WEBSTER FINANCIAL CORPORATION



�	Years ended December 31,
(In thousands)	2017			�	2016		�	2015
Current:	�			�	�		�	�
Federal	$	96,364		�	$	73,194	�	$	97,575
State and local	11,061			�	5,429		�	10,970
Total current	107,425			�	78,623		�	108,545
Deferred:	�			�	�		�	�
Federal	39,568			�	12,542		�	(7,279		)
State and local	(48,642		)	�	5,158		�	(8,234		)
Total deferred	(9,074		)	�	17,700		�	(15,513		)
�	�			�	�		�	�
Total federal	135,932			�	85,736		�	90,296
Total state and local	(37,581		)	�	10,587		�	2,736
Income tax expense	$	98,351		�	$	96,323	�	$	93,032

The Company's deferred state and local benefit in 2017 includes $47.5 million related to a reduction in its beginning-of-year valuation allowance for SALT DTA's, or $37.5 million net of deferred federal expense of $10.0 million. The deferred state and local benefit in 2017 also includes $1.8 million from other SALT DTA adjustments, net of federal effects.

The Company's deferred federal expense in 2017 also includes $31.5 million from a re-measurement of its DTA upon the enactment of the Tax Act. Due to a $10.6 million impact of the Tax Act on the $39.3 million of net SALT DTA adjustments noted above, the Company reported a $20.9 million expense attributable to the Tax Act, and a $28.7 million net benefit from SALT DTAs, for a net benefit of $7.8 million in its results for the quarter ended December 31, 2017.

Included in the Company's income tax expense for the years ended December�31, 2017, 2016, and 2015, are benefits of operating loss carryforwards of $25.1 million, none, and $3.0 million, and net tax credits of $1.6 million, $1.0 million, and $2.1 million, respectively, exclusive of Tax Act impacts.



�	Years ended December 31,
�	2017					�	2016					�	2015
(Dollars in thousands)	Amount			Percent		�	Amount			Percent		�	Amount			Percent
Income tax expense at federal statutory rate	$	123,826		35.0	�%	�	$	106,208		35.0	�%	�	$	104,217		35.0	�%
Reconciliation to reported income tax expense:	�			�		�	�			�		�	�			�
SALT expense, net of federal	8,189			2.3		�	6,882			2.3		�	7,563			2.5
Tax-exempt interest income, net	(10,826		)	(3.1	)	�	(8,917		)	(2.9	)	�	(7,117		)	(2.4	)
SALT DTA adjustments, net of federal	(28,724		)	(8.1	)	�	�			�		�	(5,785		)	(1.9	)
Tax Act impacts, net	20,891			5.9		�	�			�		�	�			�
Excess tax benefits, net	(6,349		)	(1.8	)	�	�			�		�	�			�
Increase in cash surrender value of life insurance	(5,120		)	(1.4	)	�	(5,166		)	(1.7	)	�	(4,557		)	(1.5	)
Other, net	(3,536		)	(1.0	)	�	(2,684		)	(1.0	)	�	(1,289		)	(0.5	)
Income tax expense and effective tax rate	$	98,351		27.8	�%	�	$	96,323		31.7	�%	�	$	93,032		31.2	�%



��	At December 31,
(In thousands)	2017			�	2016
Deferred tax assets:	�			�	�
Allowance for loan and lease losses	$	51,203		�	$	77,908
Net operating loss and credit carry forwards	71,813			�	64,644
Compensation and employee benefit plans	25,023			�	46,433
Net losses on derivative instruments	3,767			�	8,624
Net unrealized loss on securities available for sale	9,548			�	9,898
Other	12,273			�	17,682
Gross deferred tax assets	173,627			�	225,189
Valuation allowance	(38,292		)	�	(71,474		)
Total deferred tax assets, net of valuation allowance	$	135,335		�	$	153,715
Deferred tax liabilities:	�			�	�
Equipment-financing leases	$	27,955		�	$	41,910
Deferred income on repurchase of debt	1,275			�	4,251
Intangible assets	6,164			�	9,952
Mortgage servicing assets	4,445			�	7,313
Other	2,866			�	5,898
Gross deferred tax liabilities	42,705			�	69,324
Deferred tax assets, net	$	92,630		�	$	84,391

The $38.3 million valuation allowance at December�31, 2017 consisted of $38.2 million attributable to SALT net operating loss carryforwards and $0.1 million to a capital loss carryforward. The $33.2 million net decrease in the valuation allowance includes: (i) a $27.0 million reduction in the beginning-of-year valuation allowance applicable to a change in the estimated realizability of SALT DTAs in future years, (ii) a $3.5 million decrease applicable to the estimated utilization and expiration of capital loss carryforwards of $2.1 million and $1.4 million, respectively, and (iii) a $2.7 million net decrease in SALT net DTAs, including Tax Act-related impacts.

The reduction in the Company's valuation allowance for SALT DTAs noted above resulted from the completion of a review of its current and projected multi-jurisdictional SALT structure reflecting Webster's continued business expansion and growth. In connection with the review, an evaluation of the Company's net SALT DTAs, including valuation allowances previously established for DTAs not expected to be realized, was performed and a change in their estimated realizability was recognized.

Management believes it is more likely than not that the results of future operations will generate sufficient taxable income to realize its total DTA, net of the valuation allowance. Although taxable income in prior years is no longer able to be included as a source of taxable income, due to the general repeal of the carryback of net operating losses under the Tax Act, significant positive evidence remains in support of management's conclusion regarding the realizability of Webster's DTAs, including projected future reversals of existing taxable temporary differences and book-taxable income levels in recent and projected future years. There can, however, be no assurance that any specific level of future income will be generated or that the Company�s DTAs will ultimately be realized.

A capital loss carryforward of $1.1 million exists at December�31, 2017 and is scheduled to expire in 2018. A valuation allowance of $0.1 million has been established for the $0.4 million portion of the carryforward scheduled to expire.

SALT net operating loss carryforwards approximating $1.2 billion at December�31, 2017 are scheduled to expire in varying amounts during tax years 2023 through 2032, and credits, totaling $0.8 million at December�31, 2017, have a five-year carryover period, with excess credits subject to expiration annually. A valuation allowance of $38.2 million has been established for approximately $644 million of those net operating loss carryforwards estimated to expire.

A deferred tax liability of $14.9 million has not been recognized for certain thrift bad-debt reserves, established before 1988, that would become taxable upon the occurrence of certain events: distributions by Webster Bank in excess of certain earnings and profits; the redemption of Webster Bank�s stock; or liquidation. Webster does not expect any of those events to occur. At December�31, 2017 the cumulative taxable temporary differences applicable to those reserves approximated $58.0 million.



�	Years ended December 31,
(In thousands)	2017			�	2016			�	2015
Beginning balance	$	3,847		�	$	5,094		�	$	4,593
Additions as a result of tax positions taken during the current year	584			�	613			�	865
Additions as a result of tax positions taken during prior years	7			�	�			�	1,254
Reductions as a result of tax positions taken during prior years	(61		)	�	(625		)	�	(247		)
Reductions relating to settlements with taxing authorities	(392		)	�	(693		)	�	(992		)
Reductions as a result of lapse of statute of limitation periods	(390		)	�	(542		)	�	(379		)
Ending balance	$	3,595		�	$	3,847		�	$	5,094

Webster recognizes interest and penalties related to UTBs, where applicable, in income tax expense. During the years ended December�31, 2017, 2016, and 2015, Webster recognized an expense of $0.2 million, a benefit of $0.2 million, and an expense of $1.1 million, respectively. At December�31, 2017 and 2016, the Company had accrued interest and penalties related to UTBs of $1.9 million and $1.7 million, respectively.

Webster has determined it is reasonably possible that its total UTBs could decrease by an amount in the range of $0.6 million to $1.8 million by the end of 2018, primarily as a result of potential settlements with state and local taxing authorities concerning apportionment and tax-base determinations and/or potential lapses in statute-of-limitation periods.