Webster Financial Earnings 2020-03-31

Balance Sheet	Income Statement	Cash Flow
Assets, Equity	Rev, G Profit, Net Income	Ops, Inv, Fin

wbs-20200331

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_______________________________________________________________________________

FORM 10-Q

_________________________________________________________________________________________________________________________________________-___________________________________________________________________________________________________

☒ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ending March 31, 2020

☐ 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 class	Trading Symbols	Name of Exchange on which registered
Common Stock, $0.01 par value	WBS	New York Stock Exchange
Depository Shares, each representing 1/1000th interest in a share	WBS PrF	New 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 April 30, 2020 was 90,169,710.

INDEX


		Page No.

Forward-Looking Statements			ii
Key to Acronyms and Terms			iii

PART I – FINANCIAL INFORMATION

Item 1.	Financial Statements	29

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	68

Item 4.	Controls and Procedures	68

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	69

Item 1A.	Risk Factors	69

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	70

Item 3.	Defaults Upon Senior Securities	71

Item 4.	Mine Safety Disclosures	71

Item 5.	Other Information	71

Item 6.	Exhibits	71

EXHIBIT INDEX			71

SIGNATURES			72

Table of Contents

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 taxes, banking, 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; and

▪legal and regulatory developments including the resolution of legal proceedings or regulatory or other governmental inquiries and the results of regulatory examinations or reviews.

All forward-looking statements in this Quarterly Report on Form 10-Q speak only as of the date they are made. Factors or events that could cause the Company’s actual results to differ may emerge from time to time, and it is not possible for the Company to predict all of them. The Company undertakes no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments, or otherwise, except as may be required by law.

Table of Contents

WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES

KEY TO ACRONYMS AND TERMS


ACL			Allowance for credit losses
Agency CMO			Agency collateralized mortgage obligations
Agency MBS			Agency mortgage-backed securities
ALCO			Asset/Liability Committee
AOCL			Accumulated other comprehensive loss, net of tax
ASC			Accounting Standards Codification
ASU or the Update			Accounting Standards Update
Basel III			Capital rules under a global regulatory framework developed by the Basel Committee on Banking Supervision
CARES Act			The Coronavirus Aid, Relief, and Economic Security Act
CECL			Current expected credit losses
CET1 capital			Common Equity Tier 1 Capital, defined by Basel III capital rules
CFPB			Consumer Financial Protection Bureau
CLO			Collateralized loan obligation securities
CMBS			Commercial mortgage-backed securities
CME			Chicago Mercantile Exchange
CRA			Community Reinvestment Act
DTA			Deferred tax asset
FASB			Financial Accounting Standards Board
FDIC			Federal Deposit Insurance Corporation
FHFA			Federal 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
GDP			Gross domestic product
Holding Company			Webster Financial Corporation
HSA Bank			A division of Webster Bank, National Association

LGD			Loss given default
LPL			LPL Financial Holdings Inc.
NAV			Net asset value
NII			Net interest income
NOL			Net operating loss
OCC			Office of the Comptroller of the Currency
OCI/OCL			Other comprehensive income (loss)
OREO			Other real estate owned
PD			Probability of default
PPNR			Pretax, pre-provision net revenue
PPP			Small Business Administration Paycheck Protection Program
ROU asset			Right-of-use asset
RPA			Risk participation agreement
SEC			United States Securities and Exchange Commission
SERP			Supplemental defined benefit retirement plan
TDR			Troubled debt restructuring, defined in ASC 310-40 "Receivables-Troubled Debt Restructurings by Creditors"
VIE			Variable interest entity, defined in ASC 810-10 "Consolidation-Overall"
Webster Bank			Webster Bank, National Association, a wholly-owned subsidiary of Webster Financial Corporation
Webster or the Company			Webster Financial Corporation, collectively with its consolidated subsidiaries

iii

Table of Contents

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 months ended March 31, 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

COVID-19

During the first quarter of 2020, a global health pandemic known as COVID-19, or the Coronavirus, emerged, which has caused significant disruptions in the U.S. economy and has 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 is taking the following steps to operate through this crisis, including:

•Support for our Employees: 75% of Webster bankers are currently working remotely, special pay considerations and additional paid time off have been implemented for essential front line employees, no employees have been furloughed, bankers are at 100% pay, and zero-interest loans up to $5,000 are available to assist employees and their families facing unforeseen challenges due to COVID-19;

•Support for Individuals and Businesses: Webster instituted a 90-day foreclosure moratorium on residential loans, increased deposit limits, is waiving penalties for early CD withdrawals, waiving or reducing certain fees, not reporting payment deferrals to credit bureaus, participating in the SBA Paycheck Protection Program with approximately $1.4 billion in approved SBA loan applications, and addressing payment modifications (needs based / COVID-19 related impact);

•Support for the Communities We Serve: Webster is providing more than $375,000 in donations for urgent basic needs including to Feeding America, American Red Cross, and United Way (CT, RI, MA, NY, WI), and re-targeting existing sponsorships and grants to nonprofits to support COVID-19 related activities including Masks for Heroes, Junior Achievement, and Governor's Prevention Partnership.

Additional information regarding the effects and potential effects of the ongoing coronavirus pandemic on our 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 three months ended March 31, 2020 have been significantly impacted by the COVID-19 pandemic. The economic environment and uncertainty related to the pandemic contributed to the $76.0 million provision for credit losses recognized during the three months ended March 31, 2020 under the new CECL accounting standard adopted by the Company on January 1, 2020. While the Company has not yet experienced charge-offs related to the COVID-19 pandemic, 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 defer payments, interest, and fees. Additionally, net interest margin may be 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 March 31,
(In thousands, except per share and ratio data)	2020			2019
Earnings:
Net interest income	$	230,801		$	241,551
Provision for credit losses	76,000			8,600
Total non-interest income	73,378			68,612
Total non-interest expense	178,836			175,686
Net income	38,199			99,736
Earnings applicable to common shareholders	36,021			97,549
Share Data:
Weighted-average common shares outstanding - diluted	91,206			92,225
Diluted earnings per common share	$	0.39		$	1.06
Dividends and dividend equivalents declared per common share	0.40			0.33
Dividends declared per Series F preferred share	328.13			328.13
Book value per common share	32.66			30.62
Tangible book value per common share ^(non-GAAP)	26.46			24.51
Selected Ratios:
Net interest margin	3.23		%	3.74		%
Return on average assets ^{(annualized basis)}	0.50			1.44
Return on average common shareholders' equity ^{(annualized basis)}	4.75			14.01
CET1 risk-based capital	10.95			11.46
Tangible common equity ratio ^(non-GAAP)	7.67			8.16
Return on average tangible common shareholders' equity ^{(annualized basis) (non-GAAP)}	5.95			17.70
Efficiency ratio ^(non-GAAP)	58.03			55.93

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.

The following tables reconcile the non-GAAP financial measures with financial measures defined by GAAP:


	At March 31,
(Dollars and shares in thousands, except per share data)	2020			2019
Tangible book value per common share (non-GAAP):
Shareholders' equity (GAAP)	$	3,090,242		$	2,966,255
Less: Preferred stock (GAAP)	145,037			145,037
Goodwill and other intangible assets (GAAP)	559,328			563,176
Tangible common shareholders' equity (non-GAAP)	$	2,385,877		$	2,258,042
Common shares outstanding	90,172			92,125
Tangible book value per common share (non-GAAP)	$	26.46		$	24.51

Tangible common equity ratio (non-GAAP):
Tangible common shareholders' equity (non-GAAP)	$	2,385,877		$	2,258,042
Total assets (GAAP)	$	31,654,874		$	28,238,129
Less: Goodwill and other intangible assets (GAAP)	559,328			563,176
Tangible assets (non-GAAP)	$	31,095,546		$	27,674,953
Tangible common equity ratio (non-GAAP)	7.67		%	8.16		%


	Three months ended March 31,
(Dollars in thousands)	2020			2019
Return on average tangible common shareholders' equity (non-GAAP):
Net income (GAAP)	$	38,199		$	99,736
Less: Preferred stock dividends (GAAP)	1,969			1,969
Add: Intangible assets amortization, tax-affected (GAAP)	760			760
Income adjusted for preferred stock dividends and intangible assets amortization (non-GAAP)	$	36,990		$	98,527
Income adjusted for preferred stock dividends and intangible assets amortization, annualized basis (non-GAAP)	$	147,960		$	394,108
Average shareholders' equity (non-GAAP)	$	3,193,525		$	2,935,653
Less: Average preferred stock (non-GAAP)	145,037			145,037
Average goodwill and other intangible assets (non-GAAP)	559,786			563,646
Average tangible common shareholders' equity (non-GAAP)	$	2,488,702		$	2,226,970
Return on average tangible common shareholders' equity (non-GAAP)	5.95		%	17.70		%

Efficiency ratio (non-GAAP):
Non-interest expense (GAAP)	$	178,836		$	175,686
Less: Foreclosed property activity (GAAP)	(250)			(253)
Intangible assets amortization (GAAP)	962			962
Other expense (non-GAAP) ⁽¹⁾	—			7
Non-interest expense (non-GAAP)	$	178,124		$	174,970
Net interest income (GAAP)	$	230,801		$	241,551
Add: Tax-equivalent adjustment (non-GAAP)	2,473			2,338
Non-interest income (GAAP)	73,378			68,612
Other income (non-GAAP) ⁽²⁾	299			342
Less: Gain on sale of investment securities, net (GAAP)	8			—

Income (non-GAAP)	$	306,943		$	312,843
Efficiency ratio (non-GAAP)	58.03		%	55.93		%

(1)Other expense (non-GAAP) includes facility optimization charges.

(2)Other income (non-GAAP) includes low income housing tax credits.

Financial Performance

For the three months ended March 31, 2020, net income of $38.2 million decreased $61.5 million, or 61.7%, from the three months ended March 31, 2019, primarily due to an increase in the provision for credit losses of $67.4 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 $10.8 million, while non-interest income increased $4.8 million, and non-interest expense increased $3.2 million, resulting in a non-GAAP efficiency ratio of 58.0%.

Earnings applicable to common shareholders of $36.0 million and diluted earnings per share of $0.39 decreased for the three months ended March 31, 2020 compared to earnings applicable to common shareholders of $97.5 million and diluted earnings per share of $1.06 for the three months ended March 31, 2019.

The following table presents daily average balances, interest, yield/rate, and net interest margin on a fully tax-equivalent basis:


	Three months ended March 31,
	2020										2019
(Dollars in thousands)	Average Balance		Interest		Yield/ Rate		Average Balance		Interest		Yield/ Rate

Assets
Interest-earning assets:
Loans and leases	$	20,324,799	$	216,918	4.24	%	$	18,509,174	$	229,385	4.96	%
Investment Securities	8,319,747		58,408		2.85		7,308,946		56,954		3.09
FHLB and FRB stock	126,364		1,251		3.98		113,016		1,712		6.14
Interest-bearing deposits	68,307		191		1.11		55,372		329		2.37
Securities	8,514,418		59,850		2.86		7,477,334		58,995		3.13
Loans held for sale	22,297		175		3.14		13,451		148		4.40
Total interest-earning assets	28,861,514		$	276,943	3.84	%	25,999,959		$	288,528	4.43	%
Non-interest-earning assets	1,930,996						1,795,430
Total Assets	$	30,792,510					$	27,795,389

Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Demand deposits	$	4,516,906	$	—	—	%	$	4,191,870	$	—	—	%
Health savings accounts	6,761,358		3,296		0.20		6,140,062		2,949		0.19
Interest-bearing checking, money market and savings	9,716,974		12,403		0.51		8,958,522		12,793		0.58
Time deposits	3,067,557		12,144		1.59		3,244,714		15,278		1.91
Total deposits	24,062,795		27,843		0.47		22,535,168		31,020		0.56

Securities sold under agreements to repurchase and other borrowings	1,296,925		3,730		1.14		597,107		2,752		1.84
FHLB advances	1,325,899		6,869		2.05		1,119,035		7,785		2.78
Long-term debt	551,250		5,227		4.00		249,169		3,082		4.95
Total borrowings	3,174,074		15,826		2.00		1,965,311		13,619		2.77
Total interest-bearing liabilities	27,236,869		$	43,669	0.64	%	24,500,479		$	44,639	0.74	%
Non-interest-bearing liabilities	362,116						359,257
Total liabilities	27,598,985						24,859,736

Preferred stock	145,037						145,037
Common shareholders' equity	3,048,488						2,790,616
Total shareholders' equity	3,193,525						2,935,653
Total Liabilities and Shareholders' Equity	$	30,792,510					$	27,795,389
Tax-equivalent net interest income			$	233,274					$	243,889
Less: Tax-equivalent adjustments			(2,473)						(2,338)
Net interest income			$	230,801					$	241,551
Net interest margin					3.23	%					3.74	%

(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.

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 75.9% of total revenue for the three months ended March 31, 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 March 31, 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 0.70% at March 31, 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

Net interest income totaled $230.8 million for the three months ended March 31, 2020 as compared to $241.6 million for the three months ended March 31, 2019, a decrease of $10.8 million. On a fully tax-equivalent basis, net interest income decreased $10.6 million when compared to 2019.

Net interest margin decreased 51 basis points to 3.23% for the three months ended March 31, 2020 from 3.74% for the three months ended March 31, 2019. The decrease for the three months ended March 31, 2020 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 March 31,
	2020 vs. 2019 Increase (decrease) due to
(In thousands)	Rate ⁽¹⁾		Volume		Total
Interest on interest-earning assets:
Loans and leases	$	(33,035)	$	20,568	$	(12,467)
Loans held for sale	(61)		88		27
Securities ⁽²⁾	(7,244)		8,099		855
Total interest income	$	(40,340)	$	28,755	$	(11,585)
Interest on interest-bearing liabilities:
Deposits	$	(3,725)	$	548	$	(3,177)
Borrowings	(6,262)		8,469		2,207
Total interest expense	$	(9,987)	$	9,017	$	(970)
Net change in net interest income	$	(30,353)	$	19,738	$	(10,615)

(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, Federal Home Loan Bank (FHLB) and Federal Reserve Bank (FRB) stock, and interest-bearing deposits.

Average loans and leases for the three months ended March 31, 2020 increased $1.8 billion compared to the average for the three months ended March 31, 2019. The loan and lease portfolio comprised 70.4% of the average interest-earning assets at March 31, 2020 compared to 71.2% of the average interest-earning assets at March 31, 2019. The loan and lease portfolio yield decreased 72 basis points to 4.24% for the three months ended March 31, 2020 compared to 4.96% for the three months ended March 31, 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 commercial loan growth at a lower yield.

Average securities for the three months ended March 31, 2020 increased $1.0 billion compared to the average for the three months ended March 31, 2019. The securities portfolio comprised 29.5% of the average interest-earning assets at March 31, 2020 compared to 28.8% of the average interest-earning assets at March 31, 2019. The securities portfolio yield decreased 27 basis points to 2.86% for the three months ended March 31, 2020 compared to 3.13% for the three months ended March 31, 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 three months ended March 31, 2020 increased $1.5 billion compared to the average for the three months ended March 31, 2019. The increase was driven by health savings accounts and transactional deposit products. The average cost of deposits decreased 9 basis points to 0.47% for the three months ended March 31, 2020 from 0.56% for the three months ended March 31, 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 15.7% for the three months ended March 31, 2020 from 17.7% for the three months ended March 31, 2019, as a percentage of total interest-bearing deposits.

Average total borrowings for the three months ended March 31, 2020 increased $1.2 billion compared to the average for the three months ended March 31, 2019. Average securities sold under agreements to repurchase and other borrowings increased $699.8 million, and average FHLB advances increased $206.9 million. The Company completed an underwritten public offering of $300 million senior fixed-rate notes on March 25, 2019. The debt did not have a significant impact on the average balance, or cost, of borrowings for the three months ended March 31, 2019 given the timing of its issuance. The average cost of borrowings decreased 77 basis points to 2.00% for the three months ended March 31, 2020 from 2.77% for the three months ended March 31, 2019. The decrease in the average cost of borrowings was largely a result of changes in the federal funds rate.

Provision for Credit Losses

The provision for credit losses was $76.0 million for the three months ended March 31, 2020, which increased by $67.4 million compared to the three months ended March 31, 2019. The increase in provision for credit losses is primarily the result of the impact of COVID-19 on our allowance for credit losses. Total net charge-offs was $7.8 million and $9.6 million for the three months ended March 31, 2020 and 2019, respectively. Allowance for credit losses on loan and leases coverage increased to 1.60% at March 31, 2020 from 1.04% at December 31, 2019.

See the sections captioned "Loans and Leases" through "Troubled Debt Restructurings," contained elsewhere in the report for further details.

Non-Interest Income


	Three months ended March 31,
									Increase (decrease)
(Dollars in thousands)	2020		2019		Amount		Percent
Deposit service fees	$	42,570	$	43,024	$	(454)	(1.1)	%
Loan and lease related fees	6,496		7,819		(1,323)		(16.9)
Wealth and investment services	8,739		7,651		1,088		14.2
Mortgage banking activities	2,893		764		2,129		278.7
Increase in cash surrender value of life insurance policies	3,580		3,584		(4)		(0.1)
Gain on sale of investment securities, net	8		—		8		100.0

Other income	9,092		5,770		3,322		57.6
Total non-interest income	$	73,378	$	68,612	$	4,766	6.9

Comparison to Prior Year Quarter

Total non-interest income was $73.4 million for the three months ended March 31, 2020, an increase of $4.8 million from the three months ended March 31, 2019. The increase was primarily attributable to higher wealth and investment services, mortgage banking, and other income somewhat offset by lower loan and lease related fees.

Loan and lease related fees totaled $6.5 million for the three months ended March 31, 2020, compared to $7.8 million for the three months ended March 31, 2019. The decrease was primarily due to lower prepayment fees.

Wealth and investment services totaled $8.7 million for the three months ended March 31, 2020, compared to $7.7 million for the three months ended March 31, 2019. The increase was a result of higher transaction volume.

Mortgage banking activities totaled $2.9 million for the three months ended March 31, 2020, compared to $0.8 million for the three months ended March 31, 2019. The increase was a result of higher origination volume due to a lower mortgage interest rate environment.

Other income totaled $9.1 million for the three months ended March 31, 2020, compared to $5.8 million for the three months ended March 31, 2019. The increase was primarily due to the mark-to-market on client interest rate hedging.

Non-Interest Expense


	Three months ended March 31,
									Increase (decrease)
(Dollars in thousands)	2020		2019		Amount		Percent
Compensation and benefits	$	101,887	$	97,785	$	4,102	4.2	%
Occupancy	14,485		14,696		(211)		(1.4)
Technology and equipment	27,837		25,697		2,140		8.3
Intangible assets amortization	962		962		—		—
Marketing	3,502		3,328		174		5.2
Professional and outside services	5,663		6,048		(385)		(6.4)
Deposit insurance	4,725		4,430		295		6.7
Other expense	19,775		22,740		(2,965)		(13.0)
Total non-interest expense	$	178,836	$	175,686	$	3,150	1.8

Comparison to Prior Year Quarter

Total non-interest expense was $178.8 million for the three months ended March 31, 2020, an increase of $3.2 million, from the three months ended March 31, 2019. The increase was primarily attributable to increases in compensation and benefits and technology and equipment, partially offset by lower other expense.

Compensation and benefits totaled $101.9 million for the three months ended March 31, 2020, compared to $97.8 million for the three months ended March 31, 2019. The increase was a result of annual merit increases and temporary help partially offset by lower variable-based compensation.

Technology and equipment totaled $27.8 million for the three months ended March 31, 2020, compared to $25.7 million for the three months ended March 31, 2019. The increase was a result of continued infrastructure investment.

Other expense totaled $19.8 million for the three months ended March 31, 2020, compared to $22.7 million for the three months ended March 31, 2019. The decrease was primarily due to decreased pension costs and a decrease in the reserve for unfunded commitments due to an increase in commitment line draws.

Table of Contents

Income Taxes

Webster recognized income tax expense of $11.1 million, reflecting an effective tax rate of 22.6%, for the three months ended March 31, 2020, compared to $26.1 million, reflecting an effective tax rate of 20.8%, for the three months ended March 31, 2019.

The decrease in tax expense is due to the lower level of pre-tax income for the three months ended March 31, 2020 as compared to the same period in 2019. The increase in the effective tax rate for the three months ended March 31, 2020 as compared to the same period in 2019 reflects the recognition of $2.2 million of net tax benefits specific to the 2019 period, including $2.4 million of excess tax benefits from stock-based compensation.

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.

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. 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 or

Price	45.59	EPS	4
Shares	92	P/E	11
MCap	4,189	P/FCF	32
Net Debt	246	EBIT	688
TEV	4,435	TEV/EBIT	6
TTM 2019-09-30, in MM, except price, ratios

10-Q	2020-03-31	Filed 2020-05-08
10-K	2019-12-31	Filed 2020-02-28
10-Q	2019-09-30	Filed 2019-11-01
10-Q	2019-06-30	Filed 2019-08-05
10-Q	2019-03-31	Filed 2019-05-07
10-K	2018-12-31	Filed 2019-03-01
10-Q	2018-09-30	Filed 2018-11-05
10-Q	2018-06-30	Filed 2018-08-03
10-Q	2018-03-31	Filed 2018-05-07
10-K	2017-12-31	Filed 2018-03-01
10-Q	2017-09-30	Filed 2017-11-06
10-Q	2017-06-30	Filed 2017-08-04
10-Q	2017-03-31	Filed 2017-05-05
10-K	2016-12-31	Filed 2017-03-01
10-Q	2016-09-30	Filed 2016-11-07
10-Q	2016-06-30	Filed 2016-08-09
10-Q	2016-03-31	Filed 2016-05-09
10-K	2015-12-31	Filed 2016-02-29
10-Q	2015-09-30	Filed 2015-11-05
10-Q	2015-06-30	Filed 2015-08-07
10-Q	2015-03-31	Filed 2015-05-08
10-K	2014-12-31	Filed 2015-02-27
10-Q	2014-09-30	Filed 2014-11-05
10-Q	2014-06-30	Filed 2014-08-06
10-Q	2014-03-31	Filed 2014-05-07
10-K	2013-12-31	Filed 2014-02-28
10-Q	2013-09-30	Filed 2013-11-05
10-Q	2013-06-30	Filed 2013-08-01
10-Q	2013-03-31	Filed 2013-05-06
10-K	2012-12-31	Filed 2013-02-28
10-Q	2012-09-30	Filed 2012-11-02
10-Q	2012-06-30	Filed 2012-08-01
10-Q	2012-03-31	Filed 2012-05-02
10-K	2011-12-31	Filed 2012-02-29
10-Q	2011-09-30	Filed 2011-11-02
10-Q	2011-06-30	Filed 2011-08-01
10-Q	2011-03-31	Filed 2011-05-05
10-K	2010-12-31	Filed 2011-02-28
10-Q	2010-09-30	Filed 2010-11-03
10-Q	2010-06-30	Filed 2010-08-03
10-Q	2010-03-31	Filed 2010-05-06
10-K	2009-12-31	Filed 2010-03-01

8-K	2020-07-23	Earnings, Regulation FD, Exhibits
8-K	2020-06-17
8-K	2020-04-23
8-K	2020-04-21
8-K	2020-04-03
8-K	2020-03-15
8-K	2020-02-14
8-K	2020-01-23
8-K	2020-01-23
8-K	2019-10-29
8-K	2019-10-22
8-K	2019-07-18
8-K	2019-04-25
8-K	2019-04-18
8-K	2019-03-25
8-K	2019-02-14
8-K	2019-01-24
8-K	2018-12-05
8-K	2018-11-08
8-K	2018-10-24
8-K	2018-10-18
8-K	2018-09-12
8-K	2018-07-19
8-K	2018-04-26
8-K	2018-04-19
8-K	2018-02-14
8-K	2018-01-23
8-K	2018-01-18

EX-31.1	exhibit31103312020-nex.htm
EX-31.2	exhibit31203312020-nex.htm
EX-32.1	exhibit32103312020-nex.htm
EX-32.2	exhibit32203312020-nex.htm

WBS 10Q Quarterly Report

Webster Financial Earnings 2020-03-31