated debt Webster Statutory Trust I floating-rate notes due September 17, 2033 (2)
77,320  77,320  
Total notes and subordinated debt574,161  544,806  
Discount on senior fixed-rate notes(1,303) (1,412) 
Debt issuance cost on senior fixed-rate notes(2,829) (3,030) 
Long-term debt$570,029  $540,364  
(1)The Company has de-designated its fair value hedging relationship on the notes. A $46.8 million basis adjustment included in the carrying value will be amortized over the remaining life of the notes.
(2)The interest rate on Webster Statutory Trust I floating-rate notes, which varies quarterly based on 3-month London Interbank Offered Rate plus 2.95%, was 3.25% at June 30, 2020 and 4.85% at December 31, 2019.
57

Note 10: Accumulated Other Comprehensive Income, Net of Tax
The following tables summarize the changes in accumulated other comprehensive income (loss), net of tax, by component:

Three months ended June 30, 2020Six months ended June 30, 2020
(In thousands)Securities Available For SaleDerivative InstrumentsDefined Benefit Pension and Other Postretirement Benefit PlansTotalSecurities Available For SaleDerivative InstrumentsDefined Benefit Pension and Other Postretirement Benefit PlansTotal
Beginning balance$1,562  $17,048  $(43,410) $(24,800) $17,251  $(9,184) $(44,139) $(36,072) 
  OCI before reclassifications61,914  2,186  —  64,100  46,231  26,965  —  73,196  
  Amounts reclassified from AOCI—  1,415  730  2,145  (6) 2,868  1,459  4,321  
Net current-period OCI61,914  3,601  730  66,245  46,225  29,833  1,459  77,517  
Ending balance$63,476  $20,649  $(42,680) $41,445  $63,476  $20,649  $(42,680) $41,445  

Three months ended June 30, 2019Six months ended June 30, 2019
(In thousands)Securities Available For SaleDerivative InstrumentsDefined Benefit Pension and Other Postretirement Benefit PlansTotalSecurities Available For SaleDerivative InstrumentsDefined Benefit Pension and Other Postretirement Benefit PlansTotal
Beginning balance$(43,815) $(9,117) $(48,909) $(101,841) $(71,374) $(9,313) $(49,965) $(130,652) 
  OCI/OCL before reclassifications34,409  (870) —  33,539  61,968  (1,709) —  60,259  
  Amounts reclassified from AOCL—  1,056  1,056  2,112  —  2,091  2,112  4,203  
Net current-period OCI34,409  186  1,056  35,651  61,968  382  2,112  64,462  
Ending balance$(9,406) $(8,931) $(47,853) $(66,190) $(9,406) $(8,931) $(47,853) $(66,190) 
The following table provides information for the items reclassified from AOCI/AOCL:
(In thousands)Three months ended June 30,Six months ended June 30,Associated Line Item in the Condensed Consolidated Statements of Income
AOCI/AOCL Components2020201920202019
Securities available-for-sale:
Unrealized gains on investment securities$—  $—  $8  $—  Gain on sale of investment securities, net
Tax expense—  —  (2) —  Income tax expense
Net of tax$—  $—  $6  $—  
Derivative instruments:
Premium amortization and hedge terminations$(1,088) $(1,408) $(2,261) $(2,799) Interest expense
Premium amortization(828) (12) (1,622) (12) Interest income
Tax benefit501  364  1,015  720  Income tax expense
Net of tax$(1,415) $(1,056) $(2,868) $(2,091) 
Defined benefit pension and other postretirement benefit plans:
Amortization of net loss$(990) $(1,429) $(1,980) $(2,859) Other non-interest expense
Tax benefit260  373  521  747  Income tax expense
Net of tax$(730) $(1,056) $(1,459) $(2,112) 

58

Note 11: Regulatory Matters
Capital Requirements
Webster Financial Corporation is subject to regulatory capital requirements administered by the Federal Reserve System, while Webster Bank is subject to regulatory capital requirements administered by the 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.
Total risk-based capital is comprised of three categories as defined by Basel III capital rules: common equity Tier 1 capital (CET1 capital), Tier 1 capital, and Tier 2 capital. CET1 capital includes common shareholders' equity, less deductions for goodwill, other intangibles, and certain deferred tax adjustments. For purposes of CET1 capital, common shareholders' equity excludes AOCL components as permitted by the opt-out election taken by Webster upon adoption of Basel III. Tier 1 capital is comprised of CET1 capital plus perpetual preferred stock, while Tier 2 capital includes qualifying subordinated debt and qualifying allowance for credit losses, that together equal total capital.
The following table provides information on the capital ratios for Webster Financial Corporation and Webster Bank:
At June 30, 2020
 
Actual (1)
Minimum RequirementWell Capitalized
(Dollars in thousands)AmountRatioAmountRatioAmountRatio
Webster Financial Corporation
CET1 risk-based capital$2,485,301  11.17 %$1,001,376  4.5 %$1,446,431  6.5 %
Total risk-based capital2,985,837  13.42  1,780,223  8.0  2,225,279  10.0  
Tier 1 risk-based capital2,630,338  11.82  1,335,167  6.0  1,780,223  8.0  
Tier 1 leverage capital 2,630,338  8.33  1,262,430  4.0  1,578,038  5.0  
Webster Bank
CET1 risk-based capital$2,666,184  11.99 %$1,001,034  4.5 %$1,445,938  6.5 %
Total risk-based capital2,944,269  13.24  1,779,616  8.0  2,224,519  10.0  
Tier 1 risk-based capital2,666,184  11.99  1,334,712  6.0  1,779,616  8.0  
Tier 1 leverage capital 2,666,184  8.45  1,261,937  4.0  1,577,421  5.0  

At December 31, 2019
 ActualMinimum RequirementWell Capitalized
(Dollars in thousands)AmountRatioAmountRatioAmountRatio
Webster Financial Corporation
CET1 risk-based capital$2,516,361  11.56 %$979,739  4.5 %$1,415,179  6.5 %
Total risk-based capital2,950,181  13.55  1,741,758  8.0  2,177,198  10.0  
Tier 1 risk-based capital2,661,398  12.22  1,306,319  6.0  1,741,758  8.0  
Tier 1 leverage capital 2,661,398  8.96  1,188,507  4.0  1,485,634  5.0  
Webster Bank
CET1 risk-based capital$2,527,645  11.61 %$979,497  4.5 %$1,414,829  6.5 %
Total risk-based capital2,739,108  12.58  1,741,328  8.0  2,176,660  10.0  
Tier 1 risk-based capital2,527,645  11.61  1,305,996  6.0  1,741,328  8.0  
Tier 1 leverage capital 2,527,645  8.51  1,187,953  4.0  1,484,941  5.0  
(1)In accordance with regulatory capital rules, the Company elected an option to delay the estimated impact of CECL on its regulatory capital over a two-year deferral and subsequent three-year transition period ending December 31, 2024. As a result, capital ratios and amounts as of June 30, 2020 exclude the impact of the increased allowance for credit losses on loans, held-to-maturity debt securities, and unfunded loan commitments attributed to the adoption of CECL, adjusted for an approximation of the after-tax provision for credit losses attributable to CECL relative to the incurred loss methodology during the deferral period.
Dividend Restrictions. Webster Financial Corporation is dependent upon dividends from Webster Bank to provide funds for its cash requirements, including payments of dividends to shareholders. Dividends paid by Webster Bank are subject to various federal and state regulatory limitations. Express approval by the OCC is required if the effect of dividends declared would cause the regulatory capital of the Bank to fall below specified minimum levels, or would exceed the net income for that year combined with the undistributed net income for the preceding two years. Webster Bank paid no dividends to Webster Financial Corporation during the six months ended June 30, 2020 compared to $110 million during the six months ended June 30, 2019.
Cash Restrictions. Webster Bank is required by Federal Reserve System regulations to hold cash reserve balances on hand or with a Federal Reserve Bank. To address liquidity concerns due to COVID-19 the Federal Reserve reset the requirement to zero, effective March 26, 2020. The reserve requirement ratio is subject to adjustment as conditions warrant.
59

Note 12: Earnings Per Common Share
Reconciliation of the calculation of basic and diluted earnings per common share follows:
 Three months ended June 30,Six months ended June 30,
(In thousands, except per share data)2020201920202019
Earnings for basic and diluted earnings per common share:
Net income$53,097  $98,649  $91,296  $198,385  
Less: Preferred stock dividends1,969  1,969  3,938  3,938  
Net income available to common shareholders51,128  96,680  87,358  194,447  
Less: Earnings applicable to participating securities (1)
399  487  592  964  
Earnings applicable to common shareholders$50,729  $96,193  $86,766  $193,483  
Shares:
Weighted-average common shares outstanding - basic89,485  91,534  90,206  91,550  
Effect of dilutive securities85  321  185  348  
Weighted-average common shares outstanding - diluted89,570  91,855  90,391  91,898  
Earnings per common share(1):
Basic$0.57  $1.05  $0.96  $2.11  
Diluted 0.57  1.05  0.96  2.11  
(1)Earnings per common share amounts under the two-class method, for nonvested time-based restricted shares with nonforfeitable dividends and dividend rights, are determined the same as the presentation above.
Dilutive Securities
The Company 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 effect of dilutive securities for the periods presented is primarily the result of outstanding stock options, as well as non-participating restricted stock.
Potential common shares from non-participating restricted stock, of 192 thousand and 87 thousand for the three months ended June 30, 2020 and 2019, respectively, and 114 thousand and 59 thousand for the six months ended June 30, 2020 and 2019, respectively, are excluded from the effect of dilutive securities because they would have been anti-dilutive under the treasury stock method.
60

Note 13: Derivative Financial Instruments
Derivative Positions and Offsetting
Derivatives Designated in Hedge Relationships. Interest rate swaps allow the Company to change the fixed or variable nature of an interest rate without the exchange of the underlying notional amount. Certain pay fixed/receive variable interest rate swaps are designated as cash flow hedges to effectively convert variable-rate debt into fixed-rate debt, while certain receive fixed/pay variable interest rate swaps are designated as fair value hedges to effectively convert fixed-rate long-term debt into variable-rate debt. Certain purchased options are designated as cash flow hedges. Purchased options allow the Company to limit the potential adverse impact of variable interest rates by establishing a cap or a floor rate in exchange for an upfront premium. The purchased options designated as cash flow hedges represent interest rate caps where payment is received from the counterparty if interest rates rise above the cap rate and interest rate floors where payment is received from the counterparty when interest rates fall below the floor rate.
Derivatives Not Designated in Hedge Relationships. The Company also enters into other derivative transactions to manage economic risks but does not designate the instruments in hedge relationships. Further, the Company enters into derivative contracts to accommodate customer needs. Derivative contracts with customers are offset with dealer counterparty transactions structured with matching terms to ensure minimal impact on earnings.
The following table presents the notional amounts and fair values of derivative positions:
At June 30, 2020At December 31, 2019
Asset DerivativesLiability DerivativesAsset DerivativesLiability Derivatives
(In thousands)Notional
Amounts		Fair
Value		Notional
Amounts		Fair
Value		Notional
Amounts		Fair
Value		Notional
Amounts		Fair
Value
Designated as hedging instruments:
Interest rate derivatives (1)
$1,150,000  $48,793  $75,000  $331  $1,225,000  $11,855  $300,000  $3,153  
Not designated as hedging instruments:
Interest rate derivatives (1)
4,565,049  363,143  4,517,068  17,874  4,869,139  133,455  4,090,522  9,732  
Mortgage banking derivatives (2)
94,812  1,846  224  1  27,873  329  57,000  110  
Other (3)
99,637  270  313,020  1,332  76,544  398  275,279  818  
Total not designated as hedging instruments4,759,498  365,259  4,830,312  19,207  4,973,556  134,182  4,422,801  10,660  
Gross derivative instruments, before netting$5,909,498  414,052  $4,905,312  19,538  $6,198,556  146,037  $4,722,801  13,813  
Less: Master netting agreements12,318  12,318  4,779  4,779  
Cash collateral36,739  6,313  8,100  1,871  
Total derivative instruments, after netting$364,995  $907  $133,158  $7,163  
(1)Balances related to Chicago Mercantile Exchange (CME) are presented as a single unit of account. In accordance with its rule book, CME legally characterizes variation margin payments as settlement of derivatives rather than collateral against derivative positions. Notional amounts of interest rate swaps cleared through CME include $3.5 million and $1.1 billion for asset derivatives and $3.5 billion and $2.6 billion for liability derivatives at June 30, 2020 and December 31, 2019, respectively. The related fair values approximate zero.
(2)Notional amounts related to residential loans exclude approved floating rate commitments of $8.1 million at June 30, 2020.
(3)Other derivatives include foreign currency forward contracts related to lending arrangements and customer hedging activity, a Visa equity swap transaction, and risk participation agreements (RPAs). Notional amounts of RPAs include $92.7 million and $65.7 million for asset derivatives and $270.0 million and $223.4 million for liability derivatives at June 30, 2020 and December 31, 2019, respectively, that have insignificant related fair values.
The following table presents fair value positions transitioned from gross to net upon applying counterparty netting agreements:
At June 30, 2020
(In thousands)Gross
Amount		Offset AmountNet Amount on Balance SheetAmounts Not OffsetNet Amounts
Asset derivatives$49,104  $49,057  $47  $487  $534  
Liability derivatives18,691  18,631  60  111  171  
At December 31, 2019
(In thousands)Gross
Amount		Offset AmountNet Amount on Balance SheetAmounts Not OffsetNet Amounts
Asset derivatives$13,012  $12,879  $133  $299  $432  
Liability derivatives6,710  6,650  60  329  389  
61

Derivative Activity
The following tables present the income statement effect of derivatives designated as hedges and additional information related to a fair value hedging adjustment:
Recognized InThree months ended June 30,Six months ended June 30,
(In thousands)Net Interest Income2020201920202019
Fair value hedges: (1)
Recognized on derivativesLong-term debt$—  $14,184  $30,693  $15,812  
Recognized on hedged itemsLong-term debt—  (14,184) (30,693) (15,812) 
Net recognized on fair value hedges$—  $—  $—  $—  
Cash flow hedges:
Interest rate derivativesLong-term debt$1,228  $980  $2,349  $1,933  
Interest rate derivativesInterest and fees on loans and leases(1,837) 12  (1,097) 12  
Net recognized on cash flow hedges$(609) $992  $1,252  $1,945  

Consolidated Balance Sheet Line Item in Which Hedged Item is LocatedCarrying Amount of Hedged Item
Cumulative Amount of Fair Value Hedging Adjustment Included in Carrying Amount (1)
(In thousands)At June 30,
2020		At December 31,
2019		At June 30,
2020		At December 31,
2019
Long-term debt$346,841  $317,486  $46,841  $17,486  
(1)The Company has de-designated its fair value hedging relationship on the long-term debt. The $46.8 million basis adjustment included in the carrying value will be amortized over the remaining life of the notes through interest expense.
The following table presents the effect on the income statement for derivatives not designated as hedging instruments:
Recognized InThree months ended June 30,Six months ended June 30,
(In thousands)Non-interest Income2020201920202019
Interest rate derivativesOther income$(2,523) $4,071  $3,403  $5,122  
Mortgage banking derivativesMortgage banking activities633  157  1,626  (251) 
OtherOther income(1,014) (591) 897  (76) 
Total not designated as hedging instruments$(2,904) $3,637  $5,926  $4,795  
Purchased options designated as cash flow hedges exclude time-value premiums from the assessment of hedge effectiveness. Time-value premiums are amortized on a straight-line basis. At June 30, 2020, the remaining unamortized balance of time-value premiums was $10.8 million.
Over the next twelve months, an estimated $8.0 million decrease to interest expense will be reclassified from AOCL relating to cash flow hedges, and an estimated $1.9 million increase to interest expense will be reclassified from AOCL relating to hedge terminations. At June 30, 2020, the remaining unamortized loss on terminated cash flow hedges is $3.5 million. The maximum length of time over which forecasted transactions are hedged is 4 years.
Additional information about cash flow hedge activity impacting AOCL and the related amounts reclassified to interest expense is provided in Note 10: Accumulated Other Comprehensive Income, Net of Tax. Information about the valuation methods used to measure the fair value of derivatives is provided in Note 14: Fair Value Measurements.
Derivative Exposure
The Company had approximately $377.7 million in net margin posted with financial counterparties or the derivative clearing organization at June 30, 2020, which is primarily comprised of $91.6 million in initial margin collateral posted at CME and $316.1 million in CME variation margin posted. At June 30, 2020, $36.9 million of cash collateral received is included in cash and due from banks on the consolidated balance sheet and is considered restricted in nature.
Webster 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. Current net credit exposure relating to interest rate derivatives with Webster Bank customers was $362.9 million at June 30, 2020. 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 $40.7 million at June 30, 2020. The Company has incorporated a credit valuation adjustment (CVA) to reflect nonperformance risk in the fair value measurement of its derivatives. The CVA was $5.5 million as of June 30, 2020. Various factors impact changes in the CVA over time, including changes in the credit spreads of the parties to the contracts, as well as changes in market rates and volatilities, which affect the total expected exposure of the derivative instruments.
62

Note 14: Fair Value Measurements
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined using quoted market prices. However, in many instances, quoted market prices are not available. In such instances, fair values are determined using appropriate valuation techniques. Various assumptions and observable inputs must be relied upon in applying these techniques. Accordingly, categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. As such, the fair value estimates may not be realized in an immediate transfer of the respective asset or liability.
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the entire holdings or any part of a particular financial instrument. Fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These factors are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Fair Value Hierarchy
The three levels within the fair value hierarchy are as follows:
•Level 1: Valuation is based upon unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
•Level 2: Fair value is calculated using significant inputs other than quoted market prices that are directly or indirectly observable for the asset or liability. The valuation may rely on quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in inactive markets, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, rate volatility, prepayment speeds, credit ratings,) or inputs that are derived principally or corroborated by market data, by correlation, or other means.
•Level 3: Inputs for determining the fair value of the respective assets or liabilities are not observable. Level 3 valuations are reliant upon pricing models and techniques that require significant management judgment or estimation.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Available-for-Sale Investment Securities. When quoted prices are available in an active market, the Company classifies available-for-sale investment securities within Level 1 of the valuation hierarchy. U.S. Treasury Bills are classified within Level 1 of the fair value hierarchy.
When quoted market prices are not available, the Company employs an independent pricing service that utilizes matrix pricing to calculate fair value. Such fair value measurements consider observable data such as dealer quotes, market spreads, cash flows, yield curves, live trading levels, trade execution data, market consensus prepayments speeds, credit information, and respective terms and conditions for debt instruments. Management maintains procedures to monitor the pricing service's results and has an established process to challenge their valuations, or methodologies, that appear unusual or unexpected. Available-for-Sale investment securities which include Agency CMO, Agency MBS, Agency CMBS, CMBS, CLO, and corporate debt, are classified within Level 2 of the fair value hierarchy.
Derivative Instruments. Foreign exchange contracts are valued based on unadjusted quoted prices in active markets and classified within Level 1 of the fair value hierarchy.
All other derivative instruments are valued using third-party valuation software, which considers the present value of cash flows discounted using observable forward rate assumptions. The resulting fair value is validated against valuations performed by independent third parties and are classified within Level 2 of the fair value hierarchy. Webster evaluates the credit risk of its counterparties to determine the CVA by considering factors such as the likelihood of default by the counterparty, its net exposure, remaining contractual life, as well as the collateral securing the position. While the Company has determined that the majority of the inputs used to value its derivative financial instruments fall within Level 2 of the fair value hierarchy, the CVA utilizes Level 3 inputs. The Company has assessed the significance of the impact of the CVA on the overall valuation of its derivative positions as of June 30, 2020, and has determined that the CVA is not significant to the overall valuation of its derivative financial instruments. Therefore, the Company has determined that the fair value measures of its derivative financial instruments in their entirety are classified within Level 2 of the fair value hierarchy.
63

Mortgage Banking Derivatives. Forward sales of mortgage loans and mortgage-backed securities are utilized by the Company in its efforts to manage risk of loss associated with its mortgage loan commitments and mortgage loans held for sale. Prior to closing and funding certain single-family residential mortgage loans, an interest rate lock commitment is generally extended to the borrower. During the period from commitment date to closing date, the Company is subject to the risk that market rates of interest may change. If market rates rise, investors generally will pay less to purchase such loans resulting in a reduction in the gain on sale of the loans or, possibly, a loss. In an effort to mitigate such risk, forward delivery sales commitments are established, under which the Company agrees to deliver whole mortgage loans to various investors or issue mortgage-backed securities. The fair value of mortgage banking derivatives is determined based on current market prices for similar assets in the secondary market and, therefore, classified within Level 2 of the fair value hierarchy.
Originated Loans Held For Sale. Residential mortgage loans typically are classified as held for sale upon origination based on management's intent to sell such loans. The Company generally records residential mortgage loans held for sale under the fair value option of Accounting Standards Codification (ASC) Topic 825 "Financial Instruments." 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. 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 compares the fair value to unpaid principal balance of assets accounted for under the fair value option:
At June 30, 2020At December 31, 2019
(In thousands)Fair ValueUnpaid Principal BalanceDifferenceFair ValueUnpaid Principal BalanceDifference
Originated loans held for sale$46,446  $45,507  $939  $35,750  $35,186  $564  
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 (NAV), 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. The Company 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 $1.6 million at June 30, 2020.
Alternative Investments. Equity investments have a readily determinable fair value when quoted prices are available in an active market. Accordingly, such alternative investments are classified within Level 1 of the fair value hierarchy.
Equity investments that do not have a readily available fair value may qualify for NAV practical expedient 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 June 30, 2020, these alternative investments had a remaining unfunded commitment of $27.9 million.

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Summaries of the fair values of assets and liabilities measured at fair value on a recurring basis are as follows:
 At June 30, 2020
(In thousands)Level 1Level 2Level 3Total
Financial assets held at fair value:
Agency CMO$—  $189,603  $—  $189,603  
Agency MBS—  1,587,236  —  1,587,236  
Agency CMBS—  854,913  —  854,913  
CMBS—  456,254  —  456,254  
CLO—  84,483  —  84,483  
Corporate debt—  11,135  —  11,135  
Total available-for-sale investment securities—  3,183,624  —  3,183,624  
Gross derivative instruments, before netting (1)
130  413,922  —  414,052  
Originated loans held for sale—  46,446  —  46,446  
Investments held in Rabbi Trust4,413  —  —  4,413  
Alternative investments (2)
—  —  —  5,585  
Total financial assets held at fair value$4,543  $3,643,992  $—  $3,654,120  
Financial liabilities held at fair value:
Gross derivative instruments, before netting (1)
$695  $18,843  $—  $19,538  

 At December 31, 2019
(In thousands)Level 1Level 2Level 3Total
Financial assets held at fair value:
Agency CMO$—  $185,801  $—  $185,801  
Agency MBS—  1,612,164  —  1,612,164  
Agency CMBS—  581,552  —  581,552  
CMBS—  431,871  —  431,871  
CLO—  92,205  —  92,205  
Corporate debt—  22,240  —  22,240  
Total available-for-sale investment securities—  2,925,833  —  2,925,833  
Gross derivative instruments, before netting (1)
328  145,709  —  146,037  
Originated loans held for sale—  35,750  —  35,750  
Investments held in Rabbi Trust4,780  —  —  4,780  
Alternative investments (2)
—  —  —  4,331  
Total financial assets held at fair value$5,108  $3,107,292  $—  $3,116,731  
Financial liabilities held at fair value:
Gross derivative instruments, before netting (1)
$611  $13,202  $—  $13,813  
(1)For information relating to the impact of netting derivative assets and derivative liabilities as well as the impact from offsetting cash collateral paid to the same derivative counterparties see Note 13: Derivative Financial Instruments.
(2)Alternative investments are recorded at NAV. Assets measured at NAV are not classified within the fair value hierarchy.

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Assets Measured at Fair Value on a Non-Recurring Basis
Certain assets are measured at fair value on a non-recurring basis; that is, the assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances, for example, when there is evidence of impairment. At June 30, 2020, no significant assets classified within Level 3 were identified and measured under this basis. The following is a description of valuation methodologies used for assets measured on a non-recurring basis.
Alternative Investments. The measurement alternative has been elected for alternative investments without readily determinable fair values that do not qualify for the NAV practical expedient. The measurement alternative requires investments to be accounted for at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. These alternative investments are investments in non-public entities that generally cannot be redeemed since the investment is distributed as the underlying equity is liquidated. Accordingly, these alternative investments are classified within Level 2 of the fair value hierarchy. The carrying amount of these alternative investments was $13.4 million at June 30, 2020. No reductions for impairments, or adjustments due to observable price changes, was identified during the six months ended June 30, 2020.
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 fair value 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 Loans and Leases. Loans and leases for which the payment 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, less estimated cost to sell, using customized discounting criteria. Accordingly, such collateral dependent loans and leases are classified within Level 3 of the fair value hierarchy.
Other Real Estate Owned and Repossessed Assets. The total book value of OREO and repossessed assets was $5.3 million at June 30, 2020. OREO and repossessed assets are accounted for at the lower of cost or fair value and are considered to be recognized at fair value when recorded 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.
In addition, the amortized cost of consumer loans secured by residential real estate property that are in process of foreclosure amounted to $6.8 million at June 30, 2020.
Fair Value of Financial Instruments and Servicing Assets
The Company is required to disclose the estimated fair value of financial instruments 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 has an established process to challenge their valuations, or methodologies, that appear unusual or unexpected. Held-to-Maturity investment securities, which include Agency CMO, Agency MBS, Agency CMBS, CMBS, and municipal bonds and notes, are classified within Level 2 of the fair value hierarchy.
Loans and Leases, net. The estimated fair value of loans and leases held for investment is calculated using a discounted cash flow method, using future prepayments and market interest rates inclusive of an illiquidity premium for comparable loans and leases. The associated cash flows are adjusted for credit and other potential losses. Fair value for collateral dependent 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.
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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.
Securities Sold Under Agreements to Repurchase and Other Borrowings. The fair value of securities sold under agreements to repurchase and other borrowings that mature within 90 days is the carrying value. Fair value for all other balances are estimated using discounted cash flow analysis based on current market rates adjusted for associated credit risks, as appropriate. 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 initially recorded at fair value and subsequently measured under the amortization method. 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 reviewed quarterly and held at the lower of the carrying amount or fair value. Fair value adjustments, if any, are included as a component of loan related fees in the consolidated statement of income. During the six months ended June 30, 2020, the Company recorded a $1.2 million valuation allowance. Mortgage servicing assets are classified within Level 3 of the fair value hierarchy.
The estimated fair value of selected financial instruments and servicing assets are as follows:
 At June 30, 2020At December 31, 2019
(In thousands)Carrying
Amount		Fair
Value		Carrying
Amount		Fair
Value
Assets:
Level 2
Held-to-maturity investment securities$5,476,817  $5,745,559  $5,293,918  $5,380,653  
Level 3
Loans and leases, net21,443,995  21,595,513  19,827,890  19,961,632  
Mortgage servicing assets14,926  18,326  17,484  33,250  
Liabilities:
Level 2
Deposit liabilities$23,689,950  $23,689,950  $20,219,981  $20,219,981  
Time deposits2,666,047  2,678,763  3,104,765  3,102,316  
Securities sold under agreements to repurchase and other borrowings1,688,805  1,693,184  1,040,431  1,041,042  
FHLB advances523,321  533,955  1,948,476  1,950,035  
Long-term debt (1)
570,029  519,613  540,364  555,775  
(1)Adjustments to the carrying amount of long-term debt for basis adjustment and unamortized discount and debt issuance cost on senior fixed-rate notes are not included for determination of fair value Refer to Note 9: Borrowings for additional information.
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Note 15: Retirement Benefit Plans
Defined benefit pension and other postretirement benefits
The following table summarizes the components of net periodic benefit cost:
Three months ended June 30,
20202019
(In thousands)Pension PlanSERPOther BenefitsPension PlanSERPOther Benefits
Interest cost on benefit obligations$1,675  $12  $12  $1,977  $16  $21  
Expected return on plan assets(3,380) —  —  (2,815) —  —  
Recognized net loss993  6  (8) 1,430  3  (4) 
Net periodic benefit cost$(712) $18  $4  $592  $19  $17  

Six months ended June 30,
20202019
(In thousands)Pension PlanSERPOther BenefitsPension PlanSERPOther Benefits
Interest cost on benefit obligations$3,350  $23  $25  $3,955  $32  $42  
Expected return on plan assets(6,760) —  —  (5,630) —  —  
Recognized net loss1,985  12  (17) 2,860  7  (8) 
Net periodic benefit cost$(1,425) $35  $8  $1,185  $39  $34  
The components of net periodic benefit cost, other than service cost, are included within other expense reflected in non-interest expense in the consolidated income statement. The weighted-average expected long-term rate of return is 5.75%.
Note 16: Segment Reporting
Webster’s operations are organized into three reportable segments that represent its primary businesses - Commercial Banking, HSA Bank, and Community Banking. These segments reflect how executive management responsibilities are assigned, the type of customer served, how products and services are provided, and how discrete financial information is currently evaluated. Certain Corporate Treasury activities, 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 uses an internal profitability reporting system to generate information by operating segment, which is based on a series of management estimates for funds transfer pricing, and allocations for non-interest expense, provision for credit losses, 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 any mismatch associated with the matched maturity funding concept called Funds Transfer Pricing (FTP) is absorbed in corporate treasury activities. 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 a 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. Beginning in 2020, Webster refined the FTP calculation to reflect the allocation of capital credit to net interest income to better align segment results with key measurements used to review segment performance. Prior period net interest income and income tax expense were revised to reflect this change.
Webster allocates a majority of non-interest expense to each reportable segment using a full-absorption costing process. Costs, including corporate overhead, are analyzed, pooled by process, and assigned to the appropriate reportable segment.
The results of funds transfer pricing and allocations for non-interest expense, as well as non-interest income produces pre-tax, pre-provision net revenue, under which basis the segments are reviewed by executive management.
Webster allocates the provision for credit losses to each segment based on management's estimate of the inherent loss content in each of the specific loan and lease portfolios. During the three months ended June 30, 2019, Webster refined the precision of this allocation approach. Prior period provision for credit losses amounts, and resulting impacts from income tax expense were revised accordingly. Allowance for credit losses on loans and leases is included in total assets within the Corporate and Reconciling category.
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The following table presents total assets for Webster's reportable segments and the Corporate and Reconciling category:
(In thousands)Commercial
Banking		HSA
Bank		Community
Banking		Corporate and
Reconciling		Consolidated
Total
At June 30, 2020$12,527,397  $77,992  $10,150,431  $9,952,797  $32,708,617  
At December 31, 201911,541,803  80,176  9,348,727  9,418,638  30,389,344  
The following tables present the operating results, including all appropriate allocations, for Webster’s reportable segments and the Corporate and Reconciling category:
 Three months ended June 30, 2020
(In thousands)Commercial
Banking		HSA
Bank		Community BankingCorporate and
Reconciling		Consolidated
Total
Net interest income$104,862  $39,334  $104,870  $(24,659) $224,407  
Non-interest income14,725  23,103  23,405  (1,157) 60,076  
Non-interest expense44,694  34,020  93,686  4,184  176,584  
Pre-tax, pre-provision net revenue74,893  28,417  34,589  (30,000) 107,899  
Provision for credit losses37,559  —  2,444  (3) 40,000  
Income before income tax expense37,334  28,417  32,145  (29,997) 67,899  
Income tax expense9,143  7,587  6,365  (8,293) 14,802  
Net income$28,191  $20,830  $25,780  $(21,704) $53,097  

 Three months ended June 30, 2019
(In thousands)Commercial
Banking		HSA
Bank		Community BankingCorporate and
Reconciling		Consolidated
Total
Net interest income$100,216  $44,013  $107,838  $(10,280) $241,787  
Non-interest income14,645  24,979  27,675  8,554  75,853  
Non-interest expense46,196  34,253  96,166  4,025  180,640  
Pre-tax, pre-provision net revenue68,665  34,739  39,347  (5,751) 137,000  
Provision for credit losses7,741  —  4,159  —  11,900  
Income before income tax expense60,924  34,739  35,188  (5,751) 125,100  
Income tax expense15,110  9,206  7,459  (5,324) 26,451  
Net income$45,814  $25,533  $27,729  $(427) $98,649  

Six months ended June 30, 2020
(In thousands)Commercial
Banking		HSA
Bank		Community BankingCorporate and
Reconciling		Consolidated
Total
Net interest income$204,178  $82,007  $204,340  $(35,317) $455,208  
Non-interest income27,964  49,486  51,025  4,979  133,454  
Non-interest expense91,238  71,098  192,653  431  $355,420  
Pre-tax, pre-provision net revenue140,904  $60,395  62,712  (30,769) 233,242  
Provision for credit losses101,083  —  15,005  (88) 116,000  
Income before income tax expense39,821  60,395  47,707  (30,681) 117,242  
Income tax expense9,752  16,125  9,446  (9,377) 25,946  
Net income$30,069  $44,270  $38,261  $(21,304) $91,296  

Six months ended June 30, 2019
(In thousands)Commercial
Banking		HSA
Bank		Community
Banking		Corporate and
Reconciling		Consolidated
Total
Net interest income$198,558  $87,111  $214,128  $(16,459) $483,338  
Non-interest income28,656  50,556  53,057  12,196  144,465  
Non-interest expense90,814  67,775  191,241  6,496  356,326  
Pre-tax, pre-provision net revenue136,400  69,892  75,944  (10,759) 271,477  
Provision for credit losses13,982  —  6,518  —  20,500  
Income before income tax expense122,418  69,892  69,426  (10,759) 250,977  
Income tax expense30,361  18,522  14,717  (11,008) 52,592  
Net income$92,057  $51,370  $54,709  $249  $198,385  

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Note 17: Revenue from Contracts with Customers
The following tables present revenues within the scope of ASC 606, Revenue from Contracts with Customers and the net amount of other sources of non-interest income that is within the scope of other GAAP topics:
Three months ended June 30, 2020
(In thousands)Commercial
Banking		HSA
Bank		Community
Banking		Corporate and
Reconciling		Consolidated
Total
Non-interest Income:
Deposit service fees$2,703  $21,741  $11,488  $(93) $35,839  
Wealth and investment services2,587  —  4,553  (38) 7,102  
Other—  1,362  740  —  2,102  
Revenue from contracts with customers5,290  23,103  16,781  (131) 45,043  
Other sources of non-interest income9,435  —  6,624  (1,026) 15,033  
Total non-interest income$14,725  $23,103  $23,405  $(1,157) $60,076  

Three months ended June 30, 2019
(In thousands)Commercial
Banking		HSA
Bank		Community
Banking		Corporate and
Reconciling		Consolidated
Total
Non-interest Income:
Deposit service fees$3,085  $23,704  $16,289  $40  $43,118  
Wealth and investment services2,542  —  5,776  (9) 8,309  
Other—  1,275  704  —  1,979  
Revenue from contracts with customers5,627  24,979  22,769  31  53,406  
Other sources of non-interest income9,018  —  4,906  8,523  22,447  
Total non-interest income$14,645  $24,979  $27,675  $8,554  $75,853  

Six months ended June 30, 2020
(In thousands)Commercial
Banking		HSA
Bank		Community
Banking		Corporate and
Reconciling		Consolidated
Total
Non-interest Income:
Deposit service fees$5,762  $46,583  $26,080  $(16) $78,409  
Wealth and investment services5,115  —  10,771  (45) 15,841  
Other—  2,903  1,057  —  3,960  
Revenue from contracts with customers10,877  49,486  37,908  (61) 98,210  
Other sources of non-interest income17,087  —  13,117  5,040  35,244  
Total non-interest income$27,964  $49,486  $51,025  $4,979  $133,454  

Six months ended June 30, 2019
(In thousands)Commercial
Banking		HSA
Bank		Community
Banking		Corporate and
Reconciling		Consolidated
Total
Non-interest Income:
Deposit service fees$6,121  $48,232  $31,654  $135  $86,142  
Wealth and investment services5,026  —  10,951  (17) 15,960  
Other—  2,324  1,205  —  3,529  
Revenue from contracts with customers11,147  50,556  43,810  118  105,631  
Other sources of non-interest income17,509  —  9,247  12,078  38,834  
Total non-interest income$28,656  $50,556  $53,057  $12,196  $144,465  
The major types of revenue streams that are within the scope of ASC 606 are described below:
Deposit service fees, predominately consist of fees earned from deposit accounts and interchange fees. 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 the point in time that 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, while certain obligations may be satisfied at points in time for activities that are transactional in nature.
These disaggregated amounts are reconciled to non-interest income as presented in Note 16: Segment Reporting. Contracts with customers have not generated significant contract assets and liabilities.
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Note 18: Commitments and Contingencies
Credit-Related Financial Instruments
The Company offers credit-related financial instruments in the normal course of business to meet certain financing needs of its customers, that involve off-balance sheet risk. These transactions may include an unused commitment to extend credit, standby letter of credit, or commercial letter of credit. Such transactions involve, to varying degrees, elements of credit risk.
Commitments to Extend Credit. The Company makes commitments under various terms to lend funds to customers at a future point in time. These commitments include revolving credit arrangements, term loan commitments, and short-term borrowing agreements. Most of these loans have fixed expiration dates or other termination clauses where a fee may be required. Since commitments routinely expire without being funded, or after required availability of collateral occurs, the total commitment amount does not necessarily represent future liquidity requirements.
Standby Letter of Credit. A standby letter of credit commits the Company to make payments on behalf of customers if certain specified future events occur. The Company has recourse against the customer for any amount required to be paid to a third party under a standby letter of credit, which is often part of a larger credit agreement under which security is provided. Historically, a large percentage of standby letters of credit expire without being funded. The contractual amount of a standby letter of credit represents the maximum amount of potential future payments the Company could be required to make, and is the Company's maximum credit risk.
Commercial Letter of Credit. A commercial letter of credit is issued to facilitate either domestic or foreign trade arrangements for customers. As a general rule, drafts are committed to be drawn when the goods underlying the transaction are in transit. Similar to a standby letter of credit, a commercial letter of credit is often secured by an underlying security agreement including the assets or inventory to which they relate.
The following table summarizes the outstanding amounts of credit-related financial instruments with off-balance sheet risk:
(In thousands)At June 30,
2020		At December 31, 2019
Commitments to extend credit$5,893,139  $6,162,658  
Standby letter of credit200,280  188,103  
Commercial letter of credit27,242  29,180  
Total credit-related financial instruments with off-balance sheet risk$6,120,661  $6,379,941  
These commitments subject the Company to potential exposure in excess of amounts recorded in the financial statements, and therefore, management maintains a reserve for unfunded credit commitments to provide for expected losses in connection with funding the unused portion of legal commitments to lend when those commitments are not unconditionally cancellable by Webster. Loss calculation factors are consistent with the ACL methodology for funded loans using PD and LGD applied to the underlying borrower risk and facility grades, a draw down factor applied to utilization rates, and relevant forecast information. This reserve is reported as a component of accrued expenses and other liabilities on the consolidated balance sheet.
The following table provides a summary of activity in the reserve for unfunded credit commitments:
Three months ended June 30,Six months ended June 30,
(In thousands)2020201920202019
Beginning balance$10,084  $2,511  $2,367  $2,506  
Adoption of ASU No. 2016-13 (CECL)—  —  9,139  —  
Provision (benefit) charged to non-interest expense655  26  (767) 31  
Ending balance$10,739  $2,537  $10,739  $2,537  

Note 19: Subsequent Events
The Company has evaluated events from the date of the Condensed Consolidated Financial Statements and accompanying Notes thereto, June 30, 2020, through the issuance of this Quarterly Report on Form 10-Q and determined that no significant events were identified requiring recognition or disclosure in this report.


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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The required information is set forth above, in Item 1. Financial Statements, see Note 13: Derivative Financial Instruments, and in Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, see the section captioned "Asset/Liability Management and Market Risk," which are incorporated herein by reference.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company has performed an evaluation, under the supervision and with the participation of the Company's management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company's disclosure controls and procedures, as defined in Rules 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934. Based on this evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures for recording, processing, summarizing, and reporting the information the Company is required to disclose in the reports it files under the Securities Exchange Act of 1934, within the time periods specified in SEC rules and forms, were effective as of June 30, 2020.
Changes in Internal Control over Financial Reporting
During the quarter ended June 30, 2020, there were no changes made to the Company's internal control over financial reporting that materially affected, or would be reasonably likely to materially affect, the Company's internal control over financial reporting.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 condition. 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 1A. RISK FACTORS
Item 1A. Risk Factors of the Company's Annual Report on Form 10-K for the year ended December 31, 2019 includes a discussion of the material risks and uncertainties that could adversely affect our business and impact our results of operations or financial condition. The information presented below updates, and should be read in conjunction with, the risk factors and information disclosed in the Annual Report on Form 10-K.
The COVID-19 pandemic and resulting adverse economic conditions have adversely impacted our business and results and could have a more material impact on our business, financial condition, and results of operations.
The ongoing COVID-19 global and national health emergency has caused significant disruption in the United States and international economies and financial markets. The spread of COVID-19 has caused illness, quarantines, cancellation of events and travel, business and school shutdowns, reduction in commercial activity and financial transactions, supply chain interruptions, increased unemployment, and overall economic and financial market instability. Many states, including Connecticut, where we are headquartered, and New York, Massachusetts, Rhode Island, and Wisconsin, in which we have significant operations declared states of emergency and have begun phased re-openings.
Although Webster Bank continued operating, the COVID-19 pandemic has caused disruptions to our business and could cause material disruptions to our business and operations in the future. Impacts to our business, requiring implementation of new processes in a short period of time, have included decreases in customer traffic in our retail branch locations, shifting transactions at branches to drive through or by appointment only, the transition of a significant portion of our workforce to remote locations from home, increases in requests for forbearance and loan modifications, and additional health and safety precautions implemented at all physical locations. To the extent that commercial and social restrictions remain in place or increase, our delinquencies, foreclosures, and credit losses may materially increase and we could experience reductions in fee income as transaction volumes decline.
Unfavorable economic conditions may also make it more difficult for us to maintain deposit levels and loan origination volume and to obtain additional financing. Furthermore, such conditions have and may continue to cause the value of collateral associated with our existing loans to decline. The persistence or worsening of current economic conditions could also adversely affect certain risks related to our accounting estimates, as described within the Use of Estimates section of Management’s Discussion and Analysis within this document.
In addition, in March 2020, the Federal Reserve lowered the target range for the federal funds rate to a range from 0 to 0.25 percent in part as a result of the pandemic. A prolonged period of very low interest rates could have a material adverse impact on our interest income and the market value of our investments. Refer to Asset/Liability Management and Market Risk section in the Management’s Discussion and Analysis within this document for more information regarding the impact of the interest rate environment.
While we have taken and are continuing to take actions to protect the safety and well-being of our employees, customers, including as local economies undergo phased re-openings, and communities, no assurance can be given that the steps being taken will be adequate or appropriate. The continued or renewed spread of COVID-19 could negatively impact the availability of key personnel necessary to conduct our business, the business and operations of our third-party service providers who perform critical services for our business, or the businesses of many of our customers and borrowers. In addition, as a result of the pandemic and the related increase in remote working by our personnel and the personnel of other companies, the risk of cyber-attacks, breaches or similar events, whether through our systems or those of third parties on which we rely, has increased.
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Among the factors outside our control that are likely to affect the impact the COVID-19 pandemic will ultimately have on our business are:
•the pandemic’s course and severity;
•the direct and indirect results of the pandemic, such as recessionary economic trends, including with respect to employment, wages and benefits, commercial activity, consumer spending and real estate market values;
•political, legal and regulatory actions and policies in response to the pandemic, including the effects of restrictions on commerce and banking, such as dividends, moratorium and other suspension of collections, foreclosure, and related obligations;
•the timing, magnitude and effect of public spending, directly or through subsidies, its direct and indirect effects on commercial activity and incentives of employers and individuals to resume or increase employment, wages and benefits and commercial activity;
•the timing and availability of direct and indirect governmental support for various financial assets, including mortgage loans;
•the potential impact of changes in medical spending and unemployment on our HSA business and related deposits;
•the long-term effect of the economic downturn on the value of our assets and related accounting estimates;
•potential longer-term effects of increased government spending on the interest rate environment and borrowing costs for non-governmental parties;
•the ability of our employees and our third-party vendors to work effectively during the course of the pandemic;
•potential longer-term shifts toward mobile banking, telecommuting and telecommerce; and
•geographic variation in the severity and duration of the COVID-19 pandemic, including in states in which we operate physically such as Connecticut, New York, Massachusetts, Rhode Island and Wisconsin.
The ongoing COVID-19 pandemic has resulted in severe volatility in the financial markets and meaningfully lower stock prices for many companies, including our common stock. Depending on the extent and duration of the COVID-19 pandemic, the price of our common stock may continue to experience volatility and declines.
We are continuing to monitor the COVID-19 pandemic and related risks, although the rapid development and fluidity of the situation precludes any specific prediction as to its ultimate impact on us. However, if the pandemic continues to spread or otherwise result in a continuation or worsening of the current economic and commercial environments, our business, financial condition, results of operations and cash flows could be materially adversely affected.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
The following table provides information with respect to any purchase of equity securities of Webster Financial Corporation's common stock made by or on behalf of Webster or any "affiliated purchaser," as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934, during the three months ended June 30, 2020:
Period
Total
Number of
Shares
Purchased (1)
Average Price
Paid
Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
Maximum
Dollar Amount Available for Repurchase
Under the Plans
or Programs (2)
April560  $23.29  —  $123,443,785  
May869  24.61  —  123,443,785  
June836  29.65  —  123,443,785  
Total2,265  26.14  —  123,443,785  
(1)During the three months ended June 30, 2020, the total number of shares purchased were acquired outside of the repurchase program at market prices and related to stock compensation plan activity.
(2)Webster maintains a common stock repurchase program which authorizes management to purchase shares of its common stock, in open market or privately negotiated transactions, subject to market conditions and other factors. On October 29, 2019, the Company announced that its Board of Directors approved a modification to this program, originally approved on October 24, 2017, increasing the maximum dollar amount available for repurchase to $200 million. This program will remain in effect until fully utilized or until modified, superseded, or terminated. Given the current economic environment, the Company does not expect to continue repurchases under the common stock repurchase program until further notice.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable
ITEM 5. OTHER INFORMATION
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Not applicable
ITEM 6. EXHIBITS
The following is the exhibit index.

Exhibit Number
Exhibit Description
Exhibit Included
Incorporated by Reference
Form
Exhibit
Filing Date
3
Certificate of Incorporation and Bylaws.
3.1
10-Q
3.1
8/9/2016
3.2
8-K
3.1
6/11/2008
3.3
8-K
3.1
11/24/2008
3.4
8-K
3.1
7/31/2009
3.5
8-K
3.2
7/31/2009
3.6
8-A12B
3.3
12/4/2012
3.78-A12B3.312/12/2017
3.8
8-K
3.1
3/17/2020
31.1X
31.2X
32.1
X (1)
32.2
X (1)
101.INSXBRL 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.SCHXBRL Taxonomy Extension Schema DocumentX
101.CALXBRL Taxonomy Extension Calculation Linkbase DocumentX
101.DEFXBRL Taxonomy Extension Definitions Linkbase DocumentX
101.LABXBRL Taxonomy Extension Label Linkbase DocumentX
101.PREXBRL Taxonomy Extension Presentation Linkbase DocumentX
(1) 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.
75

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
WEBSTER FINANCIAL CORPORATION
Registrant
Date: August 4, 2020By:/s/ John R. Ciulla
John R. Ciulla
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
Date: August 4, 2020By:/s/ Glenn I. MacInnes
Glenn I. MacInnes
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
Date: August 4, 2020By:/s/ Albert J. Wang
Albert J. Wang
Senior Vice President and Chief Accounting Officer
(Principal Accounting Officer)

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