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 September 30, 2017ended March 31, 2022
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 Bank200 Elm Street, Waterbury,Stamford, Connecticut 0670206902
(Address and zip code of principal executive offices)
(203) 578-2202
(Registrant's telephone number, including area code)
| | | | | | | | |
| Title of each class | Trading Symbols | Name of each exchange on which registered |
| Common Stock, par value $0.01 per share | WBS | New York Stock Exchange |
| Depositary 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 | | |
| Depositary Shares, each representing 1/40th interest in a share | WBS-PrG | New York Stock Exchange |
| of 6.50% Series G 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 and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted 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 and post 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”,filer,” “smaller reporting company”company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Large accelerated filerAccelerated 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 transactiontransition 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 Rule 12b-2 of the Exchange Act Rule 12b-2)Act). ☐Yes☑ ☒ No
TheAt April 29, 2022, the number of shares of common stock, par value $.01 per share, outstanding as of October 31, 2017 was 92,074,790.178,099,467.
INDEX
INDEX | | | | | | | | |
| | Page No. |
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| Key to Acronyms and Terms | |
| Forward-Looking Statements | |
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| | Page No. |
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Key to Acronyms and TermsItem 1. | | |
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Item 1.2. | | |
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Item 2. | | |
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| Item 3. | | |
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| Item 4. | | |
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| Item 1. | | |
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| Item 1A. | | |
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| Item 2. | | |
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| Item 3. | | |
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| Item 4. | | |
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| Item 5. | | |
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| Item 6. | Exhibits | | |
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| |
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| |
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
FOWARD-LOOKINGKEY TO ACRONYMS AND TERMS | | | | | |
| ACL | Allowance for credit losses |
| Agency CMBS | Agency commercial mortgage-backed securities |
| Agency CMO | Agency collateralized mortgage obligations |
| Agency MBS | Agency mortgage-backed securities |
| ALCO | Asset/Liability Committee |
| (AOCL) AOCI | Accumulated other comprehensive (loss) income |
| 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 |
| Bend | Bend Financial, Inc. |
| BHC Act | Bank Holding Company Act of 1956, as amended |
| 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 obligations |
| CMBS | Non-agency commercial mortgage-backed securities |
| COVID-19 | Coronavirus |
| DTA | Deferred tax asset |
| EAD | Exposure at default |
| FASB | Financial Accounting Standards Board |
| FDIC | Federal Deposit Insurance Corporation |
| 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 |
| Holding Company | Webster Financial Corporation |
| HSA | Health savings account |
| HSA Bank | HSA Bank, a division of Webster Bank, National Association |
| LGD | Loss given default |
| LIHTC | Low income housing tax credit |
| NAV | Net asset value |
| OCC | Office of the Comptroller of the Currency |
| OREO | Other real estate owned |
| PD | Probability of default |
| PPNR | Pre-tax, pre-provision net revenue |
| PPP | Small Business Administration Paycheck Protection Program |
| ROU | Right-of-use |
| SALT | State and local tax |
| SEC | United States Securities and Exchange Commission |
| SERP | Supplemental executive defined benefit retirement plan |
| SOFR | Secured overnight financing rate |
| Sterling | Sterling Bancorp, collectively with its consolidated subsidiaries |
| TDR | Troubled debt restructuring, defined in ASC 310-40 "Receivables - Troubled Debt Restructurings by Creditors" |
| Webster Bank or the Bank | Webster Bank, National Association, a wholly-owned subsidiary of Webster Financial Corporation |
| Webster or the Company | Webster Financial Corporation, collectively with its consolidated subsidiaries |
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
FORWARD-LOOKING STATEMENTS and FACTORS THAT COULD AFFECT FUTURE RESULTS
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""estimates," and similar references to future periods; however, suchperiods. However, these 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, 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. |
▪projections of revenues, expenses, income or loss, earnings or loss per share, allowance for credit losses (ACL), expense savings, and other financial items;
▪statements of plans, objectives, and expectations of Webster Financial Corporation (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 theany forward-looking statements include, but are not limited to:
| |
▪ | local, regional, national and international economic conditions and the impact they may have on us and our customers and our assessment of that impact; |
| |
▪ | volatility and disruption in national and international financial markets; |
| |
▪ | government intervention in the U.S. financial system; |
| |
▪ | 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; |
| |
▪ | inflation, interest rate, securities market and monetary fluctuations; |
| |
▪ | the timely development and acceptance of new products and services and perceived overall value of these products and services by customers; |
| |
▪ | changes in consumer spending, borrowings and savings habits; |
| |
▪ | technological changes and cyber-security matters; |
| |
▪ | the ability to increase market share and control expenses; |
| |
▪ | changes in the competitive environment among banks, financial holding companies and other financial services providers; |
| |
▪ | the effect of changes in laws and regulations (including laws and regulations concerning taxes, banking, securities and insurance) with which we and our subsidiaries must comply, including the Dodd-Frank Act; |
| |
▪ | the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters; |
| |
▪ | the costs and effects of 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 success at managing the risks involved in the foregoing items. |
▪our ability to successfully integrate the operations of Webster and Sterling Bancorp (Sterling) and realize the anticipated benefits of the merger, including our ability to successfully complete our core conversion in the anticipated timeframe, and our ability to develop and successfully complete, if implemented, a plan to consolidate our corporate real estate;
▪our ability to successfully execute our business plan and strategic initiatives, and manage any risks or uncertainties;
▪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, Russia's invasion of Ukraine, or other unusual and infrequently occurring events, and any governmental or societal responses thereto;
▪changes in laws and regulations, including those concerning banking, taxes, dividends, securities, insurance, and healthcare, with which we and our subsidiaries must comply;
▪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 replacement of and transition from the London Interbank Offered Rate (LIBOR) to the Secured Overnight Financing Rate (SOFR) as the primary interest rate benchmark;
▪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;
▪the effects of any cyber threats, attacks or events, or fraudulent activity;
▪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 traditional and non-traditional financial services providers;
▪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;
▪the effect of changes in accounting policies and practices applicable to us, including impacts of 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 any environmental, social, governmental, and sustainability concerns that may arise from our business activities.
Any forward-looking statements made by the Companystatement in this Quarterly Report on Form 10-Q speaks only as of the date they areon which it is made. Factors or events that could cause the Company’sWebster's actual results to differ may emerge from time to time, and it is not possible for the Companyus to predict all of them. The CompanyWebster 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.
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
KEY TO ACRONYMS AND TERMS
|
| |
Agency CMBS | Agency commercial mortgage-backed securities |
Agency CMO | Agency collateralized mortgage obligations |
Agency MBS | Agency mortgage-backed securities |
ALCO | Asset/Liability Committee |
ALLL | Allowance for loan and lease losses |
AOCL | Accumulated other comprehensive loss, net of tax |
ASC | Accounting Standards Codification |
ASU | Accounting Standards Update |
Basel III | Capital rules under a global regulatory framework developed by the Basel Committee on Banking Supervision |
CDI | Core deposit intangible assets |
CET1 capital | Common Equity Tier 1 Capital, defined by Basel III capital rules |
CLO | Collateralized loan obligation securities |
CMBS | Non-agency commercial mortgage-backed securities |
Dodd-Frank Act | Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 |
FASB | Financial Accounting Standards Board |
FDIC | Federal Deposit Insurance Corporation |
FHLB | Federal Home Loan Bank |
FICO | Fair Isaac Corporation |
FINRA | Financial Industry Regulatory Authority |
FRB | Federal Reserve Bank |
FTP | Funds Transfer Pricing, a matched maturity funding concept |
GAAP | U.S. Generally Accepted Accounting Principles |
Holding Company | Webster Financial Corporation |
HSA Bank | A division of Webster Bank, National Association |
ISDA | International Swaps Derivative Association |
LBP | Look back period |
LEP | Loss emergence period |
LGD | Loss given default |
LIBOR | London Interbank Offered Rate |
LPL | LPL Financial Holdings Inc. |
NII | Net interest income |
OCC | Office of the Comptroller of the Currency |
OCI/OCL | Other comprehensive income (loss) |
OREO | Other real estate owned |
OTTI | Other-than-temporary impairment |
PD | Probability of default |
PPNR | Pre-tax, pre-provision net revenue |
RPA | Risk participation agreement |
SEC | United States Securities and Exchange Commission |
SERP | Supplemental defined benefit retirement plan |
SIPC | Securities Investor Protection Corporation |
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 |
PART I.I – FINANCIAL INFORMATION
ITEM 1.2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL STATEMENTSCONDITION AND RESULTS OF OPERATIONS
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS |
| | | | | | | |
| | September 30,
2017 | | December 31,
2016 |
| (In thousands, except share data) | (Unaudited) | | |
| Assets: | | | |
| Cash and due from banks | $ | 215,244 |
| | $ | 190,663 |
|
| Interest-bearing deposits | 26,992 |
| | 29,461 |
|
| Investment securities available-for-sale, at fair value | 2,591,162 |
| | 2,991,091 |
|
| Investment securities held-to-maturity (fair value of $4,481,675 and $4,125,125) | 4,497,311 |
| | 4,160,658 |
|
| Federal Home Loan Bank and Federal Reserve Bank stock | 136,340 |
| | 194,646 |
|
| Loans held for sale (valued under fair value option $32,855 and $60,260) | 32,855 |
| | 67,577 |
|
| Loans and leases | 17,446,421 |
| | 17,026,588 |
|
| Allowance for loan and lease losses | (201,803 | ) | | (194,320 | ) |
| Loans and leases, net | 17,244,618 |
| | 16,832,268 |
|
| Deferred tax assets, net | 82,895 |
| | 84,391 |
|
| Premises and equipment, net | 130,358 |
| | 137,413 |
|
| Goodwill | 538,373 |
| | 538,373 |
|
| Other intangible assets, net | 30,589 |
| | 33,674 |
|
| Cash surrender value of life insurance policies | 528,136 |
| | 517,852 |
|
| Accrued interest receivable and other assets | 295,309 |
| | 294,462 |
|
| Total assets | $ | 26,350,182 |
| | $ | 26,072,529 |
|
| Liabilities and shareholders' equity: | | | |
| Deposits: | | | |
| Non-interest-bearing | $ | 4,138,206 |
| | $ | 4,021,061 |
|
| Interest-bearing | 16,717,029 |
| | 15,282,796 |
|
| Total deposits | 20,855,235 |
| | 19,303,857 |
|
| Securities sold under agreements to repurchase and other borrowings | 902,902 |
| | 949,526 |
|
| Federal Home Loan Bank advances | 1,507,681 |
| | 2,842,908 |
|
| Long-term debt | 225,704 |
| | 225,514 |
|
| Accrued expenses and other liabilities | 219,873 |
| | 223,712 |
|
| Total liabilities | 23,711,395 |
| | 23,545,517 |
|
| Shareholders’ equity: | | | |
| Preferred stock, $.01 par value; Authorized - 3,000,000 shares: | | | |
| Series E issued and outstanding (5,060 shares) | 122,710 |
| | 122,710 |
|
| Common stock, $.01 par value; Authorized - 200,000,000 shares: | | | |
| Issued (93,679,599 and 93,651,601 shares) | 937 |
| | 937 |
|
| Paid-in capital | 1,123,685 |
| | 1,125,937 |
|
| Retained earnings | 1,535,585 |
| | 1,425,320 |
|
| Treasury stock, at cost (1,764,131 and 1,899,502 shares) | (75,032 | ) | | (70,899 | ) |
| Accumulated other comprehensive loss, net of tax | (69,098 | ) | | (76,993 | ) |
| Total shareholders' equity | 2,638,787 |
| | 2,527,012 |
|
| Total liabilities and shareholders' equity | $ | 26,350,182 |
| | $ | 26,072,529 |
|
SeeThis discussion and analysis provides information that management believes is necessary to understand the Company's financial condition, changes in financial condition, results of operations, and cash flows for the quarter ended March 31, 2022 as compared to 2021. The following discussion should be read in conjunction with Webster Financial Corporation's Consolidated Financial Statements, and accompanying Notes tothereto, for the year ended December 31, 2021, included in Webster Financial Corporation's Annual Report on Form 10-K filed with the United States Securities and Exchange Commission (SEC) on February 25, 2022, and in conjunction with the Condensed Consolidated Financial Statements.
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
|
| | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| (In thousands, except per share data) | 2017 | | 2016 | | 2017 | | 2016 |
| Interest Income: | | | | | | | |
| Interest and fees on loans and leases | $ | 181,130 |
| | $ | 157,071 |
| | $ | 523,394 |
| | $ | 459,050 |
|
| Taxable interest and dividends on investments | 43,819 |
| | 43,384 |
| | 136,167 |
| | 136,734 |
|
| Non-taxable interest on investment securities | 5,765 |
| | 4,820 |
| | 17,103 |
| | 13,691 |
|
| Loans held for sale | 307 |
| | 440 |
| | 826 |
| | 1,006 |
|
| Total interest income | 231,021 |
| | 205,715 |
| | 677,490 |
| | 610,481 |
|
| Interest Expense: | | | | | | | |
| Deposits | 16,760 |
| | 12,594 |
| | 44,874 |
| | 37,267 |
|
| Securities sold under agreements to repurchase and other borrowings | 3,847 |
| | 3,447 |
| | 10,970 |
| | 10,999 |
|
| Federal Home Loan Bank advances | 6,894 |
| | 6,979 |
| | 22,543 |
| | 21,517 |
|
| Long-term debt | 2,616 |
| | 2,498 |
| | 7,748 |
| | 7,444 |
|
| Total interest expense | 30,117 |
| | 25,518 |
| | 86,135 |
| | 77,227 |
|
| Net interest income | 200,904 |
| | 180,197 |
| | 591,355 |
| | 533,254 |
|
| Provision for loan and lease losses | 10,150 |
| | 14,250 |
| | 27,900 |
| | 43,850 |
|
| Net interest income after provision for loan and lease losses | 190,754 |
| | 165,947 |
| | 563,455 |
| | 489,404 |
|
| Non-interest Income: | | | | | | | |
| Deposit service fees | 38,321 |
| | 35,734 |
| | 113,519 |
| | 105,553 |
|
| Loan and lease related fees | 6,346 |
| | 9,253 |
| | 19,898 |
| | 20,563 |
|
| Wealth and investment services | 7,750 |
| | 7,593 |
| | 22,900 |
| | 21,992 |
|
| Mortgage banking activities | 2,421 |
| | 4,322 |
| | 8,038 |
| | 11,335 |
|
| Increase in cash surrender value of life insurance policies | 3,720 |
| | 3,743 |
| | 10,943 |
| | 11,060 |
|
| Gain on sale of investment securities, net | — |
| | — |
| | — |
| | 414 |
|
| Impairment loss on investment securities recognized in earnings | — |
| | — |
| | (126 | ) | | (149 | ) |
| Other income | 7,288 |
| | 5,767 |
| | 18,267 |
| | 23,093 |
|
| Total non-interest income | 65,846 |
| | 66,412 |
| | 193,439 |
| | 193,861 |
|
| Non-interest Expense: | | | | | | | |
| Compensation and benefits | 89,192 |
| | 83,148 |
| | 264,822 |
| | 244,089 |
|
| Occupancy | 14,744 |
| | 15,004 |
| | 46,957 |
| | 44,915 |
|
| Technology and equipment | 22,580 |
| | 19,753 |
| | 66,646 |
| | 59,067 |
|
| Intangible assets amortization | 1,002 |
| | 1,493 |
| | 3,085 |
| | 4,570 |
|
| Marketing | 4,045 |
| | 4,622 |
| | 14,101 |
| | 14,215 |
|
| Professional and outside services | 4,030 |
| | 4,795 |
| | 11,813 |
| | 11,360 |
|
| Deposit insurance | 6,344 |
| | 6,177 |
| | 19,701 |
| | 19,596 |
|
| Other expense | 19,886 |
| | 21,105 |
| | 62,901 |
| | 63,508 |
|
| Total non-interest expense | 161,823 |
| | 156,097 |
| | 490,026 |
| | 461,320 |
|
| Income before income tax expense | 94,777 |
| | 76,262 |
| | 266,868 |
| | 221,945 |
|
| Income tax expense | 30,281 |
| | 24,445 |
| | 81,322 |
| | 72,478 |
|
| Net income | 64,496 |
| | 51,817 |
| | 185,546 |
| | 149,467 |
|
| Preferred stock dividends and other | (2,070 | ) | | (2,183 | ) | | (6,284 | ) | | (6,540 | ) |
| Earnings applicable to common shareholders | $ | 62,426 |
| | $ | 49,634 |
| | $ | 179,262 |
| | $ | 142,927 |
|
| | | | | | | | |
| Earnings per common share: | | | | | | | |
| Basic | $ | 0.68 |
| | $ | 0.54 |
| | $ | 1.95 |
| | $ | 1.57 |
|
| Diluted | 0.67 |
| | 0.54 |
| | 1.94 |
| | 1.56 |
|
SeeStatements, and accompanying Notes to Condensed Consolidatedthereto, included in Item 1. Financial Statements. The results of operations for the three months ended March 31, 2022 are not necessarily indicative of the future results that may be attained for the entire year or other interim periods.
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
|
| | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| (In thousands) | 2017 | | 2016 | | 2017 | | 2016 |
| Net income | $ | 64,496 |
| | $ | 51,817 |
| | $ | 185,546 |
| | $ | 149,467 |
|
| Other comprehensive income, net of tax: | | | | | | | |
| Total securities available-for-sale and transferred | 872 |
| | 1,218 |
| | 1,847 |
| | 19,988 |
|
| Total derivative instruments | 1,111 |
| | 2,015 |
| | 2,921 |
| | 1,589 |
|
| Total defined benefit pension and other postretirement benefit plans | 1,001 |
| | 1,125 |
| | 3,127 |
| | 3,376 |
|
| Other comprehensive income, net of tax | 2,984 |
| | 4,358 |
| | 7,895 |
| | 24,953 |
|
| Comprehensive income | $ | 67,480 |
| | $ | 56,175 |
| | $ | 193,441 |
| | $ | 174,420 |
|
See accompanying Notes to Condensed Consolidated Financial Statements.
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited)Executive Summary
|
| | | | | | | | | | | | | | | | | | | | | |
| (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, 2016 | $ | 122,710 |
| $ | 937 |
| $ | 1,125,937 |
| $ | 1,425,320 |
| $ | (70,899 | ) | $ | (76,993 | ) | $ | 2,527,012 |
|
| Net income | — |
| — |
| — |
| 185,546 |
| — |
| — |
| 185,546 |
|
| Other comprehensive income, net of tax | — |
| — |
| — |
| — |
| — |
| 7,895 |
| 7,895 |
|
| Dividends and dividend equivalents declared on common stock $0.77 per share | — |
| — |
| 124 |
| (71,096 | ) | — |
| — |
| (70,972 | ) |
| Dividends paid on Series E preferred stock $1,200.00 per share | — |
| — |
| — |
| (6,072 | ) | — |
| — |
| (6,072 | ) |
| Stock-based compensation | — |
| — |
| — |
| 1,887 |
| 9,070 |
| — |
| 10,957 |
|
| Exercise of stock options | — |
| — |
| (2,376 | ) | — |
| 7,677 |
| — |
| 5,301 |
|
| Common shares acquired related to stock compensation plan activity | — |
| — |
| — |
| — |
| (9,295 | ) | — |
| (9,295 | ) |
| Common stock repurchase program | — |
| — |
| — |
| — |
| (11,585 | ) | — |
| (11,585 | ) |
| Balance at September 30, 2017 | $ | 122,710 |
| $ | 937 |
| $ | 1,123,685 |
| $ | 1,535,585 |
| $ | (75,032 | ) | $ | (69,098 | ) | $ | 2,638,787 |
|
| | | | | | | | |
| (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, 2015 | $ | 122,710 |
| $ | 937 |
| $ | 1,124,325 |
| $ | 1,315,948 |
| $ | (71,854 | ) | $ | (78,106 | ) | $ | 2,413,960 |
|
| Net income | — |
| — |
| — |
| 149,467 |
| — |
| — |
| 149,467 |
|
| Other comprehensive income, net of tax | — |
| — |
| — |
| — |
| — |
| 24,953 |
| 24,953 |
|
| Dividends and dividend equivalents declared on common stock $0.73 per share | — |
| — |
| 109 |
| (67,088 | ) | — |
| — |
| (66,979 | ) |
| Dividends paid on Series E preferred stock $1,200.00 per share | — |
| — |
| — |
| (6,072 | ) | — |
| — |
| (6,072 | ) |
| Stock-based compensation, net of tax impact | — |
| — |
| 2,413 |
| 245 |
| 8,031 |
| — |
| 10,689 |
|
| Exercise of stock options | — |
| — |
| (1,307 | ) | — |
| 3,679 |
| — |
| 2,372 |
|
| Common shares acquired related to stock compensation plan activity | — |
| — |
| — |
| — |
| (5,392 | ) | — |
| (5,392 | ) |
| Common stock repurchase program | — |
| — |
| — |
| — |
| (11,206 | ) | — |
| (11,206 | ) |
| Common stock warrants repurchased | — |
| — |
| (163 | ) | — |
| — |
| — |
| (163 | ) |
| Balance at September 30, 2016 | $ | 122,710 |
| $ | 937 |
| $ | 1,125,377 |
| $ | 1,392,500 |
| $ | (76,742 | ) | $ | (53,153 | ) | $ | 2,511,629 |
|
See accompanying Notes to Condensed Consolidated Financial Statements.
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
|
| | | | | | | |
| | Nine months ended September 30, |
| (In thousands) | 2017 | | 2016 |
| Operating Activities: | | | |
| Net income | $ | 185,546 |
| | $ | 149,467 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | |
| Provision for loan and lease losses | 27,900 |
| | 43,850 |
|
| Deferred tax (benefit) expense | (3,241 | ) | | 14,425 |
|
| Depreciation and amortization | 28,060 |
| | 27,342 |
|
| Amortization of earning assets and funding, premiums/discounts, net | 33,338 |
| | 42,855 |
|
| Stock-based compensation | 9,050 |
| | 8,558 |
|
| Gain on sale, net of write-down, on foreclosed and repossessed assets | (551 | ) | | (744 | ) |
| Write-down (gain on sale), net on premises and equipment | 218 |
| | (713 | ) |
| Impairment loss on investment securities recognized in earnings | 126 |
| | 149 |
|
| Gain on the sale of investment securities, net | — |
| | (414 | ) |
| Increase in cash surrender value of life insurance policies | (10,943 | ) | | (11,060 | ) |
| Mortgage banking activities | (8,038 | ) | | (11,335 | ) |
| Proceeds from sale of loans held for sale | 262,029 |
| | 298,840 |
|
| Origination of loans held for sale | (227,435 | ) | | (320,739 | ) |
| Net decrease (increase) in derivative contract assets net of liabilities | 11,235 |
| | (73,765 | ) |
| Net (increase) decrease in accrued interest receivable and other assets | (19,405 | ) | | 51,270 |
|
| Net increase (decrease) in accrued expenses and other liabilities | 12,386 |
| | (30,419 | ) |
| Net cash provided by operating activities | 300,275 |
| | 187,567 |
|
| Investing Activities: | | | |
| Net decrease in interest-bearing deposits | 2,469 |
| | 133,969 |
|
| Purchases of available for sale investment securities | (305,309 | ) | | (615,174 | ) |
| Proceeds from maturities and principal payments of available for sale investment securities | 695,595 |
| | 430,099 |
|
| Proceeds from sales of available for sale investment securities | — |
| | 259,283 |
|
| Purchases of held-to-maturity investment securities | (887,240 | ) | | (640,218 | ) |
| Proceeds from maturities and principal payments of held-to-maturity investment securities | 525,499 |
| | 517,513 |
|
| Net proceeds of Federal Home Loan Bank stock | 58,306 |
| | 3,243 |
|
| Alternative investments return of capital (capital call), net | 107 |
| | (649 | ) |
| Net increase in loans | (446,454 | ) | | (1,010,423 | ) |
| Proceeds from loans not originated for sale | 7,445 |
| | 20,764 |
|
| Proceeds from life insurance policies | 746 |
| | — |
|
| Proceeds from the sale of foreclosed and repossessed assets | 5,651 |
| | 6,900 |
|
| Proceeds from the sale of premises and equipment | 2,182 |
| | 1,550 |
|
| Additions to premises and equipment | (20,034 | ) | | (31,250 | ) |
| Proceeds from redemption of other assets | 7,581 |
| | — |
|
| Net cash used for investing activities | (353,456 | ) | | (924,393 | ) |
| | | | |
| See accompanying Notes to Condensed Consolidated Financial Statements. |
| | | | |
|
| | | | | | | |
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited), continued |
| |
| | Nine months ended September 30, |
| (In thousands) | 2017 | | 2016 |
| Financing Activities: | | | |
| Net increase in deposits | 1,551,987 |
| | 1,248,710 |
|
| Proceeds from Federal Home Loan Bank advances | 9,245,000 |
| | 14,150,000 |
|
| Repayments of Federal Home Loan Bank advances | (10,580,218 | ) | | (14,226,147 | ) |
| Net decrease in securities sold under agreements to repurchase and other borrowings | (46,624 | ) | | (350,695 | ) |
| Dividends paid to common shareholders | (70,732 | ) | | (66,648 | ) |
| Dividends paid to preferred shareholders | (6,072 | ) | | (6,072 | ) |
| Exercise of stock options | 5,301 |
| | 2,372 |
|
| Excess tax benefits from stock-based compensation | — |
| | 2,363 |
|
| Common stock repurchase program | (11,585 | ) | | (11,206 | ) |
| Common shares purchased related to stock compensation plan activity | (9,295 | ) | | (5,392 | ) |
| Common stock warrants repurchased | — |
| | (163 | ) |
| Net cash provided by financing activities | 77,762 |
| | 737,122 |
|
| Net increase in cash and due from banks | 24,581 |
| | 296 |
|
| Cash and due from banks at beginning of period | 190,663 |
| | 199,693 |
|
| Cash and due from banks at end of period | $ | 215,244 |
| | $ | 199,989 |
|
| | | | |
| Supplemental disclosure of cash flow information: | | | |
| Interest paid | $ | 85,242 |
| | $ | 79,054 |
|
| Income taxes paid | 78,832 |
| | 61,639 |
|
| Noncash investing and financing activities: | | | |
| Transfer of loans and leases to foreclosed properties and repossessed assets | $ | 6,503 |
| | $ | 4,917 |
|
| Transfer of loans from loans and leases to loans-held-for-sale | — |
| | 20,547 |
|
See accompanying Notes to Condensed Consolidated Financial Statements.
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 of 1956, as amended (BHC Act), incorporated under the laws of Delaware in 1986, and headquartered in Waterbury,Stamford, Connecticut. At September 30, 2017,Webster Bank, National Association (Webster Bank) is the principal consolidated subsidiary of Webster Financial Corporation's principal asset is allCorporation. Webster Bank, and its HSA Bank division (HSA Bank), deliver a wide range of the outstanding capital stock of Webster Bank.
Webster deliversbanking, investment, and financial services to individuals, families, and businesses primarily within its regional footprint from New York to Massachusetts.businesses. Webster providesBank serves consumer and business and consumer banking,customers with mortgage lending, financial planning, trust, and investment services through a distribution network consisting of banking offices,centers, ATMs, mobilea customer care center, and a full range of web and mobile-based banking and its internet website (www.websterbank.com or www.wbst.com).services throughout the northeastern U.S. from New York to Massachusetts, with certain businesses operating in extended geographies. Webster Bank also offers equipment financing, warehouse lending, commercial real estate lending, and asset-based lending, primarily across the Northeast. On a nationwide basis, through itsand treasury management solutions. HSA Bank division, Webster Bank offers and administersis a leading provider of health savings accounts (HSAs), and delivers health reimbursement arrangements and flexible spending accounts, health reimbursement accounts, and commuter benefits.benefit account administration services to employers and individuals in all 50 states.
BasisMergers and Acquisitions
On January 31, 2022, Webster completed its previously announced merger with Sterling in an all-stock transaction valued at $5.2 billion. The merger expanded Webster's geographic footprint and combined two complementary organizations to create one of Presentationthe largest commercial banks in the northeastern U.S. At March 31, 2022, the combined company had $65.1 billion in assets, $43.5 billion in loans and leases, and $54.4 billion in deposits, and operated 202 financial centers throughout southern New England and metro and suburban New York. In addition, on February 18, 2022, Webster acquired 100% of the equity interests of Bend Financial, Inc. (Bend), a cloud-based platform solution provider for HSAs, in exchange for cash. The Bend acquisition accelerates Webster’s efforts underway to deliver enhanced user experiences at HSA Bank. Financial results for historical reporting periods reflect only the results of Webster's operations prior to the corresponding merger or acquisition.
The accountingsuccessful integration of Webster and reportingSterling’s operations will depend on the Company’s ability to successfully consolidate operations, its management teams, corporate cultures, systems and procedures, and eliminate redundancies and costs. Noteworthy accomplishments include the rebranding of branches and digital assets, the implementation of strong governance controls and organizational structures, the coordination of credit policies and procedures, the selection of certain key operating systems, and the launch of culture-shaping offsite workshops attended by substantially all of the Company that materially affect its financial statements conformCompany's senior leaders, with GAAP. The accompanying unaudited Condensed Consolidated Financial Statementsan expected rollout to the entire organization by the end of the Company have been prepared in conformityyear. Current initiatives under development include the outline of a preliminary corporate real estate consolidation strategy to reduce the Company’s corporate facility square footage by approximately 45%, primarily throughout New York and Connecticut. In addition, key operating systems and process integration activities are underway, and Webster is well positioned to successfully execute its core conversion targeted for mid-2023.
In connection 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 readSterling merger, Webster re-evaluated its strategic priorities as a combined organization, which resulted in conjunction withmodifications to the Company's Consolidated Financial Statements, and Notes thereto, forstrategic initiatives that were announced in December 2020. As a result, the year ended December 31, 2016, included in the Company's Annual Report on Form 10-K filed with the SEC on March 1, 2017.
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts of assets and liabilities as of the date of the financial statements as well as income and expense during the period. Actual results could differCompany released $3.8 million from those estimates. 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.
Certain prior period amounts have been reclassified to conform to the current year's presentation. These reclassifications had an immaterial effect on non-interest income, non-interest expense, net cash provided by operating activities, and net cash used for investing activities.
Significant Accounting Policy Updates
Centrally Cleared Derivatives
Effectiveits previously recorded severance accrual during the first quarter of 2016, the Company offset the variation margin pertaining2022, with a corresponding adjustment to derivatives reported on a net basis, subject to a legally enforceable master netting arrangement, with the same counterparty against the net derivative position on the Company's balance sheets. The Chicago Mercantile Exchange has amended their rulebooks to legally characterize variation margin payments for over-the-counter derivatives that clear, as settlements rather than collateral, effective January 3, 2017.earnings.
The Company has updatedAdditional information regarding Webster's mergers and acquisitions and its significant accounting policies to classify variation margin deemed tostrategic initiatives can be legal settlements as a single unit of account with the derivative, for accountingfound within Note 2: Mergers and presentation purposes. The policy update does not result in a changeAcquisitions and Note 3: Strategic Initiatives in the presentation of the Company's balance sheets as the Company previously offset the variation margin pertainingNotes to derivatives reporting on a net basis, subject to a legally enforceable master netting arrangement, with the same counterparty against the net derivative position.
Accounting Standards Adopted during 2017
Effective January 1, 2017, the following new accounting guidance was adopted by the Company:
ASU No. 2016-09, Compensation - Stock Compensation (Topic 718) - Improvements to Employee Share Based Payment Accounting
The Update impacted the accounting for employee share-based payment transactions, including the income tax consequences, and classification on the statement of cash flows. The Update requires the Company to recognize the income tax effects of awards in the income statement on a prospective basis when the awards vest or are settled, compared to within additional paid-in capital. As a result, applicable excess tax benefits and tax deficiencies are recorded as an income tax benefit or expense, respectively. The Company elected to present the classification on the statement of cash flows on a prospective basis to better align this presentation with the income tax effects.
The impact of the Update will vary from period to period based on the Company's stock price and the quantity of shares that vest or are settled within a given period.
The Update also requires the Company to elect the accounting for forfeitures of share-based payments by either (i) recognizing forfeitures of awards as they occur or (ii) estimating the number of awards expected to be forfeited and adjusting the estimate when it is likely to change, as is currently required. The Company elected to account for forfeitures of share-based payments by estimating the number of awards expected to be forfeited and adjusting the estimate when it is likely to change, which is in accordance with the Company's previous accounting practices.
The adoption of this accounting standard did not have a material impact on the Company's financial statements.
ASU No. 2016-06, Derivatives and Hedging (Topic 815) - Contingent Put and Call Options in Debt Instruments.
The Update clarifies the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. The Update requires the assessment of embedded call (put) options solely in accordance with the four-step decision sequence. The Update clarified that companies are not required to assess whether the event triggering the ability to exercise the call/put option was also clearly and closely related.
The adoption of this accounting standard did not have a material impact on the Company's financial statements, as the Company has not performed the additional step of assessing whether the event triggering the ability to exercise the call (put) option was clearly and closely related, which was deemed not required by the Update.
Accounting Standards Issued but not yet Adopted
The following list identifies ASUs applicable to the Company that have been issued by the FASB but are not yet effective:
ASU No. 2017-12, Derivatives and Hedging (Topic 815) - Targeted Improvements to Accounting for Hedging Activities.
The purpose of the Update is to better align a company’s financial reporting for hedging activities with the economic objectives of those activities. The update requires a modified retrospective transition method in which the Company will recognize a cumulative effect of the change on the opening balance for each affected component of equity in the financial statements as of the date of adoption.
The Company is in the process of assessing all potential impacts of the standard.
The Update is effective for the first quarter of 2019, early adoption is permitted. The Company is evaluating the potential to early adopt the Update.
ASU No. 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20) - Premium Amortization on Purchased Callable Debt Securities.
The Update is intended to enhance the accounting for the amortization of premiums for purchased callable debt securities. Specifically, the Update shortens the amortization period for certain investments in callable debt securities purchased at a premium by requiring that the premium be amortized to the earliest call date. The Update is being issued in response to concerns from stakeholders that, current GAAP excludes certain callable debt securities from consideration of early repayment of principal even if the holder is certain that the call will be exercised.
The Update, upon adoption, is expected to accelerate the Company’s recognition of premium amortization on debt securities held within the portfolio. The amendments in the Update will be applied on a modified retrospective basis through a cumulative-effect adjustment directly through retained earnings upon adoption.
Management is in the process of evaluating the full impact of adopting the Update including, but not limited to the following:
Modifying system amortization requirements;
Evaluation of premiums associated with debt securities to determine the appropriate cumulative-effect adjustment; and
Establishing new accounting policies pertaining to premium amortization on purchased callable debt securities.
The Update is effective for the first quarter of 2019, early adoption is permitted. The Company is evaluating the potential to early adopt the Update.
ASU No. 2017-07, Compensation - Retirement Benefits (Topic 715) - Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.
The Update requires the Company to disaggregate the current-service-cost component from the other components of net benefit cost (the “other components”) and present it with other current compensation costs for related employees in the income statement and present the other components elsewhere in the income statement and outside of income from operations if that subtotal is presented. In addition, the Update requires entities to disclose the income statement lines that contain the other components if they are not presented on appropriately described separate lines.
The new guidance will be applied on a retrospective basis. The Company intends to adopt the Update for the first quarter of 2018. The Company does not expect this guidance to have a material impact on its consolidated financial statements.
ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment.
The Update eliminates Step 2 from the goodwill impairment analysis. Step 2, requires the Company to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities). Under current guidance, Step 2 testing would be performed only if Step 1 testing indicated the fair value of the reporting unit is below the reporting unit’s carrying amount.
Once effective the Update will require the Company to record an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, eliminating the Step 2 requirements. The Company intends to adopt the Update for the first quarter of 2020. Adoption is not anticipated to have a material impact on the Company's financial statements.
ASU No. 2016-15, Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments.
The Update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. The Update addresses the following eight issues: debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle.
The Company intends to adopt the Update for the first quarter of 2018. The Company does not expect this guidance to have a material impact on its consolidated financial statements.
ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments.
Current GAAP requires an "incurred loss" methodology for recognizing credit losses that delays recognition until it is probable a loss has been incurred. Both financial institutions and users of their financial statements expressed concern that current GAAP restricts the ability to record credit losses that are expected, but do not yet meet the "probable" threshold.
The main objective of this Update is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in this Update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to determine credit loss estimates.
The Change from an "incurred loss" method to an "expected loss" method represents a fundamental shift from existing GAAP, and is likely to result in a material increase to the Company's accounting for credit losses on financial instruments. The Company has established a project lead and identified a working group comprised of members from different disciplines including Credit, Finance and Information Technology. The Company is in the early stages of evaluation of the effect that this ASU will have on its financial statements and related disclosures, but has begun to develop a roadmap which includes a consideration of external resources that may be required, use of existing and new models, data availability and system solutions to facilitate implementation. The ASU will be effective for the Company as of the first quarter 2020. While we are currently unable to reasonably estimate the impact of adopting the Update, we expect the impact of adoption will be significantly influenced by the composition, characteristics and quality of our loan and securities portfolios as well as the economic conditions as of the adoption date.
ASU No. 2016-02, Leases (Topic 842).
The Update introduces a lessee model that brings most leases on the balance sheet. The Update also aligns certain of the underlying principles of the new lessor model with those in ASC 606 "Revenue from Contracts with Customers", the FASB’s new revenue recognition standard (e.g., evaluating how collectability should be considered and determining when profit can be recognized).
Furthermore, the Update addresses other concerns including the elimination of the required use of bright-line tests for determining lease classification. Lessors are required to provide additional transparency into the exposure to the changes in value of their residual assets and how they manage that exposure.
The Company intends to adopt the Update for the first quarter of 2019 using the modified retrospective method. The Company is in the early assessment stage and will continue to review the existing lease portfolio to evaluate the impact of the new accounting guidance on the financial statements.
ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10) - Recognition and Measurement of Financial Assets and Financial Liabilities.
Equity investments not accounted for under the equity method or those that do not result in consolidation of the investee are to be measured at fair value with changes in the fair value recognized through net income. Entities are to present separately in other comprehensive income, the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when an election to measure the liability at fair value in accordance with the fair value option for financial instruments has been made. Also, the requirement to disclose the method(s) and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost on the balance sheet has been eliminated.
The Company intends to adopt the Update for the first quarter of 2018. Adoption is not anticipated to have a material impact on the Company's financial statements.
ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). Also, subsequent ASUs issued to clarify this Topic.
The Update requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The Update excludes the Company's revenue associated with net interest income, and certain non-interest income lines items (loan and lease related fees, mortgage banking activities, increase in cash surrender value of life insurance policies, gain on sale of investment securities, net, impairment loss on securities recognized in earnings, and a majority of other income). As a result a substantial amount of the Company's revenue will not be affected.
The Company's deposit service fees, wealth and investment services, and certain other non-interest income items are within the scope of the Update. The Company's evaluation of the impacted revenue streams and associated customer contracts is near completion. While the assessment is not complete, the timing of the Company's revenue recognition is not expected to materially change.
The disclosure objective of the Update is to provide users of the financial statement with sufficient information to understand the nature, amount, timing and uncertainty of revenue, certain costs, and cash flows arising from contracts with customers. The Company expects to provide expanded qualitative disclosure pertaining to significant judgments, accounting policy elections and the nature, timing, and uncertainty of revenue arising from contracts with customers. Further the Company expects to provide expanded quantitative disclosure pertaining to the disaggregation of revenue arising from contracts with customers. The Company continues to assess the impact of the changes in disclosure required by guidance.
The Company intends to adopt the Update for the first quarter of 2018 utilizing the modified retrospective application with a cumulative effect adjustment to opening retained earnings, if necessary. The Company's evaluations are not final and are subject to change.
Note 2: Investment Securities
A summary of the amortized cost and fair value of investment securities is presented below:
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | At September 30, 2017 | | At December 31, 2016 |
| (In thousands) | Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | | Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value |
| Available-for-sale: |
|
|
|
| | |
|
|
|
| U.S. Treasury Bills | $ | 3,596 |
| $ | — |
| $ | — |
| $ | 3,596 |
| | $ | 734 |
| $ | — |
| $ | — |
| $ | 734 |
|
| Agency CMO | 332,341 |
| 2,573 |
| (3,116 | ) | 331,798 |
| | 419,865 |
| 3,344 |
| (3,503 | ) | 419,706 |
|
| Agency MBS | 923,819 |
| 3,214 |
| (14,056 | ) | 912,977 |
| | 969,460 |
| 4,398 |
| (19,509 | ) | 954,349 |
|
| Agency CMBS | 599,165 |
| — |
| (14,205 | ) | 584,960 |
| | 587,776 |
| 63 |
| (14,567 | ) | 573,272 |
|
| CMBS | 402,015 |
| 1,539 |
| (121 | ) | 403,433 |
| | 473,974 |
| 4,093 |
| (702 | ) | 477,365 |
|
| CLO | 273,172 |
| 1,572 |
| (161 | ) | 274,583 |
| | 425,083 |
| 2,826 |
| (519 | ) | 427,390 |
|
| Trust preferred | 30,463 |
| 676 |
| (202 | ) | 30,937 |
| | 30,381 |
| — |
| (1,748 | ) | 28,633 |
|
| Corporate debt | 48,334 |
| 674 |
| (130 | ) | 48,878 |
| | 108,490 |
| 1,502 |
| (350 | ) | 109,642 |
|
| Available-for-sale | $ | 2,612,905 |
| $ | 10,248 |
| $ | (31,991 | ) | $ | 2,591,162 |
| | $ | 3,015,763 |
| $ | 16,226 |
| $ | (40,898 | ) | $ | 2,991,091 |
|
| Held-to-maturity: |
|
|
|
| | | | | |
| Agency CMO | $ | 276,367 |
| $ | 1,138 |
| $ | (3,030 | ) | $ | 274,475 |
| | $ | 339,455 |
| $ | 1,977 |
| $ | (3,824 | ) | $ | 337,608 |
|
| Agency MBS | 2,549,500 |
| 24,275 |
| (30,012 | ) | 2,543,763 |
| | 2,317,449 |
| 26,388 |
| (41,768 | ) | 2,302,069 |
|
| Agency CMBS | 708,229 |
| 280 |
| (3,549 | ) | 704,960 |
| | 547,726 |
| 694 |
| (1,348 | ) | 547,072 |
|
| Municipal bonds and notes | 705,411 |
| 5,213 |
| (13,150 | ) | 697,474 |
| | 655,813 |
| 4,389 |
| (25,749 | ) | 634,453 |
|
| CMBS | 257,361 |
| 3,394 |
| (197 | ) | 260,558 |
| | 298,538 |
| 4,107 |
| (411 | ) | 302,234 |
|
| Private Label MBS | 443 |
| 2 |
| — |
| 445 |
| | 1,677 |
| 12 |
| — |
| 1,689 |
|
| Held-to-maturity | $ | 4,497,311 |
| $ | 34,302 |
| $ | (49,938 | ) | $ | 4,481,675 |
| | $ | 4,160,658 |
| $ | 37,567 |
| $ | (73,100 | ) | $ | 4,125,125 |
|
Other-Than-Temporary Impairment
The balance of OTTI, included in the amortized cost columns above, is related to certain CLO positions that were previously considered Covered Funds as defined by Section 619 of the Dodd-Frank Act, commonly known as the Volcker Rule. The Company has taken measures to bring its CLO positions into conformance with the Volcker Rule.
During the nine months ended September 30, 2017, OTTI of $126 thousand, related toprincipal held back in conjunction with the exercise of a clean-up call option for a Private Label MBS security, was recognized. To the extent that changes occur in interest rates, credit movements, and other factors that impact fair value and expected recovery of amortized cost of its investment securities, the Company may, in future periods, be required to recognize OTTI in earnings.
The following table presents the changes in OTTI:
|
| | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| (In thousands) | 2017 | | 2016 | | 2017 | | 2016 |
| Beginning balance | $ | 3,231 |
| | $ | 3,437 |
| | $ | 3,243 |
| | $ | 3,288 |
|
| Reduction for investment securities sold or called | (1,028 | ) | | (30 | ) | | (1,166 | ) | | (30 | ) |
| Additions for OTTI not previously recognized in earnings | — |
| | — |
| | 126 |
| | 149 |
|
| Ending balance | $ | 2,203 |
| | $ | 3,407 |
| | $ | 2,203 |
| | $ | 3,407 |
|
Fair Value and Unrealized Losses
The following tables provide information on fair value and unrealized losses for the individual investment securities with an unrealized loss, aggregated by classification and length of time that the individual investment securities have been in a continuous unrealized loss position:
|
| | | | | | | | | | | | | | | | | | | | | |
| | At September 30, 2017 |
| | Less Than Twelve Months | | Twelve Months or Longer | | Total |
| (Dollars in thousands) | Fair Value | Unrealized Losses | | Fair Value | Unrealized Losses | | # of Holdings | Fair Value | Unrealized Losses |
| Available-for-sale: | | | | | | | | | |
| Agency CMO | $ | 75,042 |
| $ | (1,002 | ) | | $ | 70,167 |
| $ | (2,114 | ) | | 16 | $ | 145,209 |
| $ | (3,116 | ) |
| Agency MBS | 464,031 |
| (5,169 | ) | | 303,770 |
| (8,887 | ) | | 104 | 767,801 |
| (14,056 | ) |
| Agency CMBS | 306,025 |
| (6,240 | ) | | 278,935 |
| (7,965 | ) | | 34 | 584,960 |
| (14,205 | ) |
| CMBS | 39,775 |
| (121 | ) | | — |
| — |
| | 5 | 39,775 |
| (121 | ) |
| CLO | 82,989 |
| (161 | ) | | — |
| — |
| | 5 | 82,989 |
| (161 | ) |
| Trust preferred | 12,570 |
| (97 | ) | | 4,574 |
| (105 | ) | | 3 | 17,144 |
| (202 | ) |
| Corporate debt | 5,797 |
| (87 | ) | | 1,825 |
| (43 | ) | | 2 | 7,622 |
| (130 | ) |
| Available-for-sale in an unrealized loss position | $ | 986,229 |
| $ | (12,877 | ) | | $ | 659,271 |
| $ | (19,114 | ) | | 169 | $ | 1,645,500 |
| $ | (31,991 | ) |
| Held-to-maturity: | | | | | | | | | |
| Agency CMO | $ | 82,839 |
| $ | (880 | ) | | $ | 83,103 |
| $ | (2,150 | ) | | 19 | $ | 165,942 |
| $ | (3,030 | ) |
| Agency MBS | 870,376 |
| (7,948 | ) | | 775,331 |
| (22,064 | ) | | 157 | 1,645,707 |
| (30,012 | ) |
| Agency CMBS | 570,781 |
| (3,504 | ) | | 4,730 |
| (45 | ) | | 45 | 575,511 |
| (3,549 | ) |
| Municipal bonds and notes | 123,965 |
| (1,745 | ) | | 226,545 |
| (11,405 | ) | | 140 | 350,510 |
| (13,150 | ) |
| CMBS | 40,150 |
| (197 | ) | | 250 |
| — |
| | 5 | 40,400 |
| (197 | ) |
| Held-to-maturity in an unrealized loss position | $ | 1,688,111 |
| $ | (14,274 | ) | | $ | 1,089,959 |
| $ | (35,664 | ) | | 366 | $ | 2,778,070 |
| $ | (49,938 | ) |
|
| | | | | | | | | | | | | | | | | | | | | |
| | At December 31, 2016 |
| | Less Than Twelve Months | | Twelve Months or Longer | | Total |
| (Dollars in thousands) | Fair Value | Unrealized Losses | | Fair Value | Unrealized Losses | | # of Holdings | Fair Value | Unrealized Losses |
| Available-for-sale: | | | | | | | | | |
| Agency CMO | $ | 107,853 |
| $ | (2,168 | ) | | $ | 67,351 |
| $ | (1,335 | ) | | 15 | $ | 175,204 |
| $ | (3,503 | ) |
| Agency MBS | 512,075 |
| (10,503 | ) | | 252,779 |
| (9,006 | ) | | 97 | 764,854 |
| (19,509 | ) |
| Agency CMBS | 554,246 |
| (14,567 | ) | | — |
| — |
| | 32 | 554,246 |
| (14,567 | ) |
| CMBS | 12,427 |
| (24 | ) | | 63,930 |
| (678 | ) | | 12 | 76,357 |
| (702 | ) |
| CLO | 49,946 |
| (54 | ) | | 50,237 |
| (465 | ) | | 5 | 100,183 |
| (519 | ) |
| Trust preferred | — |
| — |
| | 28,633 |
| (1,748 | ) | | 5 | 28,633 |
| (1,748 | ) |
| Corporate debt | — |
| — |
| | 7,384 |
| (350 | ) | | 2 | 7,384 |
| (350 | ) |
| Available-for-sale in an unrealized loss position | $ | 1,236,547 |
| $ | (27,316 | ) | | $ | 470,314 |
| $ | (13,582 | ) | | 168 | $ | 1,706,861 |
| $ | (40,898 | ) |
| Held-to-maturity: | | | | | | | | | |
| Agency CMO | $ | 163,439 |
| $ | (3,339 | ) | | $ | 17,254 |
| $ | (485 | ) | | 16 | $ | 180,693 |
| $ | (3,824 | ) |
| Agency MBS | 1,394,623 |
| (32,942 | ) | | 273,779 |
| (8,826 | ) | | 150 | 1,668,402 |
| (41,768 | ) |
| Agency CMBS | 347,725 |
| (1,348 | ) | | — |
| — |
| | 25 | 347,725 |
| (1,348 | ) |
| Municipal bonds and notes | 384,795 |
| (25,745 | ) | | 1,192 |
| (4 | ) | | 196 | 385,987 |
| (25,749 | ) |
| CMBS | 60,768 |
| (411 | ) | | — |
| — |
| | 8 | 60,768 |
| (411 | ) |
| Held-to-maturity in an unrealized loss position | $ | 2,351,350 |
| $ | (63,785 | ) | | $ | 292,225 |
| $ | (9,315 | ) | | 395 | $ | 2,643,575 |
| $ | (73,100 | ) |
Impairment Analysis
The following impairment analysis by investment security type, summarizes the basis for evaluating if investment securities within the Company’s available-for-sale and held-to-maturity portfolios have been impacted by OTTI. Unless otherwise noted for an investment security type, management does not intend to sell these investment securities and has determined, based upon available evidence, that it is more likely than not that the Company will not be required to sell these investment securities before the recovery of their amortized cost. As such, based on the following impairment analysis, the Company does not consider these investment securities, in unrealized loss positions, to be other-than-temporarily impaired at September 30, 2017.
Available-for-Sale
Agency CMO. There were unrealized losses of $3.1 million on the Company’s investment in Agency CMO at September 30, 2017, compared to $3.5 million at December 31, 2016. Unrealized losses decreased due to lower principal balances for this asset class at September 30, 2017 compared to December 31, 2016. Market prices remained essentially unchanged. These investments are issued by a government agency or a government-sponsored agency and, therefore, are backed by certain government guarantees, either direct or indirect. The contractual cash flows for these investments are performing as expected, and there has been no change in the underlying credit quality.
Agency MBS. There were unrealized losses of $14.1 million on the Company’s investment in Agency MBS at September 30, 2017, compared to $19.5 million at December 31, 2016. Unrealized losses decreased due to lower principal balances for this asset class at September 30, 2017 compared to December 31, 2016. Market prices remained essentially unchanged. These investments are issued by a government agency or a government-sponsored agency and, therefore, are backed by certain government guarantees, either direct or indirect. The contractual cash flows for these investments are performing as expected, and there has been no change in the underlying credit quality.
Agency CMBS. There were unrealized losses of $14.2 million on the Company's investment in Agency CMBS at September 30, 2017, compared to $14.6 million at December 31, 2016. Unrealized losses decreased while principal balances remained essentially unchanged. Market prices were slightly higher at September 30, 2017 compared to December 31, 2016. These investments are issued by a government agency or a government-sponsored agency and, therefore, are backed by certain government guarantees, either direct or indirect. The contractual cash flows for these investments are performing as expected, and there has been no change in the underlying credit quality.
CMBS. There were unrealized losses of $0.1 million on the Company’s investment in CMBS at September 30, 2017, compared to $0.7 million at December 31, 2016. The portfolio of mainly floating rate CMBS experienced lower principal balances and lower market spreads which resulted in higher security prices and smaller unrealized losses at September 30, 2017 compared to December 31, 2016. Internal and external metrics are considered when evaluating potential OTTI. Internal stress tests are performed on individual bonds to monitor potential losses under stress scenarios. Contractual cash flows for these investments are performing as expected.
CLO. There were unrealized losses of $0.2 million on the Company's investment in CLO at September 30, 2017, compared to $0.5 million at December 31, 2016. Unrealized losses decreased due to lower principal balances and lower market spreads for the CLO portfolio at September 30, 2017 compared to December 31, 2016. Internal and external metrics are considered when evaluating potential OTTI. Contractual cash flows for these investments are performing as expected.
Trust preferred. There were unrealized losses of $0.2 million on the Company's investment in trust preferred at September 30, 2017, compared to $1.7 million at December 31, 2016. Unrealized losses decreased due to lower market spreads for this asset class, which resulted in higher security prices compared to December 31, 2016. The trust preferred portfolio consists of three floating rate investments issued by two different large capitalization money center financial institutions, which continue to service the debt. The Company performs periodic credit reviews of the issuer to assess the likelihood for ultimate recovery of amortized cost.
Corporate debt. There were $0.1 million unrealized losses on the Company's corporate debt at September 30, 2017, compared to $0.4 million at December 31, 2016. Unrealized losses decreased due to lower principal balances for this asset class at September 30, 2017 compared to December 31, 2016. Market prices remained essentially unchanged. The Company performs periodic credit reviews of the issuer to assess the likelihood for ultimate recovery of amortized cost.
Held-to-Maturity
Agency CMO. There were unrealized losses of $3.0 million on the Company’s investment in Agency CMO at September 30, 2017 compared to $3.8 million at December 31, 2016. Unrealized losses decreased due to lower principal balances for this asset class at September 30, 2017 compared to December 31, 2016. Market prices remained essentially unchanged. These investments are issued by a government agency or a government-sponsored agency and, therefore, are backed by certain government guarantees, either direct or indirect. The contractual cash flows for these investments are performing as expected, and there has been no change in the underlying credit quality.
Agency MBS. There were unrealized losses of $30.0 million on the Company’s investment in Agency MBS at September 30, 2017, compared to $41.8 million at December 31, 2016. Unrealized losses decreased due to lower principal balances for this asset class at September 30, 2017 compared to December 31, 2016. Market prices remained essentially unchanged. These investments are issued by a government agency or a government-sponsored agency and, therefore, are backed by certain government guarantees, either direct or indirect. There has been no change in the underlying credit quality, and the contractual cash flows are performing as expected.
Agency CMBS. There were unrealized losses of $3.5 million on the Company's investment in Agency CMBS at September 30, 2017, compared to $1.3 million at December 31, 2016. Unrealized losses increased due to lower prices on recently purchased ACMBS as principal balances increased at September 30, 2017 compared to December 31, 2016. These investments are issued by a government agency or a government-sponsored agency and, therefore, are backed by certain government guarantees, either direct or indirect. There has been no change in the underlying credit quality, and the contractual cash flows are performing as expected.
Municipal bonds and notes. There were unrealized losses of $13.2 million on the Company’s investment in municipal bonds and notes at September 30, 2017, compared to $25.7 million at December 31, 2016. Unrealized losses decreased due to lower market rates which resulted in higher prices at September 30, 2017. The Company performs periodic credit reviews of the issuers and these investments are currently performing as expected.
CMBS. There were unrealized losses of $0.2 million on the Company’s investment in CMBS at September 30, 2017, compared to $0.4 million at December 31, 2016. Unrealized losses were approximately the same, for the portfolio comprised mainly of seasoned fixed rate conduit transactions, at September 30, 2017 compared to December 31, 2016. Internal and external metrics are considered when evaluating potential OTTI. Internal stress tests are performed on individual bonds to monitor potential losses under stress scenarios. The contractual cash flows for these investments are performing as expected.
Sales of Available-for Sale Investment Securities
There were no sales during the three and nine months ended September 30, 2017, or the three months ended September 30, 2016. For the nine months ended September 30, 2016, there were sales resulting in proceeds of $259.3 million, with the related gross realized gains and gross realized losses of $2.9 million and $2.5 million, respectively.
Contractual Maturities
The amortized cost and fair value of debt securities by contractual maturity are set forth below:
|
| | | | | | | | | | | | | |
| | At September 30, 2017 |
| | Available-for-Sale | | Held-to-Maturity |
| (In thousands) | Amortized Cost | Fair Value | | Amortized Cost | Fair Value |
| Due in one year or less | $ | 18,668 |
| $ | 18,714 |
| | $ | 40,146 |
| $ | 40,753 |
|
| Due after one year through five years | 40,246 |
| 40,748 |
| | 13,410 |
| 13,684 |
|
| Due after five through ten years | 381,547 |
| 383,721 |
| | 38,323 |
| 39,102 |
|
| Due after ten years | 2,172,444 |
| 2,147,979 |
| | 4,405,432 |
| 4,388,136 |
|
| Total debt securities | $ | 2,612,905 |
| $ | 2,591,162 |
| | $ | 4,497,311 |
| $ | 4,481,675 |
|
For the maturity schedule above, mortgage-backed securities and CLO, which are not due at a single maturity date, have been categorized based on the maturity date of the underlying collateral. Actual principal cash flows may differ from this maturity date presentation as borrowers have the right to prepay obligations with or without prepayment penalties.
At September 30, 2017, the Company had a carrying value of $1.2 billion in callable investment securities in its CMBS, CLO, and municipal bond portfolios. The Company considers prepayment risk in the evaluation of its interest rate risk profile. These maturities may not reflect actual durations, which may be impacted by prepayments.
Investment securities with a carrying value totaling $2.8 billion at September 30, 2017 and $2.5 billion at December 31, 2016 were pledged to secure public funds, trust deposits, repurchase agreements, and for other purposes, as required or permitted by law.
Note 3: Variable Interest Entities
The Company has an investment interest in several entities that meet the definition of a VIE. The following discussion provides information about the Company's VIEs.
Consolidated
Rabbi Trust. The Company established a Rabbi Trust to meet the obligations due under its Deferred Compensation Plan for Directors and Officers and to mitigate the expense volatility of the aforementioned plan. The funding of the Rabbi Trust and the discontinuation of the Deferred Compensation Plan for Directors and Officers occurred during 2012.
Investments held in the Rabbi Trust primarily consist of mutual funds that invest in equity and fixed income securities. The Company is considered the primary beneficiary of the Rabbi Trust as it has the power to direct the activities of the Rabbi Trust that significantly affect the VIE's economic performance and it has the obligation to absorb losses of the VIE that could potentially be significant to the VIE.
The Company consolidates the invested assets of the trust along with the total deferred compensation obligations and includes them in accrued interest receivable and other assets and accrued expenses and other liabilities, respectively, in the accompanying Condensed Consolidated Balance Sheets. Earnings in the Rabbi Trust, including appreciation or depreciation, are reflected as other non-interest income, and changes in the corresponding liability are reflected as compensation and benefits, in the accompanying Condensed Consolidated Statements of Income.
Non-Consolidated
Securitized Investments. The Company, through normal investment activities, makes passive investments in securities issued by VIEs for which Webster is not the manager. The investment securities consist of Agency CMO, Agency MBS, Agency CMBS, CLO and trust preferred. The Company has not provided financial or other support with respect to these investment securities other than its original investment. For these investment securities, the Company determined it is not the primary beneficiary due to the relative size of its investment in comparison to the principal amount of the structured securities issued by the VIEs, the level of credit subordination which reduces the Company’s obligation to absorb losses or right to receive benefits and its inability to direct the activities that most significantly impact the economic performance of the VIEs. The Company’s maximum exposure to loss is limited to the amount of its investment in the VIEs. Refer to Note 2: Investment Securities for additional information.
Tax Credit - Finance Investments. The Company makes equity investments in entities that finance affordable housing and other community development projects and provide a return primarily through the realization of tax benefits. In most instances the investments require the funding of capital commitments in the future. While the Company's investment in an entity may exceed 50% of its outstanding equity interests, the entity is not consolidated as Webster is not involved in its management. For these investments, the Company determined it is not the primary beneficiary due to its inability to direct the activities that most significantly impact the economic performance of the VIEs.
At September 30, 2017 and December 31, 2016, the aggregate carrying value of the Company's tax credit-finance investments were $35.7 million and $22.8 million, respectively. At September 30, 2017 and December 31, 2016, unfunded commitments have been recognized, totaling $24.3 million and $14.0 million, respectively, and are included in accrued expenses and other liabilities in the accompanying Condensed Consolidated Balance Sheets.
Webster Statutory Trust. The Company owns all of the outstanding common stock of Webster Statutory Trust, which is a financial vehicle that has issued, and may issue in the future, trust preferred securities. The trust is a VIE in which the Company is not the primary beneficiary and therefore, is not consolidated. The trust's only assets are junior subordinated debentures issued by the Company, which were acquired by the trust using the proceeds from the issuance of the trust preferred securities and common stock. The junior subordinated debentures are included in long-term debt in the accompanying Condensed Consolidated Balance Sheets, and the related interest expense is reported as interest expense on long-term debt in the accompanying Condensed Consolidated Statements of Income.
Other Investments. The Company invests in various alternative investments in which it holds a variable interest. Alternative 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 September 30, 2017 and December 31, 2016, the aggregate carrying value of the Company's other investments in VIEs were $13.0 million and $12.3 million, respectively, and the total exposure of the Company's other investments in VIEs, including unfunded commitments, were $22.4 million and $19.9 million, respectively.
The Company's equity interests in Tax Credit-Finance Investments, Webster Statutory Trust, and Other Investments are included in accrued interest receivable and other assets in the accompanying Condensed Consolidated Balance Sheets. For a further description of the Company's accounting policies regarding the consolidation of a VIE, refer to Note 1 to the Consolidated Financial Statements for the year ended December 31, 2016 includedcontained in its 2016 Form 10-K.
Note 4: Loans and Leases
The following table summarizes loans and leases:
|
| | | | | | | |
| (In thousands) | At September 30,
2017 | | At December 31, 2016 |
| Residential | $ | 4,499,441 |
| | $ | 4,254,682 |
|
| Consumer | 2,566,983 |
| | 2,684,500 |
|
| Commercial | 5,348,303 |
| | 4,940,931 |
|
| Commercial Real Estate | 4,464,917 |
| | 4,510,846 |
|
| Equipment Financing | 566,777 |
| | 635,629 |
|
Loans and leases (1) (2) | $ | 17,446,421 |
| | $ | 17,026,588 |
|
| |
(1) | Loans and leases include net deferred fees and net premiums/discounts of $20.8 million and $17.3 million at September 30, 2017 and December 31, 2016, respectively. |
| |
(2) | At September 30, 2017, the Company had pledged $6.7 billion of eligible residential, consumer and commercial loans as collateral to support borrowing capacity at the FHLB Boston and the FRB of Boston. |
Loans and Leases Aging
The following tables summarize the aging of loans and leases:
|
| | | | | | | | | | | | | | | | | | | | | |
| | At September 30, 2017 |
| (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-accrual | Total Past Due and Non-accrual | Current | Total Loans
and Leases |
| Residential | $ | 8,069 |
| $ | 3,654 |
| $ | — |
| $ | 45,676 |
| $ | 57,399 |
| $ | 4,442,042 |
| $ | 4,499,441 |
|
| Consumer: | | | | | | | |
| Home equity | 7,613 |
| 4,685 |
| — |
| 37,105 |
| 49,403 |
| 2,269,468 |
| 2,318,871 |
|
| Other consumer | 2,224 |
| 1,454 |
| — |
| 1,859 |
| 5,537 |
| 242,575 |
| 248,112 |
|
| Commercial: | | | | | | | |
| Commercial non-mortgage | 1,948 |
| 364 |
| 934 |
| 58,915 |
| 62,161 |
| 4,402,543 |
| 4,464,704 |
|
| Asset-based | — |
| — |
| — |
| 8,558 |
| 8,558 |
| 875,041 |
| 883,599 |
|
| Commercial real estate: | | | | | | | |
| Commercial real estate | 1,347 |
| 444 |
| — |
| 10,603 |
| 12,394 |
| 4,161,572 |
| 4,173,966 |
|
| Commercial construction | — |
| — |
| — |
| 477 |
| 477 |
| 290,474 |
| 290,951 |
|
| Equipment financing | 818 |
| 49 |
| — |
| 570 |
| 1,437 |
| 565,340 |
| 566,777 |
|
| Total | $ | 22,019 |
| $ | 10,650 |
| $ | 934 |
| $ | 163,763 |
| $ | 197,366 |
| $ | 17,249,055 |
| $ | 17,446,421 |
|
|
| | | | | | | | | | | | | | | | | | | | | |
| | At December 31, 2016 |
| (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-accrual | Total Past Due and Non-accrual | Current | Total Loans
and Leases |
| Residential | $ | 8,631 |
| $ | 2,609 |
| $ | — |
| $ | 47,279 |
| $ | 58,519 |
| $ | 4,196,163 |
| $ | 4,254,682 |
|
| Consumer: | | | | | | | |
| Home equity | 8,831 |
| 5,782 |
| — |
| 35,926 |
| 50,539 |
| 2,359,354 |
| 2,409,893 |
|
| Other consumer | 2,233 |
| 1,485 |
| — |
| 1,663 |
| 5,381 |
| 269,226 |
| 274,607 |
|
| Commercial: | | | | | | | |
| Commercial non-mortgage | 1,382 |
| 577 |
| 749 |
| 38,190 |
| 40,898 |
| 4,094,727 |
| 4,135,625 |
|
| Asset-based | — |
| — |
| — |
| — |
| — |
| 805,306 |
| 805,306 |
|
| Commercial real estate: | | | | | | | |
| Commercial real estate | 6,357 |
| 1,816 |
| — |
| 9,871 |
| 18,044 |
| 4,117,742 |
| 4,135,786 |
|
| Commercial construction | — |
| — |
| — |
| 662 |
| 662 |
| 374,398 |
| 375,060 |
|
| Equipment financing | 903 |
| 693 |
| — |
| 225 |
| 1,821 |
| 633,808 |
| 635,629 |
|
| Total | $ | 28,337 |
| $ | 12,962 |
| $ | 749 |
| $ | 133,816 |
| $ | 175,864 |
| $ | 16,850,724 |
| $ | 17,026,588 |
|
Interest on non-accrual loans and leases that would have been recorded as additional interest income had the loans and leases been current in accordance with the original terms totaled $2.8 million and $3.7 million for the three months ended September 30, 2017 and 2016, respectively, and $6.4 million and $8.4 million for the nine months ended September 30, 2017 and 2016,Item 1. Financial Statements, respectively.
Allowance for Loan and Lease Losses
The following tables summarize the activity in, as well as the loan and lease balances that were evaluated for, the ALLL:
|
| | | | | | | | | | | | | | | | | | |
| | At or for the three months ended September 30, 2017 |
| | Residential | Consumer | Commercial | Commercial Real Estate | Equipment Financing | Total |
| ALLL: | | | | | | |
| Balance, beginning of period | $ | 18,427 |
| $ | 42,488 |
| $ | 79,964 |
| $ | 52,402 |
| $ | 6,297 |
| $ | 199,578 |
|
| (Benefit) provision charged to expense | (348 | ) | (41 | ) | 12,166 |
| (2,129 | ) | 502 |
| 10,150 |
|
| Charge-offs | (585 | ) | (6,197 | ) | (3,002 | ) | (749 | ) | (121 | ) | (10,654 | ) |
| Recoveries | 280 |
| 1,894 |
| 466 |
| 10 |
| 79 |
| 2,729 |
|
| Balance, end of period | $ | 17,774 |
| $ | 38,144 |
| $ | 89,594 |
| $ | 49,534 |
| $ | 6,757 |
| $ | 201,803 |
|
| | | | | | | |
|
| | | | | | | | | | | | | | | | | | |
| | At or for the three months ended September 30, 2016 |
| (In thousands) | Residential | Consumer | Commercial | Commercial Real Estate | Equipment Financing | Total |
| ALLL: | | | | | | |
| Balance, beginning of period | $ | 24,413 |
| $ | 42,956 |
| $ | 73,822 |
| $ | 33,622 |
| $ | 5,615 |
| $ | 180,428 |
|
| Provision charged to expense | 1,076 |
| 4,985 |
| 4,351 |
| 2,953 |
| 885 |
| 14,250 |
|
| Charge-offs | (1,304 | ) | (5,259 | ) | (2,561 | ) | — |
| (300 | ) | (9,424 | ) |
| Recoveries | 554 |
| 1,313 |
| 370 |
| 194 |
| 240 |
| 2,671 |
|
| Balance, end of period | $ | 24,739 |
| $ | 43,995 |
| $ | 75,982 |
| $ | 36,769 |
| $ | 6,440 |
| $ | 187,925 |
|
| | | | | | | |
|
| | | | | | | | | | | | | | | | | | |
| | At or for the nine months ended September 30, 2017 |
| (In thousands) | Residential | Consumer | Commercial | Commercial Real Estate | Equipment Financing | Total |
| ALLL: | | | | | | |
| Balance, beginning of period | $ | 23,226 |
| $ | 45,233 |
| $ | 71,905 |
| $ | 47,477 |
| $ | 6,479 |
| $ | 194,320 |
|
| (Benefit) provision charged to expense | (4,436 | ) | 6,847 |
| 21,905 |
| 2,987 |
| 597 |
| 27,900 |
|
| Charge-offs | (1,940 | ) | (18,273 | ) | (5,321 | ) | (951 | ) | (425 | ) | (26,910 | ) |
| Recoveries | 924 |
| 4,337 |
| 1,105 |
| 21 |
| 106 |
| 6,493 |
|
| Balance, end of period | $ | 17,774 |
| $ | 38,144 |
| $ | 89,594 |
| $ | 49,534 |
| $ | 6,757 |
| $ | 201,803 |
|
| Individually evaluated for impairment | $ | 4,925 |
| $ | 1,689 |
| $ | 10,844 |
| $ | 290 |
| $ | 38 |
| $ | 17,786 |
|
| Collectively evaluated for impairment | $ | 12,849 |
| $ | 36,455 |
| $ | 78,750 |
| $ | 49,244 |
| $ | 6,719 |
| $ | 184,017 |
|
| | | | | | | |
| Loan and lease balances: | | | | | | |
| Individually evaluated for impairment | $ | 116,706 |
| $ | 46,224 |
| $ | 85,385 |
| $ | 18,199 |
| $ | 3,642 |
| $ | 270,156 |
|
| Collectively evaluated for impairment | 4,382,735 |
| 2,520,759 |
| 5,262,918 |
| 4,446,718 |
| 563,135 |
| 17,176,265 |
|
| Loans and leases | $ | 4,499,441 |
| $ | 2,566,983 |
| $ | 5,348,303 |
| $ | 4,464,917 |
| $ | 566,777 |
| $ | 17,446,421 |
|
|
| | | | | | | | | | | | | | | | | | |
| | At or for the nine months ended September 30, 2016 |
| (In thousands) | Residential | Consumer | Commercial | Commercial Real Estate | Equipment Financing | Total |
| ALLL: | | | | | | |
| Balance, beginning of period | $ | 25,876 |
| $ | 42,052 |
| $ | 66,686 |
| $ | 34,889 |
| $ | 5,487 |
| $ | 174,990 |
|
| Provision charged to expense | 991 |
| 12,458 |
| 25,447 |
| 3,921 |
| 1,033 |
| 43,850 |
|
| Charge-offs | (3,536 | ) | (14,236 | ) | (17,294 | ) | (2,521 | ) | (521 | ) | (38,108 | ) |
| Recoveries | 1,408 |
| 3,721 |
| 1,143 |
| 480 |
| 441 |
| 7,193 |
|
| Balance, end of period | $ | 24,739 |
| $ | 43,995 |
| $ | 75,982 |
| $ | 36,769 |
| $ | 6,440 |
| $ | 187,925 |
|
| Individually evaluated for impairment | $ | 9,443 |
| $ | 3,005 |
| $ | 6,579 |
| $ | 467 |
| $ | 9 |
| $ | 19,503 |
|
| Collectively evaluated for impairment | $ | 15,296 |
| $ | 40,990 |
| $ | 69,403 |
| $ | 36,302 |
| $ | 6,431 |
| $ | 168,422 |
|
| | | | | | | |
| Loan and lease balances: | | | | | | |
| Individually evaluated for impairment | $ | 122,020 |
| $ | 46,208 |
| $ | 58,197 |
| $ | 24,423 |
| $ | 6,863 |
| $ | 257,711 |
|
| Collectively evaluated for impairment | 4,112,027 |
| 2,661,135 |
| 4,721,605 |
| 4,256,090 |
| 614,833 |
| 16,365,690 |
|
| Loans and leases | $ | 4,234,047 |
| $ | 2,707,343 |
| $ | 4,779,802 |
| $ | 4,280,513 |
| $ | 621,696 |
| $ | 16,623,401 |
|
Impaired Loans and Leases
The following tables summarize impaired loans and leases:
|
| | | | | | | | | | | | | | | |
| | At September 30, 2017 |
| (In thousands) | Unpaid Principal Balance | Total
Recorded
Investment | Recorded Investment No Allowance | Recorded Investment With Allowance | Related Valuation Allowance |
| Residential | $ | 127,986 |
| $ | 116,706 |
| $ | 27,961 |
| $ | 88,745 |
| $ | 4,925 |
|
| Consumer - home equity | 51,496 |
| 46,225 |
| 21,833 |
| 24,392 |
| 1,689 |
|
| Commercial : | | | | | |
| Commercial non-mortgage | 88,221 |
| 76,827 |
| 28,124 |
| 48,703 |
| 10,844 |
|
| Asset-based | 8,558 |
| 8,558 |
| 8,558 |
| — |
| — |
|
| Commercial real estate: | | | | | |
| Commercial real estate | 19,026 |
| 17,725 |
| 12,894 |
| 4,831 |
| 271 |
|
| Commercial construction | 580 |
| 474 |
| — |
| 474 |
| 19 |
|
| Equipment financing | 3,721 |
| 3,642 |
| 3,004 |
| 638 |
| 38 |
|
| Total | $ | 299,588 |
| $ | 270,157 |
| $ | 102,374 |
| $ | 167,783 |
| $ | 17,786 |
|
|
| | | | | | | | | | | | | | | |
| | At December 31, 2016 |
| (In thousands) | Unpaid Principal Balance | Total
Recorded
Investment | Recorded Investment No Allowance | Recorded Investment With Allowance | Related Valuation Allowance |
| Residential | $ | 131,468 |
| $ | 119,424 |
| $ | 21,068 |
| $ | 98,356 |
| $ | 8,090 |
|
| Consumer - home equity | 52,432 |
| 45,719 |
| 22,746 |
| 22,973 |
| 2,903 |
|
| Commercial : | | | | | |
| Commercial non-mortgage | 57,732 |
| 53,037 |
| 26,006 |
| 27,031 |
| 7,422 |
|
| Asset-based | — |
| — |
| — |
| — |
| — |
|
| Commercial real estate: | | | | | |
| Commercial real estate | 24,146 |
| 23,568 |
| 19,591 |
| 3,977 |
| 169 |
|
| Commercial construction | 1,188 |
| 1,187 |
| 1,187 |
| — |
| — |
|
| Equipment financing | 6,398 |
| 6,420 |
| 6,197 |
| 223 |
| 9 |
|
| Total | $ | 273,364 |
| $ | 249,355 |
| $ | 96,795 |
| $ | 152,560 |
| $ | 18,593 |
|
Results of Operations
The following table summarizes the average recorded investment and interest income recognized for impaired loans and leases: |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| (In thousands) | Average Recorded Investment | Accrued Interest Income | Cash Basis Interest Income | | Average
Recorded
Investment | Accrued
Interest
Income | Cash Basis Interest Income | | Average Recorded Investment | Accrued
Interest
Income | Cash Basis Interest Income | | Average Recorded Investment | Accrued
Interest
Income | Cash Basis Interest Income |
| Residential | $ | 118,841 |
| $ | 1,027 |
| $ | 285 |
| | $ | 124,993 |
| $ | 1,070 |
| $ | 304 |
| | $ | 118,065 |
| $ | 3,133 |
| $ | 986 |
| | $ | 128,234 |
| $ | 3,309 |
| $ | 918 |
|
| Consumer - home equity | 46,753 |
| 341 |
| 246 |
| | 46,892 |
| 336 |
| 238 |
| | 45,972 |
| 998 |
| 808 |
| | 47,317 |
| 1,029 |
| 754 |
|
| Commercial | | | | | | | | | | | | | | | |
| Commercial Non-Mortgage | 81,816 |
| 249 |
| — |
| | 58,874 |
| 352 |
| — |
| | 64,932 |
| 704 |
| — |
| | 57,389 |
| 1,299 |
| — |
|
| Asset based | 4,279 |
| — |
| — |
| | — |
| — |
| — |
| | 4,279 |
|
|
| — |
| | — |
| — |
| — |
|
| Commercial real estate: | | | | | | | | | | | | | | | |
| Commercial real estate | 20,249 |
| 96 |
| — |
| | 23,930 |
| 77 |
| — |
| | 20,647 |
| 329 |
| — |
| | 26,689 |
| 374 |
| — |
|
| Commercial construction | 828 |
| — |
| — |
| | 4,386 |
| 12 |
| — |
| | 831 |
| 12 |
| — |
| | 5,171 |
| 81 |
| — |
|
| Equipment financing | 4,895 |
| 30 |
| — |
| | 3,642 |
| 107 |
| — |
| | 5,031 |
| 168 |
| — |
| | 3,642 |
| 109 |
| — |
|
| Total | $ | 277,661 |
| $ | 1,743 |
| $ | 531 |
| | $ | 262,717 |
| $ | 1,954 |
| $ | 542 |
| | $ | 259,757 |
| $ | 5,344 |
| $ | 1,794 |
| | $ | 268,442 |
| $ | 6,201 |
| $ | 1,672 |
|
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 probability of borrower default and the loss given default. 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 default. 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 borrower's current financial position and outlook, risk profile, and the related collateral and structural position. Loan officers review updated financial information on at least an annual basis for all pass rated loans to assess the accuracy of the risk grade. Criticized loans undergo more frequent reviews and enhanced monitoring.
A (7) "Special Mention" credit has the potential weakness that, if left uncorrected, may result in deterioration of the repayment prospects for the asset. An (8) "Substandard" asset has a well defined weakness that jeopardizes the full repayment of the debt. An asset rated (9) "Doubtful" has all of the same weaknesses as a substandard credit with the added characteristic that the weakness makes collection or liquidation in full, given current facts, conditions, and values, improbable. Assets classified as (10) "Loss" in accordance with regulatory guidelines are considered uncollectible and charged off.
The following table summarizes commercial, commercial real estate and equipment financing loans and leases segregated by risk rating exposure:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Commercial | | Commercial Real Estate | | Equipment Financing |
| (In thousands) | At September 30,
2017 | | At December 31,
2016 | | At September 30,
2017 | | At December 31,
2016 | | At September 30,
2017 | | At December 31,
2016 |
| (1) - (6) Pass | $ | 5,037,439 |
| | $ | 4,655,007 |
| | $ | 4,266,658 |
| | $ | 4,357,458 |
| | $ | 548,298 |
| | $ | 618,084 |
|
| (7) Special Mention | 108,828 |
| | 56,240 |
| | 85,926 |
| | 69,023 |
| | 3,557 |
| | 1,324 |
|
| (8) Substandard | 192,161 |
| | 226,603 |
| | 112,333 |
| | 84,365 |
| | 14,922 |
| | 16,221 |
|
| (9) Doubtful | 9,875 |
| | 3,081 |
| | — |
| | — |
| | — |
| | — |
|
| Total | $ | 5,348,303 |
| | $ | 4,940,931 |
| | $ | 4,464,917 |
| | $ | 4,510,846 |
| | $ | 566,777 |
| | $ | 635,629 |
|
For residential and consumer loans, the Company considers factors such as past due status, updated FICO scores, employment status, collateral, geography, loans discharged in bankruptcy, and the status of first lien position loans on second lien position loans as credit quality indicators. On an ongoing basis for portfolio monitoring purposes, the Company estimates the current value of property secured as collateral for both home equity and residential first mortgage lending products. The estimate is based on home price indices compiled by the S&P/Case-Shiller Home Price Indices. The trend data is applied to the loan portfolios taking into account the age of the most recent valuation and geographic area.
Troubled Debt Restructurings
The following table summarizes information for TDRs:
|
| | | | | | | |
| (Dollars in thousands) | At September 30,
2017 | | At December 31, 2016 |
| Accrual status | $ | 135,774 |
| | $ | 147,809 |
|
| Non-accrual status | 82,576 |
| | 75,719 |
|
| Total recorded investment of TDRs | $ | 218,350 |
| | $ | 223,528 |
|
| Specific reserves for TDRs included in the balance of ALLL | $ | 11,837 |
| | $ | 14,583 |
|
| Additional funds committed to borrowers in TDR status | 3,944 |
| | 459 |
|
For the portion of TDRs deemed to be uncollectible, Webster charged off $0.4 million and $3.0 million for the three months ended September 30, 2017 and 2016, respectively, and $3.0 million, and $17.9 million for the nine months ended September 30, 2017 and 2016, respectively.
The following table provides information on the type of concession for loans and leases modified as TDRs:
|
| | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| | Number of
Loans and
Leases | Post-
Modification
Recorded
Investment(1) | | Number of
Loans and
Leases | Post-
Modification
Recorded
Investment(1) | | Number of
Loans and
Leases | Post-
Modification
Recorded
Investment(1) | | Number of
Loans and
Leases | Post-
Modification
Recorded
Investment(1) |
| (Dollars in thousands) | |
| Residential: | | | | | | | | | | | |
| Extended Maturity | — |
| $ | — |
| | 4 |
| $ | 967 |
| | 9 | $ | 1,390 |
| | 11 | $ | 1,969 |
|
| Adjusted Interest Rate | — |
| — |
| | 1 |
| 292 |
| | 2 | 335 |
| | 2 | 528 |
|
| Maturity/Rate Combined | 4 |
| 570 |
| | 3 |
| 290 |
| | 9 | 1,416 |
| | 10 | 1,185 |
|
Other (2) | 6 |
| 1,357 |
| | 3 |
| 299 |
| | 32 | 5,471 |
| | 18 | 3,190 |
|
| Consumer - home equity | | | | | | | | | | | |
| Extended Maturity | 2 |
| 158 |
| | 2 |
| 89 |
| | 8 | 822 |
| | 9 | 381 |
|
| Adjusted Interest Rate | 1 |
| 247 |
| | — |
| — |
| | 1 | 247 |
| | — | — |
|
| Maturity/Rate Combined | 2 |
| 399 |
| | 3 |
| 264 |
| | 13 | 3,212 |
| | 11 | 923 |
|
Other (2) | 12 |
| 839 |
| | 8 |
| 270 |
| | 55 | 3,733 |
| | 37 | 1,447 |
|
| Commercial non - mortgage | | | |
|
| | | | | | | |
| Extended Maturity | — |
| — |
| | 2 |
| 213 |
| | 8 | 813 |
| | 11 | 14,862 |
|
| Maturity/Rate Combined | 8 |
| 299 |
| | — |
| — |
| | 13 | 9,153 |
| | 2 | 648 |
|
Other (2) | — |
| — |
| | 4 |
| 1,265 |
| | 1 | 4 |
| | 11 | 1,639 |
|
| Commercial real estate: | | | | | | | | | | | |
| Extended Maturity | — |
| — |
| | 1 |
| 109 |
| | — | — |
| | 1 | 109 |
|
| Maturity/Rate Combined | — |
| — |
| | 1 |
| 291 |
| | — | — |
| | 2 | 335 |
|
Other (2) | — |
| — |
| | — |
| — |
| | — | — |
| | 1 | 509 |
|
| Equipment Financing | | | | | | | | | | | |
| Extended Maturity | — |
| — |
| | 6 |
| 6,638 |
| | — | — |
| | 7 | 6,642 |
|
| Total TDRs | 35 |
| $ | 3,869 |
| | 38 |
| $ | 10,987 |
| | 151 | $ | 26,596 |
| | 133 | $ | 34,367 |
|
| |
(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. |
Loans and leases modified as TDRs within the previous 12 months and for which there was a payment default, consisted of one residential loan with a recorded investment of $248 thousand for both the three and nine months ended September 30, 2017. There were no such loans and leases for both the three and nine months ended September 30, 2016.
The recorded investment of TDRs in commercial, commercial real estate, and equipment financing segregated by risk rating exposure is as follows:
|
| | | | | | | |
| (In thousands) | At September 30, 2017 | | At December 31, 2016 |
| (1) - (6) Pass | $ | 8,902 |
| | $ | 10,210 |
|
| (7) Special Mention | 360 |
| | 7 |
|
| (8) Substandard | 46,157 |
| | 45,509 |
|
| (9) Doubtful | — |
| | 2,738 |
|
| Total | $ | 55,419 |
| | $ | 58,464 |
|
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. The gain or loss on residential mortgage loans sold and the related origination fee income, and the fair value adjustment to loans held-for-sale are included as mortgage banking activities in the accompanying Condensed Consolidated Statements of Income.
The Company may be required to repurchase a loan in the event of certain breaches of the representations and warranties, or in the event of default of the borrower within 90 days of sale, as provided for in the sale agreements. A reserve for loan repurchases provides for estimated losses pertaining to the potential repurchase of loans associated with the Company’s mortgage banking activities. The reserve reflects management’s evaluation of 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 repurchase requests for which the Company has not yet been notified, as the performance of loans sold and the quality of the servicing provided by the acquirer also may impact the reserve. The provision recorded at the time of the loan sale is netted from the gain or loss recorded in mortgage banking activities, while any incremental provision, post loan sale, is recorded in other non-interest expense in the accompanying Condensed Consolidated Statements of Income.
The following table provides a summary of activity in the reserve for loan repurchases:
|
| | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| (In thousands) | 2017 | | 2016 | | 2017 | | 2016 |
| Beginning balance | $ | 843 |
| | $ | 992 |
| | $ | 790 |
| | $ | 1,192 |
|
| Provision (benefit) charged to expense | 25 |
| | 37 |
| | 78 |
| | (64 | ) |
| Repurchased loans and settlements charged off | (18 | ) | | — |
| | (18 | ) | | (99 | ) |
| Ending balance | $ | 850 |
| | $ | 1,029 |
| | $ | 850 |
| | $ | 1,029 |
|
The following table provides information for mortgage banking activities: |
| | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| (In thousands) | 2017 | | 2016 | | 2017 | | 2016 |
| Residential mortgage loans held for sale: | | | | | | | |
| Proceeds from sale | $ | 88,691 |
| | $ | 128,268 |
| | $ | 262,029 |
| | $ | 298,840 |
|
| Loans sold with servicing rights retained | 79,690 |
| | 115,822 |
| | 239,357 |
| | 273,827 |
|
| | | | | | | | |
| Net gain on sale | 1,979 |
| | 3,324 |
| | 4,356 |
| | 6,749 |
|
| Ancillary fees | 682 |
| | 1,046 |
| | 2,091 |
| | 2,485 |
|
| Fair value option adjustment | (240 | ) | | (48 | ) | | 1,591 |
| | 2,101 |
|
The Company has retained servicing rights on residential mortgage loans totaling $2.6 billion at both September 30, 2017 and December 31, 2016.
The following table presents the changes in carrying value for mortgage servicing assets:
|
| | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| (In thousands) | 2017 | | 2016 | | 2017 | | 2016 |
| Beginning balance | $ | 24,708 |
| | $ | 21,946 |
| | $ | 24,466 |
| | $ | 20,698 |
|
| Additions | 2,576 |
| | 3,338 |
| | 7,063 |
| | 8,198 |
|
| Amortization | (2,144 | ) | | (1,900 | ) | | (6,389 | ) | | (5,512 | ) |
| Ending balance | $ | 25,140 |
| | $ | 23,384 |
| | $ | 25,140 |
| | $ | 23,384 |
|
Loan servicing fees, net of mortgage servicing rights amortization, were $0.2 million and $0.3 million for the three months ended September 30, 2017 and 2016, respectively, and $0.6 million and $0.9 million for the nine months ended September 30, 2017 and 2016, respectively, and are included as a component of loan related fees in the accompanying Condensed Consolidated Statements of Income.
See Note 13: Fair Value Measurements for a further discussion on the fair value of loans held for sale and mortgage servicing assets. Additionally, loans not originated for sale were sold approximately at carrying value, for cash proceeds of $7.4 million for certain residential loans and $20.8 million for certain commercial loans for the nine months ended September 30, 2017 and 2016, respectively.
Note 6: Goodwill and Other Intangible Assets
Goodwill and other intangible assets by reportable segment consisted of the following:
|
| | | | | | | | | | | | | | | | | | | |
| | At September 30, 2017 | | At December 31, 2016 |
| (In thousands) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount |
| Other intangible assets: | | | | | | | |
| HSA Bank CDI | $ | 22,000 |
| $ | (8,036 | ) | $ | 13,964 |
| | $ | 22,000 |
| $ | (6,162 | ) | $ | 15,838 |
|
| HSA Bank Customer relationships | 21,000 |
| (4,375 | ) | 16,625 |
| | 21,000 |
| (3,164 | ) | 17,836 |
|
| Total other intangible assets | $ | 43,000 |
| $ | (12,411 | ) | $ | 30,589 |
| | $ | 43,000 |
| $ | (9,326 | ) | $ | 33,674 |
|
| | | | | | | | |
| Goodwill: | | | | | | | |
| Community Banking | | | $ | 516,560 |
| | | | $ | 516,560 |
|
| HSA Bank | | | 21,813 |
| | | | 21,813 |
|
| Total goodwill | | | $ | 538,373 |
| | | | $ | 538,373 |
|
There was no change in the carrying amounts for goodwill since December 31, 2016.
As of September 30, 2017, the remaining estimated aggregate future amortization expense for intangible assets is as follows:
|
| | | |
| (In thousands) | |
| Remainder of 2017 | $ | 978 |
|
| 2018 | 3,847 |
|
| 2019 | 3,847 |
|
| 2020 | 3,847 |
|
| 2021 | 3,847 |
|
| Thereafter | 14,223 |
|
Note 7: Deposits
A summary of deposits by type follows:
|
| | | | | | | |
| (In thousands) | At September 30,
2017 |
| At December 31,
2016 |
| Non-interest-bearing: | | | |
| Demand | $ | 4,138,206 |
| | $ | 4,021,061 |
|
| Interest-bearing: | | | |
| Checking | 2,581,266 |
| | 2,528,274 |
|
| Health savings accounts | 4,891,024 |
| | 4,362,503 |
|
| Money market | 2,598,187 |
| | 2,047,121 |
|
| Savings | 4,428,061 |
| | 4,320,090 |
|
| Time deposits | 2,218,491 |
| | 2,024,808 |
|
| Total interest-bearing | 16,717,029 |
| | 15,282,796 |
|
| Total deposits | $ | 20,855,235 |
| | $ | 19,303,857 |
|
| | | | |
| Time deposits and interest-bearing checking, included in above balances, obtained through brokers | $ | 913,042 |
| | $ | 848,618 |
|
| Time deposits, included in above balance, that meet or exceed the FDIC limit | 613,012 |
| | 490,721 |
|
| Deposit overdrafts reclassified as loan balances | 2,494 |
| | 1,885 |
|
The scheduled maturities of time deposits are as follows:
|
| | | |
| (In thousands) | At September 30,
2017 |
| Remainder of 2017 | $ | 285,203 |
|
| 2018 | 952,745 |
|
| 2019 | 607,952 |
|
| 2020 | 225,159 |
|
| 2021 | 107,921 |
|
| Thereafter | 39,511 |
|
| Total time deposits | $ | 2,218,491 |
|
Note 8: Borrowings
Total borrowings of $2.6 billion at September 30, 2017 and $4.0 billion at December 31, 2016 are described in detail below.
The following table summarizes securities sold under agreements to repurchase and other borrowings:
|
| | | | | | | | | | | |
| | At September 30,
2017 | | At December 31,
2016 |
| (In thousands) | Amount | Rate | | Amount | Rate |
| Securities sold under agreements to repurchase: | | | | | |
| Original maturity of one year or less | $ | 335,902 |
| 0.18 | % | | $ | 340,526 |
| 0.16 | % |
| Original maturity of greater than one year, non-callable | 400,000 |
| 3.04 |
| | 400,000 |
| 3.09 |
|
| Total securities sold under agreements to repurchase | 735,902 |
| 1.73 |
| | 740,526 |
| 1.82 |
|
| Fed funds purchased | 167,000 |
| 1.12 |
| | 209,000 |
| 0.46 |
|
| Securities sold under agreements to repurchase and other borrowings | $ | 902,902 |
| 1.62 | % | | $ | 949,526 |
| 1.53 | % |
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 Webster’s Treasury Unit. Dealer counterparties have the right to pledge, transfer, or hypothecate purchased securities during the term of the transaction. The Company has right of offset with respect to all repurchase agreement assets and liabilities. Total securities sold under agreements to repurchase represents the gross amount for these transactions, as only liabilities are outstanding for the periods presented.
The following table provides information for FHLB advances:
|
| | | | | | | | | | | |
| | At September 30,
2017 | | At December 31,
2016 |
| (Dollars in thousands) | Amount | Weighted- Average Contractual Coupon Rate | | Amount | Weighted- Average Contractual Coupon Rate |
| Maturing within 1 year | $ | 880,500 |
| 1.28 | % | | $ | 2,130,500 |
| 0.71 | % |
| After 1 but within 2 years | 133,731 |
| 1.34 |
| | 200,000 |
| 1.36 |
|
| After 2 but within 3 years | 259,295 |
| 1.79 |
| | 128,026 |
| 1.73 |
|
| After 3 but within 4 years | 75,000 |
| 1.51 |
| | 175,000 |
| 1.77 |
|
| After 4 but within 5 years | 150,061 |
| 2.23 |
| | 200,000 |
| 1.81 |
|
| After 5 years | 9,091 |
| 2.61 |
| | 9,370 |
| 2.59 |
|
| | 1,507,678 |
| 1.49 | % | | 2,842,896 |
| 0.95 | % |
| Premiums on advances | 3 |
| | | 12 |
| |
| Federal Home Loan Bank advances | $ | 1,507,681 |
| | | $ | 2,842,908 |
| |
| | | | | | |
| Aggregate carrying value of assets pledged as collateral | $ | 6,388,102 |
| | | $ | 5,967,318 |
| |
| Remaining borrowing capacity | 2,668,964 |
| | | 1,192,758 |
| |
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 September 30,
2017 | | At December 31,
2016 |
| 4.375% | Senior fixed-rate notes due February 15, 2024 | $ | 150,000 |
| | $ | 150,000 |
|
Junior subordinated debt Webster Statutory Trust I floating-rate notes due September 17, 2033 (1) | 77,320 |
| | 77,320 |
|
| Total notes and subordinated debt | 227,320 |
| | 227,320 |
|
| Discount on senior fixed-rate notes | (756 | ) | | (845 | ) |
| Debt issuance cost on senior fixed-rate notes | (860 | ) | | (961 | ) |
| Long-term debt | $ | 225,704 |
| | $ | 225,514 |
|
| |
(1) | The interest rate on Webster Statutory Trust I floating-rate notes, which varies quarterly based on 3-month LIBOR plus 2.95%, was 4.27% at September 30, 2017 and 3.94% at December 31, 2016. |
Note 9: Accumulated Other Comprehensive Loss, Net of Tax
The following tables summarize the changes in AOCL by component:
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, 2017 | | Nine months ended September 30, 2017 |
| (In thousands) | Securities Available For Sale and Transferred | Derivative Instruments | Defined Benefit Pension and Other Postretirement Benefit Plans | Total | | Securities Available For Sale and Transferred | Derivative Instruments | Defined Benefit Pension and Other Postretirement Benefit Plans | Total |
| Beginning balance | $ | (14,501 | ) | $ | (15,258 | ) | $ | (42,323 | ) | $ | (72,082 | ) | | $ | (15,476 | ) | $ | (17,068 | ) | $ | (44,449 | ) | $ | (76,993 | ) |
| OCI/OCL before reclassifications | 872 |
| (34 | ) | — |
| 838 |
| | 1,847 |
| (445 | ) | — |
| 1,402 |
|
| Amounts reclassified from AOCL | — |
| 1,145 |
| 1,001 |
| 2,146 |
| | — |
| 3,366 |
| 3,127 |
| 6,493 |
|
| Net current-period OCI/OCL | 872 |
| 1,111 |
| 1,001 |
| 2,984 |
| | 1,847 |
| 2,921 |
| 3,127 |
| 7,895 |
|
| Ending balance | $ | (13,629 | ) | $ | (14,147 | ) | $ | (41,322 | ) | $ | (69,098 | ) | | $ | (13,629 | ) | $ | (14,147 | ) | $ | (41,322 | ) | $ | (69,098 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, 2016 | | Nine months ended September 30, 2016 |
| (In thousands) | Securities Available For Sale and Transferred | Derivative Instruments | Defined Benefit Pension and Other Postretirement Benefit Plans | Total | | Securities Available For Sale and Transferred | Derivative Instruments | Defined Benefit Pension and Other Postretirement Benefit Plans | Total |
| Beginning balance | $ | 12,363 |
| $ | (23,406 | ) | $ | (46,468 | ) | $ | (57,511 | ) | | $ | (6,407 | ) | $ | (22,980 | ) | $ | (48,719 | ) | $ | (78,106 | ) |
| OCI/OCL before reclassifications | 1,218 |
| 794 |
| — |
| 2,012 |
| | 20,156 |
| (2,416 | ) | — |
| 17,740 |
|
| Amounts reclassified from AOCL | — |
| 1,221 |
| 1,125 |
| 2,346 |
| | (168 | ) | 4,005 |
| 3,376 |
| 7,213 |
|
| Net current-period OCI/OCL | 1,218 |
| 2,015 |
| 1,125 |
| 4,358 |
| | 19,988 |
| 1,589 |
| 3,376 |
| 24,953 |
|
| Ending balance | $ | 13,581 |
| $ | (21,391 | ) | $ | (45,343 | ) | $ | (53,153 | ) | | $ | 13,581 |
| $ | (21,391 | ) | $ | (45,343 | ) | $ | (53,153 | ) |
The following tables provide information for the items reclassified from AOCL:
|
| | | | | | | | | | | | | | | | |
| (In thousands) | Three months ended September 30, | | Nine months ended September 30, | Associated Line Item in the Condensed Consolidated Statements of Income |
| AOCL Components | 2017 | | 2016 | | 2017 | | 2016 |
| | | | | | | | | |
| Securities available-for-sale and transferred: | | | | | | | | |
| Unrealized gains (losses) on investment securities | $ | — |
| | $ | — |
| | $ | — |
| | $ | 414 |
| Gain on sale of investment securities, net |
| Unrealized gains (losses) on investment securities | — |
| | — |
| | — |
| | (149 | ) | Impairment loss recognized in earnings |
| Total before tax | — |
| | — |
| | — |
| | 265 |
| |
| Tax benefit (expense) | — |
| | — |
| | — |
| | (97 | ) | Income tax expense |
| Net of tax | $ | — |
| | $ | — |
| | $ | — |
| | $ | 168 |
| |
| Derivative instruments: | | | | | | | | |
| Cash flow hedges | $ | (1,810 | ) | | $ | (1,925 | ) | | $ | (5,316 | ) | | $ | (6,314 | ) | Total interest expense |
| Tax benefit | 665 |
| | 704 |
| | 1,950 |
| | 2,309 |
| Income tax expense |
| Net of tax | $ | (1,145 | ) | | $ | (1,221 | ) | | $ | (3,366 | ) | | $ | (4,005 | ) | |
| Defined benefit pension and other postretirement benefit plans: | | | | | | | | |
| Amortization of net loss | $ | (1,587 | ) | | $ | (1,780 | ) | | $ | (4,959 | ) | | $ | (5,343 | ) | (1) |
| Prior service costs | — |
| | (4 | ) | | — |
| | (11 | ) | (1) |
| Total before tax | (1,587 | ) | | (1,784 | ) | | (4,959 | ) | | (5,354 | ) | |
| Tax benefit | 586 |
| | 659 |
| | 1,832 |
| | 1,978 |
| Income tax expense |
| Net of tax | $ | (1,001 | ) | | $ | (1,125 | ) | | $ | (3,127 | ) | | $ | (3,376 | ) | |
(1) These accumulated other comprehensive loss components are included in the computation of net periodic benefit cost (see Note 14 - Retirement Benefit Plans for further details).
Note 10: 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.
Basel III total risk-based capital is comprised of three categories: CET1 capital, additional Tier 1 capital, and Tier 2 capital. CET1 capital includes common shareholders' equity, less deductions for goodwill, other intangibles, and certain deferred tax liabilities. Common shareholders' equity, for purposes of CET1 capital, excludes AOCL components as permitted by the opt-out election taken by Webster upon adoption of Basel III. Tier 1 capital is comprised of CET1 capital plus perpetual preferred stock, while Tier 2 capital includes qualifying subordinated debt and qualifying allowance for credit losses, that together equal total capital.
The following table provides information on the capital ratios for Webster Financial Corporation and Webster Bank:
|
| | | | | | | | | | | | | | | | | |
| | At September 30, 2017 |
| | Actual | | Minimum Requirement | | Well Capitalized |
| (Dollars in thousands) | Amount | Ratio | | Amount | Ratio | | Amount | Ratio |
| Webster Financial Corporation | | | | | | | | |
| CET1 risk-based capital | $ | 2,031,955 |
| 10.99 | % | | $ | 832,149 |
| 4.5 | % | | $ | 1,201,993 |
| 6.5 | % |
| Total risk-based capital | 2,436,332 |
| 13.17 |
| | 1,479,376 |
| 8.0 |
| | 1,849,220 |
| 10.0 |
|
| Tier 1 risk-based capital | 2,154,665 |
| 11.65 |
| | 1,109,532 |
| 6.0 |
| | 1,479,376 |
| 8.0 |
|
| Tier 1 leverage capital | 2,154,665 |
| 8.36 |
| | 1,030,973 |
| 4.0 |
| | 1,288,717 |
| 5.0 |
|
| Webster Bank | | | | | | | | |
| CET1 risk-based capital | $ | 2,061,764 |
| 11.16 | % | | $ | 831,319 |
| 4.5 | % | | $ | 1,200,794 |
| 6.5 | % |
| Total risk-based capital | 2,266,110 |
| 12.27 |
| | 1,477,900 |
| 8.0 |
| | 1,847,376 |
| 10.0 |
|
| Tier 1 risk-based capital | 2,061,764 |
| 11.16 |
| | 1,108,425 |
| 6.0 |
| | 1,477,900 |
| 8.0 |
|
| Tier 1 leverage capital | 2,061,764 |
| 8.00 |
| | 1,030,260 |
| 4.0 |
| | 1,287,825 |
| 5.0 |
|
|
| | | | | | | | | | | | | | | | | |
| | At December 31, 2016 |
| | Actual | | Minimum Requirement | | Well Capitalized |
| (Dollars in thousands) | Amount | Ratio | | Amount | Ratio | | Amount | Ratio |
| Webster Financial Corporation | | | | | | | | |
| CET1 risk-based capital | $ | 1,932,171 |
| 10.52 | % | | $ | 826,504 |
| 4.5 | % | | $ | 1,193,840 |
| 6.5 | % |
| Total risk-based capital | 2,328,808 |
| 12.68 |
| | 1,469,341 |
| 8.0 |
| | 1,836,677 |
| 10.0 |
|
| Tier 1 risk-based capital | 2,054,881 |
| 11.19 |
| | 1,102,006 |
| 6.0 |
| | 1,469,341 |
| 8.0 |
|
| Tier 1 leverage capital | 2,054,881 |
| 8.13 |
| | 1,010,857 |
| 4.0 |
| | 1,263,571 |
| 5.0 |
|
| Webster Bank | | | | | | | | |
| CET1 risk-based capital | $ | 1,945,332 |
| 10.61 | % | | $ | 825,228 |
| 4.5 | % | | $ | 1,191,995 |
| 6.5 | % |
| Total risk-based capital | 2,141,939 |
| 11.68 |
| | 1,467,071 |
| 8.0 |
| | 1,833,839 |
| 10.0 |
|
| Tier 1 risk-based capital | 1,945,332 |
| 10.61 |
| | 1,100,304 |
| 6.0 |
| | 1,467,071 |
| 8.0 |
|
| Tier 1 leverage capital | 1,945,332 |
| 7.70 |
| | 1,010,005 |
| 4.0 |
| | 1,262,507 |
| 5.0 |
|
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. Banking regulations may limit the amount of dividends that may be paid. Approval by regulatory authorities is required if the effect of dividends declared would cause the regulatory capital of Webster Bank to fall below specified minimum levels, or if dividends declared exceed the net income for that year combined with the undistributed net income for the preceding two years. In addition, the OCC has discretion to prohibit any otherwise permitted capital distribution on general safety and soundness grounds. Dividends paid by Webster Bank to Webster Financial Corporation totaled $80 million during the nine months ended September 30, 2017 compared to $115 million during the nine months ended September 30, 2016.
Cash Restrictions
Webster Bank is required by Federal Reserve System regulations to hold cash reserve balances on hand or with the Federal Reserve Bank. Pursuant to this requirement, Webster Bank held $76.7 million and $58.6 million at September 30, 2017 and December 31, 2016, respectively.
Note 11: Earnings Per Common Share
Reconciliation of the calculation of basic and diluted earnings per common share follows:
|
| | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| (In thousands, except per share data) | 2017 | | 2016 | | 2017 | | 2016 |
| Earnings for basic and diluted earnings per common share: | | | | | | | |
| Net income | $ | 64,496 |
| | $ | 51,817 |
| | $ | 185,546 |
| | $ | 149,467 |
|
| Less: Preferred stock dividends | 2,024 |
| | 2,024 |
| | 6,072 |
| | 6,072 |
|
| Net income available to common shareholders | 62,472 |
| | 49,793 |
| | 179,474 |
| | 143,395 |
|
| Less: Earnings applicable to participating securities | 46 |
| | 159 |
| | 212 |
| | 468 |
|
| Earnings applicable to common shareholders | $ | 62,426 |
| | $ | 49,634 |
| | $ | 179,262 |
| | $ | 142,927 |
|
| | | | | | | | |
| Shares: | | | | | | | |
| Weighted-average common shares outstanding - basic | 92,125 |
| | 91,365 |
| | 92,003 |
| | 91,298 |
|
| Effect of dilutive securities: | | | | | | | |
| Stock options and restricted stock | 372 |
| | 465 |
| | 403 |
| | 452 |
|
| Warrants | 6 |
| | 27 |
| | 6 |
| | 26 |
|
| Weighted-average common shares outstanding - diluted | 92,503 |
| | 91,857 |
| | 92,412 |
| | 91,776 |
|
| | | | | | | | |
| Earnings per common share: | | | | | | | |
| Basic | $ | 0.68 |
| | $ | 0.54 |
| | $ | 1.95 |
| | $ | 1.57 |
|
| Diluted | 0.67 |
| | 0.54 |
| | 1.94 |
| | 1.56 |
|
Potential common shares excluded from the effect of dilutive securities because they would have been anti-dilutive, are as follows:
|
| | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| (In thousands) | 2017 | | 2016 | | 2017 | | 2016 |
| Stock options (shares with exercise price greater than market price) | — |
| | 172 |
| | — |
| | 172 |
|
| Restricted stock (due to performance conditions on non-participating shares) | 80 |
| | — |
| | 61 |
| | 161 |
|
Note 12: Derivative Financial Instruments
Risk Management Objective of Using Derivatives
Webster manages economic risks, such as interest rate, liquidity, and credit risks by managing the amount, sources, and duration of its debt funding in conjunction with the use of interest rate derivative financial instruments. Webster enters into interest rate derivatives to mitigate the exposure related to business activities that result in the future receipt or payment of, both known and uncertain, cash amounts that are impacted by interest rates. The primary objective for using interest rate derivatives is to add stability to interest expense by managing exposure to interest rate movements. To accomplish this objective, Webster uses interest rate swaps and interest rate caps as part of its interest rate risk management strategy.
Interest rate swaps and interest rate caps designated as cash flow hedges are designed to manage the risk associated with a forecasted event or an uncertain variable-rate cash flow. Forward-settle interest rate swaps protect the Company against adverse fluctuations in interest rates by reducing its exposure to variability in cash flows relating to interest payments on forecasted debt issuances. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. Interest rate caps designated as cash flow hedges involve the receipt of variable amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for payment of an up-front premium.
Cash flow hedges are used to regulate the variable cash flows associated with existing variable-rate debt and forecasted issuances of debt. Derivative instruments designated as cash flow hedges are recorded on the balance sheet at fair value. The effective portion of the change in fair value of the derivatives which are designated as cash flow hedges, and that qualify for hedge accounting, is recorded to AOCL and is reclassified into earnings in the subsequent periods that the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of these derivatives, attributable to the difference in the effective date of the hedge and the effective date of the debt issuance, is recognized directly in earnings. During the periods presented, there was no ineffectiveness to be recognized in earnings.
Certain fixed-rate obligations can be exposed to a change in fair value attributable to changes in benchmark interest rates. On occasion, interest rate swaps will be used to manage this exposure. An interest rate swap which involves the receipt of fixed-rate amounts from a counterparty in exchange for Webster making variable-rate payments over the life of the agreement, without the exchange of the underlying notional amount, is designated as a fair value hedge. For a qualifying derivative designated as a fair value hedge, the gain or loss on the derivative, as well as the gain or loss on the hedged item, is recognized in interest expense. During the periods presented, Webster did not have any interest rate derivative financial instruments designated as fair value hedges and as a result, there was no impact to interest expense.
Additionally, in order to address certain other risk management matters, the Company also utilizes derivative instruments that do not qualify for hedge accounting. These derivative instruments, which are recorded on the balance sheet at fair value, with changes in fair value recognized each period as other non-interest income in the accompanying Condensed Consolidated Statements of Income, are described in the following paragraphs.
Interest rate swap and cap contracts are sold to commercial and other customers who wish to modify loan interest rate sensitivity. These contracts are offset with dealer counterparty transactions structured with matching terms. As a result, there is minimal impact on earnings, except for fee income earned in such transactions.
RPAs are entered into as financial guarantees of performance on interest rate swap derivatives. The purchased (asset) or sold (liability) guarantee allows the Company to participate-in (fee received) or participate-out (fee paid) the risk associated with certain derivative positions executed with the borrower by the lead bank in a loan syndication.
Other derivatives include foreign currency forward contracts related to lending arrangements, a VISA equity swap transaction, and mortgage banking derivatives such as mortgage-backed securities related to residential loan commitments and loans held for sale. Mortgage banking derivatives are utilized by Webster in its efforts to manage risk of loss associated with its mortgage loan commitments and mortgage loans held for sale. Prior to closing and funding certain single-family residential mortgage loans interest rate lock commitments are generally extended to the borrowers. During the period from commitment date to closing date, Webster is subject to the risk that market rates of interest may change. If market rates rise, investors generally will pay less to purchase such loans causing a reduction in the anticipated gain on sale of the loans, or possibly resulting in a loss. In an effort to mitigate such risk, forward delivery sales commitments are established under which Webster agrees to deliver whole mortgage loans to various investors or issue mortgage-backed securities. Mandatory forward commitments establish the price to be received upon the sale of the related mortgage loan, thereby mitigating certain interest rate risk. There is, however, still certain execution risk specifically related to Webster’s ability to close and deliver to its investors the mortgage loans it has committed to sell.
Fair Value of Derivative Instruments
The following table presents the notional amounts and fair values of derivative positions:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | At September 30, 2017 | | At December 31, 2016 |
| Asset Derivatives | | Liability Derivatives | | Asset Derivatives | | Liability Derivatives |
| (In thousands) | Notional
Amounts | Fair
Value | | Notional
Amounts | Fair
Value | | Notional
Amounts | Fair
Value | | Notional
Amounts | Fair
Value |
| Designated as hedging instruments: | | | | | | | | | | | |
Positions subject to a master netting agreement (1) | | | | | | | | | | | |
| Interest rate derivatives | $ | 225,000 |
| $ | 1,972 |
| | $ | 100,000 |
| $ | 195 |
| | $ | 225,000 |
| $ | 3,270 |
| | $ | 100,000 |
| $ | 792 |
|
| Not designated as hedging instruments: | | | | | | | | | | | |
Positions subject to a master netting agreement (1) | | | | | | | | | | | |
| Interest rate derivatives | 2,270,444 |
| 4,225 |
| | 1,125,953 |
| 3,224 |
| | 1,943,485 |
| 32,226 |
| | 1,242,937 |
| 24,388 |
|
| Other | 8,595 |
| 260 |
| | 22,161 |
| 419 |
| | 10,634 |
| 231 |
| | 14,265 |
| 120 |
|
| Positions not subject to a master netting agreement | | | | | | | | | | | |
| Interest rate derivatives | 1,738,527 |
| 35,065 |
| | 1,652,004 |
| 15,764 |
| | 1,734,679 |
| 38,668 |
| | 1,451,762 |
| 19,001 |
|
| RPAs | 94,103 |
| 112 |
| | 99,538 |
| 136 |
| | 86,037 |
| 139 |
| | 87,273 |
| 166 |
|
Mortgage banking derivatives (2) | 42,290 |
| 614 |
| | 60,698 |
| 128 |
| | 103,440 |
| 3,084 |
| | 59,895 |
| 711 |
|
| Other | 262 |
| 2 |
| | 1,777 |
| 157 |
| | 1,438 |
| 19 |
| | 181 |
| 11 |
|
| Total not designated as hedging instruments | 4,154,221 |
| 40,278 |
| | 2,962,131 |
| 19,828 |
| | 3,879,713 |
| 74,367 |
| | 2,856,313 |
| 44,397 |
|
| Gross derivative instruments, before netting | $ | 4,379,221 |
| 42,250 |
| | $ | 3,062,131 |
| 20,023 |
| | $ | 4,104,713 |
| 77,637 |
| | $ | 2,956,313 |
| 45,189 |
|
Less: Legally enforceable master netting agreements
| | 2,915 |
| | | 2,916 |
| | | 24,252 |
| | | 24,254 |
|
| Less: Cash collateral posted | | 2,540 |
| | | 766 |
| | | 11,475 |
| | | 600 |
|
| Total derivative instruments, after netting | | $ | 36,795 |
| | | $ | 16,341 |
| | | $ | 41,910 |
| | | $ | 20,335 |
|
| |
(1) | One of Webster's counterparty relationships was impacted by a Chicago Mercantile Exchange rulebook amendment, resulting in the presentation of that relationship on a settlement basis, as a single unit of account at September 30, 2017, versus a netting basis at December 31, 2016. |
| |
(2) | Notional amounts include mandatory forward commitments of $60.5 million, while notional amounts do not include approved floating rate commitments of $21.9 million, at September 30, 2017. |
Changes in Fair Value
Changes in the fair value of derivatives not qualifying for hedge accounting treatment were recognized as follows:
|
| | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| (In thousands) | 2017 | | 2016 | | 2017 | | 2016 |
| Interest rate derivatives | $ | 1,501 |
| | $ | 608 |
| | $ | 1,780 |
| | $ | 6,515 |
|
| RPAs | 51 |
| | 110 |
| | 157 |
| | (143 | ) |
| Mortgage banking derivatives | (219 | ) | | 720 |
| | (1,886 | ) | | 357 |
|
| Other | (7 | ) | | (285 | ) | | (634 | ) | | (582 | ) |
| Total impact on other non-interest income | $ | 1,326 |
| | $ | 1,153 |
| | $ | (583 | ) | | $ | 6,147 |
|
Amounts for the effective portion of changes in the fair value of derivatives qualifying for hedge accounting treatment are reclassified to interest expense as interest payments are made on Webster's variable-rate debt. Over the next twelve months, the Company estimates that $1.2 million will be reclassified from AOCL as an increase to interest expense.
Webster records gains and losses related to hedge terminations to AOCL. These balances are subsequently amortized into interest expense over the respective terms of the hedged debt instruments. At September 30, 2017, the remaining unamortized loss on the termination of cash flow hedges is $16.5 million. Over the next twelve months, the Company estimates that $6.4 million will be reclassified from AOCL as an increase to interest expense.
Additional information about cash flow hedge activity impacting AOCL, and the related amounts reclassified to interest expense is provided in Note 9: Accumulated Other Comprehensive Loss, Net of Tax. Information about the valuation methods used to measure the fair value of derivatives is provided in Note 13: Fair Value Measurements.
Offsetting Derivatives
Webster has entered into transactions with counterparties that are subject to a legally enforceable master netting agreement. Derivatives subject to a legally enforceable master netting agreement are reported on a net basis, net of cash collateral. Net gain positions are recorded as assets and are included in accrued interest receivable and other assets, while, net loss positions are recorded as liabilities and are included in accrued expenses and other liabilities, in the accompanying Condensed Consolidated Balance Sheets.
The following table is presented on a gross basis, prior to the application of counterparty netting agreements:
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | At September 30, 2017 | | At December 31, 2016 |
| (In thousands) | Gross Amount | Relationship Offset | Cash Collateral Offset | Net Amount | | Gross Amount | Relationship Offset | Cash Collateral Offset | Net Amount |
| Derivative instrument gains: | | | | | | | | | |
| Hedge accounting | $ | 1,972 |
| $ | 292 |
| $ | 1,051 |
| $ | 629 |
| | $ | 3,270 |
| $ | 2,335 |
| $ | 935 |
| $ | — |
|
| Non-hedge accounting | 4,452 |
| 2,623 |
| 1,489 |
| 340 |
| | 32,457 |
| 21,917 |
| 10,540 |
| — |
|
| Total assets | $ | 6,424 |
| $ | 2,915 |
| $ | 2,540 |
| $ | 969 |
| | $ | 35,727 |
| $ | 24,252 |
| $ | 11,475 |
| $ | — |
|
| | | | | | | | | | |
| Derivative instrument losses: | | | | | | | | | |
| Hedge accounting | $ | 195 |
| $ | 195 |
| $ | — |
| $ | — |
| | $ | 792 |
| $ | 792 |
| $ | — |
| $ | — |
|
| Non-hedge accounting | 3,643 |
| 2,721 |
| 766 |
| 156 |
| | 24,508 |
| 23,462 |
| 600 |
| 446 |
|
| Total liabilities | $ | 3,838 |
| $ | 2,916 |
| $ | 766 |
| $ | 156 |
| | $ | 25,300 |
| $ | 24,254 |
| $ | 600 |
| $ | 446 |
|
Counterparty Credit Risk
Use of derivative contracts may expose the bank to counterparty credit risk. The Company has ISDA master agreements, including a Credit Support Annex, with all derivative counterparties. The ISDA master agreements provide that on each payment date, all amounts otherwise owing the same currency under the same transaction are netted so that only a single amount is owed in that currency. The ISDA provides, if the parties so elect, for such netting of amounts in the same currency among all transactions identified as being subject to such election that have common payment dates and booking offices. Under the Credit Support Annex, daily net exposure in excess of a negotiated threshold is secured by posted cash collateral. The Company has negotiated a zero threshold with the majority of its approved financial institution counterparties. In accordance with Webster policies, institutional counterparties must be analyzed and approved through the Company’s credit approval process.
The Company’s credit exposure on interest rate derivatives with non-dealer counterparties is limited to the net favorable value, including accrued interest, of all such instruments, reduced by the amount of collateral pledged by the counterparties. The Company's credit exposure related to derivatives with dealer counterparties is significantly mitigated with cash collateral equal to, or in excess of, the market value of the instrument updated daily.
In accordance with counterparty credit agreements and derivative clearing rules, the Company had approximately $20.7 million in net margin collateral posted with financial counterparties at September 30, 2017, comprised of $30.5 million in initial margin and $9.8 million in variation margin collateral received from financial counterparties or the derivative clearing organization. Collateral levels for approved financial institution counterparties are monitored daily and adjusted as necessary. In the event of default, should the collateral not be returned, the exposure would be offset by terminating the transaction.
The Company regularly evaluates the credit risk of its counterparties, taking into account the likelihood of default, net exposures, and remaining contractual life, among other related factors. The Company's net current credit exposure relating to interest rate derivatives with Webster Bank customers was $35.1 million at September 30, 2017. 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 $27.7 million at September 30, 2017. Credit risk exposure is mitigated as transactions with customers are generally secured by the same collateral of the underlying transactions being hedged.
Note 13: Fair Value Measurements
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined using quoted market prices. However, in many instances, quoted market prices are not available. In such instances, fair values are determined using appropriate valuation techniques. Various assumptions and observable inputs must be relied upon in applying these techniques. Accordingly, categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. As such, the fair value estimates may not be realized in an immediate transfer of the respective asset or liability.
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the entire holdings or any part of a particular financial instrument. Fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These factors are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Fair Value Hierarchy
The three levels within the fair value hierarchy are as follows:
| |
• | Level 1: Valuation is based upon unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
|
| |
• | Level 2: Fair value is calculated using significant inputs other than quoted market prices that are directly or indirectly observable for the asset or liability. The valuation may rely on quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in inactive markets, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit ratings, etc.), or inputs that are derived principally or corroborated by market data, by correlation, or other means.
|
| |
• | Level 3: Inputs for determining the fair value of the respective assets or liabilities are not observable. Level 3 valuations are reliant upon pricing models and techniques that require significant management judgment or estimation.
|
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Available-for-Sale Investment Securities. When quoted prices are available in an active market, the Company classifies investment securities within Level 1 of the valuation hierarchy. U.S. Treasury Bills are classified within Level 1 of the fair value hierarchy.
When quoted market prices are not available, the Company employs an independent pricing service that utilizes matrix pricing to calculate fair value. Such fair value measurements consider observable data such as dealer quotes, market spreads, cash flows, yield curves, live trading levels, trade execution data, market consensus prepayments speeds, credit information, and respective terms and conditions for debt instruments. Management maintains procedures to monitor the pricing service's assumptions and establishes processes to challenge the pricing service's valuations that appear unusual or unexpected. Available-for-Sale investment securities which include Agency CMO, Agency MBS, Agency CMBS, CMBS, CLO, trust preferred, and corporate debt, are classified within Level 2 of the fair value hierarchy.
Derivative Instruments. Foreign exchange contracts are valued based on unadjusted quoted prices in active markets and classified within Level 1 of the fair value hierarchy. Derivative instruments are valued using third-party valuation software, which considers the present value of cash flows discounted using observable forward rate assumptions. The Chicago Mercantile Exchange have amended their rulebooks to legally characterize variation margin payments for over-the-counter derivatives that clear as settlements rather than collateral, effective January 3, 2017. One of Webster's counterparty relationships was impacted by this change, resulting in the fair value of the instrument including cash collateral as a single unit of account.
The resulting fair values are validated against valuations performed by independent third parties and are classified within Level 2 of the fair value hierarchy. In determining if any fair value adjustment related to credit risk is required, Webster evaluates the credit risk of its counterparties by considering factors such as the likelihood of default by the counterparties, its net exposures, the remaining contractual life, as well as the amount of collateral securing the position. Webster reviews its counterparty exposure on a regular basis, and, when necessary, appropriate business actions are taken to adjust the exposure. When determining fair value, Webster applies the portfolio exception with respect to measuring counterparty credit risk for all of its derivative transactions subject to a master netting arrangement. The change in value of derivative assets and liabilities attributable to credit risk was not significant during the reported periods.
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.
Investments Held in Rabbi Trust. Investments held in the Rabbi Trust primarily include mutual funds that invest in equity and fixed income securities. Shares of mutual funds are valued based on net asset value, which represents quoted market prices for the underlying shares held in the mutual funds. Therefore, investments held in the Rabbi Trust are classified within Level 1 of the fair value hierarchy. Webster has elected to measure the investments held in the Rabbi Trust at fair value. The cost basis of the investments held in the Rabbi Trust is $2.9 million at September 30, 2017.
Alternative Investments. Alternative investments are non-public entities that cannot be redeemed since the Company’s investment is distributed as the underlying equity is liquidated. Alternative investments in which the ownership percentage is greater than 3% are fair valued on a recurring basis based upon the net asset value of the respective fund. Alternative investments in which the ownership percentage is less than 3% are fair valued on a non-recurring basis. These alternative investments are recorded at cost, subject to impairment testing. Both recurring and non-recurring alternative investments are classified within Level 3 of the fair value hierarchy, as they are non-public entities that cannot be redeemed since the Company's investment is distributed as the underlying investments are liquidated. At September 30, 2017, the alternative investments book value was $17.3 million and there was $9.4 million in remaining unfunded commitments.
Originated Loans Held For Sale. Residential mortgage loans typically are classified as held for sale upon origination based on management's intent to sell such loans. The Company generally records residential mortgage loans held for sale under the fair value option of ASC 825 "Financial Instruments". The fair value of residential mortgage loans held for sale is based on quoted market prices of similar loans sold in conjunction with securitization transactions. Accordingly, such loans are classified within Level 2 of the fair value hierarchy.
Summaries of the fair values of assets and liabilities measured at fair value on a recurring basis are as follows:
|
| | | | | | | | | | | | |
| | At September 30, 2017 |
| (In thousands) | Level 1 | Level 2 | Level 3 | Total |
| Financial assets held at fair value: | | | | |
| U.S. Treasury Bills | $ | 3,596 |
| $ | — |
| $ | — |
| $ | 3,596 |
|
| Agency CMO | — |
| 331,798 |
| — |
| 331,798 |
|
| Agency MBS | — |
| 912,977 |
| — |
| 912,977 |
|
| Agency CMBS | — |
| 584,960 |
| — |
| 584,960 |
|
| CMBS | — |
| 403,433 |
| — |
| 403,433 |
|
| CLO | — |
| 274,583 |
| — |
| 274,583 |
|
| Trust preferred | — |
| 30,937 |
| — |
| 30,937 |
|
| Corporate debt | — |
| 48,878 |
| — |
| 48,878 |
|
| Total available-for-sale investment securities | 3,596 |
| 2,587,566 |
| — |
| 2,591,162 |
|
Gross derivative instruments, before netting (1) | 262 |
| 41,988 |
| — |
| 42,250 |
|
| Investments held in Rabbi Trust | 5,278 |
| — |
| — |
| 5,278 |
|
| Alternative investments | — |
| — |
| 6,986 |
| 6,986 |
|
| Originated loans held for sale | — |
| 32,855 |
| — |
| 32,855 |
|
| Total financial assets held at fair value | $ | 9,136 |
| $ | 2,662,409 |
| $ | 6,986 |
| $ | 2,678,531 |
|
| Financial liabilities held at fair value: | | | | |
Gross derivative instruments, before netting (1) | $ | 562 |
| $ | 19,461 |
| $ | — |
| $ | 20,023 |
|
|
| | | | | | | | | | | | |
| | At December 31, 2016 |
| (In thousands) | Level 1 | Level 2 | Level 3 | Total |
| Financial assets held at fair value: | | | | |
| U.S. Treasury Bills | $ | 734 |
| $ | — |
| $ | — |
| $ | 734 |
|
| Agency CMO | — |
| 419,706 |
| — |
| 419,706 |
|
| Agency MBS | — |
| 954,349 |
| — |
| 954,349 |
|
| Agency CMBS | — |
| 573,272 |
| — |
| 573,272 |
|
| CMBS | — |
| 477,365 |
| — |
| 477,365 |
|
| CLO | — |
| 427,390 |
| — |
| 427,390 |
|
| Trust preferred | — |
| 28,633 |
| — |
| 28,633 |
|
| Corporate debt | — |
| 109,642 |
| — |
| 109,642 |
|
| Total available-for-sale investment securities | 734 |
| 2,990,357 |
| — |
| 2,991,091 |
|
Gross derivative instruments, before netting (1) | 250 |
| 77,387 |
| — |
| 77,637 |
|
| Investments held in Rabbi Trust | 5,119 |
| — |
| — |
| 5,119 |
|
| Alternative investments | — |
| — |
| 5,502 |
| 5,502 |
|
| Originated loans held for sale | — |
| 60,260 |
| — |
| 60,260 |
|
| Total financial assets held at fair value | $ | 6,103 |
| $ | 3,128,004 |
| $ | 5,502 |
| $ | 3,139,609 |
|
| Financial liabilities held at fair value: | | | | |
Gross derivative instruments, before netting (1) | $ | 120 |
| $ | 45,069 |
| $ | — |
| $ | 45,189 |
|
| |
(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 12: Derivative Financial Instruments. |
The following table presents the changes in Level 3 assets and liabilities that are measured at fair value on a recurring basis:
|
| | | |
| (In thousands) | Alternative Investments |
| Balance at January 1, 2017 | $ | 5,502 |
|
| Unrealized gain included in net income | 639 |
|
| Purchases/capital funding | 899 |
|
| Payments | (54 | ) |
| Balance at September 30, 2017 | $ | 6,986 |
|
Assets Measured at Fair Value on a Non-Recurring Basis
Certain assets are measured at fair value on a non-recurring basis; that is, the assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances, for example, when there is evidence of impairment. The following is a description of valuation methodologies used for assets measured on a non-recurring basis.
Transferred Loans Held For Sale. Certain loans are transferred to loans held for sale once a decision has been made to sell such loans. These loans are accounted for at the lower of cost or market and are considered to be recognized at fair value when they are recorded at below cost. This activity is primarily commercial loans with observable inputs and is classified within Level 2. On the occasion should these loans include adjustments for changes in loan characteristics using unobservable inputs, the loans would be classified within Level 3.
Collateral Dependent Impaired Loans and Leases. Impaired loans and leases for which repayment is expected to be provided solely by the value of the underlying collateral are considered collateral dependent and are valued based on the estimated fair value of such collateral using customized discounting criteria. As such, collateral dependent impaired loans and leases are classified as Level 3 of the fair value hierarchy.
Other Real Estate Owned and Repossessed Assets. The total book value of OREO and repossessed assets was $5.3 million at September 30, 2017. OREO and repossessed assets are accounted for at the lower of cost or market and are considered to be recognized at fair value when they are recorded at below cost. The fair value of OREO is based on independent appraisals or internal valuation methods, less estimated selling costs. The valuation may consider available pricing guides, auction results, and price opinions. Certain assets require assumptions about factors that are not observable in an active market in the determination of fair value; as such, OREO and repossessed assets are classified within Level 3 of the fair value hierarchy.
The table below presents the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a non-recurring basis as of September 30, 2017:
|
| | | | | | | | |
| (Dollars in thousands) | |
| Asset | Fair Value | Valuation Methodology | Unobservable Inputs | Range of Inputs |
| Collateral dependent impaired loans and leases | $ | 15,955 |
| Real Estate Appraisals | Discount for appraisal type | 0% | - | 20% |
| | | | Discount for costs to sell | 0% | - | 15% |
| OREO | $ | 2,587 |
| Real Estate Appraisals | Discount for appraisal type | 0% | - | 20% |
| | | | Discount for costs to sell | 8% |
Fair Value of Financial Instruments and Servicing Assets
The Company is required to disclose the estimated fair value of financial instruments, both assets and liabilities, for which it is practicable to estimate fair value. 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 assumptions and establishes processes to challenge the pricing service's valuations that appear unusual or unexpected. Held-to-Maturity investment securities, which include Agency CMO, Agency MBS, Agency CMBS, CMBS, municipal bonds and notes, and private label MBS securities, are classified within Level 2 of the fair value hierarchy.
Loans and Leases, net. The estimated fair value of loans and leases held for investment is calculated using a discounted cash flow method, using future prepayments and market interest rates inclusive of an illiquidity premium for comparable loans and leases. The associated cash flows are adjusted for credit and other potential losses. Fair value for impaired loans and leases is estimated using the net present value of the expected cash flows. Loans and leases are classified within Level 3 of the fair value hierarchy.
Deposit Liabilities. The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. Deposit liabilities are classified within Level 2 of the fair value hierarchy.
Time Deposits. The fair value of a fixed-maturity certificate of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. Time deposits are classified within Level 2 of the fair value hierarchy.
Securities Sold Under Agreements to Repurchase and Other Borrowings. The carrying value is an estimate of fair value for those securities sold under agreements to repurchase and other borrowings that mature within 90 days. The fair values of all other borrowings are estimated using discounted cash flow analysis based on current market rates adjusted, as appropriate, for associated credit risks. Securities sold under agreements to repurchase and other borrowings are classified within Level 2 of the fair value hierarchy.
Federal Home Loan Bank Advances and Long-Term Debt. The fair value of FHLB advances and long-term debt is estimated using a discounted cash flow technique. Discount rates are matched with the time period of the expected cash flow and are adjusted, as appropriate, to reflect credit risk. FHLB advances and long-term debt are classified within Level 2 of the fair value hierarchy.
Mortgage Servicing Assets. Mortgage servicing assets are accounted for at cost, subject to impairment testing. Mortgage servicing assets are considered to be recognized at fair value when they are recorded at below cost. Changes in fair value are included as a component of other non-interest income in the accompanying Condensed Consolidated Statements of Income. Fair value is calculated as the present value of estimated future net servicing income and relies on market based assumptions for loan prepayment speeds, servicing costs, discount rates, and other economic factors; as such, the primary risk inherent in valuing mortgage servicing assets is the impact of fluctuating interest rates on the servicing revenue stream. Mortgage servicing assets are classified within Level 3 of the fair value hierarchy.
The estimated fair values of selected financial
instrumentshighlights and
servicing assets are as follows:key performance indicators: | | | | | | | | | | | |
| | At or for the three months ended March 31, |
| (In thousands, except per share and ratio data) | 2022 | | 2021 |
| Income and performance ratios: | | | |
| Net (loss) income | $ | (16,747) | | | $ | 108,078 | |
| Net (loss) income available to common shareholders | (20,178) | | | 106,109 | |
| (Loss) earnings per diluted common share | (0.14) | | | 1.17 | |
| Return on average assets (annualized) | (0.12) | % | | 1.31 | % |
| Return on average common tangible common shareholders' equity (annualized) (non-GAAP) | (1.36) | | | 16.79 | |
| Return on average common shareholders' equity (annualized) | (1.25) | | | 13.65 | |
| Non-interest income as a percentage of total revenue | 20.88 | | | 25.54 | |
| Asset quality: | | | |
| Allowance for credit losses on loans and leases | $ | 569,371 | | | $ | 328,351 | |
| Non-performing assets | 251,206 | | | 152,808 | |
| Allowance for credit losses on loans and leases / total loans and leases | 1.31 | % | | 1.54 | % |
| Net charge-offs (recoveries) / average loans and leases (annualized) | 0.10 | | | 0.10 | |
| Non-performing loans and leases / total loans and leases | 0.57 | | | 0.71 | |
| Non-performing assets / total loans and leases plus OREO | 0.58 | | | 0.72 | |
| Allowance for credit losses on loans and leases / non-performing loans and leases | 229.48 | | | 218.29 | |
| Other ratios: | | | |
| Tangible equity (non-GAAP) | 8.72 | % | | 8.30 | % |
| Tangible common equity (non-GAAP) | 8.26 | | | 7.85 | |
| Tier 1 risk-based capital | 12.05 | | | 12.55 | |
| Total risk-based capital | 14.41 | | | 14.08 | |
| CET1 risk-based capital | 11.46 | | | 11.89 | |
| Shareholders' equity / total assets | 12.55 | | | 9.84 | |
| Net interest margin | 3.21 | | | 2.92 | |
| Efficiency ratio (non-GAAP) | 48.73 | | | 58.46 | |
| Equity and share related: | | | |
| Common equity | $ | 7,893,156 | | | $ | 3,127,891 | |
| Book value per common share | 44.32 | | | 34.60 | |
| Tangible book value per common share (non-GAAP) | 28.94 | | | 28.41 | |
| Common stock closing price | 56.12 | | | 55.11 | |
| Dividends and equivalents declared per common share | 0.40 | | | 0.40 | |
| Common shares issued and outstanding | 178,102 | | | 90,410 | |
| Weighted-average common shares outstanding - basic | 147,394 | | | 89,809 | |
| Weighted-average common shares outstanding - diluted | 147,394 | | | 90,108 | |
|
| | | | | | | | | | | | | | | |
| | At September 30, 2017 | | At December 31, 2016 |
| (In thousands) | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
| Assets: | | | | | | | |
| Level 2 | | | | | | | |
| Held-to-maturity investment securities | $ | 4,497,311 |
| | $ | 4,481,675 |
| | $ | 4,160,658 |
| | $ | 4,125,125 |
|
| Transferred loans held for sale | — |
| | — |
| | 7,317 |
| | 7,444 |
|
| Level 3 | | | | | | | |
| Loans and leases, net | 17,244,618 |
| | 17,155,002 |
| | 16,832,268 |
| | 16,678,106 |
|
| Mortgage servicing assets | 25,140 |
| | 44,992 |
| | 24,466 |
| | 52,075 |
|
| Alternative investments | 10,296 |
| | 12,539 |
| | 11,034 |
| | 13,189 |
|
| Liabilities: | | | | | | | |
| Level 2 | | | | | | | |
| Deposit liabilities | $ | 18,636,744 |
| | $ | 18,636,744 |
| | $ | 17,279,049 |
| | $ | 17,279,049 |
|
| Time deposits | 2,218,491 |
| | 2,213,155 |
| | 2,024,808 |
| | 2,024,395 |
|
| Securities sold under agreements to repurchase and other borrowings | 902,902 |
| | 905,249 |
| | 949,526 |
| | 955,660 |
|
FHLB advances (1) | 1,507,681 |
| | 1,512,203 |
| | 2,842,908 |
| | 2,825,101 |
|
Long-term debt (1) | 225,704 |
| | 235,686 |
| | 225,514 |
| | 225,514 |
|
| |
(1) | The following adjustments to the carrying amount are not included for determination of fair value, see Note 8: Borrowings: |
•FHLB advances - unamortized premiums on advances
•Long-term debt - unamortized discount and debt issuance cost on senior fixed-rate notes
Note 14: Retirement Benefit Plans
Defined benefit pension and other postretirement benefits
The following table summarizes the components of net periodic benefit cost:
|
| | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, |
| | 2017 | | 2016 |
| (In thousands) | Pension Plan | SERP | Other Benefits | | Pension Plan | SERP | Other Benefits |
| Service cost | $ | 12 |
| $ | — |
| $ | — |
| | $ | 11 |
| $ | — |
| $ | — |
|
| Interest cost on benefit obligations | 1,829 |
| 96 |
| 19 |
| | 2,110 |
| 98 |
| 32 |
|
| Expected return on plan assets | (3,074 | ) | — |
| — |
| | (3,067 | ) | — |
| — |
|
| Amortization of prior service cost | — |
| — |
| — |
| | — |
| — |
| 4 |
|
| Recognized net loss | 1,466 |
| 136 |
| (15 | ) | | 1,666 |
| 106 |
| 8 |
|
| Net periodic benefit cost | $ | 233 |
| $ | 232 |
| $ | 4 |
| | $ | 720 |
| $ | 204 |
| $ | 44 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Nine months ended September 30, |
| | 2017 | | 2016 |
| (In thousands) | Pension Plan | SERP | Other Benefits | | Pension Plan | SERP | Other Benefits |
| Service cost | $ | 37 |
| $ | — |
| $ | — |
| | $ | 34 |
| $ | — |
| $ | — |
|
| Interest cost on benefit obligations | 5,486 |
| 281 |
| 69 |
| | 6,331 |
| 292 |
| 94 |
|
| Expected return on plan assets | (9,222 | ) | — |
| — |
| | (8,596 | ) | — |
| — |
|
| Amortization of prior service cost | — |
| — |
| — |
| | — |
| — |
| 11 |
|
| Recognized net loss | 4,398 |
| 561 |
| — |
| | 4,998 |
| 319 |
| 26 |
|
| Net periodic benefit cost | $ | 699 |
| $ | 842 |
| $ | 69 |
| | $ | 2,767 |
| $ | 611 |
| $ | 131 |
|
Note 15: Share-Based Plans
Stock compensation plans
Webster maintains stock compensation plans under which non-qualified stock options, incentive stock options, restricted stock, restricted stock units, or stock appreciation rights may be granted to employees and directors. The Company believes these share awards better align the interests of its employees with those of its shareholders. Stock compensation cost is recognized over the required service vesting period for the awards, based on the grant-date fair value, net of estimated forfeitures, and is included as a component of compensation and benefits reflected in non-interest expense.
The following table provides a summary of stock compensation expense recognized in the accompanying Condensed Consolidated Statements of Income:
|
| | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| (In thousands) | 2017 | | 2016 | | 2017 | | 2016 |
| Stock options | $ | — |
| | $ | — |
| | $ | — |
| | $ | 43 |
|
| Restricted stock | 3,007 |
| | 2,944 |
| | 9,050 |
| | 8,515 |
|
| Total stock compensation expense | $ | 3,007 |
| | $ | 2,944 |
| | $ | 9,050 |
| | $ | 8,558 |
|
At September 30, 2017 there was $16.7 million of unrecognized stock compensation expense for restricted stock expected to be recognized over a weighted-average period of 2.0 years.
The following table provides a summary of the stock compensation plans activity for the nine months ended September 30, 2017:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Restricted Stock Awards Outstanding | | Stock Options Outstanding |
| | Time-Based | | Performance-Based | |
| | Number of Shares | Weighted-Average Grant Date Fair Value | | Number of Units | Weighted-Average Grant Date Fair Value | | Number of Shares | Weighted-Average Grant Date Fair Value | | Number of Shares | Weighted-Average Exercise Price |
| Outstanding, at January 1, 2017 | 253,361 |
| $ | 32.24 |
| | 2,158 |
| $ | 32.89 |
| | 116,184 |
| $ | 33.62 |
| | 1,072,974 |
| $ | 21.24 |
|
| Granted | 164,953 |
| 54.79 |
| | 8,129 |
| 56.07 |
| | 89,581 |
| 56.18 |
| | — |
| — |
|
| Exercised options | — |
| — |
| | — |
| — |
| | — |
| — |
| | 279,344 |
| 25.80 |
|
Vested restricted stock awards (1) | 155,390 |
| 36.36 |
| | 6,900 |
| 48.82 |
| | 87,982 |
| 40.74 |
| | — |
| — |
|
| Forfeited | 14,586 |
| 36.44 |
| | — |
| — |
| | 6,276 |
| 42.72 |
| | — |
| — |
|
| Outstanding and exercisable, at September 30, 2017 | 248,338 |
| $ | 43.96 |
| | 3,387 |
| $ | 56.07 |
| | 111,507 |
| $ | 45.61 |
| | 793,630 |
| $ | 19.63 |
|
| |
(1) | Vested for purposes of recording compensation expense. |
Time-based restricted stock. Time-based restricted stock awards vest over the applicable service period ranging from 1 to 5 years. The number of time-based awards that may be granted to an eligible individual in a calendar year is limited to 100,000 shares. Compensation expense is recorded over the vesting period based on a fair value, which is measured using the Company's common stock closing price at the date of grant.
Performance-based restricted stock. Performance-based restricted stock awards vest after a 3 year performance period. The awards vest with a share quantity dependent on that performance, in a range from 0 to 150%. The performance criteria for 50% of the shares granted in 2017 is based upon Webster's ranking for total shareholder return versus Webster's compensation peer group companies and the remaining 50% is based upon Webster's average of return on equity during the three year vesting period. The compensation peer group companies are utilized because they represent the financial institutions that best compare with Webster. The Company records compensation expense over the vesting period, based on a fair value calculated using the Monte-Carlo simulation model, which allows for the incorporation of the performance condition for the 50% of the performance-based shares tied to total shareholder return versus the compensation peer group, and based on a fair value of the market price on the date of grant for the remaining 50% of the performance-based shares tied to Webster's return on equity. Compensation expense is subject to adjustment based on management's assessment of Webster's return on equity performance relative to the target number of shares condition.
Stock options. Stock option awards have an exercise price equal to the market price of WebsterNon-GAAP Financial Corporation's stock on the date of grant. Each option grants the holder the right to acquire a share of Webster Financial Corporation common stock over a contractual life of up to 10 years. All awarded options have vested. There were 735,785 non-qualified stock options and 57,845 incentive stock options outstanding at September 30, 2017.
Note 16: Segment Reporting
Webster’s operations are organized into three reportable segments that represent its primary businesses - Commercial Banking, Community Banking and HSA Bank. These three segments reflect how executive management responsibilities are assigned, the primary businesses, the products and services provided, the type of customer served, and how discrete financial information is currently evaluated. The Corporate Treasury unit of the Company, along with the amounts required to reconcile profitability metrics to amounts reported in accordance with GAAP, are included in the Corporate and Reconciling category.
Description of Segment Reporting Methodology
Webster’s reportable segment results are intended to reflect each segment as if it were a stand-alone business. Webster uses an internal profitability reporting system to generate information by operating segment, which is based on a series of management estimates and allocations regarding funds transfer pricing, provision for loan and lease losses, non-interest expense, income taxes, and equity capital. These estimates and allocations, certain of which are subjective in nature, are periodically reviewed and refined. Changes in estimates and allocations that affect the reported results of any operating segment do not affect the consolidated financial position or results of operations of Webster as a whole. The full profitability measurement reports, which are prepared for each operating segment, reflect non-GAAP reporting methodologies. The differences between full profitability and GAAP results are reconciled in the Corporate and Reconciling category.
Webster allocates interest income and interest expense to each business, while also transferring the primary interest rate risk exposures to the Corporate and Reconciling category, using a matched maturity funding concept called Funds Transfer Pricing. The allocation process considers the specific interest rate risk and liquidity risk of financial instruments and other assets and liabilities in each line of business. The matched maturity funding concept considers the origination date and the earlier of the maturity date or the repricing date of a financial instrument to assign an FTP rate for loans and deposits originated each day. Loans are assigned an FTP rate for funds used and deposits are assigned an FTP rate for funds provided. This process is executed by the Company’s Financial Planning and Analysis division and is overseen by ALCO.
Webster allocates the provision for loan and lease losses to each segment based on management’s estimate of the inherent loss content in each of the specific loan and lease portfolios. Provision expense for certain elements of risk that are not deemed specifically attributable to a reportable segment, such as the provision for the consumer liquidating portfolio, is shown as part of the Corporate and Reconciling category.
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. Income tax expense is allocated to each reportable segment based on the consolidated effective income tax rate for the period shown.
Segment Reporting Modifications
The 2016 segment results have been adjusted for comparability to the 2017 segment presentation for the following changes.
To further strengthen Webster's ability to deliver the totality of its products and services to the owners and executives of commercial clients and other high net worth individuals, an organizational change was made during the second quarter of 2017. Effective April 1, 2017, the head of Private Banking reports directly to the head of Commercial Banking. The current organizational structure reflects how executive management responsibilities are assigned and reviewed. As a result of this change, the Private Banking and Commercial Banking operating segments are aggregated into one reportable segment, Commercial Banking.
In late 2007 Webster discontinued its indirect residential construction lending and its indirect home equity lending outside of its primary New England market area referred to as National Wholesale Lending. Webster placed these two portfolios into a liquidating loan portfolio included within the Corporate and Reconciling category. The balance of the home equity liquidating loan portfolio was $65.0 million at December 31, 2016. As the remainder of this portfolio has been performing in the same manner as the continuing home equity portfolio, management has decided to combine the liquidating loan portfolio with the continuing home equity loan portfolio. The combined portfolio is included in the Community Banking reportable segment.
The following table presents total assets for Webster's reportable segments and the Corporate and Reconciling category:
|
| | | | | | | | | | | | | | | |
| | Total Assets |
| (In thousands) | Commercial Banking | Community Banking | HSA Bank | Corporate and Reconciling | Consolidated Total |
| At September 30, 2017 | $ | 9,428,676 |
| $ | 8,881,322 |
| $ | 76,090 |
| $ | 7,964,094 |
| $ | 26,350,182 |
|
| At December 31, 2016 | 9,069,445 |
| 8,721,046 |
| 83,987 |
| 8,198,051 |
| 26,072,529 |
|
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 September 30, 2017 |
| (In thousands) | Commercial Banking | Community Banking | HSA Bank | Corporate and Reconciling | Consolidated Total |
| Net interest income (expense) | $ | 81,925 |
| $ | 96,859 |
| $ | 26,713 |
| $ | (4,593 | ) | $ | 200,904 |
|
| Provision (benefit) for loan and lease losses | 12,073 |
| (1,923 | ) | — |
| — |
| 10,150 |
|
| Net interest income (expense) after provision for loan and lease losses | 69,852 |
| 98,782 |
| 26,713 |
| (4,593 | ) | 190,754 |
|
| Non-interest income | 13,207 |
| 27,079 |
| 19,371 |
| 6,189 |
| 65,846 |
|
| Non-interest expense | 38,339 |
| 92,478 |
| 27,222 |
| 3,784 |
| 161,823 |
|
| Income (loss) before income tax expense | 44,720 |
| 33,383 |
| 18,862 |
| (2,188 | ) | 94,777 |
|
| Income tax expense (benefit) | 14,363 |
| 10,605 |
| 6,006 |
| (693 | ) | 30,281 |
|
| Net income (loss) | $ | 30,357 |
| $ | 22,778 |
| $ | 12,856 |
| $ | (1,495 | ) | $ | 64,496 |
|
|
| | | | | | | | | | | | | | | |
| | Three months ended September 30, 2016 |
| (In thousands) | Commercial Banking | Community Banking | HSA Bank | Corporate and Reconciling | Consolidated Total |
| Net interest income (expense) | $ | 74,265 |
| $ | 91,995 |
| $ | 20,560 |
| $ | (6,623 | ) | $ | 180,197 |
|
| Provision for loan and lease losses | 7,876 |
| 6,374 |
| — |
| — |
| 14,250 |
|
| Net interest income (expense) after provision for loan and lease losses | 66,389 |
| 85,621 |
| 20,560 |
| (6,623 | ) | 165,947 |
|
| Non-interest income | 15,916 |
| 29,130 |
| 16,900 |
| 4,466 |
| 66,412 |
|
| Non-interest expense | 35,793 |
| 92,508 |
| 23,021 |
| 4,775 |
| 156,097 |
|
| Income (loss) before income tax expense | 46,512 |
| 22,243 |
| 14,439 |
| (6,932 | ) | 76,262 |
|
| Income tax expense (benefit) | 14,957 |
| 7,122 |
| 4,624 |
| (2,258 | ) | 24,445 |
|
| Net income (loss) | $ | 31,555 |
| $ | 15,121 |
| $ | 9,815 |
| $ | (4,674 | ) | $ | 51,817 |
|
|
| | | | | | | | | | | | | | | |
| | Nine months ended September 30, 2017 |
| (In thousands) | Commercial Banking | Community Banking | HSA Bank | Corporate and Reconciling | Consolidated Total |
| Net interest income (expense) | $ | 239,118 |
| $ | 286,351 |
| $ | 76,339 |
| $ | (10,453 | ) | $ | 591,355 |
|
| Provision for loan and lease losses | 29,562 |
| (1,662 | ) | — |
| — |
| 27,900 |
|
| Net interest income (expense) after provision for loan and lease losses | 209,556 |
| 288,013 |
| 76,339 |
| (10,453 | ) | 563,455 |
|
| Non-interest income | 39,163 |
| 80,516 |
| 58,392 |
| 15,368 |
| 193,439 |
|
| Non-interest expense | 113,767 |
| 281,979 |
| 84,211 |
| 10,069 |
| 490,026 |
|
| Income (loss) before income tax expense | 134,952 |
| 86,550 |
| 50,520 |
| (5,154 | ) | 266,868 |
|
| Income tax expense (benefit) | 41,125 |
| 26,374 |
| 15,395 |
| (1,572 | ) | 81,322 |
|
| Net income (loss) | $ | 93,827 |
| $ | 60,176 |
| $ | 35,125 |
| $ | (3,582 | ) | $ | 185,546 |
|
|
| | | | | | | | | | | | | | | |
| | Nine months ended September 30, 2016 |
| (In thousands) | Commercial Banking | Community Banking | HSA Bank | Corporate and Reconciling | Consolidated Total |
| Net interest income (expense) | $ | 211,422 |
| $ | 274,186 |
| $ | 60,484 |
| $ | (12,838 | ) | $ | 533,254 |
|
| Provision for loan and lease losses | 29,765 |
| 14,085 |
| — |
| — |
| 43,850 |
|
| Net interest income (expense) after provision for loan and lease losses | 181,657 |
| 260,101 |
| 60,484 |
| (12,838 | ) | 489,404 |
|
| Non-interest income | 41,819 |
| 83,248 |
| 54,969 |
| 13,825 |
| 193,861 |
|
| Non-interest expense | 103,336 |
| 276,045 |
| 71,966 |
| 9,973 |
| 461,320 |
|
| Income (loss) before income tax expense | 120,140 |
| 67,304 |
| 43,487 |
| (8,986 | ) | 221,945 |
|
| Income tax expense (benefit) | 39,233 |
| 21,979 |
| 14,201 |
| (2,935 | ) | 72,478 |
|
| Net income (loss) | $ | 80,907 |
| $ | 45,325 |
| $ | 29,286 |
| $ | (6,051 | ) | $ | 149,467 |
|
Note 17: 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.
The following table summarizes the outstanding amounts of credit-related financial instruments with off-balance sheet risk:
|
| | | | | | | |
| (In thousands) | At September 30, 2017 | | At December 31, 2016 |
| Commitments to extend credit | $ | 5,043,151 |
| | $ | 5,224,280 |
|
| Standby letter of credit | 159,485 |
| | 128,985 |
|
| Commercial letter of credit | 42,007 |
| | 46,497 |
|
| Total credit-related financial instruments with off-balance sheet risk | $ | 5,244,643 |
| | $ | 5,399,762 |
|
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.
These commitments subject the Company to potential exposure in excess of the amounts recorded in the financial statements, and therefore, management maintains a specific reserve for unfunded credit commitments. This reserve is reported as a component of accrued expenses and other liabilities in the accompanying Condensed Consolidated Balance Sheets.
The following table provides a summary of activity in the reserve for unfunded credit commitments:
|
| | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| (In thousands) | 2017 | | 2016 | | 2017 | | 2016 |
| Beginning balance | $ | 2,544 |
| | $ | 2,319 |
| | $ | 2,287 |
| | $ | 2,119 |
|
| Provision charged to expense | — |
| | 172 |
| | 257 |
| | 372 |
|
| Ending balance | $ | 2,544 |
| | $ | 2,491 |
| | $ | 2,544 |
| | $ | 2,491 |
|
Litigation
Webster is involved in routine legal proceedings occurring in the ordinary course of business and is subject to loss contingencies related to such litigation and claims arising therefrom. Webster evaluates these contingencies based on information currently available, including advice of counsel and assessment of available insurance coverage. Webster establishes an accrual for litigation and claims when a loss contingency is considered probable and the related amount is reasonably estimable. This accrual is periodically reviewed and may be adjusted as circumstances change. Webster also estimates certain loss contingencies for possible litigation and claims, whether or not there is an accrued probable loss. Webster believes it has defenses to all the claims asserted against it in existing litigation matters and intends to defend itself in all matters.
Based upon its current knowledge, after consultation with counsel and after taking into consideration its current litigation accrual, Webster believes that at September 30, 2017 any reasonably possible losses, in addition to amounts accrued, are not material to Webster’s consolidated financial condition. However, in light of the uncertainties involved in such actions and proceedings, there is no assurance that the ultimate resolution of these matters will not significantly exceed the amounts currently accrued by Webster or that the Company’s litigation accrual will not need to be adjusted in future periods. Such an outcome could be material to the Company’s operating results in a particular period, depending on, among other factors, the size of the loss or liability imposed and the level of the Company’s income for that period.
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, 2016, included in its 2016 Form 10-K, 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 nine months ended September 30, 2017 are not necessarily indicative of the results for the full year ending December 31, 2017, or any future period.
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 2016 Form 10-K. Modifications to significant accounting policies 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 loan and lease losses;
fair value measurements for valuation of investments and other financial instruments;
evaluation for impairment of goodwill and other intangible assets; and
assessing the realizability of deferred tax assets and the measurement of uncertain tax positions.
These particular significant 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. The 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 2016 Form 10-K and Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, of this report.
Results of Operations
Selected financial highlights are presented in the following table:
|
| | | | | | | | | | | | | | | |
| | At or for the three months ended September 30, | | At or for the nine months ended September 30, |
| (In thousands, except per share and ratio data) | 2017 | | 2016 | | 2017 | | 2016 |
| Earnings: | | | | | | | |
| Net interest income | $ | 200,904 |
| | $ | 180,197 |
| | $ | 591,355 |
| | $ | 533,254 |
|
| Provision for loan and lease losses | 10,150 |
| | 14,250 |
| | 27,900 |
| | 43,850 |
|
| Total non-interest income | 65,846 |
| | 66,412 |
| | 193,439 |
| | 193,861 |
|
| Total non-interest expense | 161,823 |
| | 156,097 |
| | 490,026 |
| | 461,320 |
|
| Net income | 64,496 |
| | 51,817 |
| | 185,546 |
| | 149,467 |
|
| Earnings applicable to common shareholders | 62,426 |
| | 49,634 |
| | 179,262 |
| | 142,927 |
|
| Share Data: | | | | | | | |
| Weighted-average common shares outstanding - diluted | 92,503 |
| | 91,857 |
| | 92,412 |
| | 91,776 |
|
| Diluted earnings per common share | $ | 0.67 |
| | $ | 0.54 |
| | $ | 1.94 |
| | $ | 1.56 |
|
| Dividends and dividend equivalents declared per common share | 0.26 |
| | 0.25 |
| | 0.77 |
| | 0.73 |
|
| Dividends declared per Series E preferred share | 400.00 |
| | 400.00 |
| | 1,200.00 |
| | 1,200.00 |
|
| Book value per common share | 27.34 |
| | 26.06 |
| | 27.34 |
| | 26.06 |
|
Tangible book value per common share (non-GAAP) | 21.16 |
| | 19.80 |
| | 21.16 |
| | 19.80 |
|
| Selected Ratios: | | | | | | | |
| Net interest margin | 3.30 | % | | 3.10 | % | | 3.27 | % | | 3.10 | % |
Return on average assets (annualized basis) | 0.98 |
| | 0.82 |
| | 0.95 |
| | 0.80 |
|
Return on average common shareholders' equity (annualized basis) | 9.95 |
| | 8.36 |
| | 9.67 |
| | 8.16 |
|
| CET1 risk-based capital | 10.99 |
| | 10.48 |
| | 10.99 |
| | 10.48 |
|
Tangible common equity ratio (non-GAAP) | 7.55 |
| | 7.25 |
| | 7.55 |
| | 7.25 |
|
Return on average tangible common shareholders' equity (annualized basis) (non-GAAP) | 12.99 |
| | 11.24 |
| | 12.71 |
| | 11.04 |
|
Efficiency ratio (non-GAAP) | 59.18 |
| | 61.43 |
| | 60.62 |
| | 61.63 |
|
Measures
The non-GAAP financial measures identified in the preceding table provide both management and investors with information useful in understanding Webster's financial position, results of operations, the Company's financial performance, performance trendsstrength of its capital position, and financial position.overall business performance. These measures are used by management for internal planning and forecasting purposes, as well as by securities analysts, investors, and other interested parties to compareassess peer company operating performance. Management believes that thethis presentation, together with the accompanying reconciliations, provides a complete understanding of the factors and trends affecting the Company'sWebster's business and allows investors to view its performance in a similar manner.
Tangible book value per common share represents shareholders’ equity less preferred stock and goodwill and other intangible assets (tangible common equity) divided by common shares outstanding at the end of the reporting period. The tangible common equity ratio represents tangible common equity divided by total assets less goodwill and other intangible assets (tangible assets). Both of these measures are used by management to evaluate the strength of Webster's capital position. The annualized return on average tangible common shareholders' equity is calculated using net income available to common shareholders, adjusted for the annualized tax-effected amortization of intangible assets, as a percentage of average tangible common equity. This measure is used by management to assess Webster's performance against its peer financial institutions. The efficiency ratio, which represents the costs expended to generate a dollar of revenue, is calculated excluding certain non-operational items in order to measure how well Webster is managing its recurring operating expenses.
These non-GAAP financial measures should not be considered a substitute for GAAP basis measures and results.financial measures. Because non-GAAP financial measures are not standardized, it may not be possible to compare these measures with other companies that present financial measures having the same or similar names.
The following tables reconcile the non-GAAP financial measures withto the most comparable financial measures defined by GAAP: | | | | | | | | | | | |
| At March 31, |
| (Dollars and shares in thousands, except per share data) | 2022 | | 2021 |
| Tangible book value per common share: | | | |
| Shareholders' equity | $ | 8,177,135 | | | $ | 3,272,928 | |
| Less: Preferred stock | 283,979 | | | 145,037 | |
| Goodwill and other intangible assets | 2,738,353 | | | 559,617 | |
| Tangible common shareholders' equity | $ | 5,154,803 | | | $ | 2,568,274 | |
| Common shares outstanding | 178,102 | | | 90,410 | |
| Tangible book value per common share | $ | 28.94 | | | $ | 28.41 | |
| | | |
| Tangible common equity ratio: | | | |
| Tangible common shareholders' equity | $ | 5,154,803 | | | $ | 2,568,274 | |
| Total assets | $ | 65,131,484 | | | $ | 33,259,037 | |
| Less: Goodwill and other intangible assets | 2,738,353 | | | 559,617 | |
| Tangible assets | $ | 62,393,131 | | | $ | 32,699,420 | |
| Tangible common equity ratio | 8.26 | % | | 7.85 | % |
| | | | | | | | | | | |
| Three months ended March 31, |
| (Dollars in thousands) | 2022 | | 2021 |
| Return on average tangible common shareholders' equity: | | | |
| Net income | $ | (16,747) | | | $ | 108,078 | |
| Less: Preferred stock dividends | 3,431 | | | 1,969 | |
| Add: Intangible assets amortization, tax-affected | 5,046 | | | 900 | |
| Income adjusted for preferred stock dividends and intangible assets amortization | $ | (15,132) | | | $ | 107,009 | |
| Income adjusted for preferred stock dividends and intangible assets amortization (annualized) | $ | (60,528) | | | $ | 428,036 | |
| Average shareholders' equity | $ | 6,691,490 | | | $ | 3,254,203 | |
| Less: Average preferred stock | 236,121 | | | 145,037 | |
| Average goodwill and other intangible assets | 2,007,266 | | | 560,173 | |
| Average tangible common shareholders' equity | $ | 4,448,103 | | | $ | 2,548,993 | |
| Return on average tangible common shareholders' equity | (1.36) | % | | 16.79 | % |
| | | |
| Efficiency ratio: | | | |
| Non-interest expense | $ | 359,785 | | | $ | 187,982 | |
| Less: Foreclosed property activity | (75) | | | 91 | |
| Intangible assets amortization | 6,387 | | | 1,139 | |
| Operating lease depreciation | 1,632 | | | — | |
| Merger-related expenses | 108,495 | | | — | |
Other expense (1) | (4,140) | | | 9,441 | |
| Non-interest expense | $ | 247,486 | | | $ | 177,311 | |
| Net interest income | $ | 394,248 | | | $ | 223,764 | |
| Add: Tax-equivalent adjustment | 8,158 | | | 2,495 | |
| Non-interest income | 104,035 | | | 76,757 | |
Other income (2) | 3,082 | | | 277 | |
| Less: Operating lease depreciation | 1,632 | | | — | |
| | | |
| | | |
| Income | $ | 507,891 | | | $ | 303,293 | |
| Efficiency ratio | 48.73 | % | | 58.46 | % |
(1)Other expense (non-GAAP) includes the net charges associated with our strategic initiatives.
(2)Other income (non-GAAP) includes the taxable equivalent of net income from low income housing tax-credit (LIHTC) investments.
|
| | | | | | | |
| | At September 30, |
| (Dollars and shares in thousands, except per share data) | 2017 | | 2016 |
| Tangible book value per common share (non-GAAP): | | | |
| Shareholders' equity (GAAP) | $ | 2,638,787 |
| | $ | 2,511,629 |
|
| Less: Preferred stock (GAAP) | 122,710 |
| | 122,710 |
|
| Goodwill and other intangible assets (GAAP) | 568,962 |
| | 573,129 |
|
| Tangible common shareholders' equity (non-GAAP) | $ | 1,947,115 |
| | $ | 1,815,790 |
|
| Common shares outstanding | 92,034 |
| | 91,687 |
|
| Tangible book value per common share (non-GAAP) | $ | 21.16 |
| | $ | 19.80 |
|
| | | | |
| Tangible common equity ratio (non-GAAP): | | | |
| Tangible common shareholders' equity (non-GAAP) | $ | 1,947,115 |
| | $ | 1,815,790 |
|
| Total Assets (GAAP) | $ | 26,350,182 |
| | $ | 25,633,617 |
|
| Less: Goodwill and other intangible assets (GAAP) | 568,962 |
| | 573,129 |
|
| Tangible assets (non-GAAP) | $ | 25,781,220 |
| | $ | 25,060,488 |
|
| Tangible common equity ratio (non-GAAP) | 7.55 | % | | 7.25 | % |
|
| | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| (Dollars in thousands) | 2017 | | 2016 | | 2017 | | 2016 |
| Return on average tangible common shareholders' equity (non-GAAP): | | | | | | | |
| Net income (GAAP) | $ | 64,496 |
| | $ | 51,817 |
| | $ | 185,546 |
| | $ | 149,467 |
|
| Less: Preferred stock dividends (GAAP) | 2,024 |
| | 2,024 |
| | 6,072 |
| | 6,072 |
|
| Add: Intangible assets amortization, tax-affected at 35% (GAAP) | 651 |
| | 970 |
| | 2,005 |
| | 2,971 |
|
| Income adjusted for preferred stock dividends and intangible assets amortization (non-GAAP) | $ | 63,123 |
| | $ | 50,763 |
| | $ | 181,479 |
| | $ | 146,366 |
|
| Income adjusted for preferred stock dividends and intangible assets amortization, annualized (non-GAAP) | $ | 252,492 |
| | $ | 203,052 |
| | $ | 241,972 |
| | $ | 195,155 |
|
| Average shareholders' equity (non-GAAP) | $ | 2,635,312 |
| | $ | 2,503,960 |
| | $ | 2,597,574 |
| | $ | 2,466,414 |
|
| Less: Average preferred stock (non-GAAP) | 122,710 |
| | 122,710 |
| | 122,710 |
| | 122,710 |
|
| Average goodwill and other intangible assets (non-GAAP) | 569,538 |
| | 573,978 |
| | 570,562 |
| | 575,491 |
|
| Average tangible common shareholders' equity (non-GAAP) | $ | 1,943,064 |
| | $ | 1,807,272 |
| | $ | 1,904,302 |
| | $ | 1,768,213 |
|
| Return on average tangible common shareholders' equity (non-GAAP) | 12.99 | % | | 11.24 | % | | 12.71 | % | | 11.04 | % |
| | | | | | | | |
| Efficiency ratio (non-GAAP): | | | | | | | |
| Non-interest expense (GAAP) | $ | 161,823 |
| | $ | 156,097 |
| | $ | 490,026 |
| | $ | 461,320 |
|
| Less: Foreclosed property activity (GAAP) | (72 | ) | | 45 |
| | (141 | ) | | (236 | ) |
| Intangible assets amortization (GAAP) | 1,002 |
| | 1,493 |
| | 3,085 |
| | 4,570 |
|
| Other expense (non-GAAP) | 213 |
| | 793 |
| | 2,923 |
| | 2,270 |
|
| Non-interest expense (non-GAAP) | $ | 160,680 |
| | $ | 153,766 |
| | $ | 484,159 |
| | $ | 454,716 |
|
| Net interest income (GAAP) | $ | 200,904 |
| | $ | 180,197 |
| | $ | 591,355 |
| | $ | 533,254 |
|
| Add: Tax-equivalent adjustment (non-GAAP) | 4,340 |
| | 3,478 |
| | 12,509 |
| | 9,735 |
|
| Non-interest income (GAAP) | 65,846 |
| | 66,412 |
| | 193,439 |
| | 193,861 |
|
| Less: Gain on sale of investment securities, net (GAAP) | — |
| | — |
| | — |
| | 414 |
|
| Other (non-GAAP) | (431 | ) | | (236 | ) | | (1,377 | ) | | (1,372 | ) |
| Income (non-GAAP) | $ | 271,521 |
| | $ | 250,323 |
| | $ | 798,680 |
| | $ | 737,808 |
|
| Efficiency ratio (non-GAAP) | 59.18 | % | | 61.43 | % | | 60.62 | % | | 61.63 | % |
Financial Performance
Comparison to Prior Year Quarter
For the three months ended September 30, 2017, income before income tax expense of $94.8 million increased $18.5 million, or 24.3%, compared to the three months ended September 30, 2016. Net interest income increased 11.5%, the provision for loanis Webster's primary source of revenue, representing 79.1% and lease losses decreased 28.8%, non-interest income decreased 0.9%, and non-interest expense increased 3.7%.
After income tax expense74.5% of $30.3 million and $24.4 milliontotal revenues for the three months ended September 30, 2017March 31, 2022, and 2016,2021, respectively, net income was $64.5 million and diluted earnings per share was $0.67 for the three months ended September 30, 2017 compared to net income of $51.8 million and diluted earnings per share of $0.54 for the three months ended September 30, 2016.
Comparison to Prior Year to Date
For the nine months ended September 30, 2017, income before income tax expense of $266.9 million increased $44.9 million, or 20.2%, compared to the nine months ended September 30, 2016. Net interest income increased 10.9%, the provision for loan and lease losses decreased 36.4%, non-interest income was flat, and non-interest expense increased 6.2%.
After income tax expense of $81.3 million and $72.5 million for the nine months ended September 30, 2017 and 2016, respectively, net income was $185.5 million and diluted earnings per share was $1.94 for the nine months ended September 30, 2017 compared to net income of $149.5 million and diluted earnings per share of $1.56 for the nine months ended September 30, 2016.
The following tables summarize daily average balances, interest, yield/rate, and net interest margin on a fully tax-equivalent basis:
|
| | | | | | | | | | | | | | | | | |
| | Three months ended September 30, |
| | 2017 | | 2016 |
| (Dollars in thousands) | Average
Balance | Interest | Yield/Rate | | Average
Balance | Interest | Yield/Rate |
| | | | | | | | |
| Assets | | | | | | | |
| Interest-earning assets: | | | | | | | |
| Loans and leases | $ | 17,364,519 |
| $ | 182,269 |
| 4.14 | % | | $ | 16,423,642 |
| $ | 157,926 |
| 3.80 | % |
Investment securities (based upon historical amortized cost) | 6,994,661 |
| 51,130 |
| 2.92 |
| | 6,784,652 |
| 49,282 |
| 2.91 |
|
| FHLB and FRB stock | 135,943 |
| 1,482 |
| 4.33 |
| | 185,104 |
| 1,478 |
| 3.18 |
|
| Interest-bearing deposits | 58,193 |
| 173 |
| 1.17 |
| | 53,852 |
| 67 |
| 0.49 |
|
| Loans held for sale | 34,939 |
| 307 |
| 3.51 |
| | 58,299 |
| 440 |
| 3.02 |
|
| Total interest-earning assets | 24,588,255 |
| $ | 235,361 |
| 3.78 | % | | 23,505,549 |
| $ | 209,193 |
| 3.53 | % |
| Non-interest-earning assets | 1,721,591 |
| | | | 1,752,981 |
| | |
| Total Assets | $ | 26,309,846 |
| | | | $ | 25,258,530 |
| | |
| | | | | | | | |
| Liabilities and Shareholders' Equity | | | | | | | |
| Interest-bearing liabilities: | | | | | | | |
| Demand deposits | $ | 4,201,723 |
| $ | — |
| — | % | | $ | 4,011,712 |
| $ | — |
| — | % |
| Savings, checking, & money market deposits | 14,577,673 |
| 10,229 |
| 0.28 |
| | 13,257,559 |
| 7,005 |
| 0.21 |
|
| Time deposits | 2,155,743 |
| 6,531 |
| 1.20 |
| | 2,009,433 |
| 5,589 |
| 1.11 |
|
| Total deposits | 20,935,139 |
| 16,760 |
| 0.32 |
| | 19,278,704 |
| 12,594 |
| 0.26 |
|
| | | | | | | | |
| Securities sold under agreements to repurchase and other borrowings | 904,854 |
| 3,847 |
| 1.66 |
| | 909,560 |
| 3,447 |
| 1.48 |
|
| FHLB advances | 1,362,165 |
| 6,894 |
| 1.98 |
| | 2,158,911 |
| 6,979 |
| 1.26 |
|
| Long-term debt | 225,673 |
| 2,616 |
| 4.64 |
| | 225,414 |
| 2,498 |
| 4.43 |
|
| Total borrowings | 2,492,692 |
| 13,357 |
| 2.11 |
| | 3,293,885 |
| 12,924 |
| 1.54 |
|
| Total interest-bearing liabilities | 23,427,831 |
| $ | 30,117 |
| 0.51 | % | | 22,572,589 |
| $ | 25,518 |
| 0.45 | % |
| Non-interest-bearing liabilities | 246,703 |
| | | | 181,981 |
| | |
| Total liabilities | 23,674,534 |
| | | | 22,754,570 |
| �� | |
| | | | | | | | |
| Preferred stock | 122,710 |
| | | | 122,710 |
| | |
| Common shareholders' equity | 2,512,602 |
| | | | 2,381,250 |
| | |
| Total shareholders' equity | 2,635,312 |
| | | | 2,503,960 |
| | |
| Total Liabilities and Shareholders' Equity | $ | 26,309,846 |
| | | | $ | 25,258,530 |
| | |
| Tax-equivalent net interest income | | $ | 205,244 |
| | | | $ | 183,675 |
| |
| Less: Tax-equivalent adjustments | | (4,340 | ) | | | | (3,478 | ) | |
| Net interest income | | $ | 200,904 |
| | | | $ | 180,197 |
| |
| Net interest margin | | | 3.30 | % | | | | 3.10 | % |
| |
|
| | | | | | | | | | | | | | | | | |
| | Nine months ended September 30, |
| | 2017 | | 2016 |
| (Dollars in thousands) | Average
Balance | Interest | Yield/Rate | | Average
Balance | Interest | Yield/Rate |
| | | | | | | | |
| Assets | | | | | | | |
| Interest-earning assets: | | | | | | | |
| Loans and leases | $ | 17,225,217 |
| $ | 526,419 |
| 4.05 | % | | $ | 16,101,807 |
| $ | 461,399 |
| 3.79 | % |
Investment securities (based upon historical amortized cost) | 7,031,738 |
| 157,550 |
| 2.98 |
| | 6,861,128 |
| 153,280 |
| 2.98 |
|
| FHLB and FRB stock | 160,911 |
| 4,732 |
| 3.93 |
| | 188,692 |
| 4,315 |
| 3.05 |
|
| Interest-bearing deposits | 63,684 |
| 472 |
| 0.98 |
| | 57,692 |
| 216 |
| 0.49 |
|
| Loans held for sale | 31,373 |
| 826 |
| 3.51 |
| | 40,739 |
| 1,006 |
| 3.29 |
|
| Total interest-earning assets | 24,512,923 |
| $ | 689,999 |
| 3.73 | % | | 23,250,058 |
| $ | 620,216 |
| 3.54 | % |
| Non-interest-earning assets | 1,666,080 |
| | | | 1,768,426 |
| | |
| Total Assets | $ | 26,179,003 |
| | | | $ | 25,018,484 |
| | |
| | | | | | | | |
| Liabilities and Shareholders' Equity | | | | | | | |
| Interest-bearing liabilities: | | | | | | | |
| Demand deposits | $ | 4,039,738 |
| $ | — |
| — | % | | $ | 3,802,873 |
| $ | — |
| — | % |
| Savings, checking & money market deposits | 14,315,225 |
| 26,732 |
| 0.25 |
| | 13,010,427 |
| 20,481 |
| 0.21 |
|
| Time deposits | 2,079,021 |
| 18,142 |
| 1.17 |
| | 2,027,336 |
| 16,786 |
| 1.11 |
|
| Total deposits | 20,433,984 |
| 44,874 |
| 0.29 |
| | 18,840,636 |
| 37,267 |
| 0.26 |
|
| | | | | | | | |
| Securities sold under agreements to repurchase and other borrowings | 884,975 |
| 10,970 |
| 1.63 |
| | 943,458 |
| 10,999 |
| 1.53 |
|
| FHLB advances | 1,829,175 |
| 22,543 |
| 1.63 |
| | 2,340,055 |
| 21,517 |
| 1.21 |
|
| Long-term debt | 225,607 |
| 7,748 |
| 4.58 |
| | 225,651 |
| 7,444 |
| 4.40 |
|
| Total borrowings | 2,939,757 |
| 41,261 |
| 1.85 |
| | 3,509,164 |
| 39,960 |
| 1.50 |
|
| Total interest-bearing liabilities | 23,373,741 |
| $ | 86,135 |
| 0.49 | % | | 22,349,800 |
| $ | 77,227 |
| 0.46 | % |
| Non-interest-bearing liabilities | 207,688 |
| | | | 202,270 |
| | |
| Total liabilities | 23,581,429 |
| | | | 22,552,070 |
| | |
| | | | | | | | |
| Preferred stock | 122,710 |
| | | | 122,710 |
| | |
| Common shareholders' equity | 2,474,864 |
| | | | 2,343,704 |
| | |
| Total shareholders' equity | 2,597,574 |
| | | | 2,466,414 |
| | |
| Total Liabilities and Shareholders' Equity | $ | 26,179,003 |
| | | | $ | 25,018,484 |
| | |
| Tax-equivalent net interest income | | $ | 603,864 |
| | | | $ | 542,989 |
| |
| Less: Tax-equivalent adjustments | | (12,509 | ) | | | | (9,735 | ) | |
| Net interest income | | $ | 591,355 |
| | | | $ | 533,254 |
| |
| Net interest margin | | | 3.27 | % | | | | 3.10 | % |
| |
Net interest income is the difference between interest income on earninginterest-earning assets, such as loans and investments,leases and investment securities, and interest expense on interest-bearing 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 75.4% of total revenue for the nine months ended September 30, 2017.interest-earning assets and other activities. Net interest margin is calculated as the ratio of tax-equivalent net interest income to average earning assets for the period.interest-earning assets. Tax-equivalent adjustments are determined assuming a statutory federal income tax rate of 21%.
Net interest income and net interest margin are impactedinfluenced by the level of interest rates,volume and mix of assets earning and liabilities paying those interest rates, and the volume of interest-earning assets and interest-bearing liabilities.liabilities, changes in interest rate levels, re-pricing frequencies, contractual maturities, prepayment behavior, and the use of interest rate derivative financial instruments. These conditionsfactors are influencedaffected by changes in economic conditions, that impact interest rate policy, competitive conditions that impact loanwhich impacts monetary policies, competition for loans and deposit pricing strategies,deposits, as well as the extent of interest lost toon non-performing assets.
Webster manages the risk of changes in interest rates on net interest income and net interest margin through ALCO and through related interest rate risk monitoring and management policies. Four main tools are used for managing interest rate risk:
the size, duration and credit risk of the investment portfolio,
the size and duration of the wholesale funding portfolio,
off-balance sheet interest rate contracts, and
the pricing and structure of loans and deposits.
ALCO meets at least monthly to make decisions on the investment and funding portfolios based on the economic outlook, its interest rate expectations, the portfolio risk position, and other factors.
The Federal Open Market Committee increased the federal funds rate target range from 0.50-0.75% at December 31, 2016, to 0.75-1.00% effective March 16, 2017 and, to 1.00-1.25% effective June 15, 2017. See 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 $200.9increased $170.4 million, or 76.2%, from $223.8 million for the three months ended September 30, 2017 comparedMarch 31, 2021, to $180.2$394.2 million for the three months ended September 30, 2016, an increase of $20.7 million.March 31, 2022. On a fully tax-equivalent basis, net interest income increased $21.6 million when compared to the same period in 2016. The increase$176.1 million. Net interest margin increased 29 basis points from 2.92% for the three months ended September 30, 2017 was primarily the result of a significant increase in loan balances and yield improvement of 34 basis points, while investment balances remained flat but the reinvestment spreads on those assets improved. Net interest margin increased 20 basis pointsMarch 31, 2021, to 3.30%3.21% for the three months ended September 30, 2017March 31, 2022. The increase is primarily attributed to the merger with Sterling, and includes net purchase accounting accretion from 3.10%acquired loans and leases, investment securities, and interest-bearing liabilities.
Average interest-earning assets increased $19.2 billion, or 61.6%, from $31.1 billion for the three months ended September 30, 2016.
ComparisonMarch 31, 2021, to Prior Year to Date
Net interest income totaled $591.4 million$50.3 billion for the ninethree months ended September 30, 2017 comparedMarch 31, 2022, primarily due to $533.3 millionincreases of $14.4 billion and $4.5 billion in average loans and leases and average investment securities, respectively. The average yield on interest-earning assets increased 25 basis points from 3.08% for the ninethree months ended September 30, 2016, an increase of $58.1 million. On a fully tax-equivalent basis, net interest income increased $60.9 million when comparedMarch 31, 2021, to 3.33% for the same period in 2016.three months ended March 31, 2022. The increase in interest-earning assets and the increase in average yield were both impacted by the Sterling merger.
Average interest-bearing liabilities increased $17.9 billion, or 60.7%, from $29.5 billion for the ninethree months ended September 30, 2017March 31, 2021, to $47.4 billion for the three months ended March 31, 2022, primarily due to increases of $17.6 billion and $0.3 billion in average deposits and average long-term debt, partially offset by a decrease of $124.9 million in average FHLB advances. Average deposit growth was primarily impacted by the resultmerger with Sterling and the strong liquidity position of a significant increase in loan balancesretail and yield improvement of 26commercial customers. The average rate on interest-bearing liabilities decreased 3 basis points bearing greater weight on net interest margin than flat investment balances and reinvestment spreads on those assets. Net interest margin increased 17 basis points to 3.27%from 0.16% for the ninethree months ended September 30, 2017 from 3.10%March 31, 2021, to 0.13% for the ninethree months ended September 30, 2016.March 31, 2022, primarily due to customers' migration from higher cost time deposits to more liquid, lower cost deposit products, which was partially offset by the the subordinated debt assumed from Sterling in the merger.
Changes in Net Interest Income
The following table presentssummarizes daily average balances, interest, and average yield/rate by major category, and net interest margin on a fully tax-equivalent basis:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended March 31, |
| | 2022 | | 2021 |
| (Dollars in thousands) | Average
Balance | Interest Income/Expense | Average Yield/Rate | | Average
Balance | Interest Income/Expense | Average Yield/Rate |
| | | | | | | |
| Assets | | | | | | | |
| Interest-earning assets: | | | | | | | |
Loans and leases (1) | $ | 35,912,829 | | $ | 349,417 | | 3.90 | % | | $ | 21,481,320 | | $ | 191,288 | | 3.57 | % |
Investment Securities: (2) | | | | | | | |
| Taxable | 11,461,292 | | 57,467 | | 2.02 | | | 8,152,754 | | 40,944 | | 2.05 | |
| Non-taxable | 1,960,251 | | 9,802 | | 2.00 | | | 737,321 | | 5,333 | | 2.89 | |
| Total investment securities | 13,421,543 | | 67,269 | | 2.02 | | | 8,890,075 | | 46,277 | | 2.12 | |
| FHLB and FRB stock | 166,357 | | 821 | | 2.00 | | | 77,632 | | 237 | | 1.24 | |
Interest-bearing deposits (3) | 799,265 | | 453 | | 0.23 | | | 680,367 | | 176 | | 0.10 | |
| Loans held for sale | 17,918 | | 26 | | 0.58 | | | 14,351 | | 91 | | 2.54 | |
| Total interest-earning assets | 50,317,912 | | $ | 417,986 | | 3.33 | % | | 31,143,745 | | $ | 238,069 | | 3.08 | % |
| | | | | | | |
| Non-interest-earning assets | 4,490,665 | | | | | 1,982,315 | | | |
| Total assets | $ | 54,808,577 | | | | | $ | 33,126,060 | | | |
| | | | | | | |
| Liabilities and Shareholders' Equity | | | | | | | |
| Interest-bearing liabilities: | | | | | | | |
| Demand deposits | $ | 11,263,282 | | $ | — | | — | % | | $ | 6,436,858 | | $ | — | | — | % |
| Health savings accounts | 7,759,465 | | 1,087 | | 0.06 | | | 7,451,175 | | 1,607 | | 0.09 | |
| Interest-bearing checking, money market, and savings | 24,316,436 | | 5,019 | | 0.08 | | | 11,995,473 | | 1,720 | | 0.06 | |
| Time deposits | 2,544,286 | | 1,293 | | 0.21 | | | 2,371,026 | | 3,112 | | 0.53 | |
| Total deposits | 45,883,469 | | 7,399 | | 0.07 | | | 28,254,532 | | 6,439 | | 0.09 | |
| | | | | | | |
| Securities sold under agreements to repurchase | 577,039 | | 956 | | 0.66 | | | 457,694 | | 622 | | 0.54 | |
| Federal funds purchased | — | | — | | — | | | 65,034 | | 13 | | 0.08 | |
| Other borrowings | — | | 1 | | — | | | — | | — | | — | |
| FHLB advances | 10,936 | | 56 | | 2.03 | | | 135,787 | | 513 | | 1.51 | |
Long-term debt (2) | 896,310 | | 7,168 | | 3.34 | | | 567,058 | | 4,223 | | 3.23 | |
| Total borrowings | 1,484,285 | | 8,181 | | 2.26 | | | 1,225,573 | | 5,371 | | 1.82 | |
| Total interest-bearing liabilities | 47,367,754 | | $ | 15,580 | | 0.13 | % | | 29,480,105 | | $ | 11,810 | | 0.16 | % |
| Non-interest-bearing liabilities | 749,333 | | | | | 391,752 | | | |
| Total liabilities | 48,117,087 | | | | | 29,871,857 | | | |
| | | | | | | |
| Preferred stock | 236,121 | | | | | 145,037 | | | |
| Common shareholders' equity | 6,455,369 | | | | | 3,109,166 | | | |
| Total shareholders' equity | 6,691,490 | | | | | 3,254,203 | | | |
| Total liabilities and shareholders' equity | $ | 54,808,577 | | | | | $ | 33,126,060 | | | |
| Tax-equivalent net interest income | | $ | 402,406 | | | | | $ | 226,259 | | |
| Less: Tax-equivalent adjustments | | (8,158) | | | | | (2,495) | | |
| Net interest income | | $ | 394,248 | | | | | $ | 223,764 | | |
Net interest margin (4) | | | 3.21 | % | | | | 2.92 | % |
|
(1)Non-accrual loans have been included in the componentscomputation of average balances.
(2)For the purposes of our average yield/rate and margin computations, unsettled trades on investment securities and unrealized gain (loss) balances on securities available-for-sale and senior fixed-rate notes hedges are excluded.
(3)Interest-bearing deposits are a component of cash and cash equivalents on the Condensed Consolidated Statements of Cash Flows included in Part I - Item 1. Financial Statements.
(4)Tax-equivalent net interest margin approximates net interest margin for all periods presented.
The following table summarizes 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, |
| 2022 vs. 2021 Increase (decrease) due to | | 2021 vs. 2020 Increase (decrease) due to |
| (In thousands) | Rate (1) | Volume | Total | | Rate (1) | Volume | Total |
| Change in interest on interest-earning assets: | | | | | | | |
| Loans and leases | $ | 54,161 | | $ | 103,968 | | $ | 158,129 | | | $ | (40,473) | | $ | 14,843 | | $ | (25,630) | |
| Investment securities | (446) | | 21,438 | | 20,992 | | | (16,150) | | 4,019 | | (12,131) | |
| | | | | | | |
| FHLB and FRB stock | 313 | | 271 | | 584 | | | (531) | | (482) | | (1,013) | |
| Interest-bearing deposits | 246 | | 31 | | 277 | | | (1,732) | | 1,716 | | (16) | |
| Loans held for sale | 2 | | (67) | | (65) | | | (23) | | (61) | | (84) | |
| Total interest income | $ | 54,276 | | $ | 125,641 | | $ | 179,917 | | | $ | (58,909) | | $ | 20,035 | | $ | (38,874) | |
| Change in interest on interest-bearing liabilities: | | | | | | | |
| | | | | | | |
| Health savings accounts | $ | (587) | | $ | 67 | | $ | (520) | | | $ | (2,025) | | $ | 336 | | $ | (1,689) | |
| Interest-bearing checking, money market, and savings | 3,000 | | 299 | | 3,299 | | | (13,460) | | 2,777 | | (10,683) | |
| Time deposits | (1,008) | | (811) | | (1,819) | | | (6,224) | | (2,808) | | (9,032) | |
| Securities sold under agreements to repurchase | 171 | | 163 | | 334 | | | (334) | | 67 | | (267) | |
| Federal funds purchased | — | | (13) | | (13) | | | (199) | | (2,628) | | (2,827) | |
| Other borrowings | 1 | | — | | 1 | | | — | | — | | — | |
| FHLB advances | 14 | | (471) | | (457) | | | (190) | | (6,165) | | (6,355) | |
| Long-term debt | 292 | | 2,653 | | 2,945 | | | (1,164) | | 158 | | (1,006) | |
| Total interest expense | $ | 1,883 | | $ | 1,887 | | $ | 3,770 | | | $ | (23,596) | | $ | (8,263) | | $ | (31,859) | |
| Net change in net interest income | $ | 52,393 | | $ | 123,754 | | $ | 176,147 | | | $ | (35,313) | | $ | 28,298 | | $ | (7,015) | |
|
| | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| | 2017 vs. 2016
Increase (decrease) due to | | 2017 vs. 2016
Increase (decrease) due to |
| (In thousands) | Rate (1) | Volume | Total | | Rate (1) | Volume | Total |
| Interest on interest-earning assets: | | | | | | | |
| Loans and leases | $ | 15,634 |
| $ | 8,708 |
| $ | 24,342 |
| | $ | 34,294 |
| $ | 30,725 |
| $ | 65,019 |
|
| Loans held for sale | 47 |
| (181 | ) | (134 | ) | | 95 |
| (215 | ) | (120 | ) |
Investments (2) | 366 |
| 1,594 |
| 1,960 |
| | 897 |
| 3,987 |
| 4,884 |
|
| Total interest income | $ | 16,047 |
| $ | 10,121 |
| $ | 26,168 |
| | $ | 35,286 |
| $ | 34,497 |
| $ | 69,783 |
|
| Interest on interest-bearing liabilities: | | | | | | | |
| Deposits | $ | 3,104 |
| $ | 1,062 |
| $ | 4,166 |
| | $ | 5,067 |
| $ | 2,541 |
| $ | 7,608 |
|
| Borrowings | 3,034 |
| (2,601 | ) | 433 |
| | 6,567 |
| (5,267 | ) | 1,300 |
|
| Total interest expense | $ | 6,138 |
| $ | (1,539 | ) | $ | 4,599 |
| | $ | 11,634 |
| $ | (2,726 | ) | $ | 8,908 |
|
| Net change in net interest income | $ | 9,909 |
| $ | 11,660 |
| $ | 21,569 |
| | $ | 23,652 |
| $ | 37,223 |
| $ | 60,875 |
|
| |
(1) | The change attributable to mix, a combined impact of rate and volume, is included with the change due to rate. |
| |
(2) | Investments include: Securities, FHLB and FRB stock, and Interest-bearing deposits. |
(1)The change attributable to mix, a combined impact of rate and volume, is included with the change due to rate.
Average loans and leases increased $14.4 billion, or 67.2%, from $21.5 billion for the ninethree months ended September 30, 2017 increased $1.1March 31, 2021 to $35.9 billion comparedfor the three months ended March 31, 2022, which was primarily due to the average formerger with Sterling, as well as loan growth across the nine months ended September 30, 2016. Theresidential and commercial categories. This growth was partially offset by lower Paycheck Protection Program (PPP) loan balances. At March 31, 2022, and 2021, the loan and lease portfolio comprised 70.3%71.4% and 69.0% of thetotal average interest-earning assets, at September 30, 2017 comparedrespectively. The average yield on loans and leases increased 33 basis points from 3.57% for the three months ended March 31, 2021, to 69.3%3.90% for the three months ended March 31, 2022, primarily due to purchase accounting accretion on acquired loans and leases.
Average taxable and non-taxable investment securities increased $4.5 billion, or 51.0%, from $8.9 billion for the three months ended March 31, 2021 to $13.4 billion for the three months ended March 31, 2022, primarily due to the merger with Sterling. At March 31, 2022, and 2021, the investment securities portfolio comprised 26.7% and 28.5% of thetotal average interest-earning assets, at September 30, 2016.respectively. The loan and lease portfolio yield increased 26 basis points to 4.05% for the nine months ended September 30, 2017 compared to the loan and lease portfolio yield of 3.79% for the nine months ended September 30, 2016. The increase in the yield on the average loan and lease portfolio is due to increased yield on floating rate loans as well as increased spreads on loan originations.
Average investments for the nine months ended September 30, 2017 increased $148.8 million compared to the average for the nine months ended September 30, 2016. The investments portfolio comprised 29.6% of the average interest-earning assets at September 30, 2017 compared to 30.6% of the average interest-earning assets at September 30, 2016. The investments portfolio yield increased 3 basis points to 2.99% for the nine months ended September 30, 2017 compared to the investments portfolio yield of 2.96% for the nine months ended September 30, 2016. The increase in the yield on the investments portfolio is primarily due to a reduction in premium amortization from slower prepayment speeds and an increased yield on floating rate securities, more than offsetting lower current market rates on investment securities purchases compared to the yield on investment securities paydowns and maturities.decreased 10 basis points from 2.12% for the three months ended March 31, 2021, to 2.02% for the three months ended March 31, 2022. This was primarily due to the interest rate environment, which was partially offset by a higher average yield on the acquired Sterling investment securities net of purchase premium amortization.
Average total deposits increased $17.6 billion, or 62.4%, from $28.3 billion for the ninethree months ended September 30, 2017 increased $1.6March 31, 2021, to $45.9 billion compared to the average for the ninethree months ended September 30, 2016. The increase is comprisedMarch 31, 2022, reflecting increases of an increase of $236.9 million$4.8 billion and $12.8 billion in non-interest-bearing deposits and an increase of $1.4 billion in interest-bearing deposits. The increase in average interest-bearing deposits, and an improved product mix to low-costrespectively. The overall increase in deposits was primarily due to health savings account deposit growth.the merger with Sterling, as well as the strong liquidity position of retail and commercial customers. At March 31, 2022, and 2021, deposits comprised 96.9% and 95.8% of total average interest-bearing liabilities, respectively. The average cost ofrate on deposits was 0.29%decreased 2 basis points from 0.09% for the ninethree months ended September 30, 2017 comparedMarch 31, 2021, to 0.26%0.07% for the ninethree months ended September 30, 2016. The slight increase inMarch 31, 2022, primarily due to the averageinterest rate environment and the run-off of higher cost of deposits is mainly the result of an increase in the rate paid on public money market accounts.time deposits. Higher cost time deposits decreased to 12.7% for the nine months ended September 30, 2017 from 13.5% for the nine months ended September 30, 2016, as a percentage of total interest-bearing deposits.deposits decreased from 10.9% for the three months ended March 31, 2021, to 7.3% for the three months ended March 31, 2022, primarily due to customers' migration to more liquid, lower cost deposit products.
Average total borrowings for the nine months ended September 30, 2017 decreased $569.4long-term debt increased $329.2 million, compared to the average for the nine months ended September 30, 2016. Average securities sold under agreements to repurchase and other borrowings decreased $58.5 million, and average FHLB advances decreased $510.9 million as utilization of advances maturing within one year declined significantly. The average cost of borrowings increased 35 basis point to 1.85% for the nine months ended September 30, 2017or 58.1%, from 1.50% for the nine months ended September 30, 2016. The increase in average cost of borrowings is the result of the federal funds rate being increased three times between December 2016 and June 2017.
Cash flow hedges impacted the average cost of borrowings as follows:
|
| | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| (In thousands) | 2017 | 2016 | | 2017 | 2016 |
| Interest rate swaps on repurchase agreements | $ | — |
| $ | — |
| | $ | — |
| $ | 361 |
|
| Interest rate swaps on FHLB advances | 1,657 |
| 2,099 |
| | 5,139 |
| 6,469 |
|
| Interest rate swaps on senior fixed-rate notes | 76 |
| 76 |
| | 229 |
| 229 |
|
| Interest rate swaps on brokered CDs and deposits | 195 |
| 195 |
| | 585 |
| 585 |
|
| Net increase to interest expense on borrowings | $ | 1,928 |
| $ | 2,370 |
| | $ | 5,953 |
| $ | 7,644 |
|
Provision for Loan and Lease Losses
The provision for loan and lease losses is the expense necessary to maintain the allowance for loan and lease losses at levels appropriate to absorb estimated credit losses in the loan and lease portfolio.
Comparison to Prior Year Quarter
The provision for loan and lease losses was $10.2$567.1 million for the three months ended September 30, 2017, which decreased $4.1 million comparedMarch 31, 2021 to the three months ended September 30, 2016. The decrease in provision for loan and lease losses was primarily due to lower loan growth on a quarter comparative basis. Total net charge-offs was $7.9 million and $6.8$896.3 million for the three months ended September 30, 2017 and 2016, respectively. Higher commercial real estate and commercial net charge-offs contributed $1.3 millionMarch 31, 2022, primarily due to the increasemerger with Sterling. At March 31, 2022, and 2021, long-term debt comprised 1.89% and 1.92% of total average interest-bearing liabilities, respectively. The average rate on long-term debt increased 11 basis points from 3.23% for the three months ended March 31, 2021 to 3.34% for the three months ended March 31, 2022, primarily due to the subordinated debt assumed from Sterling in net charge-offs.the merger.
Comparison to Prior Year to Date
Provision for Credit Losses
The provision for loan and leasecredit losses was $27.9increased $214.6 million, or 833.4%, from a benefit of $25.8 million for the ninethree months ended September 30, 2017, which decreased $16.0 million comparedMarch 31, 2021 to the nine months ended September 30, 2016. The decrease in provision for loan and lease losses was primarily due to lower loan growth as compared to the rate for the same period in 2016. Total net charge-offs was $20.4 million and $30.9an expense of $188.8 million for the ninethree months ended September 30, 2017March 31, 2022. The increase is primarily attributed to the establishment of the initial ACL of $175.1 million for non-purchased credit-deteriorated (PCD) loans and 2016,leases that were acquired from Sterling. During the three months ended March 31, 2022 and 2021, total net charge-offs were $8.9 million and $5.3 million, respectively. The decrease was$3.6 million increase is primarily dueattributed to loweran increased volume of net charge-offs in the commercial non-mortgage portfolio, partially offset by a decreased volume of net charge-offs in the commercial real estate and other commercial loan related net charge-offs.consumer portfolios.
Allowance for Loan and Lease Losses
The ALLL is a significant accounting estimate that is determined through periodic and systematic detailed reviews ofAdditional information regarding the Company's loanprovision for credit losses and lease portfolio. The ALLL is determined based on an analysis which assessesACL can be found under the inherent risk for probable losses within the portfolio. Significant judgments and estimates are necessary in the determination of the ALLL. Significant judgments include, among others, loan risk ratings and classifications, the probability of loan defaults, the net loss exposure in the event of loan defaults, the loss emergence period, the determination and measurement of impaired loans, and other quantitative and qualitative considerations.
At September 30, 2017, the ALLL totaled $201.8 million, or 1.16% of total loans and leases, as compared to $194.3 million, or 1.14% of total loans and leases, at December 31, 2016.
See thesections captioned "Loans and Leases" through "Allowance for LoanCredit Losses" contained elsewhere in Item 2. Management's Discussion and Lease Losses Methodology" sections for further details.Analysis of Financial Condition and Results of Operations.
Non-Interest Income
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | | | Nine months ended September 30, | | |
| | | Increase (decrease) | | | Increase (decrease) |
| (Dollars in thousands) | 2017 | 2016 | | Amount | Percent | | 2017 | 2016 | | Amount | Percent |
| Deposit service fees | $ | 38,321 |
| $ | 35,734 |
| | $ | 2,587 |
| 7.2 | % | | $ | 113,519 |
| $ | 105,553 |
| | $ | 7,966 |
| 7.5 | % |
| Loan related fees | 6,346 |
| 9,253 |
| | (2,907 | ) | (31.4 | ) | | 19,898 |
| 20,563 |
| | (665 | ) | (3.2 | ) |
| Wealth and investment services | 7,750 |
| 7,593 |
| | 157 |
| 2.1 |
| | 22,900 |
| 21,992 |
| | 908 |
| 4.1 |
|
| Mortgage banking activities | 2,421 |
| 4,322 |
| | (1,901 | ) | (44.0 | ) | | 8,038 |
| 11,335 |
| | (3,297 | ) | (29.1 | ) |
| Increase in cash surrender value of life insurance policies | 3,720 |
| 3,743 |
| | (23 | ) | (0.6 | ) | | 10,943 |
| 11,060 |
| | (117 | ) | (1.1 | ) |
| Gain on sale of investment securities, net | — |
| — |
| | — |
| n/m |
| | — |
| 414 |
| | (414 | ) | n/m |
|
| Impairment loss recognized in earnings | — |
| — |
| | — |
| n/m |
| | (126 | ) | (149 | ) | | 23 |
| n/m |
|
| Other income | 7,288 |
| 5,767 |
| | 1,521 |
| 26.4 |
| | 18,267 |
| 23,093 |
| | (4,826 | ) | (20.9 | ) |
| Total non-interest income | $ | 65,846 |
| $ | 66,412 |
| | $ | (566 | ) | (0.9 | )% | | $ | 193,439 |
| $ | 193,861 |
| | $ | (422 | ) | (0.2 | )% |
n/m - not meaningful
Comparison to Prior Year Quarter | | | | | | | | | | | | | | |
| | Three months ended March 31, | | |
| (Dollars in thousands) | 2022 | | 2021 | | | |
| Deposit service fees | $ | 47,827 | | | $ | 40,469 | | | | |
| Loan and lease related fees | 22,679 | | | 8,313 | | | | |
| Wealth and investment services | 10,597 | | | 9,403 | | | | |
| Mortgage banking activities | 428 | | | 2,642 | | | | |
| Increase in cash surrender value of life insurance policies | 6,732 | | | 3,533 | | | | |
| | | | | | |
| | | | | | |
| Other income | 15,772 | | | 12,397 | | | | |
| Total non-interest income | $ | 104,035 | | | $ | 76,757 | | | | |
Total non-interest income for the three months ended September 30, 2017 was $65.8 million, a decrease of $0.6increased $27.3 million, or 0.9%35.5%, compared to $66.4from $76.8 million for the three months ended September 30, 2016. The decrease is primarily attributableMarch 31, 2021 to reductions in loan related fees and mortgage banking activities, partially offset by deposit service fee growth and higher other income.
Deposit service fees totaled $38.3$104.0 million for the three months ended September 30, 2017, comparedMarch 31, 2022, primarily due to $35.7increases in deposit service fees, loan and lease related fees, the cash surrender value of life insurance policies, and other income, all of which were primarily driven by the merger with Sterling, partially offset by a decrease in mortgage banking activities.
Deposit service fees increased $7.4 million, or 18.2%, from $40.5 million for the three months ended September 30, 2016. The increase is primarily dueMarch 31, 2021 to increased checking account service charges and check card interchange attributable to health savings account growth and usage activity.
Loan related fees totaled $6.3$47.8 million for the three months ended September 30, 2017, comparedMarch 31, 2022, primarily due to $9.3the merger with Sterling, as well as higher interchange income from increased debit card spending in the HSA and Consumer Banking segments.
Loan and lease related fees increased $14.4 million, or 172.8%, from $8.3 million for the three months ended September 30, 2016. The decrease is primarily dueMarch 31, 2021 to a lower syndication activity, and to a lesser extent, increased mortgage servicing rights amortization.
Mortgage banking activities totaled $2.4$22.7 million for the three months ended September 30, 2017, comparedMarch 31, 2022, primarily due to $4.3the merger with Sterling, which included $2.2 million of operating lease income, as well as an increase in prepayment penalties and other loan related fees.
Mortgage banking activities decreased $2.2 million, or 83.8%, from $2.6 million for the three months ended September 30, 2016. The decrease is dueMarch 31, 2021 to lower sales volume of conforming residential mortgage originations, driven by a decrease in refinance activity.
Other income totaled $7.3$0.4 million for the three months ended September 30, 2017, comparedMarch 31, 2022, primarily due to $5.8lower originations for sale, as the Company continues to execute on its strategic decision to originate residential mortgage loans for investment rather than for sale.
The cash surrender value of life insurance policies increased $3.2 million, or 90.5%, from $3.5 million for the three months ended September 30, 2016. The increase is primarily dueMarch 31, 2021 to increased client hedging revenue.
Comparison to Prior Year to Date
Total non-interest income for the nine months ended September 30, 2017 was $193.4 million, a decrease of $422 thousand, or 0.2%, compared to $193.9 million for the nine months ended September 30, 2016. The decrease is primarily attributable to decreases in mortgage banking activities and other income, partially offset by increases in deposit service fees.
Deposit service fees totaled $113.5 million for the nine months ended September 30, 2017, compared to $105.6 million for the nine months ended September 30, 2016. The increase is primarily due to increased checking account service charges and check card interchange attributable to health savings account growth and usage activity.
Mortgage banking activities totaled $8.0 million for the nine months ended September 30, 2017, compared to $11.3 million for the nine months ended September 30, 2016. The decrease is due to lower volume of conforming residential mortgage originations, driven by a decrease in refinance activity.
Other income totaled $18.3 million for the nine months ended September 30, 2017, compared to $23.1 million for the nine months ended September 30, 2016. The decrease is due to a $2.7 million favorable adjustment to the fair value of the contingent receivable recognized in 2016, a decrease in net client interest rate hedging activities/hedging revenue, and partially offset by an increase in alternative investment gains.
Non-Interest Expense
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | | | Nine months ended September 30, | | |
| | | Increase (decrease) | | | Increase (decrease) |
(Dollars in thousands)
| 2017 | 2016 | | Amount | Percent | | 2017 | 2016 | | Amount | Percent |
| Compensation and benefits | $ | 89,192 |
| $ | 83,148 |
| | $ | 6,044 |
| 7.3 | % | | $ | 264,822 |
| $ | 244,089 |
| | $ | 20,733 |
| 8.5 | % |
| Occupancy | 14,744 |
| 15,004 |
| | (260 | ) | (1.7 | ) | | 46,957 |
| 44,915 |
| | 2,042 |
| 4.5 |
|
| Technology and equipment | 22,580 |
| 19,753 |
| | 2,827 |
| 14.3 |
| | 66,646 |
| 59,067 |
| | 7,579 |
| 12.8 |
|
| Intangible assets amortization | 1,002 |
| 1,493 |
| | (491 | ) | (32.9 | ) | | 3,085 |
| 4,570 |
| | (1,485 | ) | (32.5 | ) |
| Marketing | 4,045 |
| 4,622 |
| | (577 | ) | (12.5 | ) | | 14,101 |
| 14,215 |
| | (114 | ) | (0.8 | ) |
| Professional and outside services | 4,030 |
| 4,795 |
| | (765 | ) | (16.0 | ) | | 11,813 |
| 11,360 |
| | 453 |
| 4.0 |
|
| Deposit insurance | 6,344 |
| 6,177 |
| | 167 |
| 2.7 |
| | 19,701 |
| 19,596 |
| | 105 |
| 0.5 |
|
| Other expense | 19,886 |
| 21,105 |
| | (1,219 | ) | (5.8 | ) | | 62,901 |
| 63,508 |
| | (607 | ) | (1.0 | ) |
| Total non-interest expense | $ | 161,823 |
| $ | 156,097 |
| | $ | 5,726 |
| 3.7 | % | | $ | 490,026 |
| $ | 461,320 |
| | $ | 28,706 |
| 6.2 | % |
Comparison to Prior Year Quarter
Total non-interest expense for the three months ended September 30, 2017 was $161.8 million, an increase of $5.7 million, or 3.7%, compared to $156.1$6.7 million for the three months ended September 30, 2016. The increase isMarch 31, 2022, primarily attributabledue to compensation and benefits, technology and equipment, and somewhat offset by other expense.the additional bank-owned life insurance policies acquired in the merger with Sterling.
Compensation and benefits totaled $89.2Other income increased $3.4 million, or 27.2%, from $12.4 million for the three months ended September 30, 2017, comparedMarch 31, 2021 to $83.1$15.8 million for the three months ended September 30, 2016. The increase isMarch 31, 2022, primarily due to strategic hiresan increase in income due to the impact of the merger with Sterling, higher income from client interest rate derivative activities, and annual incentives increases.gains on sale of loans not originated for sale.
Technology and equipment totaled $22.6
Non-Interest Expense | | | | | | | | | | | | | | |
| | Three months ended March 31, | | |
| (Dollars in thousands) | 2022 | | 2021 | | | |
| Compensation and benefits | $ | 184,002 | | | $ | 107,600 | | | | |
| Occupancy | 18,615 | | | 15,650 | | | | |
| Technology and equipment | 55,401 | | | 28,516 | | | | |
| Intangible assets amortization | 6,387 | | | 1,139 | | | | |
| Marketing | 3,509 | | | 2,504 | | | | |
| Professional and outside services | 54,091 | | | 9,776 | | | | |
| Deposit insurance | 5,222 | | | 3,956 | | | | |
| Other expense | 32,558 | | | 18,841 | | | | |
| Total non-interest expense | $ | 359,785 | | | $ | 187,982 | | | | |
Total non-interest expense increased $171.8 million, or 91.4%, from $188.0 million for the three months ended September 30, 2017, comparedMarch 31, 2021 to $19.8$359.8 million for the three months ended September 30, 2016. The increase isMarch 31, 2022, primarily due to increases in compensation and benefits, occupancy, technology and equipment, intangible assets amortization, professional and outside services, and other expense, all of which were primarily driven by the merger with Sterling.
Compensation and benefits increased service contracts to support bank growth.
Other expense totaled $19.9$76.4 million, or 71.0%, from $107.6 million for the three months ended September 30, 2017, comparedMarch 31, 2021 to $21.1$184.0 million for the three months ended September 30, 2016. The decrease isMarch 31, 2022, primarily due to $41.6 million of merger-related expenses, which included $26.9 million and $11.9 million of severance and retention, respectively, and higher salaries and incentives related to the increase in employees as a result of numerous items, none of which were individually significant.the merger, partially offset by a decrease in strategic initiatives severance charges.
Comparison to Prior Year to Date
Total non-interest expense for the nine months ended September 30, 2017 was $490.0 million, an increase of $28.7Occupancy increased $3.0 million, or 6.2%18.9%, compared to $461.3from $15.7 million for the ninethree months ended September 30, 2016. The increase is primarily attributableMarch 31, 2021 to compensation and benefits, occupancy, and technology and equipment.
Compensation and benefits totaled $264.8$18.6 million for the ninethree months ended September 30, 2017, compared to $244.1 million for the nine months ended September 30, 2016. The increase isMarch 31, 2022, primarily due to strategic hires as well as an increase to annual merit increasesthe additional operating lease costs and group insurance costs.
Occupancy totaled $47.0 million for the nine months ended September 30, 2017, compared to $44.9 million for the nine months ended September 30, 2016. The increase is essentially a result of chargesdepreciation related to banking center optimization.the acquired Sterling branches and corporate offices, partially offset by a decrease in strategic initiatives charges.
Technology and equipment totaled $66.6increased $26.9 million, or 94.3%, from $28.5 million for the ninethree months ended September 30, 2017, comparedMarch 31, 2021 to $59.1$55.4 million for the ninethree months ended September 30, 2016. The increase isMarch 31, 2022, primarily due to increased$19.1 million of merger-related expenses, which included $17.7 million in contract termination costs, and an increase in technology and equipment service contracts due to the impact of the merger with Sterling.
Intangible assets amortization increased $5.2 million, or 460.8%, from $1.1 million for the three months ended March 31, 2021 to $6.4 million for the three months ended March 31, 2022, due to the additional amortization expense related to the core deposits and additionalcustomer relationship intangible assets acquired in connection with the Sterling merger and Bend acquisition.
Professional and outside services increased $44.3 million, or 453.3%, from $9.8 million for the three months ended March 31, 2021 to $54.1 million for the three months ended March 31, 2022, primarily due to $44.5 million of merger-related expenses, which included $32.1 million of advisory fees, as well as legal and consulting fees, and an increase in professional service costs due to the impact of the merger with Sterling, partially offset by a decrease in strategic initiative charges.
Other expense increased $13.7 million, or 72.8%, from $18.8 million for the three months ended March 31, 2021 to $32.6 million for the three months ended March 31, 2022, primarily due to an increase in expenses due to the impact of the merger with Sterling, which included $1.6 million of operating lease depreciation on infrastructure to support bank growth.and $3.0 million of merger-related expenses.
Income Taxes
Webster recognized income tax (benefit) expense of $30.3$(33.6) million and $81.3$30.2 million reflecting effective tax rates of 31.9% and 30.5% for the three and nine months ended September 30, 2017, respectively, compared to $24.4 million and $72.5 million and 32.1% and 32.7%, for the three and nine months ended September 30, 2016, respectively.
The increases in tax expense for the three and nine months ended September 30, 2017 as compared to 2016 principally reflect the higher levels of pre-tax income in 2017, while the decreases in the effective rates in those same periods principally reflect $5.9 million of excess tax benefits recognized under ASU No. 2016-09 in the nine months ended September 30, 2017, which includes $0.5 million during the three months ended September 30, 2017.March 31, 2022, and 2021, respectively, reflecting an effective tax benefit rate of 66.7% for the three months ended March 31, 2022, and an effective tax expense rate of 21.8% for the three months ended March 31, 2021.
See “Accounting Standards Adopted During 2017” sectionThe income tax benefit and related effective tax benefit rate for the three months ended March 31, 2022, reflects the effects of Note 1: Summarythe pre-tax loss, as well as tax-exempt income and tax credits recognized during the period, and a $13.7 million deferred state and local tax (SALT) benefit associated with the merger with Sterling, of Significant Accounting Policieswhich $9.9 million related to a change in management's estimate about the Notesrealizability of its SALT deferred tax assets (DTAs) due to Condensed Consolidated Financial Statements contained elsewherean estimated increase in this reportfuture taxable income. These effects were partially offset by the effect of $21.0 million of merger-related expenses recognized during the period that were estimated to be nondeductible for income tax purposes.
At March 31, 2022, and December 31, 2021, Webster recorded a valuation allowance on its DTAs of $29.2 million and $37.4 million, respectively. The $29.2 million at March 31, 2022, reflects a reduction of $9.9 million for the change in estimate discussed above, and includes a $1.7 million valuation allowance related to the Bend acquisition. At March 31, 2022, and December 31, 2021, Webster's gross DTAs included $71.1 million and $64.4 million, respectively, applicable to SALT net operating loss carryforwards that are available to offset future taxable income. The $71.1 million at March 31, 2022, includes $5.6 million related to the Sterling merger and $1.1 million related to the Bend acquisition. Webster's total gross DTAs at March 31, 2022, also included $5.6 million and $0.5 million, respectively, of federal net operating loss and credit carryforwards related to the Sterling merger and Bend acquisition, which are subject to annual limitations on utilization.
The ultimate realization of DTAs is dependent on the generation of future taxable income during the periods in which the net operating loss and credit carryforwards are available. In making its assessment, management considers the Company's forecasted future results of operations, estimates the content and apportionment of its income by legal entity over the near term for SALT purposes, and also applies longer-term growth rate assumptions. Based on its estimates, management believes it is more likely than not that the Company will realize its DTAs, net of the valuation allowance, at March 31, 2022. However, it is possible that some or all of Webster's net operating loss and credit carryforwards could expire unused or that more net operating loss and credit carryforwards could be utilized than estimated, either as a result of changes in future forecasted levels of taxable income or if future economic or market conditions or interest rates were to vary significantly from the Company's forecasts and, in turn, impact its future results of operations.
Additional information on adoption of ASU No. 2016-09. For additional information onregarding Webster's income taxes, including its deferred tax assets and uncertain tax positions, seeDTAs, can be found within Note 8 -11: Income Taxes in the Notes to Consolidated Financial Statements contained in Part II - Item 8. Financial Statements and Supplementary Data of the Company's 2016Annual Report on Form 10-K.10-K for the year ended December 31, 2021.
Segment Reporting
Webster’sWebster's operations are organized into three reportable segments that represent its primary businesses -businesses: Commercial Banking, Community BankingHSA Bank, and HSA Bank.Consumer Banking. These three segments reflect how executive management responsibilities are assigned, the primary businesses, the products and services provided,how discrete financial information is evaluated, the type of customer served, and how discrete financial information is currently evaluated. The Corporateproducts and services are provided. Segments are evaluated using pre-tax, pre-provision net revenue (PPNR). Certain Treasury unit of the Company,activities, along with adjustmentsthe amounts required to reconcile profitability metrics to amountsthose reported in accordance with GAAP, are included in the Corporate and Reconciling category. Additional information regarding the Company's reportable segments and its segment reporting methodology can be found within Note 17: Segment Reporting in the Notes to Condensed Consolidated Financial Statements contained in Item 1. Financial Statements.
Effective January 1, 2022, Webster realigned its investment services operations from Commercial Banking to Consumer Banking to better serve its customers and deliver operational efficiencies. Under this realignment, $125.4 million of deposits and $4.3 billion of assets under administration (off-balance sheet) were reassigned from Commercial Banking to Consumer Banking. There was no goodwill reallocation nor goodwill impairment as a result of the reorganization. In addition, the non-interest expense allocation methodology was modified to exclude certain overhead and merger-related costs that are not directly related to segment performance. Prior period results of operations have been recast accordingly to reflect the realignment.
The following is a description of Webster’s three reportable segments and their primary services:
Commercial Banking is comprisedserves corporate customers with more than $2 million of revenues through its Commercial Real Estate, Business Banking, Capital Finance, Middle Market, Public Sector Finance, Sponsor and Specialty Finance, Mortgage Warehouse Lending, Private Banking, and Private Banking operating segments.Treasury Management components.
Commercial Banking provides commercial and industrial lending and leasing, commercial real estate lending, and treasury and payment solutions. Specifically, Webster Bank deploys lending through middle market, commercial real estate, equipment financing, asset-based lending and specialty lending units. These groups utilize a relationship approach model throughout its footprint when providing lending, deposit, and cash management services to middle market companies. In addition, Commercial Banking serves as a referral source within Commercial Banking and to the other lines of business.
Private Banking provides local, full relationship banking that serves high net worth clients, not-for-profit organizations, and business clients for asset management, financial planning services, trust services, loan products, and deposit products. These client relationships generate fee revenue on assets under management or administration, while a majority of the relationships also include lending and/or deposit accounts which provide net interest income and other ancillary fees.
Community Banking is comprised of Personal Banking and Business Banking operating segments.
Through a distribution network, consisting of 167 banking centers and 338 ATMs, a customer care center, and a full range of web and mobile-based banking services, it serves consumer and business customers primarily throughout southern New England and into Westchester County, New York.
Personal Banking offers consumer deposit and fee-based services, residential mortgages, home equity lines/loans, unsecured consumer loans, and credit card products. In addition, investment and securities-related services, including brokerage and investment advice is offered through a strategic partnership with LPL, a broker dealer registered with the SEC, a registered investment advisor under federal and applicable state laws, a member of the FINRA, and a member of the SIPC. Webster Bank has employees located throughout its banking center network, who, through LPL, are registered representatives.
Business Banking offers credit, deposit, and cash flow management products to businesses and professional service firms with annual revenues of up to $25 million. This group builds broad customer relationships through business bankers and business certified banking center managers, supported by a team of customer care center bankers and industry and product specialists.
HSA Bank offers health savings accounts,a comprehensive consumer-directed healthcare solution that includes HSAs, health reimbursement accounts,arrangements, flexible spending accounts, and other financial solutions. Health savings accountscommuter benefits. 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 retirement savings, in accordance with applicable laws. Health savings accounts are offered through employers for the benefit of their employees or directly to individual consumers andHSAs are distributed nationwide directly orto employers and individual consumers, as well as through national and regional insurance carriers.
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’sits loan growth. As such, net interest income represents the difference between a funding credit allocation, reflecting the value of the duration funding, and the interest paid on deposits. In addition, non-interest revenue is generated predominantly through service fees and interchange income.
Segment Results
The 2016 segment results have been adjusted for comparability to the 2017 segment presentation for the following changes:
To further strengthen Webster's ability to deliver the totalityConsumer Banking serves individual customers and small businesses with less than $2 million of itsrevenues by offering consumer deposits, residential mortgages, home equity lines, secured and unsecured loans, debit and credit card products, and investment services. Consumer Banking operates a distribution network consisting of 202 banking centers and 359 ATMs, a customer care center, and a full range of web and mobile-based banking services, to the owners and executives of commercial clients and other high net worth individuals, an organizational change was made during the second quarter of 2017. Effective April 1, 2017, the head of Private Banking reports directly to the head of Commercial Banking. The current organizational structure reflects how executive management responsibilities are assigned and reviewed. As a result of this change, the Private Banking and Commercial Banking operating segments are aggregated into one reportable segment, Commercial Banking.
In late 2007 Webster discontinued its indirect residential construction lending and its indirect home equity lending outside of its primaryprimarily throughout southern New England market area, referred to as National Wholesale Lending. Webster placed these two portfolios into a liquidating loan portfolio included within the Corporate and Reconciling category. The balance of the home equity liquidating loan portfolio was $65.0 million at December 31, 2016. As the remainder of this portfolio has been performing in the same manner as the continuing home equity portfolio, management has decided to combine the liquidating loan portfolio with the continuing home equity loan portfolio. The combined portfolio is included in the Community Banking reportable segment.
The following tables present net income (loss), selected balance sheet information, and assets under administration/management for Webster’s reportable segments and the CorporateNew York Metro and Reconciling category for the periods presented:Suburban markets.
|
| | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| (In thousands) | 2017 | | 2016 | | 2017 | | 2016 |
| Net income (loss): | | | | | | | |
| Commercial Banking | $ | 30,357 |
| | $ | 31,555 |
| | $ | 93,827 |
| | $ | 80,907 |
|
| Community Banking | 22,778 |
| | 15,121 |
| | 60,176 |
| | 45,325 |
|
| HSA Bank | 12,856 |
| | 9,815 |
| | 35,125 |
| | 29,286 |
|
| Corporate and Reconciling | (1,495 | ) | | (4,674 | ) | | (3,582 | ) | | (6,051 | ) |
| Total | $ | 64,496 |
| | $ | 51,817 |
| | $ | 185,546 |
| | $ | 149,467 |
|
|
| | | | | | | | | | | | | | | |
| | At September 30, 2017 |
| (In thousands) | Commercial
Banking | Community Banking | HSA Bank | Corporate and
Reconciling | Total |
| Total assets | $ | 9,428,676 |
| $ | 8,881,322 |
| $ | 76,090 |
| $ | 7,964,094 |
| $ | 26,350,182 |
|
| Loans and leases | 9,291,257 |
| 8,155,063 |
| 101 |
| — |
| 17,446,421 |
|
| Goodwill | — |
| 516,560 |
| 21,813 |
| — |
| 538,373 |
|
| Deposits | 4,251,470 |
| 11,331,767 |
| 4,891,024 |
| 380,974 |
| 20,855,235 |
|
| Not included in above amounts: | | | | | |
| Assets under administration/management | 1,990,988 |
| 3,231,345 |
| 1,158,601 |
| — |
| 6,380,934 |
|
| | | | | | |
| | At December 31, 2016 |
| (In thousands) | Commercial
Banking | Community Banking | HSA Bank | Corporate and
Reconciling | Total |
| Total assets | $ | 9,069,445 |
| $ | 8,721,046 |
| $ | 83,987 |
| $ | 8,198,051 |
| $ | 26,072,529 |
|
| Loans and leases | 9,066,905 |
| 7,959,558 |
| 125 |
| — |
| 17,026,588 |
|
| Goodwill | — |
| 516,560 |
| 21,813 |
| — |
| 538,373 |
|
| Deposits | 3,592,531 |
| 10,970,977 |
| 4,362,503 |
| 377,846 |
| 19,303,857 |
|
| Not included in above amounts: | | | | | |
| Assets under administration/management | 1,781,840 |
| 2,980,113 |
| 878,190 |
| — |
| 5,640,143 |
|
Commercial Banking
Operating Results: | | | | | | | | | | | |
| Three months ended March 31, |
| (In thousands) | 2022 | | 2021 |
| Net interest income | $ | 287,069 | | | $ | 141,486 | |
| Non-interest income | 38,743 | | | 18,376 | |
| Non-interest expense | 89,240 | | | 46,284 | |
| Pre-tax, pre-provision net revenue | $ | 236,572 | | | $ | 113,578 | |
|
| | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| (In thousands) | 2017 | | 2016 | | 2017 | | 2016 |
| Net interest income | $ | 81,925 |
| | $ | 74,265 |
| | $ | 239,118 |
| | $ | 211,422 |
|
| Provision for loan and lease losses | 12,073 |
| | 7,876 |
| | 29,562 |
| | 29,765 |
|
| Net interest income after provision | 69,852 |
| | 66,389 |
| | 209,556 |
| | 181,657 |
|
| Non-interest income | 13,207 |
| | 15,916 |
| | 39,163 |
| | 41,819 |
|
| Non-interest expense | 38,339 |
| | 35,793 |
| | 113,767 |
| | 103,336 |
|
| Income before income taxes | 44,720 |
| | 46,512 |
| | 134,952 |
| | 120,140 |
|
| Income tax expense | 14,363 |
| | 14,957 |
| | 41,125 |
| | 39,233 |
|
| Net income | $ | 30,357 |
| | $ | 31,555 |
| | $ | 93,827 |
| | $ | 80,907 |
|
Comparison to Prior Year Quarter
Net income decreased $1.2Commercial Banking's PPNR increased $123.0 million, or 108.3%, for the three months ended September 30, 2017March 31, 2022 as compared to the same periodthree months ended March 31, 2021, due to increases in 2016. Netboth net interest income increased $7.7and non-interest income, partially offset by an increase in non-interest expense, all of which were primarily driven by the merger with Sterling. The $145.6 million increase in net interest income is primarily attributed to incremental loan and deposit balances acquired from Sterling, and loan and deposit growth. The $20.4 million increase in non-interest income is primarily attributed to incremental fee income due to loan growththe merger, and higher loan portfolio yield. The provision for loan and lease losses increased $4.2related fees. The $43.0 million due,increase in part,non-interest expense is primarily attributed to slight increases in allowance levels for certain portfolios. Non-interest income decreased $2.7 million primarily due to greater syndication fees in the year ago period. Non-interest expense increased $2.5 million,incremental expenses incurred related to strategic hires and investments in product enhancements and infrastructure.the acquired Sterling commercial business, which was partially offset by the benefits of costs savings initiatives implemented over the course of 2021.
Comparison to Prior Year to Date
Net income increased $12.9 million for the nine months ended September 30, 2017 as compared to the same period in 2016. Net interest income increased $27.7 million, primarily due to loan growth and higher loan portfolio yield. The provision for loan and lease losses decreased $0.2 million. Non-interest income decreased $2.7 million, primarily due to greater syndication fees in the year ago period. Non-interest expense increased $10.4 million, related to strategic hires and investments in product enhancements and infrastructure.
Selected Balance Sheet Information and Assets Under Administration/Management:
|
| | | | | | | |
| (In thousands) | At September 30,
2017 | | At December 31,
2016 |
| Total assets | $ | 9,428,676 |
| | $ | 9,069,445 |
|
| Loans and leases | 9,291,257 |
| | 9,066,905 |
|
| Deposits | 4,251,470 |
| | 3,592,531 |
|
| Not included in above amounts: | | | |
| Assets under administration/management | 1,990,988 |
| | 1,781,840 |
|
| | | | | | | | | | | |
| (In thousands) | At March 31,
2022 | | At December 31,
2021 |
| Loans and leases | $ | 34,928,169 | | | $ | 15,209,515 | |
| Deposits | 21,527,954 | | | 9,519,362 | |
| Assets under administration/management (off-balance sheet) | 2,692,402 | | | 2,869,385 | |
Loans and leases increased $224.4 million$19.7 billion, or 129.6%, at September 30, 2017March 31, 2022, as compared to December 31, 2016. Loan2021, primarily due to the merger with Sterling and growth within the sponsor and specialty line of business. Total portfolio originations were $2.3 billion for the ninethree months ended September 30, 2017 comparedMarch 31, 2022, and 2021 were $2.0 billion and $1.0 billion, respectively. The $1.0 billion increase was primarily attributed to $2.1 billion for the nine months ended September 30, 2016. Management believes the reserve level is adequate to cover losses in the Commercial Banking portfolio. For additional discussion related to asset quality metrics, see the "Asset Quality" section elsewhere within this report. merger with Sterling, along with increased commercial non-mortgage originations.
Deposits increased $658.9 million$12.0 billion, or 126.1%, at September 30, 2017March 31, 2022, as compared to December 31, 20162021, primarily due to the acquisition of new clients andmerger with Sterling, along with seasonality of government deposits.municipal deposit products and client acquisitions.
Commercial Banking held approximately $356.1 million$0.7 billion and $271.7 million$0.8 billion in assets under administration and $1.6$2.0 billion and $1.5$2.1 billion in assets under management at September 30, 2017March 31, 2022, and December 31, 2016, respectively, related2021, respectively. The combined $0.2 billion decrease, or 6.2%, was primarily due to Privatevaluations in the equity markets during the three months ended March 31, 2022.
HSA Bank clients.
Community Banking
Operating Results: | | | | | | | | | | | |
| Three months ended March 31, |
| (In thousands) | 2022 | | 2021 |
| Net interest income | $ | 44,577 | | | $ | 42,109 | |
| Non-interest income | 26,958 | | | 27,005 | |
| Non-interest expense | 36,409 | | | 36,005 | |
| Pre-tax net revenue | $ | 35,126 | | | $ | 33,109 | |
|
| | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| (In thousands) | 2017 | | 2016 | | 2017 | | 2016 |
| Net interest income | $ | 96,859 |
| | $ | 91,995 |
| | $ | 286,351 |
| | $ | 274,186 |
|
| (Benefit) provision for loan and lease losses | (1,923 | ) | | 6,374 |
| | (1,662 | ) | | 14,085 |
|
| Net interest income after provision | 98,782 |
| | 85,621 |
| | 288,013 |
| | 260,101 |
|
| Non-interest income | 27,079 |
| | 29,130 |
| | 80,516 |
| | 83,248 |
|
| Non-interest expense | 92,478 |
| | 92,508 |
| | 281,979 |
| | 276,045 |
|
| Income before income taxes | 33,383 |
| | 22,243 |
| | 86,550 |
| | 67,304 |
|
| Income tax expense | 10,605 |
| | 7,122 |
| | 26,374 |
| | 21,979 |
|
| Net income | $ | 22,778 |
| | $ | 15,121 |
| | $ | 60,176 |
| | $ | 45,325 |
|
Comparison to Prior Year Quarter
Net incomeHSA Bank's pre-tax net revenue increased $7.7$2.0 million, or 6.1%, for the three months ended September 30, 2017March 31, 2022 as compared to the same period in 2016. Net interest income increased $4.9 million, primarily due to growth in both loans and deposits, coupled with improved spreads on deposits as a result of higher interest rates. The increase was partially offset by the effects of tightening spreads on the loan portfolio. A benefit in 2017 compared to a provision for loan and lease losses in 2016 resulted in a favorable impact of $8.3 million, primarily due to loan portfolio quality improvement. Non-interest income decreased $2.1 million resulting from decreases in fees from mortgage banking activities and loan servicing income. Non-interest expense was flat compared to the three months ended September 30, 2016.March 31, 2021, primarily due to an increase in net interest income, which was partially offset by an increase in non-interest expense. Non-interest income remained flat on a comparative basis. The $2.5 million increase in net interest income is primarily attributed to an increase in the net interest rate spread on deposits and overall deposit growth. The $0.4 million increase in non-interest expense is primarily attributed to incremental expenses from Bend's acquired business, which was partially offset by lower compensation and benefits costs.
Comparison to Prior Year to DateSelected Balance Sheet and Off-Balance Sheet Information: | | | | | | | | | | | |
| (In thousands) | At March 31,
2022 | | At December 31,
2021 |
| Deposits | $ | 7,804,846 | | | $ | 7,397,997 | |
| Assets under administration, through linked investment accounts (off-balance sheet) | 3,761,362 | | | 3,718,610 | |
| | | |
Net incomeDeposits increased $14.9$406.8 million, for the nine months ended September 30, 2017or 5.5%, at March 31, 2022, as compared to the same period in 2016. Net interest income increased $12.2 million,December 31, 2021, primarily due to an increase in the number of account holders and organic deposit growth, which was partially offset by a decrease in both loansthird party administrator deposits. HSA deposits accounted for approximately 14.4% and 24.8% of Webster's total consolidated deposits coupledat March 31, 2022, and December 31, 2021, respectively, with improved spreads onthe lower mix driven by the inflow of deposits as a result of higherthe merger with Sterling.
Assets under administration, through linked investment accounts, increased $42.8 million, or 1.1%, at March 31, 2022, as compared to December 31, 2021, primarily due to additional account holders and balances from the acquisition of Bend, which was partially offset by valuations in the equity markets during the three months ended March 31, 2022.
Consumer Banking
Operating Results: | | | | | | | | | | | |
| Three months ended March 31, |
| (In thousands) | 2022 | | 2021 |
| Net interest income | $ | 136,580 | | | $ | 89,365 | |
| Non-interest income | 27,892 | | | 22,872 | |
| Non-interest expense | 95,747 | | | 75,311 | |
| Pre-tax, pre-provision net revenue | $ | 68,725 | | | $ | 36,926 | |
Consumer Banking's PPNR increased $31.8 million, or 86.1%, for the three months ended March 31, 2022 as compared to the three months ended March 31, 2021, due to increases in both net interest rates.income and non-interest income, partially offset by an increase in non-interest expense, all of which were primarily driven by the merger with Sterling. The overall$47.2 million increase in net interest income is primarily attributed to incremental loan and deposit balances acquired from Sterling, and loan and deposit growth. The $5.0 million increase in non-interest income is primarily attributed to incremental fee income due to the merger, and loan and lease related fees. The $20.4 million increase in non-interest expense is primarily attributed to incremental expenses incurred related to the acquired Sterling consumer business, which was partially offset by the effectsbenefits of tightening spreads oncosts savings initiatives implemented over the loan portfolio. A benefit in 2017 compared to a provision for loan and lease losses in 2016 resulted in a favorable impactcourse of $15.7 million, primarily due to loan portfolio quality improvement. Non-interest income decreased $2.7 million, primarily due to lower fees from mortgage banking activities and client interest rate hedging activities; partially offset by increased fee income from investment management activity and deposit related service charges. Non-interest expense increased $5.9 million, primarily due to increased compensation and benefits, increased investment in technology infrastructure, charges related to banking center optimization, and net deposit fraud losses; partially offset by lower marketing, and the absence in 2017 of core deposit intangible amortization, which ended in 2016.2021.
Selected Balance Sheet Information and Assets Under Administration:Off-Balance Sheet Information: | | | | | | | | | | | |
| (In thousands) | At March 31,
2022 | | At December 31,
2021 |
| Loans | $ | 8,588,704 | | | $ | 7,062,182 | |
| Deposits | 24,115,388 | | | 12,926,302 | |
| Assets under administration (off-balance sheet) | 7,929,328 | | | 4,332,901 | |
|
| | | | | | | |
| (In thousands) | At September 30,
2017 | | At December 31,
2016 |
| Total assets | $ | 8,881,322 |
| | $ | 8,721,046 |
|
| Loans | 8,155,063 |
| | 7,959,558 |
|
| Deposits | 11,331,767 |
| | 10,970,977 |
|
| Not included in above amounts: | | | |
| Assets under administration | 3,231,345 |
| | 2,980,113 |
|
Loans increased $195.5 million to $8.2$1.5 billion, or 21.6%, at September 30, 2017March 31, 2022, as compared to December 31, 2016. The net increase is related2021, primarily due to growth inthe merger with Sterling and residential mortgages and business banking loans;mortgage loan growth, partially offset by net decreasesprincipal paydowns in home equity loans, and the equity and unsecured personal loans portfolios. Loancontinued run-off of consumer Lending Club loans. Total portfolio originations were $1.5 billion induring the ninethree months ended September 30, 2017 comparedMarch 31, 2022 and 2021 were $0.6 billion and $0.8 billion, respectively. The decrease was primarily attributed to $1.7 billion for the same periodan increase in 2016. Originations decreased by $127.3 million driven by lessmarket rates, which resulted in lower residential mortgage loan originations.
Deposits increased $360.8 million$11.2 billion, or 86.6%, at September 30, 2017March 31, 2022 as compared to December 31, 20162021, primarily due to the Boston expansionmerger with Sterling. Customer preferences for maintaining liquidity resulted in higher balances in small business and continued growth in all majorconsumer transaction accounts, particularly across savings accounts and money markets, as account holders with maturing certificates of deposit product types.migrated to more liquid deposit products.
Additionally, investmentConsumer Banking held $7.9 billion and securities-related services had assets under administration, in its strategic partnership with LPL, which increased $251.2 million to $3.2 billion at September 30, 2017, compared to December 31, 2016.
HSA Bank
Operating Results:
|
| | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| (In thousands) | 2017 | | 2016 | | 2017 | | 2016 |
| Net interest income | $ | 26,713 |
| | $ | 20,560 |
| | $ | 76,339 |
| | $ | 60,484 |
|
| Non-interest income | 19,371 |
| | 16,900 |
| | 58,392 |
| | 54,969 |
|
| Non-interest expense | 27,222 |
| | 23,021 |
| | 84,211 |
| | 71,966 |
|
| Income before income taxes | 18,862 |
| | 14,439 |
| | 50,520 |
| | 43,487 |
|
| Income tax expense | 6,006 |
| | 4,624 |
| | 15,395 |
| | 14,201 |
|
| Net income | $ | 12,856 |
| | $ | 9,815 |
| | $ | 35,125 |
| | $ | 29,286 |
|
Comparison to Prior Year Quarter
Net income increased $3.0 million for the three months ended September 30, 2017 as compared to the same period in 2016. Net interest income increased $6.2 million, reflecting the growth in deposits and improved deposit spread. Non-interest income increased $2.5 million due primarily to the growth in accounts. Non-interest expense increased $4.2 million primarily as a result of account growth and continued investment in key initiatives related to continuous improvement, customer service, and expanded distribution.
Comparison to Prior Year to Date
Net income increased $5.8 million for the nine months ended September 30, 2017 as compared to the same period in 2016. Net interest income increased $15.9 million, reflecting the growth in deposits and improved deposit spread. Non-interest income increased $3.4 million due to growth in accounts. Non-interest expense increased $12.2 million primarily due to increased compensation and benefit costs, increased processing costs in support of business growth as well as continued investment in key initiatives related to continuous improvement, customer service, and expanded distribution.
Selected Balance Sheet Information and Assets Under Administration:
|
| | | | | | | |
| (In thousands) | At September 30,
2017 | | At December 31,
2016 |
| Total assets | $ | 76,090 |
| | $ | 83,987 |
|
| Deposits | 4,891,024 |
| | 4,362,503 |
|
| Not included in above amounts: | | | |
| Assets under administration | 1,158,601 |
| | 878,190 |
|
Deposits increased $528.5 million at September 30, 2017 compared to December 31, 2016, driven by organic growth. HSA Bank deposits accounted for 23.5% and 22.6% of the Company’s total deposits at September 30, 2017 and December 31, 2016, respectively.
Additionally, HSA Bank had $1.2$4.3 billion in assets under administration through linked brokerage accounts, at September 30, 2017 comparedMarch 31, 2022, and December 31, 2021, respectively. The $3.6 billion increase was primarily due to $0.9the merger with Sterling, partially offset by valuations in the equity markets during the three months ended March 31, 2022.
Financial Condition
Total assets increased $30.2 billion, or 86.5%, from $34.9 billion at December 31, 2016,2021 to $65.1 billion at March 31, 2022. The change in total assets was primarily attributed to the following:
•Total investment securities, net increased $4.7 billion, with increases of $4.5 billion and $164.1 million in the available-for-sale and held-to-maturity portfolios, respectively, primarily due to $4.4 billion of investment securities acquired from Sterling in the merger, all of which were classified as the numberavailable-for-sale based on Webster's intent at closing;
•Loans and leases increased $21.3 billion, with increases of account holders with investments continues to increase.
At September 30, 2017, there were $6.1$19.8 billion and $1.5 billion in total footings, comprisedthe commercial and consumer portfolios, respectively, primarily due to $20.5 billion of $4.9gross loans and leases acquired from Sterling in the merger, which is inclusive of a $317.6 million purchase discount. Webster also originated $2.6 billion of loans and leases during the three months ended March 31, 2022, particularly across the commercial non-mortgage, commercial real estate, and residential mortgage categories. These increases were partially offset by the forgiveness of PPP loans, net paydowns in home equity loans, and the run-off of consumer Lending Club loans. In addition, Webster recorded $88.0 million and $175.1 million of initial ACL for the PCD and non-PCD loans and leases acquired from Sterling, respectively, which primarily contributed to the $268.2 million increase in the ACL on loans and leases;
•Goodwill and other net intangible assets increased a combined $2.2 billion. Goodwill increased $2.0 billion, which reflects the $1.9 billion and $36.0 million recognized in connection with the Sterling merger and Bend acquisition, respectively. The $206.7 million increase in other net intangible assets is due to the $119.1 million core deposit and $94.0 million customer relationship intangible assets acquired from Sterling and Bend, respectively, partially offset by current period amortization charges; and
•Accrued interest receivable and other assets increased $879.1 million primarily due to $959.5 million of balances acquired from Sterling in the merger. Notable increases include $103.4 million in accrued interest receivable, $59.1 million in alternative investments, $505.3 million in LIHTC investments, and $1.2a combined $73.7 million in accounts receivable and prepaid expenses. These increases were partially offset by a decrease of $77.8 million in treasury derivative assets.
Total liabilities increased $25.5 billion, in assets under administration balances.
Financial Condition
Webster had total assets of $26.4 billion at September 30, 2017 and $26.1or 80.9%, from $31.5 billion at December 31, 2016. Loans and leases of $17.22021 to $57.0 billion net of ALLL of $201.8 million, at September 30, 2017 increased $0.4 billion comparedMarch 31, 2022. The change in total liabilities was primarily attributed to loans and leases of $16.8 billion, net of ALLL of $194.3 million, at December 31, 2016. the following:
•Total deposits increased $24.5 billion, with increases of $20.9$6.5 billion at September 30, 2017and $18.0 billion in non-interest bearing deposits and interest-bearing deposits, respectively, primarily due to $23.3 billion of deposits assumed from Sterling in the merger;
•Long-term debt increased $1.6$515.3 million, primarily due to $499.0 million aggregate par value of subordinated notes assumed from Sterling in the merger, adjusted for a $17.9 million purchase premium, which is being amortized over the remaining lives of the subordinated notes;
•Accrued expenses and other liabilities increased $608.7 million, primarily due to the $595.3 million of balances assumed from Sterling in the merger. Notable increases include $106.9 million in derivative liabilities, $117.1 million in operating lease liabilities, and $247.2 million in unfunded commitments for LIHTC investments.
Total shareholders' equity increased $4.7 billion, compared to total deposits of $19.3or 137.8%, from $3.4 billion at December 31, 2016. Interest bearing deposits increased 9.4%, during the period, due2021 to growth$8.2 billion at March 31, 2022. The change in health savings and money market accounts.
At September 30, 2017, total shareholders' equity was attributed to the following:
•Common shares issued in the merger with Sterling totaling approximately $5.0 billion, of $2.6 billion increased $111.8which $43.9 million comparedpertained to total shareholders' equityreplacement share-based compensation awards;
•The conversion of $2.5 billion at December 31, 2016. Changes in shareholders' equity for the nine months ended September 30, 2017 included increases of $185.5 million in net income and $11.0 million for share-based award activity, partially offset by $71.0 million in common dividends, $6.1 million inSterling Series A preferred dividends, and $20.9 million purchases of treasurystock into Webster Series G preferred stock at cost.a fair value of $138.9 million;
The quarterly•Net loss recognized of $16.7 million;
•Dividends paid to common and preferred shareholders of $36.2 million and $3.4 million, respectively;
•Other comprehensive loss, net of tax, of $253.1 million, primarily due to market value decreases in the Company's available-for-sale securities portfolio and cash dividend to shareholders has been increased to $0.26 perflow hedges;
•Employee share-based compensation plan activity of $9.0 million, inclusive of restricted stock amortization and forfeitures, and stock options exercised of $0.4 million; and
•Repurchases of common share since April 24, 2017. See the selected financial highlightsstock of $122.2 million under the "Results of Operations" sectionCompany's common stock repurchase program and Note 10: Regulatory Matters in the Notes$19.0 million related to Condensed Consolidated Financial Statements contained elsewhere in this report for information on regulatory capital levels and ratios.employee share-based compensation plans.
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 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 the Bank, the Holding Company also may directly hold investment securities from time-to-time.
Webster maintains, throughThrough its Corporate Treasury Unit, investmentfunction, Webster maintains and invests in debt securities that are primarily structuredused to provide a source of liquidity for operating needs, to generate interest income, and as a means to manage the Company's interest-rate risk. InvestmentWebster's debt securities are classified into two major categories,categories: available-for-sale and held-to-maturity.
ALCO manages the Company's debt securities in accordance with regulatory guidelines and corporate policies, which include limitations on aspects such as concentrations in and types of investments, as well as minimum risk ratings per type of security. In addition, the OCC may further establish individual limits on certain types of investments if the concentration in such investment presents a safety and soundness concern. At March 31, 2022 and December 31, 2021, Webster had investment securities with a total net carrying value of $15.1 billion and $10.4 billion, respectively, with an average risk weighting for regulatory purposes of 19.5% and 12.5%, respectively. Although the Bank held the entirety of Webster's investment portfolio at both March 31, 2022 and December 31, 2021, the Holding Company may also directly hold investments.
The following table summarizes the balances and percentage composition of Webster's investment securities: | | | | | | | | | | | | | | | | | |
| | At March 31, 2022 | | At December 31, 2021 |
| (In thousands) | Amount | % | | Amount | % |
| Available-for-sale: | | | | | |
| U.S. Treasury notes | $ | 732,425 | 8.4 | % | | $ | 396,966 | 9.4 | % |
| Government agency debentures | 217,219 | 2.5 | | | — | — | |
| Municipal bonds and notes | 1,894,537 | 21.7 | | | — | — | |
| Agency CMO | 79,513 | 0.9 | | | 90,384 | 2.2 | |
| Agency MBS | 2,574,569 | 29.4 | | | 1,593,403 | 37.6 | |
| Agency CMBS | 1,583,820 | 18.1 | | | 1,232,541 | 29.1 | |
| CMBS | 864,157 | 9.9 | | | 886,263 | 20.9 | |
| CLO | 14,233 | 0.1 | | | 21,847 | 0.5 | |
| Corporate debt | 767,044 | 8.8 | | | 13,450 | 0.3 | |
| Other | 17,380 | 0.2 | | | — | — | |
| Total available-for-sale | $ | 8,744,897 | 100.0 | % | | $ | 4,234,854 | 100.0 | % |
| | | | | |
| Held-to-maturity: | | | | | |
| Agency CMO | $ | 36,533 | 0.6 | % | | $ | 42,405 | 0.7 | % |
| Agency MBS | 2,915,114 | 45.8 | | | 2,901,593 | 46.8 | |
| Agency CMBS | 2,548,347 | 40.1 | | | 2,378,475 | 38.4 | |
Municipal bonds and notes (1) | 696,601 | 10.9 | | | 705,918 | 11.4 | |
| CMBS | 165,863 | 2.6 | | | 169,948 | 2.7 | |
| Total held-to-maturity | $ | 6,362,458 | 100.0 | % | | $ | 6,198,339 | 100.0 | % |
| Total investment securities | $ | 15,107,355 | | | $ | 10,433,193 | |
(1)The balances at both March 31, 2022 and December 31, 2021, exclude the allowance for credit losses recorded on held-to-maturity debt securities of $0.2 million.
Available-for-sale consistsdebt securities increased $4.5 billion, or 106.5%, from $4.2 billion at December 31, 2021 to $8.7 billion at March 31, 2022, primarily due to the merger with Sterling, as the Company acquired $4.4 billion of Agency CMO,debt securities at fair value on January 31, 2022, all of which were classified as available-for-sale based on Webster's intent at closing. The debt securities acquired from Sterling resulted in a $221.6 million net purchase premium over par value accounted for as a yield adjustment using the effective interest method. Webster also purchased an additional $714.2 million of available-for sale debt securities during the quarter. This total purchase activity was partially offset by paydowns and net premium amortization, particularly across the Agency MBS, Agency CMBS, and CMBS and CLO. Held-to-maturity consists primarily of Agency CMO, Agency MBS, Agency CMBS, municipal bonds and notes, and CMBS. At September 30, 2017, the Company had no holdings in obligations of individual states, counties, or municipalities which exceeded 10% of consolidated shareholders’ equity.categories.
The combined carrying value of investmenttax-equivalent yield in the available-for-sale portfolio was 1.98% for the three months ended March 31, 2022 as compared to 1.83% for the three months ended March 31, 2021. The 15 basis point increase is attributed to lower premium amortization and higher rates on securities totaled $7.1 billion and $7.2 billion at September 30, 2017purchased in the current period. Available-for-sale debt securities are evaluated for credit losses on a quarterly basis. At March 31, 2022 and December 31, 2016,2021, gross unrealized losses on available-for-sale debt securities were $333.3 million and $34.3 million, respectively. Available-for-sale investment securities decreased by $399.9The $299.0 million increase in unrealized losses is primarily due to principal paydowns exceeding principal purchase activity. Held-to-maturity investment securitiesthe increased by $336.7 million, primarily dueportfolio size from the merger with Sterling, and higher market rates. Because these unrealized losses were attributable to purchase activity exceeding principal paydowns. On a tax-equivalent basis, the yield in the investment securities portfolio for both the nine months ended September 30, 2017 and 2016 was 2.98%.
The Company held $4.4 billion in investment securities that are in an unrealized loss position at September 30, 2017. Approximately $2.7 billion of this total has been in an unrealized loss position for less than twelve months, while the remainder, $1.7 billion, has been in an unrealized loss position for twelve months or longer. The total unrealized loss was $81.9 million at September 30, 2017. These investment securities were evaluated by management and were determined not to befactors other than temporarily impaired. The Company doescredit deterioration, no ACL was recorded during the period. At March 31, 2022, Webster did not have the intentintend to sell these investment securities, and it is more likely than not that itthe Company will not havebe required to sell these investment securities beforeprior to the anticipated recovery of their cost basis. To the extent that credit movements and other related factors influence the fair value of its
Held-to-maturity investment securities increased $164.1 million, or 2.6%, from $6.2 billion at December 31, 2021 to $6.4 billion at March 31, 2022, primarily due to purchases exceeding paydowns, calls, and net premium amortization, particularly across the Company may be requiredAgency CMBS and Agency MBS categories. The tax-equivalent yield in the portfolio was 2.06% for the three months ended March 31, 2022 as compared to record impairment charges2.29% for OTTIthe three months ended March 31, 2021. The 23 basis point decrease is attributed to higher premium amortization and lower rates on securities purchased over the past year. Held-to-maturity debt securities are evaluated for credit losses on a quarterly basis under CECL. At March 31, 2022 and December 31, 2021, gross unrealized losses on held-to-maturity debt securities were $291.6 million and $55.7 million, respectively. The increase in future periods.unrealized losses is primarily due to higher market rates. The ACL on held-to-maturity debt securities was $0.2 million at both March 31, 2022 and December 31, 2021.
The following table summarizes the amortized cost and fair value of investment securities:securities by contractual maturity, along with the respective weighted-average yields:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| At March 31, 2022 |
| 1 Year or Less | 1 - 5 Years | 5 - 10 Years | After 10 Years | Total |
| (Dollars in thousands) | Amount | Weighted- Average Yield (1) | Amount | Weighted- Average Yield (1) | Amount | Weighted- Average Yield (1) | Amount | Weighted- Average Yield (1) | Amount | Weighted- Average Yield (1) |
| Available-for-sale: | | | | | | | | | | |
| U.S. Treasury notes | $ | — | | — | % | $ | 732,425 | | 1.05 | % | $ | — | | — | % | $ | — | | — | % | $ | 732,425 | | 1.05 | % |
| Government agency debentures | 10,050 | | 0.47 | | 18,919 | | 1.51 | | 18,753 | | 1.73 | | 169,497 | | 2.90 | | 217,219 | | 2.56 | |
| Municipal bonds and notes | 12,113 | | 1.26 | | 252,093 | | 1.26 | | 608,558 | | 1.45 | | 1,021,773 | | 1.57 | | 1,894,537 | | 1.49 | |
| Agency CMO | — | | — | | 852 | | 2.83 | | 1,140 | | 3.01 | | 77,521 | | 2.49 | | 79,513 | | 2.50 | |
| Agency MBS | 94 | | (2.46) | | 6,149 | | 0.80 | | 182,512 | | 1.37 | | 2,385,814 | | 1.99 | | 2,574,569 | | 1.95 | |
| Agency CMBS | 3,509 | | 1.78 | | 47,013 | | 2.09 | | 102,047 | | 1.98 | | 1,431,251 | | 1.95 | | 1,583,820 | | 1.96 | |
| CMBS | — | | — | | 69,508 | | 1.65 | | 49,416 | | 3.40 | | 745,233 | | 1.78 | | 864,157 | | 1.86 | |
| CLO | — | | — | | — | | — | | 14,233 | | 1.80 | | — | | — | | 14,233 | | 1.80 | |
| Corporate debt | — | | — | | 183,835 | | 2.18 | | 488,557 | | 3.56 | | 94,652 | | 2.92 | | 767,044 | | 3.15 | |
| Other | 7,450 | | 3.69 | | 250 | | 3.77 | | 9,680 | | 3.28 | | — | | — | | 17,380 | | 3.46 | |
| Total available-for-sale | $ | 33,216 | | 1.61 | % | $ | 1,311,044 | | 1.33 | % | $ | 1,474,896 | | 2.26 | % | $ | 5,925,741 | | 1.93 | % | $ | 8,744,897 | | 1.89 | % |
| Held-to-maturity: | | | | | | | | | | |
| Agency CMO | $ | — | | — | % | $ | — | | — | % | $ | — | | — | % | $ | 36,533 | | 1.93 | % | $ | 36,533 | | 1.93 | % |
| Agency MBS | — | | — | | 2,984 | | 2.44 | | 26,243 | | 2.26 | | 2,885,887 | | 2.13 | | 2,915,114 | | 2.13 | |
| Agency CMBS | — | | — | | — | | — | | 158,188 | | 2.70 | | 2,390,159 | | 1.84 | | 2,548,347 | | 1.89 | |
| Municipal bonds and notes | 2,429 | | 3.64 | | 49,979 | | 3.29 | | 125,428 | | 2.65 | | 518,765 | | 2.90 | | 696,601 | | 2.89 | |
| CMBS | — | | — | | — | | — | | — | | — | | 165,863 | | 2.70 | | 165,863 | | 2.70 | |
| Total held-to-maturity | $ | 2,429 | | 3.64 | % | $ | 52,963 | | 3.24 | % | $ | 309,859 | | 2.64 | % | $ | 5,997,207 | | 2.09 | % | $ | 6,362,458 | | 2.13 | % |
| Total investment securities | $ | 35,645 | | 1.75 | % | $ | 1,364,007 | | 1.40 | % | $ | 1,784,755 | | 2.33 | % | $ | 11,922,948 | | 2.01 | % | $ | 15,107,355 | | 1.99 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | At September 30, 2017 | | At December 31, 2016 |
| (In thousands) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | | Amortized
Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value |
| Available-for-sale: | | | | | | | | | |
| U.S. Treasury Bills | $ | 3,596 |
| $ | — |
| $ | — |
| $ | 3,596 |
| | $ | 734 |
| $ | — |
| $ | — |
| $ | 734 |
|
| Agency CMO | 332,341 |
| 2,573 |
| (3,116 | ) | 331,798 |
| | 419,865 |
| 3,344 |
| (3,503 | ) | 419,706 |
|
| Agency MBS | 923,819 |
| 3,214 |
| (14,056 | ) | 912,977 |
| | 969,460 |
| 4,398 |
| (19,509 | ) | 954,349 |
|
| Agency CMBS | 599,165 |
| — |
| (14,205 | ) | 584,960 |
| | 587,776 |
| 63 |
| (14,567 | ) | 573,272 |
|
| CMBS | 402,015 |
| 1,539 |
| (121 | ) | 403,433 |
| | 473,974 |
| 4,093 |
| (702 | ) | 477,365 |
|
| CLO | 273,172 |
| 1,572 |
| (161 | ) | 274,583 |
| | 425,083 |
| 2,826 |
| (519 | ) | 427,390 |
|
| Trust preferred | 30,463 |
| 676 |
| (202 | ) | 30,937 |
| | 30,381 |
| — |
| (1,748 | ) | 28,633 |
|
| Corporate debt | 48,334 |
| 674 |
| (130 | ) | 48,878 |
| | 108,490 |
| 1,502 |
| (350 | ) | 109,642 |
|
| Available-for-sale | $ | 2,612,905 |
| $ | 10,248 |
| $ | (31,991 | ) | $ | 2,591,162 |
| | $ | 3,015,763 |
| $ | 16,226 |
| $ | (40,898 | ) | $ | 2,991,091 |
|
| Held-to-maturity: | | | | | | | | | |
| Agency CMO | $ | 276,367 |
| $ | 1,138 |
| $ | (3,030 | ) | $ | 274,475 |
| | $ | 339,455 |
| $ | 1,977 |
| $ | (3,824 | ) | $ | 337,608 |
|
| Agency MBS | 2,549,500 |
| 24,275 |
| (30,012 | ) | 2,543,763 |
| | 2,317,449 |
| 26,388 |
| (41,768 | ) | 2,302,069 |
|
| Agency CMBS | 708,229 |
| 280 |
| (3,549 | ) | 704,960 |
| | 547,726 |
| 694 |
| (1,348 | ) | 547,072 |
|
| Municipal bonds and notes | 705,411 |
| 5,213 |
| (13,150 | ) | 697,474 |
| | 655,813 |
| 4,389 |
| (25,749 | ) | 634,453 |
|
| CMBS | 257,361 |
| 3,394 |
| (197 | ) | 260,558 |
| | 298,538 |
| 4,107 |
| (411 | ) | 302,234 |
|
| Private Label MBS | 443 |
| 2 |
| — |
| 445 |
| | 1,677 |
| 12 |
| — |
| 1,689 |
|
| Held-to-maturity | $ | 4,497,311 |
| $ | 34,302 |
| $ | (49,938 | ) | $ | 4,481,675 |
| | $ | 4,160,658 |
| $ | 37,567 |
| $ | (73,100 | ) | $ | 4,125,125 |
|
The benchmark 10-year U.S. Treasury rate decreased to 2.33% at September 30, 2017 from 2.45% at December 31, 2016. Webster Bank hasAdditional information regarding the ability to use itsCompany's available-for-sale and held-to-maturity investment securities, as well as interest-rate financial instrumentssecurities' portfolios can be found within internal policy guidelines, to hedge and manage interest-rate risk as part of its asset/liability strategy. See Note 12: Derivative Financial Instruments4: Investment Securities in the Notes to Condensed Consolidated Financial Statements contained elsewhere in this report for additional information concerning derivative financial instruments.
Alternative Investments
Investments in Private Equity Funds. The Company has investments in private equity funds. These investments, which totaled $11.0 million at September 30, 2017 and $10.8 million at December 31, 2016, are included in other assets in the accompanying Condensed Consolidated Balance Sheets. The majority of these funds are held at cost based on ownership percentage in the fund, while some are accounted for at fair value using a net asset value. See a further discussion of fair value in Note 13: Fair Value Measurements in the Notes to Condensed Consolidated Financial Statements contained elsewhere in this report. The Company recognized a net gain of $563 thousand and a net loss of $183 thousand for the three months ended September 30, 2017 and 2016, respectively, and a net gain of $2.2 million and $186 thousand for the nine months ended September 30, 2017 and 2016, respectively. These amounts are included in other non-interest income in the accompanying Condensed Consolidated Statements of Income.
Other Non-Marketable Investments. The Company holds certain non-marketable investments, which include preferred share ownership in other equity ventures. These investments, which totaled $6.3 million at September 30, 2017 and $5.7 million at December 31, 2016, are included in other assets in the accompanying Condensed Consolidated Balance Sheets. These funds are held at cost and subject to impairment testing. The Company recorded a net gain of $17 thousand and $8 thousand for the three months ended September 30, 2017 and 2016, respectively, and a net gain of $44 thousand and $35 thousand for the nine months ended September 30, 2017 and 2016, respectively. These amounts are included in other non-interest income in the accompanying Condensed Consolidated Statements of Income.
The Volcker Rule prohibits investments in private equity funds and non-public funds that are considered Covered Funds, as defined in the regulation. On May 4, 2017, the Federal Reserve approved Webster's illiquid funds extension request. As such, compliance with the rule provisions is required by July 21, 2022. See the "Supervision and Regulation" section of Item 1. Business, contained in the Company's 2016 Form 10-K, for additional information on the Volcker Rule, including Covered Funds.Financial Statements.
Loans and Leases
The following table providessummarizes the amortized cost and percentage composition of Webster's loans and leases: | | | | | | | | | | | | | | | | | |
| | At March 31, 2022 | | At December 31, 2021 |
| (Dollars in thousands) | Amount | % | | Amount | % |
| Commercial non-mortgage | $ | 13,105,173 | 30.1 | % | | $ | 6,882,480 | 30.9 | % |
| Asset-based | 1,807,545 | 4.2 | | | 1,067,248 | 4.8 | |
| Commercial real estate | 11,957,747 | 27.5 | | | 5,463,321 | 24.5 | |
| Multi-family | 5,627,200 | 12.9 | | | 1,139,859 | 5.1 | |
| Equipment financing | 1,909,284 | 4.4 | | | 627,058 | 2.8 | |
| Warehouse lending | 564,137 | 1.3 | | | — | — | |
| Residential | 6,798,199 | 15.6 | | | 5,412,905 | 24.3 | |
| Home equity | 1,679,443 | 3.8 | | | 1,593,559 | 7.2 | |
| Other consumer | 87,757 | 0.2 | | | 85,299 | 0.4 | |
Total loans and leases (1) | $ | 43,536,485 | 100.0 | % | | $ | 22,271,729 | 100.0 | % |
|
| | | | | | | | | |
| | At September 30, 2017 | | At December 31, 2016 |
| (Dollars in thousands) | Amount | % | | Amount | % |
| Residential | $ | 4,473,557 |
| 25.6 | | $ | 4,232,771 |
| 24.9 |
| Consumer: | | | | | |
| Home equity | 2,304,058 |
| 13.2 | | 2,395,483 |
| 14.1 |
| Other consumer | 247,855 |
| 1.4 | | 274,336 |
| 1.6 |
| Total consumer | 2,551,913 |
| 14.6 | | 2,669,819 |
| 15.7 |
| Commercial: | | | | | |
| Commercial non-mortgage | 4,482,191 |
| 25.7 | | 4,151,740 |
| 24.4 |
| Asset-based | 886,475 |
| 5.1 | | 808,836 |
| 4.8 |
| Total commercial | 5,368,666 |
| 30.8 | | 4,960,576 |
| 29.1 |
| Commercial real estate: | | | | | |
| Commercial real estate | 4,178,424 |
| 24.0 | | 4,141,025 |
| 24.3 |
| Commercial construction | 290,936 |
| 1.7 | | 375,041 |
| 2.2 |
| Total commercial real estate | 4,469,360 |
| 25.7 | | 4,516,066 |
| 26.5 |
| Equipment financing | 562,171 |
| 3.2 | | 630,040 |
| 3.7 |
| Net unamortized premiums | 14,780 |
| 0.1 | | 9,402 |
| 0.1 |
| Net deferred fees | 5,974 |
| — | | 7,914 |
| — |
| Total loans and leases | $ | 17,446,421 |
| 100.0 | | $ | 17,026,588 |
| 100.0 |
Total residential loans were $4.5 billion(1)The amortized cost balances at September 30, 2017, an increase of $240.8 million fromMarch 31, 2022 and December 31, 2016. The net increase is a result of direct and correspondent originations of $632.8 million, partially offset by payments and payoffs.
Total consumer loans were $2.6 billion at September 30, 2017, a decrease of $117.9 million from December 31, 2016. The net decrease is primarily due to lower utilization of home equity lines.
Total commercial loans were $5.4 billion at September 30, 2017, an increase of $408.1 million from December 31, 2016. The net increase primarily related to originations of $1.8 billion, partially offset by payments and payoffs.
Total commercial real estate loans were $4.5 billion at September 30, 2017, a decrease of $46.7 million from December 31, 2016. The net decrease is a result of originations of $570.2 million, more than offset by payments and payoffs.
Equipment financing2021, exclude the allowance for credit losses recorded on loans and leases were $562.2of $569.4 million at September 30, 2017, a decrease of $67.9and $301.2 million, from December 31, 2016. The net decrease was primarily related to scheduled amortization and higher prepayments, partially offset by originations of $96.3 million.respectively.
Asset Quality
Management maintains asset quality within established risk tolerance levels through its underwriting standards, servicing, and management of loan and lease performance. Loans and leases, particularly where a heightened risk of loss has been identified, are regularly monitored to mitigate further deterioration which could potentially impact key measures of asset quality in future periods. Past due loans and leases, non-performing assets, and credit loss levels are considered to be key measures of asset quality.
The following table provides key asset quality ratios:
|
| | | | | |
| | At September 30, 2017 | | At December 31, 2016 |
| Non-performing loans and leases as a percentage of loans and leases | 0.94 | % | | 0.79 | % |
| Non-performing assets as a percentage of loans and leases plus OREO | 0.97 |
| | 0.81 |
|
| Non-performing assets as a percentage of total assets | 0.64 |
| | 0.53 |
|
| Loans and leases over 30 days past due and accruing income as a percentage of loans and leases | 0.19 |
| | 0.25 |
|
| ALLL as a percentage of non-performing loans and leases | 123.32 |
| | 144.98 |
|
| ALLL as a percentage of loans and leases | 1.16 |
| | 1.14 |
|
Net charge-offs as a percentage of average loans and leases (1) | 0.16 |
| | 0.23 |
|
Ratio of ALLL to net charge-offs (1) | 7.41x |
| | 5.25x |
|
| |
(1) | Calculated for the September 30, 2017 period based on the year-to-date net charge-offs, annualized. |
Potential Problem Loans and Leases
Potential problem loans and leases are defined by management as certain loans and leases that, for;
commercial, commercial real estate, and equipment financing are performing loans and leases with a well defined weakness that jeopardizes the full repayment of the debt where there is also information which causes management to have serious concern about the ability of a borrower to comply with the present repayment terms in the future, and
residential and consumer are performing loans with a delinquency migration that approaches a period which would historically result in non-accrual status.
Potential problem loans and leases exclude loans and leases past due 90 days or more and accruing, non-accrual loans and leases, and TDRs. Management monitors potential problem loans and leases due to a higher degree of risk associated them. The current expectation of probable losses is included in the ALLL, however management cannot predict whether these potential problem loans and leases ultimately will become non-performing or result in a loss. In addition to loans and leases past due 90 days or more and accruing and TDRs, which are contained elsewhere within this section, the Company had potential problem loans and leases of $239.6 million at September 30, 2017 compared to $263.3 million at December 31, 2016.
Past Due Loans and Leases
The following table provides information regarding loans and leases past due 30 days or more and accruing income:
|
| | | | | | | | | |
| | At September 30, 2017 | | At December 31, 2016 |
| (Dollars in thousands) | Amount | % (1) | | Amount | % (1) |
| Residential | $ | 11,700 |
| 0.26 | | $ | 11,202 |
| 0.26 |
| Consumer: | | | | | |
| Home equity | 12,268 |
| 0.53 | | 14,578 |
| 0.61 |
| Other consumer | 3,674 |
| 1.48 | | 3,715 |
| 1.35 |
| Commercial non-mortgage | 2,302 |
| 0.05 | | 1,949 |
| 0.05 |
| Commercial real estate | 1,783 |
| 0.04 | | 8,173 |
| 0.20 |
| Equipment financing | 867 |
| 0.15 | | 1,596 |
| 0.25 |
| Loans and leases past due 30-89 days | 32,594 |
| 0.19 | | 41,213 |
| 0.24 |
Loans and leases past due 90 days and accruing (2) | 934 |
| 0.02 | | 749 |
| 0.02 |
| Total | $ | 33,528 |
| 0.19 | | $ | 41,962 |
| 0.25 |
| Deferred costs and unamortized premiums | 75 |
| | | 86 |
| |
| Total loans and leases over 30 days past due and accruing income | $ | 33,603 |
| | | $ | 42,048 |
| |
| |
(1) | Represents the principal balance of loans and leases over 30 days past due and accruing income as a percentage of the outstanding principal balance within the comparable loan and lease category, and which excludes the impact of deferred costs and unamortized premiums. |
| |
(2) | Loans and leases past due 90 days and accruing was exclusively commercial non-mortgage for the periods presented. |
The balance of loans and leases past due 30 days or more and accruing income decreased $8.4 million at September 30, 2017 compared to December 31, 2016 and was centered in commercial real estate and consumer home equity. The ratio of loans and leases past due 30 days or more and accruing income as a percentage of loans and leases declined to 0.19% at September 30, 2017 as compared to 0.25% at December 31, 2016.
Non-performing Assets
The following table provides information regarding non-performing assets:
|
| | | | | | | | | |
| | At September 30, 2017 | | At December 31, 2016 |
| (Dollars in thousands) | Amount | % (1) | | Amount | % (1) |
| Residential | $ | 45,597 |
| 1.02 | | $ | 47,201 |
| 1.12 |
| Consumer: | | | | | |
| Home equity | 37,057 |
| 1.61 | | 35,875 |
| 1.50 |
| Other consumer | 1,858 |
| 0.75 | | 1,663 |
| 0.61 |
| Total consumer | 38,915 |
| 1.52 | | 37,538 |
| 1.41 |
| Commercial: | | | | | |
| Commercial non-mortgage | 58,942 |
| 1.32 | | 38,550 |
| 0.93 |
| Asset-based loans | 8,558 |
| 0.97 | | — |
| — |
| Total commercial | 67,500 |
| 1.26 | | 38,550 |
| 0.78 |
| Commercial real estate: | | | | | |
| Commercial real estate | 10,590 |
| 0.25 | | 9,859 |
| 0.24 |
| Commercial construction | 476 |
| 0.16 | | 662 |
| 0.18 |
| Total commercial real estate | 11,066 |
| 0.25 | | 10,521 |
| 0.23 |
| Equipment financing | 570 |
| 0.10 | | 225 |
| 0.04 |
| Total non-accrual loans and leases | 163,648 |
| 0.94 | | 134,035 |
| 0.79 |
| Deferred costs and unamortized premiums | 115 |
| | | (219 | ) | |
Total recorded investment in non-accrual loans and leases (2) | $ | 163,763 |
| | | $ | 133,816 |
| |
| | | | | | |
| Total non-accrual loans and leases | $ | 163,648 |
| | | $ | 134,035 |
| |
| Foreclosed and repossessed assets: | | | | | |
| Residential and consumer | 4,986 |
| | | 3,911 |
| |
| Commercial and equipment financing | 328 |
| | | — |
| |
| Total foreclosed and repossessed assets | $ | 5,314 |
| | | $ | 3,911 |
| |
| Total non-performing assets | $ | 168,962 |
| | | $ | 137,946 |
| |
| |
(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, and which excludes the impact of deferred costs and unamortized premiums. |
| |
(2) | Includes non-accrual TDRs of $82.6 million at September 30, 2017 and $75.7 million at December 31, 2016. |
Non-performing assets increased $31.0 million at September 30, 2017 compared to December 31, 2016. The increase in non-performing assets at September 30, 2017 is primarily due to three middle market loans that were moved to non-accrual during the year and are being actively monitored and managed, with appropriate reserves established at the time of move to non-accrual. As a result, overall non-performing assets as a percentage of total assets increased to 0.64% at September 30, 2017 as compared to 0.53% at December 31, 2016.
The following table provides detail of non-performing loan and lease activity:
|
| | | | | | | |
| | Nine months ended September 30, |
| (In thousands) | 2017 | | 2016 |
| Beginning balance | $ | 134,035 |
| | $ | 139,941 |
|
| Additions | 104,693 |
| | 73,990 |
|
| Paydowns/draws | (48,187 | ) | | (46,778 | ) |
| Charge-offs | (21,002 | ) | | (32,999 | ) |
| Other reductions | (5,891 | ) | | (5,936 | ) |
| Ending balance | $ | 163,648 |
| | $ | 128,218 |
|
Impaired Loans and Leases
Loans are considered impaired when it becomes probable the Company will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. Impairment is evaluated on a pooled basis for smaller-balance loans of a similar nature. Consumer and residential loans for which the borrower has been discharged in Chapter 7 bankruptcy are considered collateral dependent impaired loans at the date of discharge. Commercial, commercial real estate, and equipment financing loans and leases over a specific dollar amount, risk rated substandard or worse and non-accruing, all TDRs, and all loans that have had a partial charge-off are evaluated individually for impairment.
To the extent that an impaired loan or lease balance is collateral dependent, the Company evaluates the fair value of the collateral. Impairment is calculated as the excess of the present value of estimated future cash flows using the original interest rate of the loan, or at the fair value of collateral, less estimated selling costs and other customized discounting criteria.
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. Fair value is also reassessed, with any excess amount charged off, for consumer loans that reach 180 days past due in accordance with Federal Financial Institutions Examination Council guidelines. For commercial, commercial real estate, and equipment financing collateral dependent loans and leases, The Company's impairment process requires obtaining a third-party appraisal or asset valuation, an interim valuation analysis, blue book reference, or other internal methods, when determining the fair value of the collateral. 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 reviewer reviews these appraisals for compliance with the Financial Institutions Reform Recovery and Enforcement Act and the Uniform Standards of Professional Appraisal Practice.
A fair value shortfall is recorded as an impairment reserve, thereby increasing the ALLL. Subsequent to an appraisal or other fair value estimate, should reliable information come to management's attention that the value has declined further, additional impairment reserves may be recorded to reflect the particular situation. Any impaired loan for which no specific valuation allowance was necessary is the result of either sufficient cash flow or sufficient collateral coverage of the book balance.
At September 30, 2017, there were 1,612 impaired loans and leases with a recorded investment balance of $270.2 million, which included loans and leases of $167.8 million with an impairment allowance of $17.8 million. This compares to 1,635 impaired loans and leases with a recorded investment balance of $249.4 million, which included loans and leases of $152.6 million, with an impairment allowance of $18.6 million at December 31, 2016. For additional information, see Note 4: Loans and Leases in the Notes to 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. Initially, all TDRs are reported as impaired. Generally, a TDR is classified as an impaired loan and reported as a TDR for the remaining life of the loan. Impaired and TDR classification may be removed if the borrower demonstrates compliance with the modified terms for a minimum of six months and through one fiscal year-end, and the restructuring agreement specifies a market rate of interest equal to that which would be provided to a borrower with similar credit at the time of restructuring. In the limited circumstance that a loan is removed from TDR classification, it is the Company’s policy to continue to base its measure of loan impairment on the contractual terms specified by the loan agreement.
The following tables provide information for TDRs:
|
| | | | | | | |
| | Nine months ended September 30, |
| (In thousands) | 2017 | | 2016 |
| Beginning balance | $ | 223,528 |
| | $ | 272,690 |
|
| Additions | 25,604 |
| | 32,996 |
|
| Paydowns/draws | (25,277 | ) | | (49,906 | ) |
| Charge-offs | (2,999 | ) | | (17,927 | ) |
| Transfers to OREO | (2,506 | ) | | (1,853 | ) |
| Ending balance | $ | 218,350 |
| | $ | 236,000 |
|
|
| | | | | | | |
| (In thousands) | At September 30,
2017 | | At December 31,
2016 |
| Accrual status | $ | 135,774 |
| | $ | 147,809 |
|
| Non-accrual status | 82,576 |
| | 75,719 |
|
| Total recorded investment of TDRs | $ | 218,350 |
| | $ | 223,528 |
|
| Specific reserves for TDRs included in the balance of ALLL | $ | 11,837 |
| | $ | 14,583 |
|
| Additional funds committed to borrowers in TDR status | 3,944 |
| | 459 |
|
Overall, TDR balances decreased $5.2 million at September 30, 2017 compared to December 31, 2016. The September 30, 2017 specific reserves for TDRs declined from year end, and reflects management’s current assessment of reserve requirements.
Allowance for Loan and Lease Losses Methodology
The ALLL policy is considered a critical accounting policy. Executive management reviews and advises on the adequacy of the ALLL reserve, which is maintained at a level deemed sufficient by management to cover probable losses inherent within the loan and lease portfolios.
The quarterly process for estimating probable losses is based on predictive models, to measure the current risk profile of loan portfolio and combines other quantitative and qualitative factors together with the impairment reserve to determine the overall reserve requirement. Management's judgment and assumptions influence loss estimates and ALLL balances. Quantitative and qualitative factors that management considers include factors such as the nature and volume of portfolio growth, national and regional economic conditions and trends, other internal performance metrics, and how each of these factors is expected to impact near term loss trends. While actual future conditions and realized losses may vary significantly from assumptions, management believes the ALLL is adequate at September 30, 2017.
The Company’s methodology for assessing an appropriate level of the ALLL includes three key elements:
Impaired loans and leases are either analyzed on an individual or pooled basis and assessed for specific reserves measured based on the present value of expected future cash flows discounted at the effective interest rate of the loan or lease, except that as a practical expedient, impairment may be measured based on a loan or lease's observable market price, or the fair value of the collateral, if the loan or lease is collateral dependent. A loan or lease is collateral dependent if the repayment of the loan or lease is expected to be provided solely by the underlying collateral. The Company considers the pertinent facts and circumstances for each impaired loan or lease when selecting the appropriate method to measure impairment and evaluates, on a quarterly basis, each selection to ensure its continued appropriateness.
Loans and leases that are not considered impaired and have similar risk characteristics, are segmented into homogeneous pools and modeled using quantitative methods. The Company's loss estimate for its commercial portfolios utilizes an expected loss methodology that is based on PG and LGD models. The PD and LGD models are based on borrower and facility risk ratings assigned to each loan and are updated throughout the year as a borrower's financial condition changes. PD and LGD models are derived using the Company's portfolio specific historic data and are refreshed annually. Residential and consumer portfolio loss estimates are based on roll rate models that utilize the Company's historic delinquency and default data. For each segmentation the loss estimates incorporate a LEP model which represents an amount of time between when a loss event first occurs to when it is charged-off. An LEP is determined for each loan type based on the Company's historical experience and is reassessed at least annually.
The Company also considers qualitative factors, consistent with interagency regulatory guidance, that are not explicitly factored in the quantitative models but that can have an incremental or regressive impact on losses incurred in the current loan and lease portfolio.
At September 30, 2017 the ALLL was $201.8 million compared to $194.3 million at December 31, 2016. The increase of $7.5 million in the reserve at September 30, 2017 compared to December 31, 2016 is primarily due to growth in both commercial banking and community banking portfolios and increased reserves for certain impaired loans. The ALLL reserve remains adequate to cover inherent losses in the loan and lease portfolios. ALLL as a percentage of loans and leases, also known as the reserve coverage, increased to 1.16% at September 30, 2017 from 1.14% at December 31, 2016, reflecting an updated assessment of inherent losses and impaired reserves. ALLL as a percentage of non-performing loans and leases decreased to 123.32% at September 30, 2017 from 144.98% at December 31, 2016.
The following table provides an allocation of the ALLL by portfolio segment:
|
| | | | | | | | | |
| | At September 30, 2017 | | At December 31, 2016 |
| (Dollars in thousands) | Amount | % (1) | | Amount | % (1) |
| Residential | $ | 17,774 |
| 0.40 | | $ | 23,226 |
| 0.55 |
| Consumer | 38,144 |
| 1.49 | | 45,233 |
| 1.68 |
| Commercial | 89,594 |
| 1.68 | | 71,905 |
| 1.46 |
| Commercial real estate | 49,534 |
| 1.11 | | 47,477 |
| 1.05 |
| Equipment financing | 6,757 |
| 1.19 | | 6,479 |
| 1.02 |
| Total ALLL | $ | 201,803 |
| 1.16 | | $ | 194,320 |
| 1.14 |
| |
(1) | Percentage represents allocated ALLL to total loans and leases within the comparable category. The allocation of a portion of the ALLL 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 ALLL:
|
| | | | | | | | | | | | | | | |
| | At or for the three months ended September 30, | | At or for the nine months ended September 30, |
| (In thousands) | 2017 | | 2016 | | 2017 | | 2016 |
| Beginning balance | $ | 199,578 |
| | $ | 180,428 |
| | $ | 194,320 |
| | $ | 174,990 |
|
| Provision | 10,150 |
| | 14,250 |
| | 27,900 |
| | 43,850 |
|
| Charge-offs: | | | | | | | |
| Residential | (585 | ) | | (1,304 | ) | | (1,940 | ) | | (3,536 | ) |
| Consumer | (6,197 | ) | | (5,259 | ) | | (18,273 | ) | | (14,236 | ) |
| Commercial | (3,002 | ) | | (2,561 | ) | | (5,321 | ) | | (17,294 | ) |
| Commercial real estate | (749 | ) | | — |
| | (951 | ) | | (2,521 | ) |
| Equipment financing | (121 | ) | | (300 | ) | | (425 | ) | | (521 | ) |
| Total charge-offs | (10,654 | ) | | (9,424 | ) | | (26,910 | ) | | (38,108 | ) |
| Recoveries: | | | | | | | |
| Residential | 280 |
| | 554 |
| | 924 |
| | 1,408 |
|
| Consumer | 1,894 |
| | 1,313 |
| | 4,337 |
| | 3,721 |
|
| Commercial | 466 |
| | 370 |
| | 1,105 |
| | 1,143 |
|
| Commercial real estate | 10 |
| | 194 |
| | 21 |
| | 480 |
|
| Equipment financing | 79 |
| | 240 |
| | 106 |
| | 441 |
|
| Total recoveries | 2,729 |
| | 2,671 |
| | 6,493 |
| | 7,193 |
|
| Net charge-offs | (7,925 | ) | | (6,753 | ) | | (20,417 | ) | | (30,915 | ) |
| Ending balance | $ | 201,803 |
| | $ | 187,925 |
| | $ | 201,803 |
| | $ | 187,925 |
|
The following table provides a summary of net charge-offs (recoveries) to averagesummarizes loans and leases by category:contractual maturity, along with the indication of whether interest rates are fixed or variable:
| | | | | | | | | | | | | | | | | |
| At March 31, 2022 |
| (In thousands) | 1 Year or Less | 1 - 5 Years | 5 - 15 Years | After 15 Years | Total |
| Fixed rate: | | | | | |
| Commercial non-mortgage | $ | 264,217 | | $ | 453,705 | | $ | 1,440,816 | | $ | 1,160,554 | | $ | 3,319,292 | |
| Asset-based | 2,123 | | 61,372 | | — | | — | | 63,495 | |
| Commercial real estate | 457,671 | | 1,646,493 | | 932,003 | | 45,309 | | 3,081,476 | |
| Multi-family | 248,592 | | 1,547,600 | | 1,521,393 | | 18,722 | | 3,336,307 | |
| Equipment financing | 140,037 | | 1,403,776 | | 329,549 | | — | | 1,873,362 | |
| Warehouse lending | — | | — | | — | | — | | — | |
| Residential | 757 | | 60,867 | | 451,514 | | 4,255,424 | | 4,768,562 | |
| Home equity | 6,268 | | 25,250 | | 186,736 | | 182,710 | | 400,964 | |
| Other consumer | 7,023 | | 25,952 | | 462 | | 194 | | 33,631 | |
| Total fixed rate loans and leases | $ | 1,126,688 | | $ | 5,225,015 | | $ | 4,862,473 | | $ | 5,662,913 | | $ | 16,877,089 | |
| Variable rate: | | | | | |
| Commercial non-mortgage | $ | 1,871,798 | | $ | 7,198,986 | | $ | 643,087 | | $ | 72,010 | | $ | 9,785,881 | |
| Asset-based | 467,120 | | 1,271,360 | | 5,570 | | — | | 1,744,050 | |
| Commercial real estate | 1,466,858 | | 4,509,409 | | 2,164,888 | | 735,116 | | 8,876,271 | |
| Multi-family | 479,401 | | 843,392 | | 930,047 | | 38,053 | | 2,290,893 | |
| Equipment financing | 14,442 | | 21,480 | | — | | — | | 35,922 | |
| Warehouse lending | 555,449 | | 8,688 | | — | | — | | 564,137 | |
| Residential | 681 | | 11,296 | | 338,056 | | 1,679,604 | | 2,029,637 | |
| Home equity | 4,010 | | 8,360 | | 176,883 | | 1,089,226 | | 1,278,479 | |
| Other consumer | 16,363 | | 28,266 | | 3,339 | | 6,158 | | 54,126 | |
| Total variable rate loans and leases | $ | 4,876,122 | | $ | 13,901,237 | | $ | 4,261,870 | | $ | 3,620,167 | | $ | 26,659,396 | |
Total loans and leases (1) | $ | 6,002,810 | | $ | 19,126,252 | | $ | 9,124,343 | | $ | 9,283,080 | | $ | 43,536,485 | |
|
| | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| (Dollars in thousands) | Amount | % (1) | | Amount | % (1) | | Amount | % (1) | | Amount | % (1) |
| Residential | $ | 305 |
| 0.03 | | $ | 750 |
| 0.07 | | $ | 1,016 |
| 0.03 | | $ | 2,128 |
| 0.07 |
| Consumer | 4,303 |
| 0.67 | | 3,946 |
| 0.58 | | 13,936 |
| 0.71 | | 10,515 |
| 0.51 |
| Commercial | 2,536 |
| 0.19 | | 2,191 |
| 0.19 | | 4,216 |
| 0.11 | | 16,151 |
| 0.48 |
| Commercial real estate | 739 |
| 0.07 | | (194 | ) | (0.02) | | 930 |
| 0.03 | | 2,041 |
| 0.07 |
| Equipment financing | 42 |
| 0.03 | | 60 |
| 0.04 | | 319 |
| 0.07 | | 80 |
| 0.02 |
| Net charge-offs | $ | 7,925 |
| 0.18 | | $ | 6,753 |
| 0.16 | | $ | 20,417 |
| 0.16 | | $ | 30,915 |
| 0.26 |
| |
(1) | Net charge-offs (recoveries) to average loans and leases, percentage calculated based on period-to-date activity, annualized. |
Net charge-offs increased $1.2 millionCredit Policies and decreased $10.5 million for the three and nine months ended September 30, 2017, respectively, as compared to the same periods in 2016. The decrease for nine months period is primarily due to improved asset quality in commercial loans. Procedures
Webster Bank has credit policies and procedures in place designed to support its lending activityactivities within an acceptable level of risk. Management reviewsrisk, which are reviewed and approves these policiesapproved by management and proceduresthe Board of Directors on a regular basis. To assist with this process, management with its review,inspects reports generated by the Company's loan reporting systems related to loan production, loan quality, concentrations of credit, loan delinquencies, non-performing loans, and potential problem loans are generated by loan reporting systems.loans. In response to the ongoing COVID-19 pandemic, management has implemented incremental policies and procedures to monitor credit risk.
Commercial non-mortgage, asset-based, equipment finance, and warehouse lending loans are underwritten after evaluating and understanding the borrower’s ability to operate and service its debt. Underwriting standards are designed to focus onAssessment of the borrower's management is a critical element of the underwriting process and support the promotion of relationships rather than transactional banking.credit decision. Once it ishas been determined that the borrower’s management possesses sound ethics and a solid business acumen, the Company examines current and projected cash flows are examined to determine the ability of the borrower to repay obligations, as agreed.contracted. Commercial non-mortgage, asset-based, and industrialequipment finance loans are primarily made based on the identified cash flows of the borrower, and secondarily on the underlying collateral provided by the borrower. TheWarehouse lending loans are primarily made based on the borrower's ability to originate high-quality, first-mortgage residential loans that can be sold into the agency, government, or private jumbo markets, and secondarily on the underlying cash flows of borrowers; however,the borrower. However, the cash flows of borrowers may not be as expected, and the collateral securing these loans, as applicable, may fluctuate in value. Most commercial non-mortgage, asset-based, and industrialequipment finance loans are secured by the assets being financed and may incorporate personal guarantees of the principals.principal balance. Warehouse lending loans are generally uncommitted facilities.
Commercial real estate loans, including multi-family, are subject to underwriting standards and processes similar to those for commercial non-mortgage, asset-based, equipment finance, and industrial loans, in addition to those specific to real estatewarehouse lending loans. These loans are primarily viewed primarily as cash flow loans, and secondarily as loans secured by real estate. Repayment of thesecommercial real estate 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. All transactions are appraised to validate market value. Commercial real estate loans may be adversely affected by conditions in the real estate markets or in the general economy. The Company alsoManagement periodically utilizes third-party experts to provide insight and guidance about economic conditions and trends affecting its commercial real estate loan portfolio.
Consumer loans have uniqueare subject to policies and procedures developed to manage the specific risk characteristics and are provided to experienced developers/sponsors with strong track records of successful completion and sound financial condition and are underwritten utilizing feasibility studies, independent appraisals, sensitivity analysis of absorption and lease rates, and financial analysis of the developers and property owners. Commercial construction loans are generally based upon estimates of costs and value associated with the complete project.portfolio. These estimates may be subject to change as the construction project proceeds. In addition, these loans often include partial or full completion guarantees. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property, or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored with on-site inspections by third-party professionals and the Company's internal staff.
Policies and procedures are in place to manage consumer loan risk and are developed and modified, as needed. Policiespolicies and procedures, coupled with relatively small individual loan amounts and predominately collateralized loan structures, are spread across many individualdifferent borrowers, minimizeminimizing the level of credit risk. Trend and outlook reports are reviewed by management on a regular basis.basis, and policies and procedures are modified or developed, as needed. Underwriting factors for residential mortgage and home equity loans include the borrower’s FICOFair 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,debt-to-income level. Webster Bank originates both qualified mortgage and non-qualified mortgage loans, as defined by theapplicable Consumer Financial Protection Bureau rules(CFPB) rules.
Allowance for Credit Losses on Loans and Leases
The ACL on loans and leases increased $268.2 million, or 89.0%, from $301.2 million at December 31, 2021, to $569.4 million at March 31, 2022, primarily due to the initial ACL of $88.0 million and $175.1 million recorded for PCD and non-PCD loans and leases, respectively, that went intowere acquired from Sterling. The establishment of the initial ACL for PCD loans and leases is net of $48.3 million in charge-offs, which were recognized upon completion of the merger in accordance with GAAP.
The following table summarizes the percentage allocation of the ACL across the loans and leases categories:
| | | | | | | | | | | | | | | | | |
| At March 31, 2022 | | At December 31, 2021 |
| (Dollars in thousands) | Amount | % (1) | | Amount | % (1) |
| Commercial non-mortgage | $ | 202,235 | 35.5 | % | | $ | 111,351 | 37.0 | % |
| Asset-based | 8,214 | 1.4 | | | 6,481 | 2.2 | |
| Commercial real estate | 226,812 | 39.8 | | | 114,493 | 38.0 | |
| Multi-family | 40,819 | 7.2 | | | 19,414 | 6.4 | |
| Equipment financing | 32,116 | 5.6 | | | 6,138 | 2.0 | |
| Warehouse lending | 500 | 0.1 | | | — | — | |
| Residential | 28,768 | 5.1 | | | 15,628 | 5.2 | |
| Home equity | 26,667 | 4.7 | | | 23,523 | 7.8 | |
| Other consumer | 3,240 | 0.6 | | | 4,159 | 1.4 | |
| Total ACL on loans and leases | $ | 569,371 | 100.0 | % | | $ | 301,187 | 100.0 | % |
(1)The ACL allocated to a single loan and lease category does not preclude its availability to absorb losses in other categories.
Methodology
Webster's ACL on loans and leases is considered to be 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 that are expected to occur over the life of the asset. Executive management reviews and advises on the adequacy of the allowance, which is maintained at a level that management deems to be sufficient to cover expected losses within the loan and lease portfolios.
The ACL on loans and leases is determined using the CECL model, whereby an expected lifetime credit loss is recognized at the origination or purchase of an asset, including those acquired through a business combination, which is then reassessed at each reporting date over the contractual life of the asset. The calculation of expected credit losses includes consideration of past events, current conditions, and reasonable and supportable economic forecasts that affect the collectability of the reported amounts. Generally, expected credit losses are determined through a pooled, collective assessment of loans and leases with similar risk characteristics. However, if the risk characteristics of a loan or lease change such that it no longer matches that of the collectively assessed pool, it is removed from the population and individually assessed for credit losses. The total ACL on loans and leases recorded by management represents the aggregated estimated credit loss determined through both the collective and individual assessments.
Collectively Assessed Loans and Leases. Collectively assessed loans and leases are segmented based on product type, credit quality, risk ratings, and/or collateral types within its commercial and consumer portfolios, and expected losses are determined using a Probability of Default (PD), Loss Given Default (LGD), and Exposure at Default (EAD), loss rate, or discounted cash flow framework.
For portfolios using the PD/LGD/EAD framework, credit losses are calculated as the product of the probability of a loan defaulting, expected loss given the occurrence of a default, and the expected exposure of a loan at default. Summing the product across loans over their lives yields the lifetime expected credit losses for a given portfolio. Management's PD and LGD calculations are predictive models that measure the current risk profile of the loan pools using forecasts of future macroeconomic conditions, historical loss information, loan-level risk attributes, and credit risk ratings. The calculation of EAD follows an iterative process to determine the expected remaining principal balance of a loan based on historical paydown rates for loans of a similar segment within the same portfolio. The calculation of portfolio exposure in future quarters incorporates expected losses, the loan's amortization schedule, and prepayment rates.
Under the loss rate method, expected credit losses are estimated using a loss rate that is multiplied by the amortized cost of the asset at the balance sheet date. For each loan segment identified above, we apply an expected historical loss trend based on third-party loss estimates, correlate them to observed economic metrics and reasonable and supportable forecasts of economic conditions. Under the discounted cash flow method, expected credit losses are determined by comparing the amortized cost of the asset at the balance sheet date to the present value of estimated future principal and interest payments expected to be collected over the remaining life of the asset. Our loss model generates cash flow projections at the loan level based on reasonable and supportable projections, from which we estimate payment collections adjusted for curtailments, recovery time, probability of default and loss given default.
Webster's models incorporate an economic forecast scenario and macroeconomic assumptions over a reasonable and supportable forecast period. The development of the reasonable and supportable forecast assumes each macroeconomic variable will revert to long-term expectations, with reversion characteristics unique to specific economic indicators and forecasts. Reversion towards long-term expectations generally begins two to three years from the forecast start date and is complete within three to five years. Certain models revert to mean historical portfolio loss rates on a straight-line basis in the third year of the forecast, and are therefore considered to be explicitly mean reverting at output level. In other models, the reasonable and supportable economic variable forecasts are mean reverting and therefore, the modeled results are considered to be implicitly mean reverting at input level.
Webster incorporates forecasts of macroeconomic variables in the determination of expected credit losses. Macroeconomic variables are selected for each class of financing receivable based on relevant factors, such as asset type, the correlation of the variables to credit losses, among others. Data from the forecast scenario of these variables is used as an input to the modeled loss calculation.
A portion of the collective ACL is comprised of qualitative adjustments for risk characteristics that are not reflected or captured in the quantitative models but are likely to impact the measurement of estimated credit losses. Qualitative factors are based on our judgement of the company, market, industry, or business specific data including loan trends, portfolio segment composition, and loan rating or credit scores. Qualitative adjustments may be applied in relation to economic forecasts when relevant facts and circumstances are expected to impact credit losses, particularly in times of significant volatility in economic activity.
Individually Assessed Loans and Leases. If the risk characteristics of a loan or lease change such that it no longer matches the risk characteristics of the collectively assessed pool, it is removed from the population and individually assessed for credit losses. Generally, all non-accrual loans, TDRs, potential TDRs, loans with a charge-off, and collateral dependent loans where the borrower is experiencing financial difficulty, are individually assessed. The measurement method used to calculate the expected credit loss on an individually assessed loan or lease is dependent on the type and whether the loan or lease is considered to be collateral dependent. Methods for collateral dependent loans are either based on the fair value of the collateral less estimated cost to sell (when the basis of repayment is the sale of collateral), or the present value of the expected cash flows from the operation of the collateral. For non-collateral dependent loans, either a discounted cash flow method or other loss factor method is used. Any individually assessed loan or lease for which no specific valuation allowance is deemed necessary is either the result of sufficient cash flows or sufficient collateral coverage relative to the amortized cost of the asset.
Additional information regarding Webster's ACL methodology can be found within Note 1: Summary of Significant Accounting Policies in the Consolidated Financial Statements contained in Part II - Item 8. Financial Statements and Supplementary Data of the Company's Annual Report on Form 10-K for the year ended December 31, 2021.
Asset Quality Ratios
Webster manages asset quality using risk tolerance levels established through the Company's underwriting standards, servicing, and management of its loan and lease portfolio. Loans and leases for which a heightened risk of loss has been identified are regularly monitored to mitigate further deterioration and preserve asset quality in future periods. Non-performing assets, credit losses, and net charge-offs are considered by management to be key measures of asset quality.
The following table summarizes key asset quality ratios and their underlying components: | | | | | | | | | | | |
| (Dollars in thousands) | At March 31,
2022 | | At December 31, 2021 |
| Non-performing loans and leases | $ | 248,111 | | | $ | 109,778 | |
| Total loans and leases | 43,536,485 | | | 22,271,729 | |
| Non-performing loans and leases as a percentage of loans and leases | 0.57 | % | | 0.49 | % |
| | | |
| Non-performing assets | $ | 251,206 | | | $ | 112,590 | |
| Total loans and leases | $ | 43,536,485 | | | $ | 22,271,729 | |
| Add: OREO | 3,095 | | | 2,812 | |
| Total loans and leases plus OREO | $ | 43,539,580 | | | $ | 22,274,541 | |
| Non-performing assets as a percentage of loans and leases plus OREO | 0.58 | % | | 0.51 | % |
| | | |
| Non-performing assets | $ | 251,206 | | | $ | 112,590 | |
| Total assets | 65,131,484 | | | 34,915,599 | |
| Non-performing assets as a percentage of total assets | 0.39 | % | | 0.32 | % |
| | | |
| ACL on loans and leases | $ | 569,371 | | | $ | 301,187 | |
| Non-performing loans and leases | 248,111 | | | 109,778 | |
| ACL on loans and leases as a percentage of non-performing loans and leases | 229.48 | % | | 274.36 | % |
| | | |
| ACL on loans and leases | $ | 569,371 | | | $ | 301,187 | |
| Total loans and leases | 43,536,485 | | | 22,271,729 | |
| ACL on loans and leases as a percentage of loans and leases | 1.31 | % | | 1.35 | % |
| | | |
| ACL on loans and leases | $ | 569,371 | | $ | 301,187 |
| Net charge-offs | 35,716 | | 3,829 |
Ratio of ACL on loans and leases to net charge-offs (1) | 15.94x | | 78.66x |
(1)Calculated for the March 31, 2022 period based on annualized year-to-date net charge-offs.
The following table summarizes net charge-offs (recoveries) as a percentage of average loans and leases for each category:
| | | | | | | | | | | | | | | | | | | | | | | |
| At or for the three months ended March 31, |
| 2022 | | 2021 |
| Net
Charge-offs (Recoveries) | Average Balance | % (1) | | Net
Charge-offs (Recoveries) | Average Balance | % (1) |
| Commercial non-mortgage | $ | 8,663 | $ | 10,863,354 | 0.32 | % | | $ | 870 | $ | 7,048,012 | 0.05 | % |
| Asset-based | (50) | 1,540,301 | (0.01) | | | (1,424) | 896,093 | (0.64) | |
| Commercial real estate | 1,048 | 9,738,181 | 0.04 | | | 5,154 | 5,317,105 | 0.39 | |
| Multi-family | 10 | 3,994,744 | — | | | — | 986,660 | — | |
| Equipment financing | 213 | 1,339,775 | 0.06 | | | 85 | 602,355 | 0.06 | |
| Warehouse lending | — | 365,325 | — | | | — | — | — | |
| Residential | (44) | 6,322,495 | — | | | (778) | 4,720,703 | (0.07) | |
| Home equity | (1,267) | 1,658,938 | (0.31) | | | (30) | 1,765,989 | (0.01) | |
| Other consumer | 356 | 89,716 | 1.59 | | | 1,444 | 144,403 | 4.00 | |
| Total | $ | 8,929 | $ | 35,912,829 | 0.10 | % | | $ | 5,321 | $ | 21,481,320 | 0.10 | % |
(1)Percentage represents annualized year-to-date net charge-offs (recoveries) to average loans and leases within the comparable category.
Net charge-offs as a percentage of average loans and leases were 10 basis points for both the three months ended March 31, 2022 and 2021. This was a result of a $7.8 million increase in net charge-offs taken in the commercial non-mortgage portfolio, partially offset by a reduced volume of net charge-offs in the commercial real estate and other consumer portfolios. Commercial real estate and other consumer portfolios contributed to a $4.1 million and $1.1 million decrease, respectively, from the three months ended March 31, 2021, to the three months ended March 31, 2022.
Liquidity and Capital Resources
Webster manages its cash flow requirements through proactive liquidity measures at both the Holding Company and Webster Bank in order to maintain stable, cost-effective funding and to promote overall balance sheet strength. The liquidity position of the Company is continuously monitored and adjustments are made to balance sources and uses of funds, as needed. At March 31, 2022, management is not aware of any events that are reasonably likely to have a material adverse effect on the Company’s liquidity position, capital resources, or operating activities. Further, management is not aware of any regulatory recommendations regarding liquidity, that if implemented, would have a material adverse effect on the Company.
Cash inflows are provided through a variety of sources, including as operating activities such as principal and interest payments on loans and investments, financing activities, such as unpledged securities that can be sold or utilized to secure funding, and new deposits. Webster is committed to maintaining a strong base of core deposits, which consists of demand, interest-bearing checking, savings, health savings, and money market accounts, in order to support growth in its loan and lease portfolio.
Holding Company Liquidity. The primary source of liquidity at the Holding Company is dividends from Webster Bank. To a lesser extent, investment income, net proceeds from investment sales, borrowings, and public offerings may provide additional liquidity. The Holding Company generally uses its funds for principal and interest payments on senior notes, subordinated notes, and junior subordinated debt, dividend payments to preferred and common shareholders, repurchases of its common stock, and purchases of investment securities, as applicable.
There are certain restrictions on Webster Bank's payment of dividends to the Holding Company, which are described within Note 11: Regulatory Capital and Restrictions in the Notes to Condensed Consolidated Financial Statements contained in Item 1. Financial Statements, and in the section captioned "Supervision and Regulation" in Part I - Item 1. Business of the Company's Annual Report on Form 10-K for the year ended December 31, 2021. During the three months ended March 31, 2022, Webster Bank did not pay dividends to the Holding Company. At March 31, 2022, there were $484.7 million of retained earnings available for the payment of dividends by Webster Bank to the Holding Company. On April 27, 2022, Webster Bank was approved to pay the Holding Company $125.0 million in dividends during the second quarter of 2022.
The quarterly cash dividend to common shareholders remained at $0.40 per common share during the three months ended March 31, 2022. On April 28, 2022, it was announced that Webster Financial Corporation’s Board of Directors had declared a quarterly cash dividend of $0.40 per share. Webster continues to monitor economic forecasts, anticipated earnings, and its capital position in the determination of its dividend payments.
Webster maintains a common stock repurchase program, which was approved by the Board of Directors, that authorized management to purchase up to $200.0 million in shares of its common stock as of March 31, 2022. During the three months ended March 31, 2022, the Company repurchased 2,173,936 shares under the program at a weighted-average price of $56.21 per share totaling $122.2 million. The remaining purchase authority at March 31, 2022 was $1.2 million. On April 27, 2022, the Board of Directors increased Webster's authority to repurchase shares of its common stock by $600.0 million in shares. In addition, the Company will periodically acquire common shares outside of the repurchase program related to stock compensation plan activity. During the three months ended March 31, 2022, a total of 318,600 shares were repurchased at a weighted average price of $59.53 per share totaling $19.0 million for this purpose.
Webster Bank Liquidity. Webster Bank's primary source of funding is core deposits. Including time deposits, Webster Bank had a loan to total deposit ratio of 80.1% and 74.6% at March 31, 2022 and December 31, 2021, respectively. The 5.5% point increase is attributed to loan growth exceeding deposit growth, both within the legacy and acquired Sterling portfolios.
Webster Bank is required by OCC regulations to maintain a sufficient level of liquidity to ensure safe and sound operations. The adequacy of liquidity, as assessed by the OCC, depends on factors such as overall asset and liability structure, market conditions, competition, and the nature of the institution’s deposit and loan customers. At March 31, 2022, Webster Bank exceeded all regulatory liquidity requirements. Webster has designed a detailed contingency plan in order to respond to any liquidity concerns in a prompt and comprehensive manner, including early detection of potential problems and corrective action to address liquidity stress scenarios.
Capital Requirements. Webster Financial Corporation and Webster Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory actions by regulators that 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 pursuant to regulatory directives. Capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by the Basel III Capital Rules to ensure capital adequacy require the Company to maintain minimum ratios of CET1 capital, Tier 1 capital, Total capital to risk-weighted assets, and Tier 1 capital to average tangible assets (as defined in the regulations). At March 31, 2022, both Webster Financial Corporation and Webster Bank were classified as well-capitalized. Management believes that no events or changes have occurred subsequent to quarter-end that would change this designation.
In accordance with regulatory capital rules, Webster elected an option to delay the estimated impact of the adoption of CECL on its regulatory capital over a two-year deferral period, which ended on January 1, 2022, and subsequent three-year transition period ending on December 31, 2024. During the three-year transition period, capital ratios will begin to phase out the aggregate amount of the regulatory capital benefit provided from the delayed CECL adoption during the initial two years. For 2022, 2023, and 2024, Webster is allowed 75%, 50%, and 25% of the regulatory capital benefit as of December 31, 2021, respectively, with full absorption occurring in 2025. At March 31, 2022, the benefit allowed from the delayed CECL adoption resulted in a 10, 2014.10, and 8 basis point increase to Webster Financial Corporation's and Webster Bank's CET1 capital to total risk-weighted assets (CET1 risk-based capital), Tier 1 capital to total risk-weighted assets (Tier 1 risk-based capital), and Tier 1 capital to average tangible assets (Tier 1 leverage capital), respectively, and a 2 basis point decrease to Total capital to total risk-weighted assets (Total risk-based capital). Both Webster Financial Corporation's and Webster Bank's regulatory ratios remain in excess of being well-capitalized, even without the benefit of the delayed CECL adoption impact.
Additional information regarding the required regulatory capital levels and ratios applicable to Webster Financial Corporation and Webster Bank can be found within Note 11: Regulatory Capital and Restrictions in the Notes to Condensed Consolidated Financial Statements contained in Item 1. Financial Statements.
Sources and Uses of Funds and Liquidity
Sources of Funds. The primary source of cash flows for Webster Bank’s cash flow for use in its lending activities and meeting its general operational needs is deposits. Operating activities, such as loan and mortgage-backed securities repayments, proceeds from loans and other investment securities held for sale, proceeds and maturities also provide cash flow.flows. While scheduled loan and investment securitysecurities repayments are a relatively stable source of funds, loanprepayments and investment security prepayments andother deposit inflows are influenced by economic conditions and prevailing interest rates, and local economic conditions and arethe timing of which is inherently uncertain. Additional sources of funds are provided by both short-term and long-term borrowings, and to a lesser extent, dividends received as part of the Bank's membership with the FHLB and FRB.
Deposits. Webster Bank offers a wide variety of checking and savings deposit products designed to meet the transactional and investment needs of both its consumer and business customers. The Bank’s deposit services include, but are not limited to, ATM and debit card use, direct deposit, ACH payments, mobile banking, internet-based banking, banking by mail, account transfers, and overdraft protection, among others. The Bank manages the flow of funds in its deposit accounts and interest rates consistent with Federal Deposit Insurance Corporation (FDIC) regulations. Both Webster Bank’s Retail Pricing Committee and its Commercial and Institutional Liability Pricing Committee meet regularly to determine pricing and marketing initiatives.
Total deposits were $54.4 billion and $29.8 billion at March 31, 2022 and December 31, 2021, respectively. The $24.6 billion increase was primarily attributed to the deposits assumed from Sterling in the merger. Customer preferences for maintaining liquidity resulted in higher balances across savings and money market accounts, as customers with maturing higher cost time deposits opted to migrate to more liquid products. The aggregate amount of time deposits accounts that exceeded the FDIC limit of $250,000 represented 0.7% and 0.9% of total deposits at March 31, 2022 and December 31, 2021, respectively.
The following table summarizes daily average balances of deposits by type and the weighted-average rates paid thereon: | | | | | | | | | | | | | | | | | |
| Three months ended March 31, |
| 2022 | | 2021 |
| (Dollars in thousands) | Average
Balance | Average Rate | | Average
Balance | Average Rate |
| Non-interest-bearing: | | | | | |
| Demand | $ | 11,263,282 | | — | % | | $ | 6,436,858 | | — | % |
| Interest-bearing: | | | | | |
| Checking | 7,699,097 | | 0.06 | | | 3,674,761 | | 0.05 | |
| Health savings accounts | 7,759,465 | | 0.06 | | | 7,451,175 | | 0.09 | |
| Money market | 9,093,101 | | 0.15 | | | 3,232,446 | | 0.12 | |
| Savings | 7,524,238 | | 0.03 | | | 5,088,266 | | 0.03 | |
| Time deposits | 2,544,286 | | 0.21 | | | 2,371,026 | | 0.53 | |
| Total interest-bearing | 34,620,187 | | 0.09 | | | 21,817,674 | | 0.12 | |
| Total average deposits | $ | 45,883,469 | | 0.07 | % | | $ | 28,254,532 | | 0.09 | % |
The following table summarizes total uninsured deposits: | | | | | | | | | | | |
| (In thousands) | At March 31, 2022 | | At December 31, 2021 |
Uninsured deposits (1) | $ | 22,933,937 | | $ | 10,936,416 |
(1)A portion of Webster’s total uninsured deposits are estimated based on the same methodologies and assumptions used for regulatory reporting requirements.
The following table summarizes the portion of U.S. time deposits in excess of the FDIC insurance limit and time deposits otherwise uninsured by contractual maturity: | | | | | |
| (In thousands) | March 31, 2022 |
| Portion of U.S. time deposits in excess of insurance limit | $ | 163,023 |
Time deposits otherwise uninsured with a maturity of: (1) | |
| 3 months or less | $ | 180,352 |
| Over 3 months through 6 months | 53,175 |
| Over 6 months through 12 months | 21,098 |
| Over 12 months | 9,801 |
(1)Includes $101.4 million of Eurodollar deposits, of which $97.4 million are due within 3 months or less, and $4.0 million are due within 3 and 6 months.
Additional information regarding period-end deposit balances and rates can be found within Note 8: Deposits in the Notes to Condensed Consolidated Financial Statements contained in Item 1. Financial Statements.
Borrowings. Webster Bank's borrowing sources include securities sold under agreements to repurchase, FHLB advances, and long-term debt. The Bank may also purchase term and overnight federal funds to meet its short-term liquidity needs. Total borrowed funds were $1.6 billion and $1.2 billion at March 31, 2022 and December 31, 2021, respectively, and represented 2.5% and 3.6% of total assets, respectively. The $0.4 billion increase is primarily attributed to the $0.5 billion increase in long-term debt, partially offset by a $156.2 million decrease in securities sold under agreements to repurchase.
Webster Bank had additional borrowing capacity from the FHLB of $5.1 billion at both March 31, 2022 and December 31, 2021. The Bank also had additional borrowing capacity from the FRB of $1.4 billion and $1.5 billion at March 31, 2022 and December 31, 2021, respectively. Unpledged investment securities of $6.8 billion at March 31, 2022 could have been used for collateral on borrowings or other borrowings.to increase borrowing capacity by $6.0 billion with the FHLB or $6.7 billion with the FRB.
Securities sold under agreements to repurchase are generally a form of short-term funding for the Bank in which it sells securities to counterparties with an agreement to buy them back in the future at a fixed price. Securities sold under agreements to repurchase totaled $518.7 million and $674.9 million at March 31, 2022 and December 31, 2021, respectively. The $156.2 million decrease is primarily attributed to borrowings mix and the timing of maturities around close to period end.
FHLB advances are not only utilized as a source of funding, but also for interest rate risk management purposes. FHLB advances remained flat on a comparative basis, totaling $10.9 million and $11.0 million at March 31, 2022 and December 31, 2021, respectively.
Long-term debt consists of senior fixed-rate notes maturing in 2024 and 2029 and floating-rate junior subordinated notes maturing in 2033. Long-term debt totaled $1.1 billion and $0.6 billion at March 31, 2022 and December 31, 2021, respectively. The $0.5 billion increase is primarily attributed to the subordinated notes assumed from Sterling in the merger.
The following table summarizes daily average balances of borrowings by type and the weighted-average rates paid thereon: | | | | | | | | | | | | | | | | | |
| Three months ended March 31, |
| 2022 | | 2021 |
| (Dollars in thousands) | Average
Balance | Average Rate | | Average
Balance | Average Rate |
| FHLB advances | $ | 10,936 | | 2.03 | % | | $ | 135,787 | | 1.51 | % |
| Securities sold under agreements to repurchase | 577,039 | | 0.66 | | | 457,694 | | 0.54 | |
| Federal funds purchased | — | | — | | | 65,034 | | 0.08 | |
| Long-term debt | 896,310 | | 3.34 | | | 567,058 | | 3.23 | |
| | | | | |
| Total average borrowings | $ | 1,484,285 | | 2.26 | % | | $ | 1,225,573 | | 1.82 | % |
Additional information regarding period-end borrowings balances and rates can be found within Note 9: Borrowings in the Notes to Condensed Consolidated Financial Statements contained in Item 1. Financial Statements.
Federal Home Loan Bank and Federal Reserve Bank Stock. Webster Bank is a member of the Federal Home Loan BankFHLB System, which consists of eleven district Federal Home Loan Banks, each of which is subject to the supervision and regulation of the Federal Housing Finance Agency. An activity-based FHLB capital stock investment in the FHLB is required in order for Webster Bank to maintain its membership and access to advances and other extensions of credit for sources of funds and liquidity purposes. The FHLB capital stock investment is restricted in thatas there is no market for it, and it can only be redeemed by the FHLB. The FHLB recently has initiated a process to redeem the holdings of its member banks in excess of their membership and activity requirements, based on current conditions. As a result, Webster Bank held $85.6 million of FHLB capital stock at September 30, 2017 compared to $143.9of $17.0 million and $11.3 million at March 31, 2022 and December 31, 2016, for its membership and for outstanding advances and other extensions of credit. On August2021, respectively. The most recent FHLB quarterly cash dividend was paid on March 2, 2017, the FHLB paid a cash dividend2022 in an amount equal to an annual yield of 4.22%2.05%.
Additionally, Webster Bank is also required to hold FRB 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 FRB. TheFederal Reserve System. Similar to FHLB stock, the FRB capital stock investment is restricted in thatas there is no market for it, and it can only be redeemed by the FRB. At both September 30, 2017Webster Bank held FRB capital stock of $189.1 million and $60.5 million at March 31, 2022 and December 31, 2016, Webster Bank held $50.7 million of2021, respectively. The most recent FRB capital stock. Beginningsemi-annual cash dividend was paid on December 31, 2021 in 2016, the semi-annual dividend payment from the FRB will be calculated as the lesser of three percent oran amount equal to an annual yield of the 10-year Treasury note auctioned at the last auction held prior to the payment of the dividend.
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 167 banking centers within its primary market area. Webster Bank manages the flow of funds in its deposit accounts and provides a variety of accounts and rates consistent with FDIC regulations. Webster Bank’s Retail Pricing Committee and its Commercial and Institutional Liability Pricing Committee meet regularly to determine pricing and marketing initiatives.
Total deposits were $20.9 billion at September 30, 2017 compared to $19.3 billion at December 31, 2016. The increase is predominately related to an increase in health savings accounts of $0.5 billion and an increase in money market accounts of $0.6 billion. See Note 7: Deposits in the Notes to Condensed Consolidated Financial Statements contained elsewhere in this report for additional information.
Borrowings. Utilized as a source of funding for liquidity and interest rate risk management purposes, borrowings primarily consist of FHLB advances and 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. At September 30, 2017 and December 31, 2016, FHLB advances totaled $1.5 billion and $2.8 billion, respectively. Webster Bank had additional borrowing capacity from the FHLB of approximately $2.7 billion at September 30, 2017 compared to approximately $1.2 billion at December 31, 2016. Webster Bank also had additional borrowing capacity at the FRB of approximately $0.5 billion at September 30, 2017 and $0.6 billion at December 31, 2016. In addition, unpledged investment securities of $4.3 billion at September 30, 2017 could have been used to increase borrowing capacity by approximately $3.8 billion at the FHLB or approximately $3.8 billion at the FRB, or alternatively used for collateral on other borrowings, such as repurchase agreements.
In addition, Webster Bank may utilize term and overnight Fed funds to meet short-term liquidity needs. The Company's long-term debt consists of senior fixed-rate notes maturing in 2024 and junior subordinated notes maturing in 2033. Total borrowed funds were $2.6 billion at September 30, 2017 compared to $4.0 billion at December 31, 2016. Borrowings represented 10.0% and 15.4% of total assets at September 30, 2017 and December 31, 2016, respectively. The reduction in borrowings was primarily related to FHLB advances maturing within one year. For additional information, see Note 8: Borrowings in the Notes to Condensed Consolidated Financial Statements contained elsewhere in this report.
Liquidity1.52%.Webster meets its cash flow requirements at an efficient cost under various operating environments through proactive liquidity management at both the Holding Company and Webster Bank. Liquidity comes from a variety of cash flow sources such as operating activities, including principal and interest payments on loans and investments, or financing activities, including unpledged 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. Net cash provided by operating activities was $300.3 million for the nine months ended September 30, 2017 as compared to $187.6 million for the nine months ended September 30, 2016. The increase is significantly a result of derivative activity and, to a lesser extent, mortgage banking activities.
Holding Company Liquidity. The primary source of liquidity at the Holding Company is dividends from Webster Bank. Webster Bank paid $80 million in dividends to the Holding Company during the nine months ended September 30, 2017. To a lesser extent, investment income, net proceeds from investment sales, borrowings, and public offerings may provide additional liquidity. The main uses of liquidity are the payment of principal and interest to holders of senior notes and capital securities, the payment of dividends to preferred and common shareholders, repurchases of its common stock, and purchases of available-for-sale investment securities. There are certain restrictions on the payment of dividends by Webster Bank to the Holding Company, which is described in the section captioned "Supervision and Regulation" in Item 1 of Webster’s 2016 Form 10-K. At September 30, 2017, there was $328.8 million of retained earnings available for the payment of dividends by Webster Bank to the Holding Company.
The Company has a common stock repurchase program authorized by the Board of Directors, with $3.9 million of remaining repurchase authority at September 30, 2017. 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 nine months ended September 30, 2017, a total of 389,952 shares of common stock were repurchased for approximately $20.9 million, of which 222,000 shares were purchased under the common stock repurchase program at a cost of approximately $11.6 million, and 167,952 shares were purchased, at market prices, related to stock compensation plan activity for a cost of approximately $9.3 million.
Webster Bank Liquidity. Webster Bank's primary source of funding is core deposits. The primary use of this funding is for loan portfolio growth. Including time deposits, Webster Bank had a loan to total deposit ratio of 83.7% and 88.2% at September 30, 2017 and December 31, 2016, respectively.
Webster Bank is required by OCC regulations to maintain liquidity sufficient to ensure safe and sound operations. Whether liquidity is adequate, as assessed bywill change its location for the OCC, depends on such factors aspurposes of Federal Reserve Regulation D from the overall asset/liability structure, market conditions, competition, and the natureFederal Reserve District of the institution’s deposit and loan customers. Webster Bank exceeded all regulatory liquidity requirements as of September 30, 2017. 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 September 30, 2017, Webster Bank was in compliance with all applicable capital requirements and exceeded the FDIC requirements for a well-capitalized institution. See Note 10: Regulatory Matters in the Notes to Condensed Consolidated Financial Statements contained elsewhere in this report for a further discussion of regulatory requirements applicable to Webster Financial Corporation and Webster Bank.
The liquidity position of the Company is continuously monitored, and adjustments are madeBoston to the balance between sources and usesFederal Reserve District of funds as deemed appropriate. Management is not awareNew York on June 1, 2022.
Uses 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.
Off-Balance Sheet Arrangements
Funds. 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 utilizedenters into various contractual obligations in the normal course of business for general corporate purposes or for customerthat require future cash payments and could impact the Company's short-term and long-term liquidity and capital resource needs. The following table summarizes significant fixed and determinable contractual obligations at March 31, 2022. The actual timing and amounts of future cash payments may differ from the amounts presented. Based on Webster's current liquidity position, it is expected that our sources of funds will be sufficient to fulfill these obligations when they come due.
| | | | | | | | | | | | | | | | | |
| Payments Due by Period (1) | |
| (In thousands) | Less than
one year | 1-3 years | 3-5 years | After 5
years | Total |
| Senior notes | $ | — | | $ | 150,000 | | $ | — | | $ | 337,473 | | $ | 487,473 | |
| Subordinated notes | — | | — | | — | | 499,000 | | 499,000 | |
| Junior subordinated debt | — | | — | | — | | 77,320 | | 77,320 | |
| FHLB advances | 85 | | 198 | | — | | 10,620 | | 10,903 | |
| Securities sold under agreements to repurchase | 318,733 | | 200,000 | | — | | — | | 518,733 | |
| | | | | |
| Deposits with stated maturity dates | 2,095,195 | | 521,619 | | 189,691 | | 14,592 | | 2,821,097 | |
| Operating lease liabilities | 27,093 | | 74,576 | | 59,756 | | 100,493 | | 261,918 | |
| | | | | |
| Total contractual obligations | $ | 2,441,106 | | $ | 946,393 | | $ | 249,447 | | $ | 1,039,498 | | $ | 4,676,444 | |
(1)Interest payments on borrowings have been excluded.
In addition, in the normal course of business, Webster offers financial instruments with off-balance sheet risk to meet the 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.needs of its customers. These transactions give riseinclude commitments to inextend credit, and commercial and standby letters of credit, which involve to a varying degrees,degree, elements of credit risk. Since many of these commitments are expected to expire unused or be only partially funded, the total commitment amount of $10.8 billion at March 31, 2022 does not necessarily reflect future cash payments.
Webster also enters into commitments to invest in venture capital and private equity funds, as well as low income housing tax credit investments to assist the Bank in meeting its responsibilities under the CRA. The total unfunded commitment for these alternative investments was $302.3 million at March 31, 2022. However, the timing of capital calls cannot be reasonably estimated, and depending on the nature of the contract, the entirety of the capital committed by Webster may not be called.
Pension obligations are funded by the Company, as needed, to provide for participant benefit payments as it relates to Webster's frozen, non-contributory, qualified defined benefit pension plan. Decisions to contribute to the defined benefit pension plan are made based upon pension funding requirements under the Pension Protection Act, the maximum amount deductible under the Internal Revenue Code, the actual performance of plan assets, and trends in the regulatory environment. Webster does not currently anticipate that it will make a contribution in 2022. Webster's non-qualified supplemental executive retirement plans and other post employment benefit plans, including those acquired from Sterling in the merger, are unfunded.
At March 31, 2022, Webster's condensed consolidated balance sheet reflects a liability for uncertain tax positions of $11.7 million and $2.8 million of accrued interest rate, and liquidity risk. For the nine months ended September 30, 2017, Webster did not engage inpenalties. The ultimate timing and amount of any off-balance sheet transactions that would have a material effect on itsrelated future cash settlements cannot be predicted with reasonable certainty.
Additional information regarding credit-related financial condition. For additional information, seeinstruments, alternative investments, defined benefit pension and other postretirement benefit plans, and income taxes can be found within Note 17:19: Commitments and Contingencies, Note 12: Variable Interest Entities, Note 16: Retirement Benefit Plans, and the under the section captioned "Income Taxes", respectively, in the Notes to the Condensed Consolidated Financial Statements contained elsewhere in this report.Item 1. Financial Statements and Item. 2 Management's Discussion and Analysis of Financial Condition and Results of Operations, respectively.
Asset/Liability Management and Market Risk
An effective asset/liability management process must balance the risks and rewards from both shortshort-term and long-term interest rate risks inwhen determining managementmanagement's strategy and action. To facilitate and manage this, process, interest rate sensitivity is monitored on an ongoing basis by ALCO.the Asset/Liability Committee (ALCO). The primary goal of ALCO is to manage interest rate risk and to maximize net income and net economic value over time in changing interest rate environments subjectenvironments. ALCO meets at least monthly to Board of Director approved risk limits. The Board of Directors sets the policy limits for earnings at risk for parallel ramps in interest rates over twelve months of plus and minus 100 and 200 basis points as well as twist shocks of plus and minus 50 and 100 basis points. Economic value, or equity at risk, limits are set for parallel shocks in interest rates of plus and minus 100 and 200 basis points. Basedmake decisions on the near historic lows in short-term interest rates,investment securities and funding portfolios based on the decliningeconomic outlook, its interest rate scenarios of minus 100 basis points or moreexpectations, the portfolio risk position, and other factors.
Four main tools are used for both earnings atmanaging interest rate risk:
•the size, duration, and credit risk and equity at risk were temporarily suspended per ALCO policy. Effective with September 30, 2017, these scenarios were re-instituted. The results of the re-instituted minus 100 basis point scenario is outsideinvestment portfolio;
•the size and duration of the established wholesale funding portfolio;
•interest rate risk limit due to contracts; and
•the impactpricing and structure of deposit floors. Due to the low probability of occurrenceloans and the current level of rates, the Board of Directors has approved a temporary exception to policy. ALCO also regularly reviews earnings at risk scenarios for customized changes in rates, as well as longer-term scenarios of up to four years in the future.deposits.
Management measures interest rate risk using simulation analysis to calculate Webster's earnings at risk and equity at risk. These risk measures are quantified using simulation software from one of the leading firms in the field of asset/liability modeling. Key assumptions relate to the behavior ofEssentially, interest rates and spreads, prepayment speeds, and the run-off of deposits are included in the simulation analysis. From such simulations, interest rate risk is quantified, and appropriate strategies are formulated and implemented.
Earnings at risk is defined as the change in earnings (excluding provision for loan and lease losses and income tax expense) due to changes in interest rates. Interest rates are assumed to change up or down in a parallel fashion, and earningsthe net interest income results in each scenario are compared to a flat rate scenario as a base.based scenario. The flat rate scenario holds the end of the period yield curve constant over the twelve month forecast horizon. Earnings simulation analysis incorporates assumptions about balance sheet changes such as asset and liability growth, loan and deposit pricing, and changes to the mix of assets and liabilities. It is a measure of short-term interest rate risk. Equity at risk is defined as the change in the net economic value of assets and liabilities due to changes in interest rates compared to a base net economic value. Equity at risk analyzes sensitivity in the present value of cash flows over the expected life of existing assets, liabilities, and off-balance sheet contracts. It is a measure of the long-term interest rate risk to future earnings streams embedded in the current balance sheet.
Asset sensitivity is defined as earnings or net economic value increasing compared to a base scenario when interest rates rise and decreasing when interest rates fall. In other words, assets are more sensitive to changing interest rates than liabilities and, therefore, re-price faster. Likewise, liability sensitivity is defined as earnings or net economic value decreasing compared to a base scenario when interest rates rise and increasing when interest rates fall.
Key assumptions underlying the present value of cash flows include the behavior of interest rates and spreads, asset prepayment speeds, and attrition rates on deposits. Cash flow projections from the model are compared to market expectations for similar collateral types and adjusted based on experience with Webster Bank's own portfolio. The model's valuation results are compared to observable market prices for similar instruments whenever possible. The behavior of deposit and loan customers is studied using historical time series analysis to model future customer behavior under varying interest rate environments.
The equity at risk simulation process uses multiple interest rate paths generated by an arbitrage-free trinomial lattice term structure model. The Base Case rate scenario, against which all others are compared, uses the month-end LIBOR/Swap yield curve as a starting point to derive forward rates for future months. Using interest rate swap option volatilities as inputs, the model creates multiple rate paths for this scenario with forward rates as the mean. In shock scenarios, the starting yield curve is shocked up or down in a parallel fashion. Future rate paths are then constructed in a similar manner to the Base Case.
Cash flows for all instruments are generated using product specific prepayment models and account specific system data for properties such as maturity date, amortization type, coupon rate, repricing frequency, and repricing date. The asset/liability simulation software is enhanced with a mortgage prepayment model and a Collateralized Mortgage Obligation database. Instruments with explicit options such as caps, floors, puts and calls, and implicit options such as prepayment and early withdrawal ability require such a rate and cash flow modeling approach to more accurately quantify value and risk. On the asset side, risk is impacted the most by mortgage loans and mortgage-backed securities, which can typically prepay at any time without penalty and may have embedded caps and floors. In the loan portfolio, floors are a benefit to interest income in low rate environments. Floating-rate loans at floors pay a higher interest rate than a loan at a fully indexed rate without a floor, as with a floor there is a limit on how low the interest rate can fall. As market rates rise, however, the interest rate paid on these loans does not rise until the fully indexed rate rises through the contractual floor. On the liability side, there is a large concentration of customers with indeterminate maturity deposits who have options to add or withdraw funds from their accounts at any time. Implicit floors on deposits are modeled based upon historical data. Webster Bank also has the option to change the interest rate paid on these deposits at any time.
Webster's earnings at risk model incorporates net interest income, non-interest income and expense items, some of which vary with interest rates. These items include mortgage banking income, servicing rights, cash management fees, and derivative mark-to-market adjustments.
Four main tools are used for managing interest rate risk:
the size and duration of the investment portfolio,
the size and duration of the wholesale funding portfolio,
off-balance sheet interest rate contracts, and
the pricing and structure of loans and deposits.
ALCO meets at least monthly to make decisions on the investment and funding portfolios based on the economic outlook, the Committee's interest rate expectations, the risk position, and other factors. ALCO delegates pricing and product design responsibilities to individuals and sub-committees but monitors and influences their actions on a regular basis.
Various interest rate contracts, including futures and options, interest rate swaps, and interest rate caps and floors can be used to manage interest rate risk. These interest rate contracts involve, to varying degrees, credit risk and interest rate risk. Credit risk is the possibility that a loss may occur if a counterparty to a transaction fails to perform according to the terms of the contract. The notional amount of interest rate contracts is the amount upon which interest and other payments are based. The notional amount is not exchanged, and therefore, should not be taken as a measure of credit risk. See Note 12: Derivative Financial Instruments in the Notes to Condensed Consolidated Financial Statements contained elsewhere in this report for additional information.
Certain derivative instruments, primarily forward sales of mortgage-backed securities, are utilized by Webster Bank in its efforts to manage risk of loss associated with its mortgage banking activities. Prior to closing and funds disbursement, an interest-rate lock commitment is generally extended to the borrower. During such time, Webster Bank is subject to risk that market rates of interest may change impacting pricing on loan sales. In an effort to mitigate this risk, forward delivery sales commitments are established, thereby setting the sales price.
The following table summarizes the estimated impact that gradual parallel changes in income of 100 and 200 basis points, over a twelve month period starting September 30, 2017forecasted horizon. At March 31, 2022 and December 31, 2016, might have on Webster’s NII for2021, the subsequent twelve month period comparedflat rate scenario assumed a federal funds rate of 0.50% and 0.25%, respectively. The federal funds rate target range was 0.25-0.50% at March 31, 2022 and 0-0.25% at December 31, 2021. Due to NII assuming no change inthe lower rate environment, management did not run standard scenarios with negative interest rates:
|
| | | | |
| NII | -200bp | -100bp | +100bp | +200bp |
| September 30, 2017 | N/A | (6.1)% | 3.5% | 6.5% |
| December 31, 2016 | N/A | N/A | 2.4% | 4.7% |
The following table summarizes the estimated impact that gradual parallel changes in interest rates of 100 and 200 basis points might have on Webster's net interest income over a twelve month period starting September 30, 2017at March 31, 2022 and December 31, 2016, might have on Webster’s PPNR for the subsequent twelve month period2021, as compared to PPNRactual net interest income and assuming no changechanges in interest rates:
| | | | | | | | | | | | | | |
| -200bp | -100bp | +100bp | +200bp |
| March 31, 2022 | n/a | n/a | 4.5% | 9.6% |
| December 31, 2021 | n/a | n/a | 4.9% | 10.7% |
|
| | | | |
| PPNR | -200bp | -100bp | +100bp | +200bp |
| September 30, 2017 | N/A | (11.9)% | 5.5% | 10.7% |
| December 31, 2016 | N/A | N/A | 2.9% | 6.3% |
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 September 30, 2017 and December 31, 2016 assumed a Fed Funds rate of 1.25% and 0.75% respectively. Asset sensitivity for both NII and PPNR on September 30, 2017 was higherin terms of net interest income increased at March 31, 2022 as compared to December 31, 2016,2021, primarily due to growth in deposits, mainly health savings accounts, a reduction in borrowings and loans moving further away from floors.
Webster can also hold futures, options, and forward foreign currency contracts to minimize the price volatility of certain assets and liabilities. Changeschanges in the market valueoverall composition and size of the balance sheet on a combined basis post-merger and the relative size and duration of the securities portfolio. Loans at floors have increased $3.1 billion from $4.5 billion at December 31, 2021 to $7.6 billion at March 31, 2022. While loans with floors, which are considered "in the money", have the impact of reducing overall asset sensitivity, as interest rates start to rise, these positions are recognized in earnings.loans will move through their floors and begin to reprice accordingly.
The following table summarizes the estimated impact that yield curve twists or immediate non-parallel changes in interest rates might have on Webster’s NIIWebster's net interest income for the subsequent twelve month period starting September 30, 2017at March 31, 2022 and December 31, 2016:2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Short End of the Yield Curve | | Long End of the Yield Curve |
| -100bp | -50bp | +50bp | +100bp | | -100bp | -50bp | +50bp | +100bp |
| March 31, 2022 | n/a | n/a | 2.8% | 5.9% | | (2.1)% | (1.1)% | 1.1% | 2.3% |
| December 31, 2021 | n/a | n/a | 3.2% | 7.3% | | (3.1)% | (1.4)% | 1.3% | 2.6% |
|
| | | | | | | | | |
| | Short End of the Yield Curve | | Long End of the Yield Curve |
| NII | -100bp | -50bp | +50bp | +100bp | | -100bp | -50bp | +50bp | +100bp |
| September 30, 2017 | (8.6)% | (4.3)% | 2.0% | 3.9% | | (4.1)% | (1.8)% | 1.4% | 2.6% |
| December 31, 2016 | N/A | N/A | 1.2% | 2.3% | | (3.8)% | (1.6)% | 1.3% | 2.3% |
The following table summarizes the estimated impact that immediate non-parallel changes in interest rates might have on Webster’s PPNR for the subsequent twelve month period starting September 30, 2017 and December 31, 2016:
|
| | | | | | | | | |
| | Short End of the Yield Curve | | Long End of the Yield Curve |
| PPNR | -100bp | -50bp | +50bp | +100bp | | -100bp | -50bp | +50bp | +100bp |
| September 30, 2017 | (16.3)% | (8.0)% | 3.2% | 6.3% | | (6.3)% | (2.7)% | 2.3% | 4.5% |
| December 31, 2016 | N/A | N/A | 1.4% | 2.7% | | (5.6)% | (2.1)% | 1.7% | 3.7% |
TheThese 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 of the yield curve is defined as terms of greater than eighteen months. TheseThe results above reflect the annualized impact of immediate interest rate changes.
Sensitivity to increases in the short end and long end of the yield curve for NII and PPNR increased fromnet interest income decreased at March 31, 2022 as compared to December 31, 20162021, primarily due to higher forecasted health savings accounts balances, a reduction in borrowings and greater distance from loan floors. Sensitivity to decreaseschanges in the short endoverall composition and size of the yield curve for NIIbalance sheet on a combined basis post-merger, as well as the relative size and PPNR are much greater than sensitivity forduration of the securities portfolio and slower forecasted prepayment speeds as a result of increases due to the assumption of deposit floors. Sensitivity to both increases and decreases in the long end of the yield curve, was essentially unchanged from December 31, 2016which in both NIIturn, extends the duration for mortgage-backed securities and PPNR.residential mortgage loans.
The following table summarizes the estimated economic value of financial assets, financial liabilities, and off-balance sheet contracts at September 30, 2017 and December 31, 2016financial instruments and the projectedcorresponding estimated change toin economic valuesvalue if interest rates were to instantaneously increase or decrease by 100 basis points:points at March 31, 2022 and December 31, 2021:
| | | Book Value | Estimated Economic Value | Estimated Economic Value Change | |
| | | | | | | | | | | | | | | |
| (Dollars in thousands) | -100 bp | +100 bp | (Dollars in thousands) | Book
Value | Estimated
Economic
Value | Estimated Economic Value Change |
| September 30, 2017 | |
| (Dollars in thousands) | | Estimated Economic Value Change | |
| (Dollars in thousands) | Book
Value | Estimated
Economic
Value |
| | Assets | $ | 26,350,182 |
| $ | 25,811,516 |
| $ | 518,087 |
| $ | (631,956 | ) | n/a | $ | (1,337,389) | |
| Liabilities | 23,711,395 |
| 22,630,383 |
| 741,133 |
| (633,646 | ) | Liabilities | 56,954,349 | | 52,044,545 | | n/a | (1,871,504) | |
| Net | $ | 2,638,787 |
| $ | 3,181,133 |
| $ | (223,046 | ) | $ | 1,690 |
| Net | $ | 8,177,135 | | $ | 10,133,532 | | n/a | $ | 534,115 | |
| Net change as % base net economic value | | (7.0 | )% | 0.1 | % | Net change as % base net economic value | | n/a | 5.3 | % |
| | | |
| December 31, 2016 | | |
| December 31, 2021 | | December 31, 2021 | |
| Assets | $ | 26,072,529 |
| $ | 25,527,648 |
| N/A | $ | (633,934 | ) | Assets | $ | 34,915,599 | | $ | 34,515,422 | | n/a | $ | (801,524) | |
| Liabilities | 23,545,517 |
| 22,650,967 |
| N/A | (555,854 | ) | Liabilities | 31,477,274 | | 30,015,357 | | n/a | (988,401) | |
| Net | $ | 2,527,012 |
| $ | 2,876,681 |
| N/A | $ | (78,080 | ) | Net | $ | 3,438,325 | | $ | 4,500,065 | | n/a | $ | 186,877 | |
| Net change as % base net economic value | | N/A | (2.7 | )% | Net change as % base net economic value | | n/a | 4.2 | % |
Changes in economic value can best be best described using duration. Durationthrough duration, which is a measure of the price sensitivity of financial instruments for smalldue to changes in interest rates. For fixed-rate financial instruments, it can also be thought of as the weighted-average expected time to receive future cash flows. Forflows, whereas for floating-rate financial instruments, it can be thought of as the weighted-average expected time until the next rate reset. TheOverall, the longer the duration, the greater the price sensitivity for givendue to changes in interest rates. Generally, increases in interest rates reduce the economic value of fixed-rate financial assets as future discounted cash flows are worth less at higher interest rates. In a rising interest rate environment, the economic value of financial liabilities decreases for the same reason. A reduction in the economic value of financial liabilities is a benefit to Webster. Floating-rate financial instruments may have durations as short as one day, and therefore, may 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 isrepresents the difference between the duration of financial assets and the duration offinancial liabilities. A duration gap at or near zero implieswould imply that the balance sheet is matched, and therefore, would exhibit no change in estimated economic value for a small changechanges in interest rates. At March 31, 2022 and December 31, 2021, Webster's duration gap was negative 0.92.1 years at September 30, 2017. At December 31, 2016, the duration gap wasand negative 0.4 years.1.8 years, respectively. A negative duration gap implies that the duration of financial liabilities areis longer than the duration of financial assets, and therefore, theyliabilities have more price sensitivity than assets and will reset their interest rates at a slower than assets.pace. 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 financial liabilities would more than offset the decreased value of financial 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 longerlong term, absent the effects of any new business booked in the future. The change in Webster'sAt March 31, 2022, long-term rates have risen by 83 basis points as compared to December 31, 2021. This higher starting point extends financial asset duration gap is due primarily to the increase in health savings accountsby decreasing residential mortgage loans and demand deposit balances as of September 30, 2017.mortgage-backed securities prepayment speeds.
These estimates assume that management does not take any action to mitigate any positive or negative effects from changing interest rates. The earnings and economic values estimates are subject to factors that could cause actual results to differ.differ, and also assume that management does not take any additional action to mitigate any positive or negative effects from changing interest rates. Management believes that Webster'sthe Company's interest rate risk position at September 30, 2017March 31, 2022 represents a reasonable level of risk given the current interest rate outlook. Management as always, is prepared to acttake additional action in the event that interest rates do change rapidly.
Additional information regarding Webster's asset/liability management process can be found under the section captioned "Asset/Liability Management and Market Risk" contained in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company's Annual Report on Form 10-K for the year ended December 31, 2021.
Impact of Inflation and Changing Prices
Critical Accounting Estimates
The preparation of Webster's Condensed Consolidated Financial Statements, and accompanying notes thereto, are based on the application of accounting policies, the most significant of which can be found within Note 1: Summary of Significant Accounting Policies in the Notes to Condensed Consolidated Financial Statements contained in Item 1. Financial Statements, and in Note 1: Summary of Significant Accounting Policies to the Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2021. Critical accounting policies are defined as those that are most important to the portrayal of the Company's financial condition and results of operations, and that require management to make difficult, subjective, and complex judgments about matters that are inherently uncertain and which could potentially result in materially different amounts using different assumptions or under different conditions.
Accounting estimates are necessary in the application of certain accounting policies and can be susceptible to significant change in the near term. Critical accounting estimates are those estimates made in accordance with GAAP that involve a significant level of estimation uncertainty and have had, or are reasonably likely to have, a material impact on Webster's financial condition or results of operations. Webster's most critical accounting policies and accounting estimates are those related data presented hereinto the allowance for credit losses on loans and leases and business combinations. These critical accounting policies, including its underlying estimates, are discussed directly with the Audit Committee of the Board of Directors.
Allowance for Credit Losses on Loans and Leases
The ACL on loans and leases is a reserve established through a provision for credit losses charged to expense, which represents management’s best estimate of expected lifetime credit losses within Webster's loan and lease portfolios at the balance sheet date. The calculation of expected credit losses is determined using predictive methods and models that follow a PD/LGD/EAD, loss rate, or discounted cash flow framework, and include consideration of past events, current conditions, macroeconomic variables (such as unemployment, gross domestic product, property values, and interest rate spreads), and reasonable and supportable economic forecasts that affect the collectability of the reported amounts. Changes to the ACL on loans and leases, and therefore, to the related provision for credit losses, can materially affect financial results.
The determination of the appropriate level of ACL on loans and leases inherently involves a high degree of subjectivity and requires Webster to make significant estimates of current credit risks and trends using existing qualitative and quantitative information and reasonable supportable forecasts of future economic conditions, all of which may undergo frequent and material changes. Changes in economic conditions affecting borrowers and macroeconomic variables that Webster is more susceptible to, unforeseen events such as natural disasters and pandemics, along with new information regarding existing loans, identification of additional problems loans, the fair value of underlying collateral, and other factors, both within and outside the Company's control, may indicate the need for an increase or decrease in the ACL on loans and leases.
It is difficult to estimate the sensitivity of how potential changes in any one economic factor or input might affect the overall reserve because a wide variety of factors and inputs are considered in estimating the ACL and changes in those factors and inputs considered may not occur at the same rate and may not be consistent across all product types. Further, changes in factors and inputs may also be directionally inconsistent, such that improvement in one factor may offset deterioration in others.
Executive management reviews and advises on the adequacy of the ACL on loans and leases on a quarterly basis. Although the overall balance is determined based on specific portfolio segments and individually assessed assets, the entire balance is available to absorb credit losses for any of the loan and lease portfolios.
Business Combinations
The acquisition method of accounting generally requires that the identifiable assets acquired and liabilities assumed in business combinations are recorded at fair value as of the acquisition date. The determination of fair value often involves the use of internal or third-party valuation techniques, such as discounted cash flow analyses or appraisals. Particularly, the valuation techniques used to estimate the fair value of loans and leases and the core deposit intangible asset acquired in the Sterling merger include estimates related to discount rates, credit risk, and other relevant factors, which are inherently subjective. A description of the valuation methodologies used to estimate the fair values of the significant assets acquired and liabilities assumed from the Sterling merger can be found within Note 2: Mergers and Acquisitions in the Notes to Condensed Consolidated Financial Statements contained in Item 1. Financial Statements.
ITEM 1. FINANCIAL STATEMENTS
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS | | | | | | | | | | | |
| March 31,
2022 | | December 31,
2021 |
| (In thousands, except share data) | (Unaudited) | | |
| Assets: | | | |
| Cash and due from banks | $ | 240,435 | | | $ | 137,385 | |
| Interest-bearing deposits | 552,778 | | | 324,185 | |
| Investment securities available-for-sale, at fair value | 8,744,897 | | | 4,234,854 | |
| | | |
| | | |
| Investment securities held-to-maturity, net of allowance for credit losses of $204 and $214 | 6,362,254 | | | 6,198,125 | |
| Federal Home Loan Bank and Federal Reserve Bank stock | 206,123 | | | 71,836 | |
| Loans held for sale (valued under fair value option $1,333 and $4,694) | 17,970 | | | 4,694 | |
| Loans and leases | 43,536,485 | | | 22,271,729 | |
| Allowance for credit losses on loans and leases | (569,371) | | | (301,187) | |
| Loans and leases, net | 42,967,114 | | | 21,970,542 | |
| Deferred tax assets, net | 178,042 | | | 109,405 | |
| Premises and equipment, net | 490,004 | | | 204,557 | |
| Goodwill | 2,513,771 | | | 538,373 | |
| Other intangible assets, net | 224,582 | | | 17,869 | |
| Cash surrender value of life insurance policies | 1,222,898 | | | 572,305 | |
| Accrued interest receivable and other assets | 1,410,616 | | | 531,469 | |
| Total assets | $ | 65,131,484 | | | $ | 34,915,599 | |
| Liabilities and shareholders' equity: | | | |
| Deposits: | | | |
| Non-interest-bearing | $ | 13,570,702 | | | $ | 7,060,488 | |
| Interest-bearing | 40,785,581 | | | 22,786,541 | |
| Total deposits | 54,356,283 | | | 29,847,029 | |
| Securities sold under agreements to repurchase and other borrowings | 518,733 | | | 674,896 | |
| Federal Home Loan Bank advances | 10,903 | | | 10,997 | |
| Long-term debt | 1,078,274 | | | 562,931 | |
| Accrued expenses and other liabilities | 990,156 | | | 381,421 | |
| Total liabilities | 56,954,349 | | | 31,477,274 | |
| 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 | |
| Series G issued and outstanding (135,000 shares) | 138,942 | | | — | |
| Common stock, $0.01 par value; Authorized - 400,000,000 shares: | | | |
| Issued (182,778,045 and 93,686,311 shares) | 1,828 | | | 937 | |
| Paid-in capital | 6,129,440 | | | 1,108,594 | |
| Retained earnings | 2,276,875 | | | 2,333,288 | |
| Treasury stock, at cost (4,675,923 and 3,102,690 shares) | (239,264) | | | (126,951) | |
| Accumulated other comprehensive (loss), net of tax | (275,723) | | | (22,580) | |
| Total shareholders' equity | 8,177,135 | | | 3,438,325 | |
| Total liabilities and shareholders' equity | $ | 65,131,484 | | | $ | 34,915,599 | |
See accompanying Notes to Condensed Consolidated Financial Statements.
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
| | | | | | | | | | | | | | | |
| | | Three months ended March 31, |
| (In thousands, except per share data) | | | | | 2022 | | 2021 |
| Interest Income: | | | | | | | |
| Interest and fees on loans and leases | | | | | $ | 346,276 | | | $ | 190,536 | |
| Taxable interest and dividends on investments | | | | | 53,724 | | | 39,614 | |
| Non-taxable interest on investment securities | | | | | 9,802 | | | 5,333 | |
| Loans held for sale | | | | | 26 | | | 91 | |
| Total interest income | | | | | 409,828 | | | 235,574 | |
| Interest Expense: | | | | | | | |
| Deposits | | | | | 7,399 | | | 6,439 | |
| Securities sold under agreements to repurchase and other borrowings | | | | | 957 | | | 635 | |
| Federal Home Loan Bank advances | | | | | 56 | | | 513 | |
| Long-term debt | | | | | 7,168 | | | 4,223 | |
| Total interest expense | | | | | 15,580 | | | 11,810 | |
| Net interest income | | | | | 394,248 | | | 223,764 | |
| Provision (benefit) for credit losses | | | | | 188,845 | | | (25,750) | |
| Net interest income after provision (benefit) for credit losses | | | | | 205,403 | | | 249,514 | |
| Non-interest Income: | | | | | | | |
| Deposit service fees | | | | | 47,827 | | | 40,469 | |
| Loan and lease related fees | | | | | 22,679 | | | 8,313 | |
| Wealth and investment services | | | | | 10,597 | | | 9,403 | |
| Mortgage banking activities | | | | | 428 | | | 2,642 | |
| Increase in cash surrender value of life insurance policies | | | | | 6,732 | | | 3,533 | |
| | | | | | | |
| | | | | | | |
| Other income | | | | | 15,772 | | | 12,397 | |
| Total non-interest income | | | | | 104,035 | | | 76,757 | |
| Non-interest Expense: | | | | | | | |
| Compensation and benefits | | | | | 184,002 | | | 107,600 | |
| Occupancy | | | | | 18,615 | | | 15,650 | |
| Technology and equipment | | | | | 55,401 | | | 28,516 | |
| Intangible assets amortization | | | | | 6,387 | | | 1,139 | |
| Marketing | | | | | 3,509 | | | 2,504 | |
| Professional and outside services | | | | | 54,091 | | | 9,776 | |
| Deposit insurance | | | | | 5,222 | | | 3,956 | |
| Other expense | | | | | 32,558 | | | 18,841 | |
| Total non-interest expense | | | | | 359,785 | | | 187,982 | |
| (Loss) income before income taxes | | | | | (50,347) | | | 138,289 | |
| Income tax (benefit) expense | | | | | (33,600) | | | 30,211 | |
| Net (loss) income | | | | | (16,747) | | | 108,078 | |
| Preferred stock dividends | | | | | 3,431 | | | 1,969 | |
| Net (loss) income available to common shareholders | | | | | $ | (20,178) | | | $ | 106,109 | |
| | | | | | | |
| (Loss) earnings per common share: | | | | | | | |
| Basic | | | | | $ | (0.14) | | | $ | 1.18 | |
| Diluted | | | | | (0.14) | | | 1.17 | |
See accompanying Notes to Condensed Consolidated Financial Statements.
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) | | | | | | | | | | | | | | | |
| | | | Three months ended March 31, |
| (In thousands) | | | | | 2022 | | 2021 |
| Net (loss) income | | | | | $ | (16,747) | | | $ | 108,078 | |
| Other comprehensive (loss) income, net of tax: | | | | | | | |
| Investment securities available-for-sale | | | | | (244,879) | | | (30,353) | |
| Derivative instruments | | | | | (7,844) | | | (4,372) | |
| Defined benefit pension and other postretirement benefit plans | | | | | (420) | | | 743 | |
| Other comprehensive (loss), net of tax | | | | | (253,143) | | | (33,982) | |
| Comprehensive (loss) income | | | | | $ | (269,890) | | | $ | 74,096 | |
See accompanying Notes to Condensed Consolidated Financial Statements.
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| At or for the three months ended March 31, 2022 |
| (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, 2021 | $ | 145,037 | | $ | 937 | | $ | 1,108,594 | | $ | 2,333,288 | | $ | (126,951) | | $ | (22,580) | | $ | 3,438,325 | |
| | | | | | | |
| Net (loss) | — | | — | | — | | (16,747) | | — | | — | | (16,747) | |
| Other comprehensive (loss), net of tax | — | | — | | — | | — | | — | | (253,143) | | (253,143) | |
| Common stock dividends and equivalents $0.40 per share | — | | — | | — | | (36,234) | | — | | — | | (36,234) | |
| Series F preferred stock dividends $328.125 per share | — | | — | | — | | (1,969) | | — | | — | | (1,969) | |
| Series G preferred stock dividends $16.25 per share | — | | — | | — | | (1,463) | | — | | — | | (1,463) | |
| Issued in business combination | 138,942 | | 891 | | 5,040,291 | | — | | — | | — | | 5,180,124 | |
| Stock-based compensation | — | | — | | (19,098) | | — | | 28,101 | | — | | 9,003 | |
| Exercise of stock options | — | | — | | (347) | | — | | 758 | | — | | 411 | |
| Common shares acquired from stock compensation plan activity | — | | — | | — | | — | | (18,967) | | — | | (18,967) | |
| Common stock repurchase program | — | | — | | — | | — | | (122,205) | | — | | (122,205) | |
| Balance at March 31, 2022 | $ | 283,979 | | $ | 1,828 | | $ | 6,129,440 | | $ | 2,276,875 | | $ | (239,264) | | $ | (275,723) | | $ | 8,177,135 | |
| | | | | | | |
| At or for the three months ended March 31, 2021 |
| (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, 2020 | $ | 145,037 | | $ | 937 | | $ | 1,109,532 | | $ | 2,077,522 | | $ | (140,659) | | $ | 42,256 | | $ | 3,234,625 | |
| | | | | | | |
| Net income | — | | — | | — | | 108,078 | | — | | — | | 108,078 | |
| Other comprehensive (loss), net of tax | — | | — | | — | | — | | — | | (33,982) | | (33,982) | |
| Common stock dividends and equivalents $0.40 per share | — | | — | | — | | (36,195) | | — | | — | | (36,195) | |
| Series F preferred stock dividends $328.125 per share | — | | — | | — | | (1,969) | | — | | — | | (1,969) | |
| Stock-based compensation | — | | — | | 649 | | — | | 2,316 | | — | | 2,965 | |
| Exercise of stock options | — | | — | | (5,044) | | — | | 8,358 | | — | | 3,314 | |
| Common shares acquired from stock compensation plan activity | — | | — | | — | | — | | (3,908) | | — | | (3,908) | |
| | | | | | | |
| Balance at March 31, 2021 | $ | 145,037 | | $ | 937 | | $ | 1,105,137 | | $ | 2,147,436 | | $ | (133,893) | | $ | 8,274 | | $ | 3,272,928 | |
See accompanying Notes to Condensed Consolidated Financial Statements.
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
| | | | | | | | | | | |
| | Three months ended March 31, |
| (In thousands) | 2022 | | 2021 |
| Operating Activities: | | | |
| Net (loss) income | $ | (16,747) | | | $ | 108,078 | |
| Adjustments to reconcile net (loss) income to net cash provided by operating activities: | | | |
| Provision (benefit) for credit losses | 188,845 | | | (25,750) | |
| Deferred income tax (benefit) expense | (28,543) | | | 13,192 | |
| Stock-based compensation expense | 9,003 | | | 2,965 | |
| Depreciation and amortization of property and equipment and intangible assets | 16,784 | | | 10,351 | |
| (Accretion) and amortization of net discounts / premiums on earning assets and borrowings | (19,854) | | | 35,583 | |
| Amortization of low-income housing tax credit investments | 10,377 | | | 1,205 | |
| Amortization of mortgage servicing assets | 570 | | | 1,490 | |
| Reduction of right-of-use lease assets | 7,928 | | | 58 | |
| Net (gain) loss on sale, net of write-downs, of foreclosed properties and repossessed assets | (103) | | | 29 | |
| Net loss on sale, net of write-downs, of property and equipment | 1,662 | | | 197 | |
| | | |
| Originations of loans held for sale | (23,056) | | | (81,361) | |
| Proceeds from sale of loans held for sale | 26,753 | | | 79,308 | |
| Net (gain) on mortgage banking activities | (397) | | | (2,109) | |
| Net (gain) on sale of loans not originated for sale | (1,816) | | | (191) | |
| (Increase) in cash surrender value of life insurance policies | (6,732) | | | (3,533) | |
| (Gain) from life insurance policies | (38) | | | (410) | |
| Net decrease in derivative contract assets and liabilities | 215,423 | | | 128,550 | |
| Net (increase) decrease in accrued interest receivable and other assets | (69,651) | | | 1,046 | |
| Net (decrease) increase in accrued expenses and other liabilities | (95,151) | | | (39,873) | |
| Net cash provided by operating activities | 215,257 | | | 228,825 | |
| Investing Activities: | | | |
| Purchases of available-for-sale securities | (714,208) | | | (291,386) | |
| Proceeds from principal payments, maturities, and calls of available-for-sale securities | 283,474 | | | 255,362 | |
| | | |
| Purchases of held-to-maturity securities | (456,139) | | | (356,624) | |
| Proceeds from principal payments, maturities, and calls of held-to-maturity securities | 280,080 | | | 343,825 | |
| Net decrease (increase) in Federal Home Loan Bank and Federal Reserve Bank stock | 16,215 | | | (80) | |
| Alternative investments (capital calls), net of distributions | (5,661) | | | (3,526) | |
| Net (increase) decrease in loans | (674,472) | | | 302,554 | |
| Proceeds from sale of loans not originated for sale | 51,127 | | | 16,787 | |
| Proceeds from sale of foreclosed properties and repossessed assets | 231 | | | 44 | |
| Proceeds from sale of property and equipment | — | | | 250 | |
| Additions to property and equipment | (4,644) | | | (3,680) | |
| Proceeds from life insurance policies | 7,793 | | | 1,100 | |
| Net cash paid for acquisition of Bend | (54,407) | | | — | |
| Net cash received in merger with Sterling | 513,960 | | | — | |
| Net cash (used for) provided by investing activities | (756,651) | | | 264,626 | |
| | | |
| See accompanying Notes to Condensed Consolidated Financial Statements. |
| | | | | | | | | | | |
| | | |
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited), continued |
|
| | Three months ended March 31, |
| (In thousands) | 2022 | | 2021 |
| Financing Activities: | | | |
| Net increase in deposits | 1,235,442 | | | 1,145,364 | |
| Proceeds from Federal Home Loan Bank advances | — | | | 80,470 | |
| Repayments of Federal Home Loan Bank advances | (94) | | | (75,080) | |
| Net (decrease) in securities sold under agreements to repurchase and other borrowings | (183,347) | | | (496,977) | |
| | | |
| | | |
| Dividends paid to common shareholders | (36,234) | | | (36,108) | |
| Dividends paid to preferred shareholders | (1,969) | | | (1,969) | |
| Exercise of stock options | 411 | | | 3,314 | |
| | | |
| Common stock repurchase program | (122,205) | | | — | |
| Common shares acquired related to stock compensation plan activity | (18,967) | | | (3,908) | |
| | | |
| Net cash provided by financing activities | 873,037 | | | 615,106 | |
| Net increase in cash and cash equivalents | 331,643 | | | 1,108,557 | |
| Cash and cash equivalents at beginning of period | 461,570 | | | 263,104 | |
| Cash and cash equivalents at end of period | $ | 793,213 | | | $ | 1,371,661 | |
| | | |
| Supplemental disclosure of cash flow information: | | | |
| Interest paid | $ | 15,457 | | | $ | 16,638 | |
| Income taxes paid | 7,112 | | | 3,355 | |
| Non-cash investing and financing activities: | | | |
| Transfer of loans and leases to foreclosed properties and repossessed assets | $ | 213 | | | $ | 151 | |
| Transfer of loans from portfolio to loans-held-for-sale | 42,431 | | | 16,587 | |
| Merger with Sterling: | | | |
| Tangible assets acquired | 27,434,111 | | | — | |
| Goodwill and other intangible assets | 2,149,532 | | | — | |
| Liabilities assumed | 24,403,343 | | | — | |
| Common stock issued | 5,041,182 | | | — | |
| Preferred stock exchanged | 138,942 | | | — | |
| Acquisition of Bend: | | | |
| Tangible assets acquired | 16,597 | | | — | |
| Goodwill and other intangible assets | 38,966 | | | — | |
| Liabilities assumed | 290 | | | — | |
| | | |
| | | |
| | | |
| | | |
See accompanying Notes to Condensed Consolidated Financial Statements
Note 1: Summary of Significant Accounting Policies
Nature of Operations
Webster Financial Corporation is a bank holding company and financial holding company under the BHC Act, incorporated under the laws of Delaware in 1986, and headquartered in Stamford, Connecticut. 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 the northeastern U.S. from New York to Massachusetts, with certain businesses operating in extended geographies. Webster Bank also offers equipment financing, warehouse lending, commercial real estate lending, asset-based lending, and treasury management solutions. HSA Bank is a leading provider of HSAs, and delivers health reimbursement arrangements and flexible spending and commuter benefit account administration services to employers and individuals in all 50 states.
Basis of Presentation
The unaudited condensed consolidated financial statements of Webster have been prepared in accordance with GAAP for interim financial information and Article 10 of Regulation S-X. Certain information and footnote disclosures required by GAAP for complete financial statements have been omitted or condensed. Therefore, the condensed consolidated financial statements should be read in conjunction with Webster's Annual Report on Form 10-K for the year ended December 31, 2021. The results of operations for the three months ended March 31, 2022 are not necessarily indicative of the future results that may be attained for the entire year or other interim periods.
In the opinion of management, all necessary adjustments have been reflected to present fairly the financial position, results of operations, and cash flows for the reporting periods presented. Intercompany transactions and balances have been eliminated in consolidation. Assets under administration or assets under management that Webster holds or manages in a fiduciary or agency capacity for customers are not included in the consolidated financial statements.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current period presentation. These reclassifications did not have a significant impact on the Company's consolidated financial statements.
Use of Estimates
The preparation of the consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Business Combinations
Business combinations are accounted for under the acquisition method, in which the identifiable assets acquired and liabilities assumed are generally measured and recognized at fair value as of the acquisition date, with the excess of the purchase price over the fair value of the net assets acquired capitalized as goodwill. Items such as acquired right-of-use (ROU) lease assets and operating lease liabilities as lessee, employee benefit plans, and income-tax related balances are recognized in accordance with other applicable GAAP, which may result in measurements that differ from fair value. Business combinations are included in the consolidated financial statements from the respective dates of acquisition. Historical reporting periods reflect only the results of legacy Webster operations. Merger-related costs are expensed in their applicable non-interest expense categories in the period incurred. Additional information regarding Webster's mergers and acquisitions can be found within Note 2: Mergers and Acquisitions.
Purchased Credit-Deteriorated Loans and Leases
Purchased credit-deteriorated (PCD) loans and leases are defined as those that have experienced a more-than-insignificant deterioration in credit quality since origination. Webster considers a variety of factors to evaluate and identify whether acquired loans are PCD, including but not limited to, nonaccrual status, delinquency, TDR classification, partial charge-offs, decreases in FICO scores, risk rating downgrades, and other factors. Upon acquisition, expected credit losses are added to the fair value of individual PCD loans and leases to determine the amortized cost basis. After initial recognition, any changes to the estimate of expected credit losses, favorable or unfavorable, are recorded as a provision for credit loss during the period of change.
PCD accounting is also applied to loans and leases previously charged-off by the acquiree if Webster has contractual rights to the cash flows at the acquisition date. Webster recognizes an additional allowance for credit loss for these amounts previously charged-off by the acquiree with a corresponding increase to the amortized costs basis. Balances deemed to be uncollectible are immediately charged-off in accordance with Webster’s charge-off policies, resulting in the establishment of the initial allowance for credit losses for PCD loans and leases to be recorded net of these uncollectible balances.
Relevant Accounting Standards Issued But Not Yet Adopted
In March 2022, the FASB issued ASU No. 2022-02—Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, which eliminates the accounting guidance for TDRs by creditors in Subtopic 310-40, Receivables—Troubled Debt Restructurings by Creditors, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. Specifically, rather than applying the recognition and measurement guidance for TDRs, an entity must apply the loan refinancing and restructuring guidance in paragraphs 310-20-35-9 through 35-11 to determine whether a modification results in a new loan or a continuation of an existing loan. In addition, ASU No. 2022-02 requires that an entity disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20, Financial Instruments—Credit Losses—Measured at Amortized Cost in the vintage disclosures required by paragraph 326-20-50-6.
ASU No. 2022-02 is effective for fiscal years beginning after December 15, 2022, with early adoption permitted. The amendments should be applied prospectively, however, an entity has the option to apply a modified retrospective transition method related to the recognition and measurement of TDRs, which would result in a cumulative effect adjustment to retained earnings in the period of adoption. The Company is in the early assessment stage of evaluating the amendments, as well as determining under which transition method it plans to adopt for TDRs. Therefore, the Company is currently unable to reasonably estimate the impact of adoption on the consolidated financial statements.
Note 2: Mergers and Acquisitions
Merger with Sterling Bancorp
On January 31, 2022, Webster completed its previously announced merger with Sterling pursuant to an agreement and plan of merger dated as of April 18, 2021 (the merger agreement), in which Sterling merged with and into Webster, with Webster continuing as the surviving corporation. Following the merger, on February 1, 2022, Sterling National Bank, a wholly-owned subsidiary of Sterling, merged with and into Webster Bank, with Webster Bank continuing as the surviving bank. Sterling was a full-service regional bank headquartered in Pearl River, New York, that primarily served the Greater New York metropolitan area. The merger expanded Webster's geographic footprint and combined two complementary organizations to create one of the largest commercial banks in the northeast U.S.
Each share of Sterling common stock issued and outstanding immediately prior to the merger, other than certain shares held by Webster and Sterling, was converted into the right to receive a fixed 0.4630 share of Webster common stock. In connection with the completion of the merger and in accordance with the merger agreement, the number of authorized shares of Webster common stock was increased from 200.0 million shares to 400.0 million shares as of January 31, 2022. Cash was also paid to Sterling common shareholders in lieu of fractional shares, as applicable.
In addition, each share of Sterling 6.50% Series A Non-Cumulative Perpetual Preferred Stock issued and outstanding immediately prior to the merger was converted into the right to receive one share of newly created Webster 6.50% Series G Non-Cumulative Perpetual Preferred Stock, having substantially the same terms. On January 31, 2022, Webster registered and issued 5,400,000 depositary shares, each representing 1/40th interest in a share of 6.50% Series G Non-Cumulative Preferred Perpetual Stock, par value $0.01 per share, with a liquidation preference equal to $1,000 per share (equivalent to $25 per depositary share) (the Series G Preferred Stock). The Series G Preferred Stock ranks on parity with Webster 5.25% Series F Non-Cumulative Preferred Perpetual Stock, par value $0.01 per share, with a liquidation preference of $25,000 per share (equivalent to $25 per depositary share), and senior to Webster common stock, with respect to the payment of dividends and distributions upon the liquidation, dissolution, or winding-up of Webster.
Series G Preferred Stock dividends are payable quarterly on the fifteenth day of each January, April, July, and December, if and when declared by the Board of Directors. Webster may redeem the Series G Preferred Stock at its option, in whole or in part, subject to the approval of Federal Reserve Board, on October 15, 2022, or any dividend payment date occurring thereafter, or in whole but not in part, upon the occurrence of a regulatory capital treatment event, at a redemption price equal to the liquidation preference plus any declared and unpaid dividends, without accumulation of any undeclared dividends.
Further, certain equity awards granted under Sterling's equity compensation plans were converted into a corresponding award with respect to Webster common stock, generally subject to the same terms and conditions, with the number of shares underlying such awards adjusted based on the 0.4630 fixed exchange ratio.
The following table summarizes the determination of the purchase price consideration:
| | | | | |
| (In thousands, except share and price per share data) | |
| Webster common stock issued | 87,965,239 | |
| Price per share of Webster common stock on January 31, 2022 | $ | 56.81 | |
| Consideration for outstanding common stock | 4,997,305 | |
| Consideration for preferred stock exchanged | 138,942 | |
Consideration for replacement equity awards (1) | 43,877 | |
| Cash in lieu of fractional shares | 176 | |
| Total purchase price consideration | $ | 5,180,300 | |
(1)The fair value of the replacement equity awards issued by Webster and included in the consideration transferred pertain to services performed prior to the merger effective date. The fair value attributed to services performed after the merger effective date will be recognized over the required service vesting period for each award and recorded as compensation and benefits expense on the consolidated statements of income. Webster recognized an incremental $2.8 million of stock compensation expense related to the replacement equity awards during the three months ended March 31, 2022.
The merger was accounted for as a business combination. Accordingly, the purchase price has been allocated to the assets acquired and liabilities assumed based on their fair values as of the merger effective date. The determination of fair value requires management to make estimates about discount rates, future expected cash flows, market conditions, and other future events that are highly subjective in nature and are subject to change. Fair value estimates of the assets acquired and liabilities assumed may be adjusted for a period up to one year (the measurement period) from the closing date of the merger if new information is obtained about facts and circumstances that existed as of the merger effective date that, if known, would have affected the measurement of the amounts recognized as of that date.
Webster considers its valuations of loans and leases, tax receivables and payables, and certain other assets and other liabilities to be preliminary, as management continues to identify and assess information regarding the nature of these assets acquired and liabilities assumed, including extended information gathering, management review procedures, and any new information that may arise as a result of integration activities. Accordingly, the amounts recorded for current and deferred tax assets and liabilities are also considered preliminary, as Webster continues to evaluate the nature and extent of permanent and temporary differences between the book and tax bases of the acquired assets and liabilities assumed. While the Company believes that the information available as of January 31, 2022 provides a reasonable basis for estimating fair value, it is possible that additional information may become available during the measurement period that would result in changes to the fair values presented. Any adjustments identified during the measurement period would be recognized in the corresponding reporting period.
The following table summarizes the preliminary allocation of the purchase price to the fair value of the identifiable assets acquired and liabilities assumed from Sterling at January 31, 2022:
| | | | | | | | | | | | | |
| (In thousands) | | | Unpaid Principal Balance | | Fair Value |
| Purchase price consideration | | | | | $ | 5,180,300 | |
| Assets: | | | | | |
| Cash and due from banks | | | | | 510,929 | |
| Interest-bearing deposits | | | | | 3,207 | |
| Investment securities available-for-sale | | | | | 4,429,948 | |
| Federal Home Loan Bank and Federal Reserve Bank Stock | | | | | 150,502 | |
| Loans held for sale | | | | | 23,517 | |
| Loans and leases: | | | | | |
| Commercial non-mortgage | | | $ | 5,570,782 | | | 5,527,657 | |
| Asset-based | | | 694,137 | | | 683,958 | |
| Commercial real estate | | | 6,790,600 | | | 6,656,405 | |
| Multi-family | | | 4,303,381 | | | 4,255,906 | |
| Equipment financing | | | 1,350,579 | | | 1,314,311 | |
| Warehouse lending | | | 647,767 | | | 643,754 | |
| Residential | | | 1,313,785 | | | 1,281,637 | |
| Home equity | | | 132,758 | | | 122,553 | |
| Other consumer | | | 12,559 | | | 12,525 | |
| Total loans and leases | | | $ | 20,816,348 | | | 20,498,706 | |
| Deferred tax assets, net | | | | | (52,130) | |
Premises and equipment (1) | | | | | 264,421 | |
| Other intangible assets | | | | | 210,100 | |
| Bank-owned life insurance policies | | | | | 645,510 | |
| Accrued interest receivable and other assets | | | | | 959,501 | |
| Total assets acquired | | | | | $ | 27,644,211 | |
| Liabilities: | | | | | |
| Non-interest-bearing deposits | | | | | $ | 6,620,248 | |
| Interest-bearing deposits | | | | | 16,643,755 | |
| Securities sold under agreements to repurchase and other borrowings | | | | | 27,184 | |
| Long-term debt | | | | | 516,881 | |
| | | | | |
Accrued expenses and other liabilities (1) | | | | | 595,275 | |
| Total liabilities assumed | | | | | $ | 24,403,343 | |
| Net assets acquired | | | | | 3,240,868 | |
| Goodwill | | | | | $ | 1,939,432 | |
(1)Includes $100.0 million of ROU lease assets and $106.9 million of operating lease liabilities reported within premises and equipment and accrued expenses and other liabilities, respectively, which were measured based upon the estimated present value of the remaining lease payments. In addition, ROU lease assets were adjusted for favorable and unfavorable terms of the lease when compared to market terms, as applicable.
In connection with the merger, Webster recorded $1.9 billion of goodwill, which represents the excess of the purchase price over the fair value of the net assets acquired. Information regarding the allocation of goodwill to the Company's reportable segments, as well as the carrying amounts and amortization of the core deposit intangible and customer relationship intangible assets, can be found within Note 17: Segment Reporting and Note 7: Goodwill and Other Intangible Assets, respectively.
The following is a description of the valuation methodologies used to estimate the fair values of the significant assets acquired and liabilities assumed:
Cash and due from banks and interest-bearing deposits. The carrying amount of these assets is a reasonable estimate of fair value based on the short-term nature of these assets.
Investment securities available-for-sale. The fair values for investment securities available-for-sale were based on quoted market prices, where available. If quoted market prices were not available, fair value estimates are based on observable inputs, including quoted market prices for similar instruments. Investment securities held-to-maturity were reclassified to investment securities available-for-sale based on the Company's intent at closing.
Loans and leases. The fair values for loans and leases were estimated using a discounted cash flow methodology that considered factors including the type of loan or lease and the related collateral, classification status, fixed or variable interest rate, remaining term, amortization status, and current discount rates. In addition, the probability of default, loss given default, and prepayment assumptions that were derived based on loan and lease characteristics, historical loss experience, comparable market data, and current and forecasted economic conditions were used to estimate expected credit losses. Loans and leases generally were valued individually. The discount rates used for loans and leases were based on current market rates for new originations or comparable loans and leases and include adjustments for liquidity. The discount rate did not include credit losses as that was included as a reduction to the estimated cash flows.
Premises and equipment. The fair values for land and buildings were based on appraised values using the cost approach, which estimates the price a buyer would pay if they were to rebuild or reconstruct a similar property on a comparable piece of land.
Intangible assets. A core deposit intangible asset represents the value of relationships with deposit clients. The fair value of the core deposit intangible asset was estimated using a net cost savings method, a form of discounted cash flow methodology that gave appropriate consideration to expected client attrition rates and other applicable adjustments to the projected deposit balance, the interest cost and net maintenance cost associated with the client deposit base, alternative cost of funds, and a discount rate used to discount the future economic benefits of the core deposit intangible asset to present value. The core deposit intangible asset is being amortized on an accelerated basis over 10 years based upon the period over which the estimated economic benefits are estimated to be received. Customer relationship intangible assets for payroll finance, factoring receivables finance, and wealth businesses were estimated using a discounted cash flow methodology that reflects the estimated value of the future net earnings for each relationship with adjustments for attrition. The customer relationship intangible assets are being amortized on an accelerated basis over their estimated useful life of 10 years.
Bank-owned life insurance policies. The cash surrender value of these insurance policies is a reasonable estimate of fair value since it reflects the amount that would be realized by the contract owner upon discontinuance or surrender.
Deposits. The fair values used for the demand and savings deposits by definition equal the amount payable on demand at the merger date. The fair values for time deposits were estimated using a discounted cash flow methodology that applies interest rates currently being offered to the contractual interest rates on such time deposits.
Securities sold under agreements to repurchase and other borrowings. The carrying amount of these liabilities is a reasonable estimate of fair value based on the short-term nature of these liabilities.
Long-term debt.The fair values of long-term debt instruments are estimated based on quoted market prices for the instrument, if available, or for similar instruments, if not available, or by using a discounted cash flow methodology based on current incremental borrowing rates for similar types of instruments.
PCD Loans and Leases
Purchased loans and leases that have experienced more-than-insignificant deterioration in credit quality since origination are considered PCD. For PCD loans and leases, the initial estimate of expected credit losses was established through an adjustment to the unpaid principal balance and non-credit discount at acquisition. Subsequent to the merger effective date, Webster recorded an ACL for non-PCD loans and leases of $175.1 million through an increase to the provision for credit losses. There was no carryover of Sterling's previously recorded ACL on loans and leases.
The following table reconciles the unpaid principal balance to the fair value of PCD loans and leases by portfolio segment:
| | | | | | | | | | | | | | | | | |
| (In thousands) | Commercial | | Consumer | | Total |
| Unpaid principal balance | $ | 3,394,963 | | | $ | 541,471 | | | $ | 3,936,434 | |
| ACL at acquisition | (115,464) | | | (20,852) | | | (136,316) | |
| Non-credit (discount) | (40,947) | | | (2,784) | | | (43,731) | |
| Fair value | 3,238,552 | | | 517,835 | | | 3,756,387 | |
Supplemental Pro Forma Financial Information (Unaudited)
The following table summarizes supplemental pro forma financial information giving effect to the merger as if it had been completed on January 1, 2021:
| | | | | | | | | | | |
| Three months ended March 31, |
| (In thousands) | 2022 | | 2021 |
| Net interest income | $ | 433,349 | | | $ | 463,990 | |
| Non-interest income | 114,836 | | | 116,308 | |
| Net income | 183,167 | | | 21,998 | |
The supplemental pro forma financial information does not necessarily reflect the results of operations that would have occurred had Webster merged with Sterling on January 1, 2021. The supplemental pro forma financial information includes the impact of (i) accreting and amortizing the discounts and premiums associated with the estimated fair value adjustments to acquired loans and leases, investment securities, deposits, and long-term debt, (ii) the amortization of recognized intangible assets, (iii) the elimination of Sterling's historical accretion and amortization of discounts and premiums and deferred origination fees and costs on loans and leases, (iv) the elimination of Sterling's historical accretion and amortization of discounts and premiums on investment securities, and (iv) the related estimated income tax effects. Costs savings and other business synergies related to the merger are not included in the supplemental pro forma financial information.
In addition, the supplemental pro forma financial information was adjusted to include the $108.5 million of merger-related expenses recognized during three months ended March 31, 2022, as summarized in the following table:
| | | | | |
| |
| (In thousands) | |
Compensation and benefits (1) | $ | 41,585 | |
| Occupancy | 356 | |
Technology and equipment (2) | 19,085 | |
Professional and outside services (3) | 44,457 | |
Other expense (4) | 3,012 | |
| Total merger-related expenses | $ | 108,495 | |
(1)Comprised primarily of severance and employee retention costs.
(2)Comprised primarily of technology contract termination fees.
(3)Comprised primarily of advisory, legal, accounting, and other professional fees.
(4)Comprised primarily of disposals on property and equipment, costs of shareholder matters, and other miscellaneous expenses.
Webster's operating results for the three months ended March 31, 2022 includes the operating results of acquired assets and assumed liabilities of Sterling subsequent to the merger on January 31, 2022. Due to the various conversions of Sterling systems during the first quarter of 2022, as well as other streamlining and integration of operating activities into those of the Company, historical reporting for the former Sterling operations after January 31, 2022 is impracticable, and thus disclosures of Sterling's revenue and earnings since the merger effective date that are included in the condensed consolidated statements of income for the reporting period is impracticable.
Bend Financial, Inc. Acquisition
On February 18, 2022, Webster acquired 100% of the equity interests of Bend, a cloud-based platform solution provider for HSAs, in exchange for cash of $55.3 million. The acquisition accelerates Webster’s efforts underway to deliver enhanced user experiences at HSA Bank. The transaction was accounted for as a business combination, and resulted in the addition of $19.3 million in net assets, which primarily comprises $15.9 million of internal use software and a $3.0 million customer relationship intangible asset.
Note 3: Strategic Initiatives
During the fourth quarter of 2020, Webster launched a strategic plan (the 2020 strategic initiatives) to drive incremental revenue and cost savings measures across the organization through the consolidation of banking centers and corporate facilities, process automation, ancillary spend reduction, and other organizational actions. By the end of 2021, key project milestones had been completed, including the completion of all planned banking center closures, the delivery of a new digital onboarding platform for retail consumers, an investment in foundational technology modernization, and the realignment of certain business banking and investment service operations across the Company's reportable segments. Collectively, these initiatives have contributed to the realization of operational efficiencies and ancillary spend reductions.
In connection with the Sterling merger, Webster re-evaluated its strategic priorities as a combined organization, which resulted in modifications to the outstanding 2020 strategic initiatives. As a result, the Company released $3.8 million from its previously recorded severance accrual during the first quarter of 2022, with a corresponding adjustment to compensation and benefits expense on the Condensed Consolidated Statements of Income. At March 31, 2022 and December 31, 2021, respectively, $0.6 million and $5.1 million of accrued severance and other benefits associated with the 2020 strategic initiatives was reported within accrued expenses and other liabilities on the Condensed Consolidated Balance Sheets, which will be paid out to the impacted employees over the course of 2022.
Charges related to the 2020 strategic initiatives comprised the following for the three months ended March 31, 2022 and 2021:
| | | | | | | | | | | |
| Three months ended March 31, |
| (In thousands) | 2022 | | 2021 |
| Compensation and benefits | $ | (3,811) | | | $ | 2,060 | |
Occupancy (1) | (330) | | | 2,257 | |
| Technology and equipment | — | | | 338 | |
| Professional and outside services | 1 | | | 4,786 | |
| | | |
| Total strategic initiatives charges | $ | (4,140) | | | $ | 9,441 | |
(1)Comprised primarily of a gain on an early lease termination in 2022 and accelerated depreciation and operating lease costs in 2021.
Note 4: Investment Securities
Available-for-Sale
The following table summarizes the amortized cost and fair value of available-for-sale debt securities by major type: | | | | | | | | | | | | | | | | |
| | At March 31, 2022 |
| (In thousands) | Amortized
Cost | Unrealized
Gains | Unrealized
Losses | Fair Value (1) | | |
| U.S. Treasury notes | $ | 754,313 | | $ | — | | $ | (21,888) | | $ | 732,425 | | | |
| Government agency debentures | 227,161 | | 84 | | (10,026) | | 217,219 | | | |
| Municipal bonds and notes | 1,946,946 | | 6 | | (52,415) | | 1,894,537 | | | |
| Agency CMO | 80,766 | | 127 | | (1,380) | | 79,513 | | | |
| Agency MBS | 2,679,206 | | 4,347 | | (108,984) | | 2,574,569 | | | |
| Agency CMBS | 1,683,526 | | 14 | | (99,720) | | 1,583,820 | | | |
| CMBS | 871,981 | | 265 | | (8,089) | | 864,157 | | | |
| CLO | 14,245 | | — | | (12) | | 14,233 | | | |
| Corporate debt | 797,694 | | 18 | | (30,668) | | 767,044 | | | |
| Other | 17,500 | | — | | (120) | | 17,380 | | | |
| Available-for-sale debt securities | $ | 9,073,338 | | $ | 4,861 | | $ | (333,302) | | $ | 8,744,897 | | | |
| | | | | | |
| At December 31, 2021 |
| (In thousands) | Amortized
Cost | Unrealized
Gains | Unrealized
Losses | Fair Value (1) | | |
| U.S. Treasury notes | $ | 398,664 | | $ | — | | $ | (1,698) | | $ | 396,966 | | |
| Agency CMO | 88,109 | | 2,326 | | (51) | | 90,384 | | |
| Agency MBS | 1,568,293 | | 36,130 | | (11,020) | | 1,593,403 | | |
| Agency CMBS | 1,248,548 | | 2,537 | | (18,544) | | 1,232,541 | | |
| CMBS | 887,640 | | 506 | | (1,883) | | 886,263 | | |
| CLO | 21,860 | | — | | (13) | | 21,847 | | |
| Corporate debt | 14,583 | | — | | (1,133) | | 13,450 | | |
| Available-for-sale debt securities | $ | 4,227,697 | | $ | 41,499 | | $ | (34,342) | | $ | 4,234,854 | | | |
(1)Fair value represents net carrying value. No ACL has been recorded on available-for-sale debt securities at March 31, 2022 and December 31, 2021, as the securities held are high credit quality and investment grade.
The increase of $4.5 billion in available-for-sale debt securities from December 31, 2021 to March 31, 2022, is primarily attributed to $4.4 billion of investment securities acquired from Sterling in the merger, all of which were classified as available-for-sale based on Webster's intent at closing. Accrued interest receivable of $41.9 million and $7.5 million at March 31, 2022 and December 31, 2021, respectively, is excluded from amortized cost and is reported within accrued interest receivable and other assets on the accompanying Condensed Consolidated Balance Sheets.
Unrealized Losses
The following table summarizes the gross unrealized losses and fair value of available-for-sale debt securities by length of time each major security type has been in a continuous unrealized loss position:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | At March 31, 2022 |
| | Less Than 12 Months | | 12 Months or More | | Total |
| (Dollars in thousands) | Fair
Value | Unrealized
Losses | | Fair
Value | Unrealized
Losses | | # of
Holdings | Fair
Value | Unrealized
Losses |
| U.S. Treasury notes | $ | 732,424 | | $ | (21,888) | | | $ | — | | $ | — | | | 23 | $ | 732,424 | | $ | (21,888) | |
| Government agency debentures | 194,636 | | (10,026) | | | — | | — | | | 13 | 194,636 | | (10,026) | |
| Municipal bonds and notes | 1,887,526 | | (52,415) | | | — | | — | | | 533 | 1,887,526 | | (52,415) | |
| Agency CMO | 65,378 | | (1,380) | | | — | | — | | | 26 | 65,378 | | (1,380) | |
| Agency MBS | 2,097,135 | | (90,138) | | | 171,877 | | (18,846) | | | 392 | 2,269,012 | | (108,984) | |
| Agency CMBS | 1,234,865 | | (67,130) | | | 348,893 | | (32,590) | | | 132 | 1,583,758 | | (99,720) | |
| CMBS | 665,550 | | (7,265) | | | 148,459 | | (824) | | | 45 | 814,009 | | (8,089) | |
| CLO | — | | — | | | 14,233 | | (12) | | | 1 | 14,233 | | (12) | |
| Corporate debt | 753,284 | | (29,821) | | | 9,460 | | (847) | | | 104 | 762,744 | | (30,668) | |
| Other | 7,130 | | (120) | | | — | | — | | | 2 | 7,130 | | (120) | |
| Available-for-sale debt securities in unrealized loss position | $ | 7,637,928 | | $ | (280,183) | | | $ | 692,922 | | $ | (53,119) | | | 1,271 | $ | 8,330,850 | | $ | (333,302) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | At December 31, 2021 |
| | Less Than Twelve Months | | Twelve Months or Longer | | Total |
| (Dollars in thousands) | Fair
Value | Unrealized
Losses | | Fair
Value | Unrealized
Losses | | # of
Holdings | Fair
Value | Unrealized
Losses |
| U.S. Treasury notes | $ | 396,966 | | $ | (1,698) | | | $ | — | | $ | — | | | 8 | $ | 396,966 | | $ | (1,698) | |
| Agency CMO | 7,895 | | (51) | | | — | | — | | | 2 | 7,895 | | (51) | |
| Agency MBS | 506,602 | | (7,354) | | | 110,687 | | (3,666) | | | 70 | 617,289 | | (11,020) | |
| Agency CMBS | 632,213 | | (6,163) | | | 335,480 | | (12,381) | | | 28 | 967,693 | | (18,544) | |
| CMBS | 724,762 | | (1,744) | | | 81,253 | | (139) | | | 50 | 806,015 | | (1,883) | |
| CLO | — | | — | | | 21,848 | | (13) | | | 1 | 21,848 | | (13) | |
| Corporate debt | 4,203 | | (76) | | | 9,247 | | (1,057) | | | 3 | 13,450 | | (1,133) | |
| Available-for-sale debt securities in unrealized loss position | $ | 2,272,641 | | $ | (17,086) | | | $ | 558,515 | | $ | (17,256) | | | 162 | $ | 2,831,156 | | $ | (34,342) | |
Webster assesses each available-for-sale debt security that is in an unrealized loss position to determine whether the decline in fair value below the amortized cost basis resulted from a credit loss or other factors. The increase in unrealized losses from December 31, 2021 to March 31, 2022 is primarily due to increased portfolio size from the merger with Sterling, and higher market rates. Market prices will approach par as the securities approach maturity.
At March 31, 2022, Webster had the intent to hold available-for-sale debt securities with unrealized losses through the anticipated recovery period, and it was more-likely-than-not that the Company would not have to sell these securities before recovery of their amortized cost basis. The issuers of these securities have not, to the Company’s knowledge, established any cause for default on these securities. As a result, the Company expects to recover the securities' entire amortized cost basis. Accordingly, no available-for-sale debt securities were in non-accrual status and there was no ACL recorded at both March 31, 2022 and December 31, 2021.
Contractual Maturities
The following table summarizes the amortized cost and fair value of available-for-sale debt securities by contractual maturity: | | | | | | | | | | | |
| At March 31, 2022 |
| (In thousands) | Amortized Cost | | Fair Value |
| Due in one year or less | $ | 33,293 | | | $ | 33,216 | |
| Due after one year through five years | 1,346,552 | | | 1,311,044 | |
| Due after five through ten years | 1,522,072 | | | 1,474,896 | |
| Due after ten years | 6,171,421 | | | 5,925,741 | |
| Total available-for-sale debt securities | $ | 9,073,338 | | | $ | 8,744,897 | |
Available-for-sale debt securities that 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 categorization as borrowers have the right to repay their obligations with or without prepayment penalties.
Sales of Available-for Sale Debt Securities
There were no sales of available-for-sale debt securities during the three months ended March 31, 2022, nor during the three months ended March 31, 2021.
Other Information
The following table summarizes available-for-sale debt securities pledged for deposits, borrowings, and other purposes:
| | | | | | | | | | | |
| (In thousands) | At March 31, 2022 | | At December 31, 2021 |
| Available-for-sale debt securities pledged for deposits, at fair value | $ | 3,761,342 | | $ | 855,323 |
| Available-for-sale debt securities pledged for borrowings and other, at fair value | 902,581 | | 924,841 |
| Total available-for-sale debt securities pledged | $ | 4,663,923 | | $ | 1,780,164 |
At March 31, 2022, Webster had callable available-for-sale debt securities with an aggregate carrying value of $3.5 billion.
Held-to-Maturity
The following table summarizes the amortized cost, fair value, and ACL on held-to-maturity debt securities by major type:
| | | | | | | | | | | | | | | | | | | | | | | |
| At March 31, 2022 |
| (In thousands) | Amortized
Cost | Unrealized
Gains | Unrealized
Losses | Fair Value | | Allowance | Net Carrying Value |
| Agency CMO | $ | 36,533 | | $ | 54 | | $ | (856) | | $ | 35,731 | | | $ | — | | $ | 36,533 | |
| Agency MBS | 2,915,114 | | 8,452 | | (128,688) | | 2,794,878 | | | — | | 2,915,114 | |
| Agency CMBS | 2,548,347 | | 33 | | (153,778) | | 2,394,602 | | | — | | 2,548,347 | |
| Municipal bonds and notes | 696,601 | | 12,198 | | (4,138) | | 704,661 | | | 204 | | 696,397 | |
| CMBS | 165,863 | | 62 | | (4,180) | | 161,745 | | | — | | 165,863 | |
| Held-to-maturity debt securities | $ | 6,362,458 | | $ | 20,799 | | $ | (291,640) | | $ | 6,091,617 | | | $ | 204 | | $ | 6,362,254 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| At December 31, 2021 |
| (In thousands) | Amortized
Cost | Unrealized
Gains | Unrealized
Losses | Fair Value | | Allowance | Net Carrying Value |
| Agency CMO | $ | 42,405 | | $ | 655 | | $ | (25) | | $ | 43,035 | | | $ | — | | $ | 42,405 | |
| Agency MBS | 2,901,593 | | 71,444 | | (11,788) | | 2,961,249 | | | — | | 2,901,593 | |
| Agency CMBS | 2,378,475 | | 11,202 | | (43,844) | | 2,345,833 | | | — | | 2,378,475 | |
| Municipal bonds and notes | 705,918 | | 51,572 | | — | | 757,490 | | | 214 | | 705,704 | |
| CMBS | 169,948 | | 3,381 | | — | | 173,329 | | | — | | 169,948 | |
| Held-to-maturity debt securities | $ | 6,198,339 | | $ | 138,254 | | $ | (55,657) | | $ | 6,280,936 | | | $ | 214 | | $ | 6,198,125 | |
Accrued interest receivable of $17.3 million and $21.2 million at March 31, 2022 and December 31, 2021, respectively, is excluded from amortized cost and is reported in accrued interest receivable and other assets on the accompanying Condensed Consolidated Balance Sheets.
An ACL on held-to-maturity debt securities is recorded for certain municipal bonds and notes to account for expected lifetime credit losses. 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. Held-to-maturity debt securities with gross unrealized losses and no ACL are considered to be of high credit quality and therefore, zero credit loss is recorded as of March 31, 2022. The current period unrealized loss position of certain Agency CMBS is primarily attributed to the changing interest rate environment.
The following table summarizes the activity in the ACL on held-to-maturity debt securities: | | | | | | | | | | | | | | | |
| | | Three months ended March 31, |
| (In thousands) | | | | | 2022 | | 2021 |
| Balance, beginning of period | | | | | $ | 214 | | $ | 299 |
| | | | | | | |
| (Benefit) provision for credit losses | | | | | (10) | | 9 |
| Balance, end of period | | | | | $ | 204 | | $ | 308 |
Contractual Maturities
The following table summarizes the amortized cost and fair value of held-to-maturity debt securities by contractual maturity: | | | | | | | | | | | |
| At March 31, 2022 |
| (In thousands) | Amortized Cost | | Fair Value |
| Due in one year or less | $ | 2,429 | | | $ | 2,448 | |
| Due after one year through five years | 52,963 | | | 54,861 | |
| Due after five years through ten years | 309,859 | | | 306,139 | |
| Due after ten years | 5,997,207 | | | 5,728,169 | |
| Total held-to-maturity debt securities | $ | 6,362,458 | | | $ | 6,091,617 | |
Held-to-maturity debt securities that 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 categorization as borrowers have the right to repay their obligations with or without prepayment penalties.
Credit Quality Information
The Company monitors the credit quality of held-to-maturity debt securities through credit ratings provided 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 debt security, and are updated at each quarter end. Investment grade debt securities are rated BBB- or higher by S&P, or Baa3 or higher by Moody's, and are generally considered by the rating agencies and market participants to be of low credit risk. Conversely, debt securities rated below investment grade, which are labeled as speculative grade by the rating agencies, are considered to have distinctively higher credit risk than investment grade debt securities. There were no speculative grade held-to-maturity debt securities at March 31, 2022 and December 31, 2021. Held-to-maturity debt securities that are not rated are collateralized with U.S. Treasury obligations.
The following table summarizes the amortized cost basis of held-to-maturity debt securities based on their lowest publicly available credit rating:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2022 |
| Investment Grade | | |
| (In thousands) | Aaa | Aa1 | Aa2 | Aa3 | A1 | A2 | A3 | Baa2 | | Not Rated |
| Agency CMO | $ | — | | $ | 36,533 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | | $ | — | |
| Agency MBS | — | | 2,915,114 | | — | | — | | — | | — | | — | | — | | | — | |
| Agency CMBS | — | | 2,548,347 | | — | | — | | — | | — | | — | | — | | | — | |
| Municipal bonds and notes | 207,035 | | 117,428 | | 226,724 | | 98,112 | | 35,836 | | 8,256 | | — | | 95 | | | 3,115 | |
| CMBS | 165,863 | | — | | — | | — | | — | | — | | — | | — | | | — | |
| Held-to-maturity debt securities | $ | 372,898 | | $ | 5,617,422 | | $ | 226,724 | | $ | 98,112 | | $ | 35,836 | | $ | 8,256 | | $ | — | | $ | 95 | | | $ | 3,115 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| Investment Grade | | |
| (In thousands) | Aaa | Aa1 | Aa2 | Aa3 | A1 | A2 | A3 | Baa2 | | Not Rated |
| Agency CMO | $ | — | | $ | 42,405 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | | $ | — | |
| Agency MBS | — | | 2,901,593 | | — | | — | | — | | — | | — | | — | | | — | |
| Agency CMBS | — | | 2,378,475 | | — | | — | | — | | — | | — | | — | | | — | |
| Municipal bonds and notes | 207,426 | | 119,804 | | 227,106 | | 104,232 | | 35,878 | | 8,260 | | — | | 95 | | | 3,117 | |
| CMBS | 169,948 | | — | | — | | — | | — | | — | | — | | — | | | — | |
| Held-to-maturity debt securities | $ | 377,374 | | $ | 5,442,277 | | $ | 227,106 | | $ | 104,232 | | $ | 35,878 | | $ | 8,260 | | $ | — | | $ | 95 | | | $ | 3,117 | |
At March 31, 2022 and December 31, 2021, there were no held-to-maturity debt securities past due under the terms of their agreements or in non-accrual status.
Other Information
The following table summarizes held-to-maturity debt securities pledged for deposits, borrowings, and other purposes:
| | | | | | | | | | | |
| (In thousands) | At March 31, 2022 | | At December 31, 2021 |
| Held-to-maturity debt securities pledged for deposits, at amortized cost | $ | 1,858,753 | | $ | 1,834,117 |
| Held-to-maturity debt securities pledged for borrowing and other, at amortized cost | 1,026,796 | | 1,243,139 |
| Total held-to-maturity debt securities pledged | $ | 2,885,549 | | $ | 3,077,256 |
At March 31, 2022, Webster had callable held-to-maturity debt securities with an aggregate carrying value of $0.7 billion.
Note 5: Loans and Leases
The following table summarizes loans and leases by portfolio segment and class: | | | | | | | | | | | |
| (In thousands) | At March 31,
2022 | | At December 31, 2021 |
| Commercial non-mortgage | $ | 13,105,173 | | | $ | 6,882,480 | |
| Asset-based | 1,807,545 | | | 1,067,248 | |
| Commercial real estate | 11,957,747 | | | 5,463,321 | |
| Multi-family | 5,627,200 | | | 1,139,859 | |
| Equipment financing | 1,909,284 | | | 627,058 | |
| Warehouse lending | 564,137 | | | — | |
| Commercial portfolio | 34,971,086 | | | 15,179,966 | |
| Residential | 6,798,199 | | | 5,412,905 | |
| Home equity | 1,679,443 | | | 1,593,559 | |
| Other consumer | 87,757 | | | 85,299 | |
| Consumer portfolio | 8,565,399 | | | 7,091,763 | |
| Loans and leases | $ | 43,536,485 | | | $ | 22,271,729 | |
The increase of $21.3 billion in loans and leases from December 31, 2021 to March 31, 2022 is primarily attributed to $20.5 billion of loans and leases acquired from Sterling in the merger, which is inclusive of a $317.6 million purchase discount. The carrying amount of loans and leases at March 31, 2022 and December 31, 2021 includes net unamortized (discounts)/premiums and net unamortized deferred (costs)/fees totaling $(124.1) million and $12.3 million, respectively. Accrued interest receivable of $122.6 million and $50.7 million at March 31, 2022 and December 31, 2021, respectively, is excluded from the carrying amount of loans and leases and is reported within accrued interest receivable and other assets on the accompanying Condensed Consolidated Balance Sheets. At March 31, 2022, Webster had pledged $7.6 billion and $0.2 billion of eligible loans as collateral to support borrowing capacity at the FHLB and FRB, respectively.
Non-Accrual and Past Due Loans and Leases
The following table summarizes the aging of accrual and non-accrual loans and leases by class: | | | | | | | | | | | | | | | | | | | | | | | |
| | At March 31, 2022 |
| (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-accrual | Total Past Due and Non-accrual | Current | Total Loans
and Leases |
| Commercial non-mortgage | $ | 1,981 | | $ | 1,788 | | $ | 124 | | $ | 87,005 | | $ | 90,898 | | $ | 13,014,275 | | $ | 13,105,173 | |
| Asset-based | 23,387 | | — | | — | | 5,356 | | 28,743 | | 1,778,802 | | 1,807,545 | |
| Commercial real estate | 6,506 | | 674 | | — | | 68,204 | | 75,384 | | 11,882,363 | | 11,957,747 | |
| Multi-family | 346 | | 13,007 | | — | | 383 | | 13,736 | | 5,613,464 | | 5,627,200 | |
| Equipment financing | 3,276 | | 881 | | — | | 15,364 | | 19,521 | | 1,889,763 | | 1,909,284 | |
| Warehouse lending | — | | — | | — | | — | | — | | 564,137 | | 564,137 | |
| Commercial portfolio | 35,496 | | 16,350 | | 124 | | 176,312 | | 228,282 | | 34,742,804 | | 34,971,086 | |
| Residential | 7,518 | | 1,786 | | — | | 26,602 | | 35,906 | | 6,762,293 | | 6,798,199 | |
| Home equity | 3,834 | | 1,593 | | — | | 31,910 | | 37,337 | | 1,642,106 | | 1,679,443 | |
| Other consumer | 361 | | 196 | | — | | 154 | | 711 | | 87,046 | | 87,757 | |
| Consumer portfolio | 11,713 | | 3,575 | | — | | 58,666 | | 73,954 | | 8,491,445 | | 8,565,399 | |
| Total | $ | 47,209 | | $ | 19,925 | | $ | 124 | | $ | 234,978 | | $ | 302,236 | | $ | 43,234,249 | | $ | 43,536,485 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | At December 31, 2021 |
| (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-accrual | Total Past Due and Non-accrual | Current | Total Loans
and Leases |
| Commercial non-mortgage | $ | 3,729 | | $ | 4,524 | | $ | 1,977 | | $ | 59,607 | | $ | 69,837 | | $ | 6,812,643 | | $ | 6,882,480 | |
| Asset-based | — | | — | | — | | 2,086 | | 2,086 | | 1,065,162 | | 1,067,248 | |
| Commercial real estate | 508 | | 417 | | 519 | | 5,046 | | 6,490 | | 5,456,831 | | 5,463,321 | |
| Multi-family | — | | — | | — | | — | | — | | 1,139,859 | | 1,139,859 | |
| Equipment financing | 1,034 | | — | | — | | 3,728 | | 4,762 | | 622,296 | | 627,058 | |
| Commercial portfolio | 5,271 | | 4,941 | | 2,496 | | 70,467 | | 83,175 | | 15,096,791 | | 15,179,966 | |
| Residential | 3,212 | | 368 | | — | | 15,747 | | 19,327 | | 5,393,578 | | 5,412,905 | |
| Home equity | 3,467 | | 1,600 | | — | | 23,489 | | 28,556 | | 1,565,003 | | 1,593,559 | |
| Other consumer | 379 | | 181 | | — | | 224 | | 784 | | 84,515 | | 85,299 | |
| Consumer portfolio | 7,058 | | 2,149 | | — | | 39,460 | | 48,667 | | 7,043,096 | | 7,091,763 | |
| Total | $ | 12,329 | | $ | 7,090 | | $ | 2,496 | | $ | 109,927 | | $ | 131,842 | | $ | 22,139,887 | | $ | 22,271,729 | |
The following table provides additional information on non-accrual loans and leases: | | | | | | | | | | | | | | | | | |
| At March 31, 2022 | | At December 31, 2021 |
| (In thousands) | Non-accrual | Non-accrual with No Allowance | | Non-accrual | Non-accrual with No Allowance |
| Commercial non-mortgage | $ | 87,005 | | $ | 17,877 | | | $ | 59,607 | | $ | 4,802 | |
| Asset-based | 5,356 | | 1,959 | | | 2,086 | | 2,086 | |
| Commercial real estate | 68,204 | | 24,193 | | | 5,046 | | 4,310 | |
| Multi-family | 383 | | — | | | — | | — | |
| Equipment financing | 15,364 | | 1,272 | | | 3,728 | | — | |
| Warehouse lending | — | | — | | | — | | — | |
| Commercial portfolio | 176,312 | | 45,301 | | | 70,467 | | 11,198 | |
| Residential | 26,602 | | 9,847 | | | 15,747 | | 10,584 | |
| Home equity | 31,910 | | 17,233 | | | 23,489 | | 18,920 | |
| Other consumer | 154 | | 3 | | | 224 | | 2 | |
| Consumer portfolio | 58,666 | | 27,083 | | | 39,460 | | 29,506 | |
| Total | $ | 234,978 | | $ | 72,384 | | | $ | 109,927 | | $ | 40,704 | |
Interest on non-accrual loans and leases that would have been recognized as additional interest income had the loans and leases been current in accordance with their original terms totaled $4.4 million and $4.0 million for the three months ended March 31, 2022 and 2021, respectively.
Allowance for Credit Losses on Loans and Leases
The following table summarizes the change in the ACL on loans and leases by portfolio segment:
| | | | | | | | | | | | | | | | | | | | | | | |
| | At or for the three months ended March 31, |
| 2022 | | 2021 |
| (In thousands) | Commercial Portfolio | Consumer Portfolio | Total | | Commercial Portfolio | Consumer Portfolio | Total |
| ACL on loans and leases: | | | | | | | |
| Balance, beginning of period | $ | 257,877 | | $ | 43,310 | | $ | 301,187 | | | $ | 312,244 | | $ | 47,187 | | $ | 359,431 | |
| | | | | | | |
Initial allowance for PCD loans and leases (1) | 78,376 | | 9,669 | | 88,045 | | | — | | — | | — | |
| Provision (benefit) | 184,327 | | 4,741 | | 189,068 | | | (23,653) | | (2,106) | | (25,759) | |
| Charge-offs | (11,248) | | (1,120) | | (12,368) | | | (6,321) | | (2,974) | | (9,295) | |
| Recoveries | 1,364 | | 2,075 | | 3,439 | | | 1,636 | | 2,338 | | 3,974 | |
| Balance, end of period | $ | 510,696 | | $ | 58,675 | | $ | 569,371 | | | $ | 283,906 | | $ | 44,445 | | $ | 328,351 | |
| Individually evaluated for impairment | 32,736 | | 12,057 | | 44,793 | | | 14,809 | | 4,913 | | 19,722 | |
| Collectively evaluated for impairment | $ | 477,960 | | $ | 46,618 | | $ | 524,578 | | | $ | 269,097 | | $ | 39,532 | | $ | 308,629 | |
(1)Represents the establishment of the initial reserve for PCD loans and leases, which is reported net of $48.3 million of day one charge-offs recognized at the date of acquisition in accordance with GAAP.
Credit Quality Indicators
To measure credit risk for the commercial portfolio, the Company employs a dual grade credit risk grading system for estimating the PD and LGD. The credit risk grade system assigns a rating to each borrower and to the facility, which together form a Composite Credit Risk Profile. The credit risk grade system categorizes borrowers by common financial characteristics that measure the credit strength of borrowers and facilities by common structural characteristics. The Composite Credit Risk Profile has ten grades, with each grade corresponding to a progressively greater risk of loss. Grades (1) to (6) are considered pass ratings, and grades (7) to (10) are considered criticized, as defined by the regulatory agencies. A (7) "Special Mention" rating has a potential weakness that, if left uncorrected, may result in deterioration of the repayment prospects for the asset. A (8) "Substandard" rating has a well-defined weakness that jeopardizes the full repayment of the debt. A (9) "Doubtful" rating has all of the same weaknesses as a substandard asset with the added characteristic that the weakness makes collection or liquidation in full given current facts, conditions, and values improbable. Assets classified as a (10) "Loss" rating are considered uncollectible and are charged-off. Risk ratings, which are assigned to differentiate risk within the portfolio, are reviewed on an ongoing basis and revised to reflect changes in a borrower's current financial position and operating resultsoutlook, risk profile, and the related collateral and structural position. Loan officers review updated financial information or other loan factors 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.
The following tables summarize the amortized cost basis of commercial loans and leases by Composite Credit Risk Profile grade and origination year:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| At March 31, 2022 |
| (In thousands) | 2022 | 2021 | 2020 | 2019 | 2018 | Prior | Revolving Loans Amortized Cost Basis | Total |
| Commercial non-mortgage: | | | | | | | | |
| Pass | $ | 1,184,061 | | $ | 2,726,171 | | $ | 1,570,383 | | $ | 1,173,542 | | $ | 781,857 | | $ | 1,071,677 | | $ | 4,211,772 | | $ | 12,719,463 | |
| Special mention | — | | 13,405 | | — | | 405 | | 27,790 | | 15,491 | | 23,979 | | 81,070 | |
| Substandard | — | | 4,159 | | 91,597 | | 53,013 | | 90,196 | | 24,393 | | 37,425 | | 300,783 | |
| Doubtful | — | | — | | — | | — | | — | | — | | 3,857 | | 3,857 | |
| Commercial non-mortgage | 1,184,061 | | 2,743,735 | | 1,661,980 | | 1,226,960 | | 899,843 | | 1,111,561 | | 4,277,033 | | 13,105,173 | |
| Asset-based: | | | | | | | | |
| Pass | — | | 1,585 | | 4,737 | | 9,697 | | 2,589 | | 20,543 | | 1,676,341 | | 1,715,492 | |
| Special mention | — | | — | | 11,597 | | — | | — | | — | | 40,953 | | 52,550 | |
| Substandard | — | | — | | — | | — | | — | | — | | 39,503 | | 39,503 | |
| Asset-based | — | | 1,585 | | 16,334 | | 9,697 | | 2,589 | | 20,543 | | 1,756,797 | | 1,807,545 | |
| Commercial real estate: | | | | | | | | |
| Pass | 480,774 | | 2,300,007 | | 1,862,529 | | 2,271,370 | | 1,324,793 | | 3,092,728 | | — | | 11,332,201 | |
| Special mention | 87,287 | | — | | 33,796 | | 46,723 | | 75,725 | | 109,753 | | — | | 353,284 | |
| Substandard | 1,646 | | 1,503 | | 5,752 | | 46,189 | | 68,445 | | 148,727 | | — | | 272,262 | |
| | | | | | | | |
| Commercial real estate | 569,707 | | 2,301,510 | | 1,902,077 | | 2,364,282 | | 1,468,963 | | 3,351,208 | | — | | 11,957,747 | |
| Multi-family: | | | | | | | | |
| Pass | 353,825 | | 1,154,643 | | 526,163 | | 790,407 | | 555,600 | | 2,107,897 | | — | | 5,488,535 | |
| Special mention | — | | — | | — | | 5,223 | | 46,200 | | 32,374 | | — | | 83,797 | |
| Substandard | — | | — | | 397 | | 16,652 | | 6,903 | | 30,916 | | — | | 54,868 | |
| | | | | | | | |
| | | | | | | | |
| Multi-family | 353,825 | | 1,154,643 | | 526,560 | | 812,282 | | 608,703 | | 2,171,187 | | — | | 5,627,200 | |
| Equipment financing: | | | | | | | | |
| Pass | 87,396 | | 460,154 | | 498,215 | | 450,145 | | 171,362 | | 176,105 | | — | | 1,843,377 | |
| Special mention | — | | — | | 1,042 | | 4,132 | | 11,208 | | 4,929 | | — | | 21,311 | |
| Substandard | 689 | | 4,406 | | 18,001 | | 7,802 | | 5,218 | | 8,480 | | — | | 44,596 | |
| Equipment financing | 88,085 | | 464,560 | | 517,258 | | 462,079 | | 187,788 | | 189,514 | | — | | 1,909,284 | |
| Warehouse lending: | | | | | | | | |
| Pass | — | | — | | — | | — | | — | | — | | 564,137 | | 564,137 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Warehouse lending | — | | — | | — | | — | | — | | — | | 564,137 | | 564,137 | |
| Commercial portfolio | $ | 2,195,678 | | $ | 6,666,033 | | $ | 4,624,209 | | $ | 4,875,300 | | $ | 3,167,886 | | $ | 6,844,013 | | $ | 6,597,967 | | $ | 34,971,086 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| At December 31, 2021 |
| (In thousands) | 2021 | 2020 | 2019 | 2018 | 2017 | Prior | Revolving Loans Amortized Cost Basis | Total |
| Commercial non-mortgage: | | | | | | | | |
| Pass | $ | 2,270,320 | | $ | 1,179,620 | | $ | 757,343 | | $ | 581,633 | | $ | 292,637 | | $ | 275,789 | | $ | 1,182,562 | | $ | 6,539,904 | |
| Special mention | 14,216 | | 22,892 | | 37,877 | | 15,575 | | 9,721 | | 15,399 | | 27,808 | | 143,488 | |
| Substandard | 3,660 | | 46,887 | | 30,437 | | 69,963 | | 5,255 | | 19,483 | | 23,403 | | 199,088 | |
| | | | | | | | |
| Commercial non-mortgage | 2,288,196 | | 1,249,399 | | 825,657 | | 667,171 | | 307,613 | | 310,671 | | 1,233,773 | | 6,882,480 | |
| Asset-based: | | | | | | | | |
| Pass | 7,609 | | 19,141 | | 12,810 | | 13,456 | | 6,113 | | 25,850 | | 920,496 | | 1,005,475 | |
| Special mention | — | | — | | — | | 675 | | — | | — | | 59,012 | | 59,687 | |
| Substandard | — | | — | | 2,086 | | — | | — | | — | | — | | 2,086 | |
| Asset-based | 7,609 | | 19,141 | | 14,896 | | 14,131 | | 6,113 | | 25,850 | | 979,508 | | 1,067,248 | |
| Commercial real estate: | | | | | | | | |
| Pass | 1,152,431 | | 733,220 | | 1,146,149 | | 594,180 | | 384,664 | | 1,136,384 | | 55,044 | | 5,202,072 | |
| Special mention | 95 | | 3,084 | | — | | 84,475 | | 51,536 | | 79,096 | | — | | 218,286 | |
| Substandard | — | | 82 | | 227 | | 373 | | 13,874 | | 28,407 | | — | | 42,963 | |
| Commercial real estate | 1,152,526 | | 736,386 | | 1,146,376 | | 679,028 | | 450,074 | | 1,243,887 | | 55,044 | | 5,463,321 | |
| Multi-family: | | | | | | | | |
| Pass | 222,875 | | 135,924 | | 185,087 | | 322,688 | | 17,054 | | 203,558 | | 566 | | 1,087,752 | |
| Special mention | — | | — | | — | | 35,201 | | — | | — | | — | | 35,201 | |
| Substandard | — | | 400 | | — | | 6,933 | | — | | 9,573 | | — | | 16,906 | |
| Multi-family | 222,875 | | 136,324 | | 185,087 | | 364,822 | | 17,054 | | 213,131 | | 566 | | 1,139,859 | |
| Equipment financing: | | | | | | | | |
| Pass | 231,762 | | 188,031 | | 93,547 | | 41,276 | | 14,864 | | 32,588 | | — | | 602,068 | |
| Special mention | — | | 108 | | 2,229 | | 3,341 | | — | | 600 | | — | | 6,278 | |
| Substandard | — | | 8,388 | | 4,756 | | 2,612 | | 332 | | 2,624 | | — | | 18,712 | |
| Equipment financing | 231,762 | | 196,527 | | 100,532 | | 47,229 | | 15,196 | | 35,812 | | — | | 627,058 | |
| Commercial portfolio | $ | 3,902,968 | | $ | 2,337,777 | | $ | 2,272,548 | | $ | 1,772,381 | | $ | 796,050 | | $ | 1,829,351 | | $ | 2,268,891 | | $ | 15,179,966 | |
To measure credit risk for the consumer portfolio, the most relevant credit characteristic is the FICO score, which is a widely used credit scoring system that ranges from 300 to 850. A lower FICO score is indicative of higher credit risk and a higher FICO score is indicative of lower credit risk. FICO scores are updated at least on a quarterly basis.
The following tables summarize the amortized cost basis of consumer loans by FICO score and origination year:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| At March 31, 2022 |
| (In thousands) | 2022 | 2021 | 2020 | 2019 | 2018 | Prior | Revolving Loans Amortized Cost Basis | Total |
| Residential: | | | | | | | | |
| 800+ | $ | 39,359 | | $ | 797,341 | | $ | 450,236 | | $ | 159,820 | | $ | 32,779 | | $ | 988,591 | | $ | — | | $ | 2,468,126 | |
| 740-799 | 179,363 | | 1,150,417 | | 371,094 | | 141,957 | | 41,325 | | 904,628 | | — | | 2,788,784 | |
| 670-739 | 63,399 | | 371,717 | | 122,158 | | 66,514 | | 26,780 | | 483,134 | | — | | 1,133,702 | |
| 580-669 | 3,646 | | 41,718 | | 18,238 | | 9,163 | | 4,729 | | 197,165 | | — | | 274,659 | |
| 579 and below | 868 | | 2,420 | | 1,595 | | 47,842 | | 728 | | 79,475 | | — | | 132,928 | |
| Residential | 286,635 | | 2,363,613 | | 963,321 | | 425,296 | | 106,341 | | 2,652,993 | | — | | 6,798,199 | |
| Home equity: | | | | | | | | |
| 800+ | 9,110 | | 34,957 | | 29,116 | | 10,058 | | 14,217 | | 62,760 | | 483,151 | | 643,369 | |
| 740-799 | 8,128 | | 42,151 | | 20,593 | | 7,809 | | 10,159 | | 41,587 | | 435,737 | | 566,164 | |
| 670-739 | 4,811 | | 18,414 | | 8,147 | | 5,161 | | 8,432 | | 34,326 | | 251,203 | | 330,494 | |
| 580-669 | 290 | | 2,023 | | 1,394 | | 1,037 | | 1,835 | | 15,424 | | 84,571 | | 106,574 | |
| 579 and below | 73 | | 326 | | 676 | | 720 | | 647 | | 6,487 | | 23,913 | | 32,842 | |
| Home equity | 22,412 | | 97,871 | | 59,926 | | 24,785 | | 35,290 | | 160,584 | | 1,278,575 | | 1,679,443 | |
| Other consumer: | | | | | | | | |
| 800+ | 49 | | 352 | | 1,205 | | 1,918 | | 651 | | 494 | | 11,781 | | 16,450 | |
| 740-799 | 57 | | 988 | | 683 | | 779 | | 438 | | 3,344 | | 10,524 | | 16,813 | |
| 670-739 | — | | — | | 3,486 | | 5,089 | | 1,900 | | 945 | | 15,697 | | 27,117 | |
| 580-669 | 185 | | 712 | | 5,497 | | 9,478 | | 3,002 | | 866 | | 1,986 | | 21,726 | |
| 579 and below | 13 | | 291 | | 835 | | 2,119 | | 467 | | 490 | | 1,436 | | 5,651 | |
| Other consumer | 304 | | 2,343 | | 11,706 | | 19,383 | | 6,458 | | 6,139 | | 41,424 | | 87,757 | |
| Consumer portfolio | $ | 309,351 | | $ | 2,463,827 | | $ | 1,034,953 | | $ | 469,464 | | $ | 148,089 | | $ | 2,819,716 | | $ | 1,319,999 | | $ | 8,565,399 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| At December 31, 2021 |
| (In thousands) | 2021 | 2020 | 2019 | 2018 | 2017 | Prior | Revolving Loans Amortized Cost Basis | Total |
| Residential: | | | | | | | | |
| 800+ | $ | 590,238 | | $ | 428,118 | | $ | 161,664 | | $ | 35,502 | | $ | 105,198 | | $ | 735,517 | | $ | — | | $ | 2,056,237 | |
| 740-799 | 1,083,608 | | 421,380 | | 154,960 | | 32,172 | | 95,662 | | 456,722 | | — | | 2,244,504 | |
| 670-739 | 374,460 | | 135,146 | | 73,499 | | 25,099 | | 34,550 | | 227,863 | | — | | 870,617 | |
| 580-669 | 38,644 | | 13,782 | | 9,348 | | 3,056 | | 9,000 | | 71,811 | | — | | 145,641 | |
| 579 and below | 9,478 | | 1,051 | | 49,252 | | 390 | | 2,519 | | 33,216 | | — | | 95,906 | |
| Residential | 2,096,428 | | 999,477 | | 448,723 | | 96,219 | | 246,929 | | 1,525,129 | | — | | 5,412,905 | |
| Home equity: | | | | | | | | |
| 800+ | 35,678 | | 30,157 | | 9,591 | | 16,347 | | 11,068 | | 58,189 | | 463,334 | | 624,364 | |
| 740-799 | 42,430 | | 22,030 | | 9,413 | | 13,317 | | 7,711 | | 33,777 | | 409,518 | | 538,196 | |
| 670-739 | 17,493 | | 9,162 | | 5,889 | | 8,220 | | 5,802 | | 31,160 | | 233,744 | | 311,470 | |
| 580-669 | 1,773 | | 1,397 | | 1,298 | | 1,066 | | 1,329 | | 15,042 | | 66,361 | | 88,266 | |
| 579 and below | 380 | | 446 | | 725 | | 1,060 | | 434 | | 5,666 | | 22,552 | | 31,263 | |
| Home equity | 97,754 | | 63,192 | | 26,916 | | 40,010 | | 26,344 | | 143,834 | | 1,195,509 | | 1,593,559 | |
| Other consumer: | | | | | | | | |
| 800+ | 463 | | 1,343 | | 2,398 | | 916 | | 231 | | 118 | | 10,160 | | 15,629 | |
| 740-799 | 2,588 | | 5,408 | | 8,303 | | 2,985 | | 379 | | 77 | | 9,528 | | 29,268 | |
| 670-739 | 1,061 | | 7,034 | | 13,602 | | 3,859 | | 607 | | 412 | | 5,644 | | 32,219 | |
| 580-669 | 256 | | 1,083 | | 2,550 | | 735 | | 216 | | 211 | | 1,267 | | 6,318 | |
| 579 and below | 147 | | 87 | | 215 | | 159 | | 40 | | 21 | | 1,196 | | 1,865 | |
| Other consumer | 4,515 | | 14,955 | | 27,068 | | 8,654 | | 1,473 | | 839 | | 27,795 | | 85,299 | |
| Consumer portfolio | $ | 2,198,697 | | $ | 1,077,624 | | $ | 502,707 | | $ | 144,883 | | $ | 274,746 | | $ | 1,669,802 | | $ | 1,223,304 | | $ | 7,091,763 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Collateral Dependent Loans and Leases
A loan or lease is considered collateral dependent when the borrower is experiencing financial difficulty and repayment is substantially expected to be provided through the operation or sale of collateral. At March 31, 2022 and December 31, 2021, the carrying amount of collateral dependent commercial loans and leases totaled $102.2 million and $16.6 million, respectively, and the carrying amount of collateral dependent consumer loans totaled $32.1 million and $34.9 million, respectively. Commercial non-mortgage, asset-based, and equipment financing loans and leases are generally secured by machinery and equipment, inventory, receivables, or other non-real estate assets, whereas commercial real estate, multi-family, warehouse lending, residential, home equity, and other consumer loans are secured by real estate. The ACL for collateral dependent loans and leases is individually assessed based on the fair value of the collateral less costs to sell at the reporting date. At March 31, 2022 and December 31, 2021, the collateral value associated with collateral dependent loans and leases totaled $139.9 million and $86.0 million, respectively.
Troubled Debt Restructurings
The following table summarizes information related to TDRs: | | | | | | | | | | | |
| (In thousands) | At March 31, 2022 | | At December 31, 2021 |
| Accrual status | $ | 104,910 | | | $ | 110,625 | |
| Non-accrual status | 46,338 | | | 52,719 | |
| Total TDRs | $ | 151,248 | | | $ | 163,344 | |
| | | |
| Additional funds committed to borrowers in TDR status | $ | 5,747 | | | $ | 5,975 | |
| Specific reserves for TDRs included in the ACL on loans and leases: | | | |
| Commercial portfolio | $ | 2,939 | | | $ | 9,017 | |
| Consumer portfolio | 3,689 | | | 3,745 | |
The respective portions of commercial and consumer TDRs deemed to be uncollectible and charged off were $9.1 million and $0.1 million during the three months ended March 31, 2022, and $1.6 million and $0.3 million during the three months ended March 31, 2021.
The following table summarizes loans and leases modified as TDRs by class and modification type: | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three months ended March 31, |
| | | | | 2022 | | 2021 |
| (Dollars in thousands) | | | | | | | Number of
Contracts | Recorded Investment (1) | | Number of
Contracts | Recorded Investment (1) |
| Commercial non-mortgage | | | | | | | | | | | |
| Extended maturity | | | | | | | 2 | $ | 98 | | 6 | $ | 507 |
| | | | | | | | | | | |
| Maturity/rate combined | | | | | | | 2 | 92 | | 1 | 37 |
Other (2) | | | | | | | — | — | | 2 | 113 |
| Commercial real estate | | | | | | | | | | | |
| Extended maturity | | | | | | | — | — | | 1 | 183 |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Residential | | | | | | | | | | | |
| Extended maturity | | | | | | | — | — | | 1 | 99 |
| | | | | | | | | | | |
Other (2) | | | | | | | 5 | 2,985 | | 2 | 233 |
| Home equity | | | | | | | | | | | |
| Extended maturity | | | | | | | — | — | | 1 | 28 |
| Maturity/rate combined | | | | | | | 4 | 44 | | 5 | 1,011 |
Other (2) | | | | | | | 17 | 1,242 | | 7 | 433 |
| Total TDRs | | | | | | | 30 | $ | 4,461 | | 26 | $ | 2,644 |
(1)Post-modification balances approximate pre-modification balances. The aggregate amount of charge-offs due to restructurings was not significant.
(2)Other includes covenant modifications, forbearance, discharges under Chapter 7 bankruptcy, or other concessions.
For the three months ended March 31, 2022 and 2021, there were no significant loans and leases modified as TDRs within the previous 12 months and for which there was a payment default.
Note 6: Transfers and Servicing of Financial Assets
Webster originates and sells residential mortgage loans in termsthe normal course of historical dollars without consideringbusiness, primarily to government-sponsored entities through established programs and securitizations. Residential mortgage origination fees, adjustments for changes in fair value, and any gain or loss recognized on residential mortgage loans sold are included in mortgage banking activities on the accompanying Condensed Consolidated Statements of Income.
The following table summarizes information related to mortgage banking activities: | | | | | | | | | | | | | | | |
| | | | Three months ended March 31, |
| (In thousands) | | | | | 2022 | | 2021 |
| Net gain on sale | | | | | $ | 397 | | | $ | 2,109 | |
| Origination fees | | | | | 135 | | | 541 | |
| Fair value adjustment | | | | | (104) | | | (8) | |
| Mortgage banking activities | | | | | $ | 428 | | | $ | 2,642 | |
| | | | | | | |
| Proceeds from sale | | | | | $ | 26,753 | | | $ | 79,308 | |
| Loans sold with servicing rights retained | | | | | 25,363 | | | 75,691 | |
Under certain circumstances, Webster may decide to sell loans that were not originated with the intent to sell. During the three months ended March 31, 2022 and 2021, Webster sold commercial loans not originated for sale for proceeds of $51.1 million and $16.8 million, respectively, which resulted in net gains on sale of $1.8 million and $0.2 million, respectively.
In addition, Webster may retain servicing rights on its residential mortgage loans sold in the normal course of business. At March 31, 2022 and December 31, 2021, the aggregate principal balance of residential mortgage loans serviced for others totaled $2.2 billion and $2.0 billion, respectively. Mortgage servicing assets are held at the lower of cost, net of accumulated amortization, or fair market value, and are included in accrued interest receivable and other assets on the accompanying Consolidated Balance Sheets. Webster assesses mortgage servicing assets for impairment each quarter and establishes or adjusts the valuation allowance to the extent that amortized cost exceeds the estimated fair market value.
The following table presents the change in the carrying amount for mortgage servicing assets: | | | | | | | | | | | | | | | |
| | | Three months ended March 31, |
| (In thousands) | | | | | 2022 | | 2021 |
| Beginning balance | | | | | $ | 9,237 | | | $ | 13,422 | |
Additions (1) | | | | | 1,068 | | | 586 | |
| Amortization | | | | | (570) | | | (1,490) | |
| Adjustment to valuation allowance | | | | | — | | | (191) | |
| Ending balance | | | | | $ | 9,735 | | | $ | 12,327 | |
(1)Includes $0.9 million acquired in connection with the Sterling merger.
Loan servicing fees, net of mortgage servicing rights amortization, were $1.1 million and $0.4 million for the three months ended March 31, 2022 and 2021, respectively, and are included in loan and lease related fees on the accompanying Condensed Consolidated Statements of Income. Information regarding the fair value of loans held for sale and mortgage servicing assets can be found within Note 15: Fair Value Measurements.
Note 7: Goodwill and Other Intangible Assets
Goodwill
The following table summarizes changes in the carrying amount of goodwill:
| | | | | | | | | | | | | | | |
| (In thousands) | | | At March 31,
2022 | | At December 31,
2021 |
| Balance, beginning of period | | | | | $ | 538,373 | | | $ | 538,373 | |
| Sterling merger | | | | | 1,939,432 | | | — | |
| Bend acquisition | | | | | 35,966 | | | — | |
| Balance, end of period | | | | | $ | 2,513,771 | | | $ | 538,373 | |
Information regarding goodwill by reportable segment can be found within Note 17: Segment Reporting.
Other Intangible Assets
The following table summarizes other intangible assets: | | | | | | | | | | | | | | | | | | | | | | | |
| | At March 31, 2022 | | At December 31, 2021 |
| (In thousands) | Gross Carrying Amount (1) | Accumulated
Amortization | Net Carrying
Amount | | Gross Carrying
Amount | Accumulated
Amortization | Net Carrying
Amount |
| Core deposits | $ | 145,725 | | $ | 22,183 | | $ | 123,542 | | | $ | 26,625 | | $ | 18,516 | | $ | 8,109 | |
| Customer relationships | 115,000 | | 13,960 | | 101,040 | | | 21,000 | | 11,240 | | 9,760 | |
| Total other intangible assets | $ | 260,725 | | $ | 36,143 | | $ | 224,582 | | | $ | 47,625 | | $ | 29,756 | | $ | 17,869 | |
(1)In connection with the Sterling merger and Bend acquisition, Webster recorded a $119.1 million core deposit intangible and $94.0 million of customer relationship intangibles, all of which are being amortized on an accelerated basis over a period of 10 years.
The remaining estimated aggregate future amortization expense for other intangible assets as of March 31, 2022 is as follows: | | | | | |
| (In thousands) | Amortization Expense |
| Remainder of 2022 | $ | 25,543 | |
| 2023 | 30,315 | |
| 2024 | 24,442 | |
| 2025 | 21,455 | |
| 2026 | 21,455 | |
| Thereafter | 101,372 | |
Note 8: Deposits
The following table summarizes deposits by type: | | | | | | | | | | | |
| (In thousands) | At March 31,
2022 | | At December 31,
2021 |
| Non-interest-bearing: | | | |
| Demand | $ | 13,570,702 | | | $ | 7,060,488 | |
| Interest-bearing: | | | |
| Health savings accounts | 7,804,858 | | | 7,397,582 | |
| Checking | 9,579,839 | | | 4,182,497 | |
| Money market | 11,964,649 | | | 3,718,953 | |
| Savings | 8,615,138 | | | 5,689,739 | |
| Time deposits | 2,821,097 | | | 1,797,770 | |
| Total interest-bearing | $ | 40,785,581 | | | $ | 22,786,541 | |
| Total deposits | $ | 54,356,283 | | | $ | 29,847,029 | |
| | | |
| Time deposits, money market, and interest-bearing checking obtained through brokers | $ | 115,538 | | | $ | 120,392 | |
| Aggregate amount of time deposit accounts that exceeded the FDIC limit | 390,023 | | | 256,522 | |
| Demand deposit overdrafts reclassified as loan balances | 10,122 | | | 1,577 | |
The following table summarizes the scheduled maturities of time deposits: | | | | | |
| (In thousands) | At March 31,
2022 |
| Remainder of 2022 | $ | 2,095,195 | |
| 2023 | 399,082 | |
| 2024 | 122,537 | |
| 2025 | 127,698 | |
| 2026 | 61,993 | |
| Thereafter | 14,592 | |
| Total time deposits | $ | 2,821,097 | |
Note 9: Borrowings
The following table summarizes securities sold under agreements to repurchase: | | | | | | | | | | | | | | | | | |
| At March 31, 2022 | | At December 31, 2021 |
| (Dollars in thousands) | Total Outstanding | Rate | | Total Outstanding | Rate |
| | | | | |
| Original maturity of one year or less | $ | 318,733 | | 0.11 | % | | $ | 474,896 | | 0.11 | % |
| Original maturity of greater than one year, non-callable | 200,000 | | 2.04 | | | 200,000 | | 1.32 | |
Total securities sold under agreements to repurchase (1) | 518,733 | | 0.85 | | | 674,896 | | 0.47 | |
| | | | | |
| | | | | |
| | | | | |
(1)Webster has the 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.
Securities sold under agreements to repurchase are used as a source of borrowed funds and are collateralized by Agency MBS and corporate bonds. The Company's repurchase agreement counterparties are limited to primary dealers in government securities, and commercial and municipal customers through the Corporate Treasury function. Webster may also purchase unsecured term and overnight federal funds to satisfy its short-term liquidity needs.
The following table summarizes information for FHLB advances: | | | | | | | | | | | | | | | | | |
| At March 31, 2022 | | At December 31, 2021 |
| (Dollars in thousands) | Total Outstanding | Weighted-
Average Contractual Coupon Rate | | Total Outstanding | Weighted-
Average Contractual Coupon Rate |
| Maturing within 1 year | $ | 85 | | — | % | | $ | 90 | | — | % |
| After 1 but within 2 years | 198 | | 2.96 | | | 202 | | 2.95 | |
| After 2 but within 3 years | — | | — | | | — | | — | |
| After 3 but within 4 years | — | | — | | | — | | — | |
| After 4 but within 5 years | — | | — | | | — | | — | |
| After 5 years | 10,620 | | 2.03 | | | 10,705 | | 2.03 | |
| Total FHLB advances | $ | 10,903 | | 2.03 | | | $ | 10,997 | | 2.03 | |
| | | | | |
| Aggregate carrying value of assets pledged as collateral | $ | 7,565,427 | | | | $ | 7,556,034 | | |
| Remaining borrowing capacity at FHLB | 5,129,597 | | | | 5,087,294 | | |
Webster Bank may borrow up to the amount of eligible mortgages and securities that have been pledged as collateral to secure FHLB advances, which primarily include certain residential and commercial real estate loans and home equity lines of credit. Webster Bank was in compliance with its FHLB collateral requirements at both March 31, 2022 and December 31, 2021.
The following table summarizes long-term debt: | | | | | | | | | | | | | | |
| (Dollars in thousands) | At March 31,
2022 | | At December 31,
2021 |
| 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) | 337,473 | | | 338,811 | |
| 4.000% | Subordinated fixed-to-floating rate notes due December 30, 2029 | 274,000 | | | — | |
| 3.875% | Subordinated fixed-to-floating rate notes due November 1, 2030 | 225,000 | | | — | |
Junior subordinated debt Webster Statutory Trust I floating-rate notes due September 17, 2033 (2) | 77,320 | | | 77,320 | |
| Total senior and subordinated debt | 1,063,793 | | | 566,131 | |
| Discount on senior fixed-rate notes | (920) | | | (974) | |
| Debt issuance cost on senior fixed-rate notes | (2,125) | | | (2,226) | |
| Premium on subordinated fixed-to-floating rate notes | 17,526 | | | — | |
| Long-term debt | $ | 1,078,274 | | | $ | 562,931 | |
(1)Webster de-designated its fair value hedging relationship on these senior notes in 2020. A basis adjustment of $37.5 million and $38.8 million at March 31, 2022 and December 31, 2021, respectively, is included in the carrying value and is being amortized over the remaining life of the senior notes.
(2)The interest rate on the Webster Statutory Trust I floating-rate notes, which varies quarterly based on 3-month LIBOR plus 2.95%, was 3.87% and 3.17% at March 31, 2022 and December 31, 2021, respectively.
Webster assumed $274.0 million in aggregate principal amount of 4.00% fixed-to-floating rate subordinated notes due on December 30, 2029 (the 2029 subordinated notes) in connection with the Sterling merger. The 2029 subordinated notes were issued by Sterling on December 16, 2019 through a public offering, and are redeemable at a price equal to the total principal amount plus any accrued and unpaid interest thereon, in whole or in part by Webster on December 30, 2024, or any interest payment date thereafter, upon the occurrence of certain specified events. Until December 30, 2024, the interest rate is fixed at 4.00% and payable semi-annually in arrears on each June 30 and December 30. From December 30, 2024 through the earlier of maturity or redemption, the 2029 subordinated notes will bear interest at a floating rate per annum equal to three-month term SOFR plus 253 basis points, payable quarterly in arrears on each March 30, June 30, September 30, and December 30.
In addition, Webster assumed $225.0 million in aggregate principal amount of 3.875% fixed-to-floating rate subordinated notes due on November 1, 2030 (the 2030 subordinated notes) in connection with the Sterling merger. The 2030 subordinated notes were issued by Sterling on October 30, 2020 through a public offering, and are redeemable at a price equal to the total principal amount plus any accrued and unpaid interest thereon, in whole or in part by Webster on December 30, 2024, or any interest payment date thereafter, upon the occurrence of certain specified events. Until November 1, 2025, the interest rate is fixed at 3.875% and payable semi-annually in arrears on each May 1 and December 30. From November 1, 2025 through the earlier of maturity or redemption, the 2030 subordinated notes will bear interest at a floating rate per annum equal to three-month term SOFR plus 369 basis points, payable quarterly in arrears on each February 1, May 1, August 1, and November 1.
Webster recorded the 2029 and 2030 subordinated notes at their estimated fair value of $281.0 million and $235.9 million, respectively, on the merger effective date. The purchase premiums are being amortized into interest expense over the remaining lives of the subordinated notes.
Note 10: Accumulated Other Comprehensive (Loss) Income, Net of Tax
The following table summarizes the changes in each component of accumulated other comprehensive (loss) income, net of tax:
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | |
| | | Three months ended March 31, 2022 |
| (In thousands) | | | | | | Securities Available For Sale | Derivative Instruments | Defined Benefit Pension and Other Postretirement Benefit Plans | Total |
| Balance, beginning of period | | | | | | $ | 4,536 | | $ | 6,070 | | $ | (33,186) | | $ | (22,580) | |
| Other comprehensive (loss) before reclassifications | | | | | | (244,879) | | (8,613) | | (719) | | (254,211) | |
| Amounts reclassified from accumulated other comprehensive income (loss) | | | | | | — | | 769 | | 299 | | 1,068 | |
| Other comprehensive (loss) income, net of tax | | | | | | (244,879) | | (7,844) | | (420) | | (253,143) | |
| Balance, end of period | | | | | | $ | (240,343) | | $ | (1,774) | | $ | (33,606) | | $ | (275,723) | |
| | | | | | | | | | | | | | | | | | | |
| | | Three months ended March 31, 2021 |
| (In thousands) | | | | | | Securities Available For Sale | Derivative Instruments | Defined Benefit Pension and Other Postretirement Benefit Plans | Total |
| Balance, beginning of period | | | | | | $ | 67,424 | | $ | 19,918 | | $ | (45,086) | | $ | 42,256 | |
| Other comprehensive (loss) before reclassifications | | | | | | (30,353) | | (5,170) | | — | | (35,523) | |
| Amounts reclassified from accumulated other comprehensive (loss) | | | | | | — | | 798 | | 743 | | 1,541 | |
| Other comprehensive (loss) income, net of tax | | | | | | (30,353) | | (4,372) | | 743 | | (33,982) | |
| Balance, end of period | | | | | | $ | 37,071 | | $ | 15,546 | | $ | (44,343) | | $ | 8,274 | |
The following table further summarizes the amounts reclassified from accumulated other comprehensive (loss) income: | | | | | | | | | | | | | | | | | | |
| | | Three months ended March 31, | Associated Line Item on the
Condensed Consolidated Statements of Income |
Accumulated Other Comprehensive
(Loss) Income Components | | | | | 2022 | | 2021 |
| (In thousands) | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Derivative instruments: | | | | | | | | |
| Hedge terminations | | | | | $ | (77) | | | $ | (76) | | Interest expense |
| Premium amortization | | | | | (978) | | | (1,005) | | Interest income |
| Tax benefit | | | | | 286 | | | 283 | | Income tax expense |
| Net of tax | | | | | $ | (769) | | | $ | (798) | | |
Defined benefit pension and other
postretirement benefit plans: | | | | | | | | |
| Actuarial loss amortization | | | | | $ | (411) | | | $ | (1,008) | | Other non-interest expense |
| Tax benefit | | | | | 112 | | | 265 | | Income tax expense |
| Net of tax | | | | | $ | (299) | | | $ | (743) | | |
Note 11: Regulatory Capital and Restrictions
Capital Requirements
Webster Financial Corporation and Webster Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory actions by regulators that 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 pursuant to regulatory directives. Capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by the Basel III Capital Rules to ensure capital adequacy require the Company to maintain minimum ratios of CET1 capital to total risk-weighted assets (CET1 risk-based capital), Tier 1 capital to total risk-weighted assets (Tier 1 risk-based capital), Total capital to total risk-weighted assets (Total risk-based capital), and Tier 1 capital to average tangible assets (Tier 1 leverage capital), as defined in the regulations.
CET1 capital consists of common shareholders’ equity less deductions for goodwill and other intangible assets, and certain deferred tax adjustments. Upon adoption of the Basel III Capital Rules, Webster elected to opt-out of the requirement to include certain components of accumulated other comprehensive income in CET1 capital. Tier 1 capital consists of CET1 capital plus preferred stock. Total capital consists of Tier 1 capital and Tier 2 capital, as defined in the regulations. Tier 2 capital includes permissible portions of subordinated debt and the allowance for credit losses.
At March 31, 2022 and December 31, 2021, Webster Financial Corporation and Webster Bank were both classified as well-capitalized. Management believes that no events or changes have occurred subsequent to quarter-end that would change this designation.
The following table provides information on the capital ratios for Webster Financial Corporation and Webster Bank: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| At March 31, 2022 |
| | Actual (1) | | Minimum Requirement | | Well Capitalized |
| (Dollars in thousands) | Amount | Ratio | | Amount | Ratio | | Amount | Ratio |
| Webster Financial Corporation | | | | | | | | |
| CET1 risk-based capital | $ | 5,509,106 | | 11.46 | % | | $ | 2,163,855 | | 4.5 | % | | $ | 3,125,569 | | 6.5 | % |
| Total risk-based capital | 6,927,124 | | 14.41 | | | 3,846,854 | | 8.0 | | | 4,808,567 | | 10.0 | |
| Tier 1 risk-based capital | 5,793,085 | | 12.05 | | | 2,885,140 | | 6.0 | | | 3,846,854 | | 8.0 | |
| Tier 1 leverage capital | 5,793,085 | | 11.10 | | | 2,087,830 | | 4.0 | | | 2,609,787 | | 5.0 | |
| Webster Bank | | | | | | | | |
| CET1 risk-based capital | $ | 6,376,845 | | 13.28 | % | | $ | 2,160,507 | | 4.5 | % | | $ | 3,120,732 | | 6.5 | % |
| Total risk-based capital | 6,917,038 | | 14.41 | | | 3,840,901 | | 8.0 | | | 4,801,127 | | 10.0 | |
| Tier 1 risk-based capital | 6,376,845 | | 13.28 | | | 2,880,676 | | 6.0 | | | 3,840,901 | | 8.0 | |
| Tier 1 leverage capital | 6,376,845 | | 12.19 | | | 2,092,902 | | 4.0 | | | 2,616,128 | | 5.0 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| At December 31, 2021 |
| | Actual (1) | | Minimum Requirement | | Well Capitalized |
| (Dollars in thousands) | Amount | Ratio | | Amount | Ratio | | Amount | Ratio |
| Webster Financial Corporation | | | | | | | | |
| CET1 risk-based capital | $ | 2,804,290 | | 11.72 | % | | $ | 1,076,871 | | 4.5 | % | | $ | 1,555,480 | | 6.5 | % |
| Total risk-based capital | 3,265,064 | | 13.64 | | | 1,914,436 | | 8.0 | | | 2,393,046 | | 10.0 | |
| Tier 1 risk-based capital | 2,949,327 | | 12.32 | | | 1,435,827 | | 6.0 | | | 1,914,436 | | 8.0 | |
| Tier 1 leverage capital | 2,949,327 | | 8.47 | | | 1,393,607 | | 4.0 | | | 1,742,008 | | 5.0 | |
| Webster Bank | | | | | | | | |
| CET1 risk-based capital | $ | 3,034,883 | | 12.69 | % | | $ | 1,075,920 | | 4.5 | % | | $ | 1,554,107 | | 6.5 | % |
| Total risk-based capital | 3,273,300 | | 13.69 | | | 1,912,747 | | 8.0 | | | 2,390,934 | | 10.0 | |
| Tier 1 risk-based capital | 3,034,883 | | 12.69 | | | 1,434,560 | | 6.0 | | | 1,912,747 | | 8.0 | |
| Tier 1 leverage capital | 3,034,883 | | 8.72 | | | 1,392,821 | | 4.0 | | | 1,741,026 | | 5.0 | |
(1)In accordance with regulatory capital rules, Webster elected an option to delay the estimated impact of the adoption of CECL on its regulatory capital over a two-year deferral period, which ended on January 1, 2022, and a subsequent three-year transition period ending on December 31, 2024. Therefore, the December 31, 2021 capital ratios and amounts exclude the impact of the increased ACL on loans and leases, held-to-maturity debt securities, and unfunded loan commitments related to the adoption of CECL on January 1, 2020, adjusted for an approximation of the after-tax provision for credit losses attributable to CECL relative purchasingto the incurred loss methodology during the deferral period. During the three year transition period, capital ratios will begin to phase out the aggregate amount of the capital benefit provided in the initial two years. For 2022, 2023, and 2024, Webster is allowed 75%, 50%, and 25% of the capital benefit as of December 31, 2021, respectively, with full absorption occurring in 2025.
Dividend Restrictions
Webster Financial Corporation is dependent upon dividends from Webster Bank to provide funds for the payment of dividends to shareholders and to provide for other cash requirements. Dividends paid by the 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 if the amount would exceed the net income for that year combined with the undistributed net income for the preceding two years. During the three months ended March 31, 2022 and 2021, Webster Bank paid no dividends and $60.0 million in dividends, respectively, to Webster Financial Corporation, to which no express approval from the OCC was required.
Cash Restrictions
Webster Bank is required under Federal Reserve regulations to maintain cash reserve balances in the form of vault cash or deposits held at a Federal Reserve Bank to ensure that it is able to meet customer demands. The reserve requirement ratio is subject to adjustment as economic conditions warrant. Effective March 26, 2020, the Federal Reserve reset the requirement to zero in order to address liquidity concerns resulting from the COVID-19 pandemic. Pursuant to this action, the Bank was not required to hold cash reserve balances at both March 31, 2022 and December 31, 2021.
Note 12: Variable Interest Entities
Webster has an investment interest in the following entities that meet the definition of a variable interest entity.
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 expense volatility. The funding of the Rabbi Trust and the discontinuation of the Deferred Compensation Plan for Directors and Officers occurred during 2012. In connection with the Sterling merger, Webster acquired assets held in a separate Rabbi Trust that had been previously established to fund obligations due under the Greater New York Savings Bank Directors' Retirement Plan, which was also assumed from Sterling.
Investments held in the Rabbi Trusts consist primarily of mutual funds that invest in equity and fixed income securities. Webster is considered the primary beneficiary of these Rabbi Trusts as it has the power to direct the activities of moneythe Rabbi Trusts that most significantly impact its economic performance and it has the obligation to absorb losses and/or the right to receive benefits of the Rabbi Trusts that could potentially be significant.
The Rabbi Trusts' assets are included in accrued interest receivable and other assets on the accompanying Condensed Consolidated Balance Sheets. Investment earnings are included in other non-interest income, and depending on the nature of the underlying assets in the Rabbi Trusts, fair value changes are either recognized in other non-interest income or in other comprehensive (loss) income, net of tax, on the accompanying Condensed Consolidated Statements of Income or on the accompanying Condensed Consolidated Statements of Comprehensive Income, respectively. Information regarding the fair value of the Rabbi Trusts' investments can be found within Note 15: Fair Value Measurements.
Non-Consolidated
Tax Credit Finance Investments. Webster makes non-marketable equity investments in entities that sponsor affordable housing and other community development projects that qualify for the Low Income Housing Tax Credit (LIHTC) Program pursuant to Section 42 of the Internal Revenue Code. The purpose of these investments is not only to assist the Bank in meeting its responsibilities under the CRA, but also to provide a return, primarily through the realization of tax benefits. While Webster's investment in an entity may exceed 50% of its outstanding equity interests, the entity is not consolidated as the Company is not the primary beneficiary. Webster has determined that it is not the primary beneficiary due to its inability to direct the activities that most significantly impact economic performance and the Company does not have the obligation to absorb losses and/or the right to receive benefits. Webster applies the proportional amortization method to subsequently measure its investments in qualified affordable housing projects.
The following table summarizes Webster's LIHTC investments and related unfunded commitments:
| | | | | | | | | | | |
| (In thousands) | March 31, 2022 | | December 31, 2021 |
Gross investment in LIHTC (1) | $ | 584,266 | | | $ | 68,635 | |
| Accumulated amortization | (35,593) | | | (25,216) | |
| Net investment in LIHTC | $ | 548,673 | | | $ | 43,419 | |
| | | |
Unfunded commitments for LIHTC investments (1) | $ | 258,297 | | | $ | 11,106 | |
(1)In connection with the Sterling merger, Webster acquired $515.6 million of LIHTC investments and assumed $267.3 million of unfunded commitments for LIHTC investments on January 31, 2022.
The aggregate carrying value of Webster's LIHTC investments is included in accrued interest receivable and other assets on the accompanying Condensed Consolidated Balance Sheets, and represents the Company's maximum exposure to loss. The related unfunded commitments are included in accrued expenses and other liabilities on the accompanying Condensed Consolidated Balance Sheets. Other than those acquired from Sterling, there were no additional commitments approved to fund LIHTC investments during the three months ended March 31, 2022, and 2021.
Webster Statutory Trust. Webster 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 Company is not the primary beneficiary of Webster Statutory Trust. Webster Statutory Trust's only assets are junior subordinated debentures that are issued by the Company, which were acquired using the proceeds from the issuance of trust preferred securities and common stock. The junior subordinated debentures are included in long-term debt on the accompanying Condensed Consolidated Balance Sheets, and the related interest expense is reported as interest expense on long-term debt on the accompanying Condensed Consolidated Statements of Income. Additional information regarding these junior subordinated debentures can be found within Note 9: Borrowings.
Other Non-Marketable Investments. Webster invests in alternative investments comprising interests in non-public entities that cannot be redeemed since the investment is distributed as the underlying equity is liquidated. The ultimate timing and amount of these distributions cannot be predicted with reasonable certainty. For each of these alternative investments that is classified as a variable interest entity, the Company has determined that it is not the primary beneficiary due to its inability to direct the activities that most significantly impact economic performance. The aggregate carrying value of Webster's other non-marketable investments was $120.7 million and $61.5 million at March 31, 2022 and December 31, 2021, respectively, which is included in accrued interest receivable and other assets on the accompanying Condensed Consolidated Balance Sheets, and its maximum exposure to loss, including unfunded commitments, was $164.7 million and $95.9 million, respectively. Information regarding the fair value of other non-marketable investments can be found within Note 15: Fair Value Measurements.
Additional Information regarding Webster's consolidation of variable interest entities can be found within Note 1: Summary of Significant Accounting Policies in the Consolidated Financial Statements contained in Part II - Item 8. Financial Statements and Supplementary Data of the Company's Annual Reporting on Form 10-K for the year ended December 31, 2021.
Note 13: Earnings Per Common Share
The following table summarizes the calculation of basic and diluted (loss) earnings per common share: | | | | | | | | | | | | | | | |
| | | | Three months ended March 31, |
| (In thousands, except per share data) | | | | | 2022 | | 2021 |
| Net (loss) income | | | | | $ | (16,747) | | | $ | 108,078 | |
| Less: Preferred stock dividends | | | | | 3,431 | | | 1,969 | |
| Net (loss) income available to common shareholders | | | | | (20,178) | | | 106,109 | |
| Less: Earnings allocated to participating securities | | | | | — | | | 579 | |
| (Loss) earnings applicable to common shareholders | | | | | $ | (20,178) | | | $ | 105,530 | |
| | | | | | | |
| Weighted-average common shares outstanding - basic | | | | | 147,394 | | | 89,809 | |
| Effect of dilutive securities | | | | | — | | | 299 | |
| Weighted-average common shares outstanding - diluted | | | | | 147,394 | | | 90,108 | |
| | | | | | | |
| Basic (loss) earnings per common share | | | | | $ | (0.14) | | | $ | 1.18 | |
| Diluted (loss) earnings per common share | | | | | (0.14) | | | 1.17 | |
Earnings per common share is calculated under the two-class method in which all earnings (distributed and undistributed) are allocated to common stock and participating securities based on their respective rights to receive dividends. Webster may grant restricted stock, restricted stock units, non-qualified stock options, incentive stock options, or stock appreciation rights to certain employees and directors under its stock-based compensation programs, which entitle recipients to receive non-forfeitable dividends during the vesting period on a basis equivalent to the dividends paid to holders of common stock. These unvested awards meet the definition of participating securities.
Potential common shares from stock options and performance-based restricted stock awards that were not included in the computation of dilutive earnings per common share because they were anti-dilutive under the treasury stock method were 341,904 for the three months ended March 31, 2022. There were no anti-dilutive stock options nor performance-based restricted shares excluded from the effect of dilutive securities for the three months ended March 31, 2021.
Note 14: 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 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, including accrued interest, of derivative positions: | | | | | | | | | | | | | | | | | |
| At March 31, 2022 |
| Asset Derivatives | | Liability Derivatives |
| (In thousands) | Notional Amounts | Fair Value | | Notional Amounts | Fair Value |
| Designated as hedging instruments: | | | | | |
Interest rate derivatives (1) | $ | 1,000,000 | | $ | 5,651 | | | $ | — | | $ | — | |
| Not designated as hedging instruments: | | | | | |
Interest rate derivatives (1) | 6,385,652 | | 101,454 | | | 6,054,975 | | 117,041 | |
Mortgage banking derivatives (2) | 4,123 | | 32 | | | 336 | | 1 | |
Other (3) | 109,881 | | 434 | | | 451,036 | | 282 | |
| Total not designated as hedging instruments | 6,499,656 | | 101,920 | | | 6,506,347 | | 117,324 | |
| Gross derivative instruments, before netting | $ | 7,499,656 | | 107,571 | | | $ | 6,506,347 | | 117,324 | |
| Less: Master netting agreements | | 5,977 | | | | 5,977 | |
| Cash collateral | | 54,206 | | | | 904 | |
| Total derivative instruments, after netting | | $ | 47,388 | | | | $ | 110,443 | |
| | | | | |
| At December 31, 2021 |
| Asset Derivatives | | Liability Derivatives |
| (In thousands) | Notional Amounts | Fair Value | | Notional Amounts | Fair Value |
| Designated as hedging instruments: | | | | | |
Interest rate derivatives (1) | $ | 1,000,000 | | $ | 17,583 | | | $ | — | | $ | — | |
| Not designated as hedging instruments: | | | | | |
Interest rate derivatives (1) | 4,463,048 | | 141,243 | | | 4,372,846 | | 21,570 | |
Mortgage banking derivatives (2) | 14,212 | | 80 | | | — | | — | |
Other (3) | 76,755 | | 211 | | | 374,688 | | 214 | |
| Total not designated as hedging instruments | 4,554,015 | | 141,534 | | | 4,747,534 | | 21,784 | |
| Gross derivative instruments, before netting | $ | 5,554,015 | | 159,117 | | | $ | 4,747,534 | | 21,784 | |
| Less: Master netting agreements | | 6,364 | | | | 6,364 | |
| Cash collateral | | 19,272 | | | | 2,119 | |
| Total derivative instruments, after netting | | $ | 133,481 | | | | $ | 13,301 | |
(1)Balances related to clearing houses are presented as a single unit of account. In accordance with their rule books, clearing houses legally characterize variation margin payments as settlement of derivatives rather than collateral against derivative positions. Notional amounts of interest rate swaps cleared through clearing houses include $2.0 billion and $0.4 billion for asset derivatives and $1.5 billion and $2.6 billion for liability derivatives at March 31, 2022 and December 31, 2021, respectively. The related fair values approximate zero.
(2)Notional amounts related to residential loans exclude approved floating rate commitments of $0.9 million at March 31, 2022.
(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. Notional amounts of risk participation agreements include $68.0 million and $66.0 million for asset derivatives and $438.8 million and $338.2 million for liability derivatives at March 31, 2022 and December 31, 2021, 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 March 31, 2022 |
| (In thousands) | Gross
Amount | Offset
Amount | Net Amount on Balance Sheet | | Amounts
Not Offset | Net
Amounts |
| Asset derivatives | $ | 62,877 | | $ | 60,183 | | $ | 2,694 | | | $ | (3,060) | | $ | (366) | |
| Liability derivatives | 6,881 | | 6,881 | | — | | | 1,014 | | 1,014 | |
| | | | | | |
| At December 31, 2021 |
| (In thousands) | Gross
Amount | Offset
Amount | Net Amount on Balance Sheet | | Amounts
Not Offset | Net
Amounts |
| Asset derivatives | $ | 25,636 | | $ | 25,636 | | $ | — | | | $ | 51 | | $ | 51 | |
| Liability derivatives | 8,483 | | 8,483 | | — | | | 428 | | 428 | |
Derivative Activity
The following table summarizes the income statement effect of derivatives designated as cash flow hedges: | | | | | | | | | | | | | | | | | | |
| Recognized In | | | Three months ended March 31, |
| (In thousands) | Net Interest Income | | | | | 2022 | | 2021 |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Interest rate derivatives | Long-term debt | | | | | $ | 76 | | | $ | 121 | |
| Interest rate derivatives | Interest and fees on loans and leases | | | | | (2,559) | | | (2,582) | |
| Net recognized on cash flow hedges | | | | | | $ | (2,483) | | | $ | (2,461) | |
The following table summarizes information related to a fair value hedging adjustment: | | | | | | | | | | | | | | | | | | | | | | | |
| Condensed Consolidated Balance Sheet Line Item in Which Hedged Item is Located | Carrying Amount of Hedged Item | | Cumulative Amount of Fair Value Hedging Adjustment Included in Carrying Amount |
| (In thousands) | At March 31,
2022 | | At December 31,
2021 | | At March 31,
2022 | | At December 31,
2021 |
| Long-term debt | $ | 337,473 | | | $ | 338,811 | | | $ | 37,473 | | | $ | 38,811 | |
The following table summarizes the income statement effect of derivatives not designated as hedging instruments: | | | | | | | | | | | | | | | | | | |
| Recognized In | | | Three months ended March 31, |
| (In thousands) | Non-interest Income | | | | | 2022 | | 2021 |
| Interest rate derivatives | Other income | | | | | $ | 6,445 | | | $ | 4,644 | |
| Mortgage banking derivatives | Mortgage banking activities | | | | | (49) | | | (382) | |
| Other | Other income | | | | | 397 | | | 472 | |
| Total not designated as hedging instruments | | | | | $ | 6,793 | | | $ | 4,734 | |
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 March 31, 2022, the remaining unamortized balance of time-value premiums was $6.2 million. Over the next twelve months, an estimated $1.2 million decrease to interest expense will be reclassified from (AOCL) AOCI relating to cash flow hedges, and an estimated $0.3 million increase to interest expense will be reclassified from (AOCL) AOCI relating to hedge terminations. At March 31, 2022, the remaining unamortized loss on terminated cash flow hedges is $0.6 million. The maximum length of time over which forecasted transactions are hedged is 2.3 years. Additional information about cash flow hedge activity impacting (AOCL) AOCI and the related amounts reclassified to interest expense is provided in Note 10: Accumulated Other Comprehensive (Loss) Income, Net of Tax. Information about the valuation methods used to measure the fair value of derivatives is provided in Note 15: Fair Value Measurements.
Derivative Exposure. At March 31, 2022, the Company had $83.9 million in initial margin collateral posted at clearing houses. In addition, $55.2 million of cash collateral received is included in cash and due from banks on the accompanying Condensed Consolidated Balance Sheets. 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. Current net credit exposure relating to interest rate derivatives with Webster Bank customers was $44.6 million at March 31, 2022. 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 $47.8 million at March 31, 2022. Webster has incorporated a valuation adjustment to reflect nonperformance risk in the fair value measurement of its derivatives, which totaled $3.3 million and $(0.4) million at March 31, 2022 and December 31, 2021, respectively. Various factors impact changes in the valuation adjustment 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.
Note 15: Fair Value Measurements
Fair value is defined as 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. The determination of fair value may require the use of estimates when quoted market prices are not available. Fair value estimates made at a specific point in time are based on management’s judgments regarding future expected losses, current economic conditions, the risk characteristics of each financial instrument, and other subjective factors that cannot be determined with precision.
The framework for measuring fair value provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The three levels within the fair value hierarchy are as follows:
•Level 1: Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that Webster has the ability to access at the measurement date.
•Level 2: Inputs to the valuation methodology include 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, and credit ratings), or inputs that are derived principally from or corroborated by market data, correlation, or other means.
•Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement. This includes certain pricing models or other similar 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 unadjusted quoted prices are available in an active market, Webster classifies available-for-sale investment securities within Level 1 of the fair value hierarchy. U.S. Treasury notes have a readily determinable fair value, and therefore are classified within Level 1 of the fair value hierarchy.
When quoted market prices are not available, Webster employs an independent pricing service that utilizes matrix pricing to calculate fair value. These 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 the respective terms and conditions for debt instruments. Management maintains procedures to monitor the pricing service's results and has a process in place to challenge their valuations and methodologies that appear unusual or unexpected. Government agency debentures, municipal bonds and notes, Agency CMO, Agency MBS, Agency CMBS, CMBS, CLO, corporate debt, and other securities available-for-sale are classified within Level 2 of the fair value hierarchy.
Derivative Instruments. The fair values presented for derivative instruments include any accrued interest. Foreign exchange contracts are valued based on unadjusted quoted prices in active markets and accordingly are classified within Level 1 of the fair value hierarchy. Except for mortgage banking derivatives, 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 then validated against valuations performed by independent third parties. These derivative instruments are classified within Level 2 of the fair value hierarchy.
Mortgage Banking Derivatives. Webster uses forward sales of mortgage loans and mortgage-backed securities to manage the 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 this in-between time period, Webster is subject to the risk that market interest rates may change. If rates rise, investors generally will pay less to purchase mortgage loans, which would result in a reduction in the gain on sale of the loans, or possibly a loss. In an effort to mitigate this risk, forward delivery sales commitments are established in which Webster agrees to either 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. Accordingly, mortgage banking derivatives are classified within Level 2 of the fair value hierarchy.
Originated Loans Held For Sale. Webster has elected to measure originated loans held for sale at fair value under the fair value option per ASC Topic 825, Financial Instruments. Electing to measure originated loans held for sale at fair value reduces certain timing differences and better reflects the price Webster would expect to receive from the sale of these loans. The fair value of originated loans held for sale is based on quoted market prices of similar loans sold in conjunction with securitization transactions. Accordingly, originated loans held for sale are classified within Level 2 of the fair value hierarchy.
The following table compares the fair value to the unpaid principal balance of originated loans held for sale: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| At March 31, 2022 | | At December 31, 2021 |
| (In thousands) | Fair Value | | Unpaid Principal Balance | | Difference | | Fair Value | | Unpaid Principal Balance | | Difference |
| Originated loans held for sale | $ | 1,333 | | | $ | 1,974 | | | $ | (641) | | | $ | 4,694 | | | $ | 5,034 | | | $ | (340) | |
Rabbi Trust Investments.Investments held in each of the Rabbi Trusts consist primarily of mutual funds that invest in equity and fixed income securities. Shares of these mutual funds are valued based on the NAV as reported by the trustee of the funds, which represents quoted prices in active markets. Webster has elected to measure the Rabbi Trusts' investments at fair value. Accordingly, the Rabbi Trusts' investments are classified within Level 1 of the fair value hierarchy. At March 31, 2022, the cost basis of the Rabbi Trusts' investments was $9.0 million.
Alternative Investments. Equity investments have a readily determinable fair value when unadjusted quoted prices are available in an active market for identical assets. Accordingly, these alternative investments are classified within Level 1 of the fair value hierarchy. At March 31, 2022, equity investments with a readily determinable fair value had a carrying amount of $1.1 million and no remaining unfunded commitment. During the three months ended March 31, 2022, there was a write-down in fair value of $0.7 million associated with these alternative investments.
Equity investments that do not have a readily available fair value may qualify for the NAV practical expedient if they meet certain requirements. Webster's alternative investments measured at NAV consist of investments in non-public entities that cannot be redeemed since investments are distributed as the underlying equity is liquidated. Alternative investments measured at NAV are not classified within the fair value hierarchy. At March 31, 2022, these alternative investments had a carrying amount of $72.1 million and a remaining unfunded commitment of $18.2 million.
The following table summarizes the fair values of assets and liabilities measured at fair value on a recurring basis: | | | | | | | | | | | | | | | |
| | At March 31, 2022 |
| (In thousands) | Level 1 | Level 2 | Level 3 | | Total |
| Financial Assets: | | | | | |
| Available-for-sale investment securities: | | | | | |
| U.S. Treasury notes | $ | 732,425 | | $ | — | | $ | — | | | $ | 732,425 | |
| Government agency debentures | — | | 217,219 | | — | | | 217,219 | |
| Municipal bonds and notes | — | | 1,894,537 | | — | | | 1,894,537 | |
| Agency CMO | — | | 79,513 | | — | | | 79,513 | |
| Agency MBS | — | | 2,574,569 | | — | | | 2,574,569 | |
| Agency CMBS | — | | 1,583,820 | | — | | | 1,583,820 | |
| CMBS | — | | 864,157 | | — | | | 864,157 | |
| CLO | — | | 14,233 | | — | | | 14,233 | |
| Corporate debt | — | | 767,044 | | — | | | 767,044 | |
| Other | — | | 17,380 | | — | | | 17,380 | |
| Total available-for-sale investment securities | 732,425 | | 8,012,472 | | — | | | 8,744,897 | |
Gross derivative instruments, before netting (1) | 422 | | 107,149 | | — | | | 107,571 | |
| Originated loans held for sale | — | | 1,333 | | — | | | 1,333 | |
| Investments held in Rabbi Trust | 13,402 | | — | | — | | | 13,402 | |
Alternative investments (2) | 1,131 | | — | | — | | | 73,185 | |
| Total financial assets | $ | 747,380 | | $ | 8,120,954 | | $ | — | | | $ | 8,940,388 | |
| Financial Liabilities: | | | | | |
Gross derivative instruments, before netting (1) | $ | 217 | | $ | 117,107 | | $ | — | | | $ | 117,324 | |
| | | | | | | | | | | | | | | |
| | At December 31, 2021 |
| (In thousands) | Level 1 | Level 2 | Level 3 | | Total |
| Financial Assets: | | | | | |
| Available-for-sale investment securities: | | | | | |
| U.S. Treasury notes | $ | 396,966 | | $ | — | | $ | — | | | $ | 396,966 | |
| Agency CMO | — | | 90,384 | | — | | | 90,384 | |
| Agency MBS | — | | 1,593,403 | | — | | | 1,593,403 | |
| Agency CMBS | — | | 1,232,541 | | — | | | 1,232,541 | |
| CMBS | — | | 886,263 | | — | | | 886,263 | |
| CLO | — | | 21,847 | | — | | | 21,847 | |
| Corporate debt | — | | 13,450 | | — | | | 13,450 | |
| Total available-for-sale investment securities | 396,966 | | 3,837,888 | | — | | | 4,234,854 | |
Gross derivative instruments, before netting (1) | 187 | | 158,930 | | — | | | 159,117 | |
| Originated loans held for sale | — | | 4,694 | | — | | | 4,694 | |
| Investments held in Rabbi Trust | 3,416 | | — | | — | | | 3,416 | |
Alternative investments (2) | 1,877 | | — | | — | | | 27,732 | |
| Total financial assets | $ | 402,446 | | $ | 4,001,512 | | $ | — | | | $ | 4,429,813 | |
| Financial Liabilities: | | | | | |
Gross derivative instruments, before netting (1) | $ | 141 | | $ | 21,643 | | $ | — | | | $ | 21,784 | |
(1)Additional information regarding the impact of netting derivative assets and derivative liabilities, as well as the impact from offsetting cash collateral paid to the same derivative counterparties, can be found within Note 14: Derivative Financial Instruments.
(2)Certain alternative investments are recorded at NAV. Assets measured at NAV are not classified within the fair value hierarchy.
Assets Measured at Fair Value on a Non-Recurring Basis
Webster measures certain assets at fair value on a non-recurring basis. The following is a description of the valuation methodologies used for assets measured at fair value on a non-recurring basis.
Alternative Investments. The measurement alternative has been elected for alternative investments without readily determinable fair values that do not qualify for the NAV practical expedient. The measurement alternative requires investments to be measured at cost minus impairment, if any, plus or minus adjustments resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer. Accordingly, these alternative investments are classified within Level 2 of the fair value hierarchy. At March 31, 2022, the carrying amount of these alternative investments was $29.3 million. There were no write-ups due to inflation.observable price changes or write-downs due to impairment in the current period.
Unlike most industrialLoans Transferred to Held for Sale. Once a decision has been made to sell loans not previously classified as held for sale, these loans are transferred into the held for sale category and carried at the lower of cost or fair value. At the time of transfer into held for sale classification, any amount by which cost exceeds fair value is accounted for as a valuation allowance. This activity generally pertains to commercial loans with observable inputs, and therefore, are classified within Level 2 of the fair value hierarchy. However, should these loans include adjustments for changes in loan characteristics based on unobservable inputs, the loans would then be classified within Level 3 of the fair value hierarchy. At March 31, 2022, the carrying amount of loans transferred to held for sale was $16.6 million.
Collateral Dependent Loans and Leases. Loans and leases for which repayment is substantially expected to be provided through the operation or sale of collateral are considered collateral dependent, and are valued based on the estimated fair value of the collateral, less estimated costs to sell at the reporting date, using customized discounting criteria. Accordingly, collateral dependent loans and leases are classified within Level 3 of the fair value hierarchy.
Other Real Estate Owned and Repossessed Assets. Other real estate owned (OREO) and repossessed assets are held at the lower of cost or fair value and are considered to be measured at fair value when recorded below cost. The fair value of OREO is calculated using independent appraisals or internal valuation methods, less estimated selling costs, and may consider available pricing guides, auction results, and price opinions. Certain repossessed assets may also require assumptions about factors that are not observable in an active market when determining fair value. Accordingly, OREO and repossessed assets are classified within Level 3 of the fair value hierarchy. At March 31, 2022, the total book value of OREO and repossessed assets was $3.1 million. In addition, the amortized cost of consumer loans secured by residential real estate property that are in process of foreclosure at March 31, 2022 was $14.5 million.
Estimated Fair Values of Financial Instruments and Mortgage Servicing Assets
Webster is required to disclose the estimated fair values of certain financial instruments and mortgage servicing assets. The following is a description of the valuation methodologies used to estimate fair value for those assets and liabilities.
Cash and Cash Equivalents.Given the short time frame to maturity, the carrying amount of cash and cash equivalents, which comprises cash and due from banks and interest-bearing deposits, approximates fair value. Cash and cash equivalents are classified within Level 1 of the fair value hierarchy.
Held-to-Maturity Investment Securities. When quoted market prices are not available, Webster employs an independent pricing service that utilizes matrix pricing to calculate fair value. These 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 the respective terms and conditions for debt instruments. Management maintains procedures to monitor the pricing service's results and has a process in place to challenge their valuations and 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. Except for collateral dependent loans and leases, the fair value of loans and leases held for investment is estimated using a discounted cash flow methodology, based on future prepayments and market interest rates inclusive of an illiquidity premium for comparable loans and leases. The associated cash flows are then adjusted for associated credit risks and other potential losses, as appropriate. Loans and leases are classified within Level 3 of the fair value hierarchy.
Mortgage Servicing Assets. Mortgage servicing assets are initially measured at fair value and subsequently measured using the amortization method. Webster assess mortgage servicing assets for impairment each quarter and establishes or adjusts the valuation allowance to the extent that amortized cost exceeds the estimated fair market value. 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. Accordingly, the primary risk inherent in valuing mortgage servicing assets is the impact of fluctuating interest rates on the related servicing revenue stream. Mortgage servicing assets are classified within Level 3 of the fair value hierarchy.
Deposit Liabilities. The fair value of deposit liabilities, which comprises demand deposits, interest-bearing checking, savings, health savings, and money market accounts, reflects 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 fixed-maturity certificates of deposit is estimated using rates that are currently offered for deposits with 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 approximates their carrying value. The fair value of securities sold under agreements to repurchase and other borrowings that mature after 90 days is estimated using a discounted cash flow methodology based on current market rates and 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 methodology in which discount rates are matched with the time period of the expected cash flows and adjusted for associated credit risks, as appropriate. FHLB advances and long-term debt are classified within Level 2 of the fair value hierarchy.
The following table summarizes the carrying amounts, estimated fair values, and classifications within the fair value hierarchy of selected financial instruments and mortgage servicing assets:
| | | | | | | | | | | | | | | | | | | | | | | |
| | At March 31, 2022 | | At December 31, 2021 |
| (In thousands) | Carrying
Amount | | Fair
Value | | Carrying
Amount | | Fair
Value |
| Assets: | | | | | | | |
| Level 1 | | | | | | | |
| Cash and cash equivalents | $ | 793,213 | | | $ | 793,213 | | | $ | 461,570 | | | $ | 461,570 | |
| Level 2 | | | | | | | |
| Held-to-maturity investment securities | 6,362,254 | | | 6,091,617 | | | 6,198,125 | | | 6,280,936 | |
| Level 3 | | | | | | | |
| Loans and leases, net | 42,967,114 | | | 43,217,955 | | | 21,970,542 | | | 21,702,732 | |
| Mortgage servicing assets | 9,735 | | | 26,631 | | | 9,237 | | | 12,527 | |
| Liabilities: | | | | | | | |
| Level 2 | | | | | | | |
| Deposit liabilities | $ | 51,535,186 | | | $ | 51,535,186 | | | $ | 28,049,259 | | | $ | 28,049,259 | |
| Time deposits | 2,821,097 | | | 2,785,621 | | | 1,797,770 | | | 1,794,829 | |
| Securities sold under agreements to repurchase and other borrowings | 518,733 | | | 483,544 | | | 674,896 | | | 676,581 | |
| FHLB advances | 10,903 | | | 10,653 | | | 10,997 | | | 11,490 | |
Long-term debt (1) | 1,078,274 | | | 1,069,991 | | | 562,931 | | | 515,912 | |
(1)Any unamortized premiums/discounts, debt issuance costs, or basis adjustments to long-term debt, as applicable, are excluded from the determination of fair value.
Note 16: Retirement Benefit Plans
Defined Benefit Pension and Other Postretirement Benefits
The following table summarizes the components of net periodic benefit (income) cost: | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, |
| 2022 | | 2021 |
| (In thousands) | Pension Plan | SERP | OPEB | | Pension Plan | SERP | OPEB |
| Service cost | $ | — | | $ | — | | $ | 6 | | | $ | — | | $ | — | | $ | — | |
| Interest cost | $ | 1,377 | | $ | 15 | | $ | 144 | | | $ | 1,166 | | $ | 7 | | $ | 4 | |
| Expected return on plan assets | (3,669) | | — | | — | | | (3,595) | | — | | — | |
| Amortization of actuarial loss (gain) | 422 | | 7 | | (18) | | | 1,019 | | 8 | | (20) | |
| Net periodic benefit (income) cost | $ | (1,870) | | $ | 22 | | $ | 132 | | | $ | (1,410) | | $ | 15 | | $ | (16) | |
| | | | | | | |
| | | | | | | |
The components of net periodic benefit (income) cost are included within other non-interest expense on the accompanying Condensed Consolidated Statements of Income. The weighted-average expected long-term rate of return on plan assets for the three months ended March 31, 2022 was 5.50%, as determined at the beginning of the year. In connection with the Sterling merger, Webster assumed the benefit obligations of Sterling's pension and other postretirement benefit plans, which included the Astoria Excess and Supplemental Benefit Plans, Astoria Directors' Retirement Plan, Greater New York Savings Bank Directors' Retirement Plan, Astoria Bank Retiree Health Care Plan, and the Sterling Other Postretirement Life Insurance and Other Plans, totaling $30.5 million as of January 31, 2022. The underfunded status of these plans is included in accrued expenses and other current liabilities on the Condensed Consolidated Balance Sheets.
Note 17: Segment Reporting
Webster's operations are organized into 3 reportable segments that represent its primary businesses: Commercial Banking, HSA Bank, and Consumer Banking. These segments reflect how executive management responsibilities are assigned, how discrete financial information is evaluated, the type of customer served, and how products and services are provided. Certain Treasury activities, along with the amounts required to reconcile profitability metrics to those reported in accordance with GAAP, are included in the Corporate and Reconciling category.
Effective January 1, 2022, Webster realigned its investment services operations from Commercial Banking to Consumer Banking to better serve its customers and deliver operational efficiencies. Under this realignment, $125.4 million of deposits and $4.3 billion of assets under administration (off-balance sheet) were reassigned from Commercial Banking to Consumer Banking. There was no goodwill reallocation nor goodwill impairment as a result of the reorganization. In addition, the non-interest expense allocation methodology was modified to exclude certain overhead and merger-related costs that are not directly related to segment performance. Prior period results of operations have been recasted accordingly to reflect the realignment.
As discussed in Note 2: Mergers and Acquisitions, Webster acquired Sterling on January 31, 2022, and the allocation of the purchase price is considered preliminary. Accordingly, of the total $1.9 billion in preliminary goodwill recorded, $1.7 billion and $0.2 million was preliminarily allocated to Commercial Banking and Consumer Banking, respectively. The $36.0 million of goodwill recorded in connection with the Bend acquisition was allocated entirely to HSA Bank.
Segment Reporting Methodology
Webster uses an internal profitability reporting system to generate information by reportable 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 results of any one reportable 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 reportable 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 through an internal matched maturity Funds Transfer Pricing (FTP) process. The goal of the FTP allocation is to encourage loan and deposit growth consistent with the Webster’s overall profitability objectives. The FTP process considers the specific interest rate risk and liquidity risk of financial instruments and other assets and liabilities in each line of business. Loans and leases are assigned an FTP rate for funds used and deposits are assigned an FTP rate for funds provided. The allocation considers the origination date and the earlier of the maturity date or the repricing date of a financial instrument to assign an FTP rate for loans and leases and deposits originated each day. The FTP process transfers the corporate interest rate risk exposure to the treasury function included within the Corporate and Reconciling category, where such exposures are centrally managed.
Webster allocates a majority of non-interest expense to each reportable segment using an activity and driver-based costing process. Costs, including shared services and back-office support areas, are analyzed, pooled by process, and assigned to the appropriate reportable segment. The combination of direct revenue, direct expenses, funds transfer pricing, and allocations of non-interest expense, produces PPNR, which is the basis the segments are reviewed by executive management.
Webster also allocates the provision for credit losses to each reportable segment based on management's estimate of the inherent loss content in each of the specific loan and lease portfolios. The ACL on loans and leases is included in total assets within the Corporate and Reconciling category. Merger-related expenses and strategic initiatives charges are also generally included in the Corporate and Reconciling category.
The following table presents balance sheet information, including the appropriate allocations, for Webster's reportable segments and the Corporate and Reconciling category: | | | | | | | | | | | | | | | | | | | | | |
| At March 31, 2022 |
| (In thousands) | Commercial Banking | HSA Bank | Consumer Banking | | | Corporate and Reconciling | Consolidated Total |
| Goodwill | $ | 1,865,887 | | $ | 57,779 | | $ | 590,105 | | | | $ | — | | $ | 2,513,771 | |
| Total assets | 39,028,843 | | 132,266 | | 9,587,880 | | | | 16,382,495 | | 65,131,484 | |
| | | | | | | |
| At December 31, 2021 |
| (In thousands) | Commercial Banking | HSA Bank | Consumer Banking | | | Corporate and Reconciling | Consolidated Total |
| Goodwill | $ | 131,000 | | $ | 21,813 | | $ | 385,560 | | | | $ | — | | $ | 538,373 | |
| Total assets | 15,398,159 | | 73,564 | | 7,663,921 | | | | 11,779,955 | | 34,915,599 | |
The following tables present results of operations, including the appropriate allocations, for Webster’s reportable segments and the Corporate and Reconciling category: | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
| | Three months ended March 31, 2022 |
| (In thousands) | Commercial Banking | HSA Bank | Consumer Banking | | Corporate and Reconciling | Consolidated Total |
| Net interest income | $ | 287,069 | | $ | 44,577 | | $ | 136,580 | | | $ | (73,978) | | $ | 394,248 | |
| Non-interest income | 38,743 | | 26,958 | | 27,892 | | | 10,442 | | 104,035 | |
| Non-interest expense | 89,240 | | 36,409 | | 95,747 | | | 138,389 | | 359,785 | |
| Pre-tax, pre-provision net revenue | 236,572 | | 35,126 | | 68,725 | | | (201,925) | | 138,498 | |
| Provision (benefit) for credit losses | 181,931 | | — | | 7,136 | | | (222) | | 188,845 | |
| Income (loss) before income taxes | 54,641 | | 35,126 | | 61,589 | | | (201,703) | | (50,347) | |
| Income tax expense (benefit) | 10,055 | | 9,414 | | 15,964 | | | (69,033) | | (33,600) | |
| Net income (loss) | $ | 44,586 | | $ | 25,712 | | $ | 45,625 | | | $ | (132,670) | | $ | (16,747) | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | |
| | Three months ended March 31, 2021 |
| (In thousands) | Commercial Banking | HSA Bank | Consumer Banking | | Corporate and Reconciling | Consolidated Total |
| Net interest income | $ | 141,486 | | $ | 42,109 | | $ | 89,365 | | | $ | (49,196) | | $ | 223,764 | |
| Non-interest income | 18,376 | | 27,005 | | 22,872 | | | 8,504 | | 76,757 | |
| Non-interest expense | 46,284 | | 36,005 | | 75,311 | | | 30,382 | | 187,982 | |
| Pre-tax, pre-provision net revenue | 113,578 | | 33,109 | | 36,926 | | | (71,074) | | 112,539 | |
| (Benefit) provision for credit losses | (19,373) | | — | | (6,386) | | | 9 | | (25,750) | |
| Income (loss) before income taxes | 132,951 | | 33,109 | | 43,312 | | | (71,083) | | 138,289 | |
| Income tax expense (benefit) | 34,035 | | 8,840 | | 10,308 | | | (22,972) | | 30,211 | |
| Net income (loss) | $ | 98,916 | | $ | 24,269 | | $ | 33,004 | | | $ | (48,111) | | $ | 108,078 | |
Note 18: Revenue from Contracts with Customers
The following table summarizes revenues recognized in accordance with ASC Topic 606, Revenue from Contracts with Customers. These disaggregated amounts, together with sources of other non-interest income that are subject to other GAAP topics, have been reconciled to non-interest income by reportable segment as presented within Note 17: Segment Reporting.
| | | | | | | | | | | | | | | | | |
| Three months ended March 31, 2022 |
| (In thousands) | Commercial Banking | HSA Bank | Consumer Banking | Corporate and
Reconciling | Consolidated
Total |
| Non-interest Income: | | | | | |
| Deposit service fees | $ | 6,685 | | $ | 25,134 | | $ | 15,954 | | $ | 54 | | $ | 47,827 | |
Loan and lease related fees (1) | 4,498 | | — | | — | | — | | 4,498 | |
| Wealth and investment services | 3,134 | | — | | 7,471 | | (8) | | 10,597 | |
| Other income | — | | 1,824 | | 385 | | — | | 2,209 | |
| Revenue from contracts with customers | 14,317 | | 26,958 | | 23,810 | | 46 | | 65,131 | |
| Other sources of non-interest income | 24,426 | | — | | 4,082 | | 10,396 | | 38,904 | |
| Total non-interest income | $ | 38,743 | | $ | 26,958 | | $ | 27,892 | | $ | 10,442 | | $ | 104,035 | |
| | | | | | | | | | | | | | | | | |
| Three months ended March 31, 2021 |
| (In thousands) | Commercial Banking | HSA Bank | Consumer Banking | Corporate and
Reconciling | Consolidated
Total |
| Non-interest Income: | | | | | |
| Deposit service fees | $ | 4,090 | | $ | 25,018 | | $ | 11,314 | | $ | 47 | | $ | 40,469 | |
| Wealth and investment services | 2,919 | | — | | 6,493 | | (9) | | 9,403 | |
| Other income | — | | 1,987 | | 548 | | — | | 2,535 | |
| Revenue from contracts with customers | 7,009 | | 27,005 | | 18,355 | | 38 | | 52,407 | |
| Other sources of non-interest income | 11,367 | | — | | 4,517 | | 8,466 | | 24,350 | |
| Total non-interest income | $ | 18,376 | | $ | 27,005 | | $ | 22,872 | | $ | 8,504 | | $ | 76,757 | |
(1)A portion of loan and lease related fees comprises income generated from factored receivables and payroll financing activities that is within the scope of ASC Topic 606. These revenue streams are new to Webster as of the first quarter of 2022 due to the businesses acquired in connection with the Sterling merger.
Contracts with customers did not generate significant contract assets and liabilities at March 31, 2022 and December 31, 2021.
Revenue Streams
Deposit service fees consist of fees earned from customer deposit accounts, such as account maintenance fees, insufficient funds, and other transactional service charges. Performance obligations for account maintenance services are satisfied on a monthly basis at a fixed transaction price, whereas performance obligations for other deposit service charges resulting from various customer-initiated transactions are satisfied at a point-in-time when the service is rendered. Payment for deposit service fees is generally received immediately or in the following month through a direct charge to the customers' accounts. On occasion, Webster may waive certain fees for its customers. Fee waivers are recognized as a reduction to revenue in the period the waiver is granted to the customer. Due to the insignificance of the amounts waived, Webster does not reduce its transaction price to reflect any variable consideration.
The deposit service fees revenue stream also includes interchange fees earned from debit and credit card transactions. The transaction price for interchange services is based on the transaction value and the interchange rate set by the card network. Performance obligations for interchange fees are satisfied at a point-in-time when the cardholders' transaction is authorized and settled. Payment for interchange fees is generally received immediately or in the following month.
Factored receivables non-interest income consists of fees earned from accounts receivable management services. Webster factors accounts receivable, with and without recourse, for customers whereby the Company purchases their accounts receivable at a discount and assumes the risk, as applicable, and ownership of the assets through direct cash receipt from the end consumer. Factoring services are performed in exchange for a non-refundable fee at a transaction price based on a percentage of the gross invoice amount of each receivable purchased, subject to a minimum required amount. The performance obligation for factoring services is generally satisfied at a point-in-time when the receivable is assigned to Webster. However, should the commission earned not meet or exceed the minimum required amount, the difference between that and the actual amount is recognized over the contract term using a time-based measurement of progress. Other fees associated with factoring receivables may include wire transfer and technology fees, field examination fees, and Uniform Commercial Code fees, where the performance obligations are satisfied at a point-in-time when the services are rendered. Payment from the customer for factoring services is generally received immediately or within the following month.
Payroll finance non-interest income consists of fees earned from performing payroll financing and business process outsourcing services, including full back-office technology and tax accounting services, along with payroll preparation, making payroll tax payments, invoice billings, and collections for independently-owned temporary staffing companies substantiallynationwide. Performance obligations for payroll finance and business processing activities are either satisfied upon completion of the support services or as payroll remittances are made on behalf of customers to fund their employee payroll, which generally occurs on a weekly basis. The agreed-upon transaction price is based on a fixed-percentage per the terms of the contract, which could be subject to a hold-back reserve to provide for any balances that are assessed to be at risk of collection. When Webster collects on amounts due from end consumers on behalf of its customers and at the time of financing payroll, the Company retains the agreed-upon transaction price payable for the performance of its services and remits an amount to the customer net of any advances and payroll tax withholdings, as applicable.
Wealth and investment services consist of fees earned from asset management, trust administration, and investment advisory services, and through facilitating securities transactions. Performance obligations for asset management and trust administration services are satisfied on a monthly or quarterly basis at a transaction price based on a percentage of the period-end market value of the assets under administration. Payment for asset management and trust administration services is generally received a few days after period-end through a direct charge to the customers' accounts. Performance obligations for investment advisory services are satisfied over the period in which the services are provided through a time-based measurement of progress, and the agreed-upon transaction price with the customer varies depending on the nature of the services performed. Performance obligations for facilitating securities transactions are satisfied at a point-in-time when the securities are sold at a transaction price that is based on a percentage of the contract value. Payment for both investment advisory services and facilitating securities transactions may be received in advance of the service, but generally is received immediately or in the following period, in arrears.
Note 19: Commitments and Contingencies
Credit-Related Financial Instruments
In the normal course of business, Webster offers financial instruments with off-balance sheet risk to meet the financing needs of its customers. These transactions include commitments to extend credit, standby letters of credit, and commercial letters of credit, which involve, to varying degrees, elements of credit risk.
The following table summarizes the outstanding amounts of credit-related financial instruments with off-balance sheet risk: | | | | | | | | | | | |
| (In thousands) | At March 31,
2022 | | At December 31, 2021 |
| Commitments to extend credit | $ | 10,333,453 | | | $ | 6,870,095 | |
| Standby letters of credit | 379,495 | | | 224,061 | |
| Commercial letters of credit | 68,544 | | | 58,175 | |
| Total credit-related financial instruments with off-balance sheet risk | $ | 10,781,492 | | | $ | 7,152,331 | |
Webster enters into contractual commitments to extend credit to its customers, such as revolving credit arrangements, term loan commitments, and short-term borrowing agreements, generally with fixed expiration dates or other termination clauses and that require payment of a fee. Substantially all of the assetsCompany's commitments to extend credit are contingent upon its customers maintaining specific credit standards at the time of loan funding, and liabilitiesare often secured by real estate collateral. Since the majority of the Company's commitments typically expire without being funded, the total contractual amount does not necessarily represent Webster's future payment requirements.
Standby letters of credit are written conditional commitments issued by the Company to guarantee its customers' performance to a banking institutionthird party. In the event the customer does not perform in accordance with the terms of its agreement with a third-party, Webster would be required to fund the commitment. The contractual amount of each standby letter of credit represents the maximum amount of potential future payments the Company could be required to make. Historically, the majority of Webster's standby letters of credit expire without being funded. However, if the commitment were funded, the Company has recourse against the customer. Webster's standby letter of credit agreements are monetary in nature.often secured by cash or other collateral.
Commercial letters of credit are issued to finance either domestic or foreign customer trade arrangements. As a result, interestgeneral rule, drafts are committed to be drawn when the goods underlying the transaction are in transit. Similar to standby letters of credit, Webster's commercial letter of credit agreements are often secured by the underlying goods subject to trade.
An ACL is recorded within accrued expenses and other liabilities on the accompanying Condensed Consolidated Balance Sheets to provide for the unused portion of commitments to lend that are not unconditionally cancellable by Webster. Under the CECL methodology, the calculation of the allowance generally includes the probability of funding to occur and a corresponding estimate of expected lifetime credit losses on amounts assumed to be funded. Loss calculation factors are consistent with those for funded loans using PD and LGD applied to the underlying borrower's risk and facility grades, a draw down factor applied to utilization rates, relevant forecast information, and management's qualitative factors.
The following table summarizes the activity in the ACL on unfunded loan commitments:
| | | | | | | | | | | | | | | |
| | | Three months ended March 31, |
| (In thousands) | | | | | 2022 | | 2021 |
| Balance, beginning of period | | | | | $ | 13,104 | | | $ | 12,755 | |
| ACL assumed from Sterling | | | | | 6,749 | | | — | |
| (Benefit) provision for credit losses | | | | | (213) | | | 45 | |
| Balance, end of period | | | | | $ | 19,640 | | | $ | 12,800 | |
Litigation
Webster is subject to certain legal proceedings and unasserted claims and assessments in the ordinary course of business. Legal contingencies are evaluated based on information currently available, including advice of counsel and assessment of available insurance coverage. The Company 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. Once established, each accrual is adjusted to reflect any subsequent developments. Legal contingencies are subject to inherent uncertainties, and unfavorable rulings may occur that could cause Webster to either adjust its litigation accrual or incur actual losses that exceed the current estimate, which ultimately could 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 directionmaterial adverse effect, either individually or in the same magnitude asaggregate, on its business, financial condition, or operating results. Webster will consider settlement of cases when it is in the best interests of the Company and its stakeholders. Webster intends to defend itself in all claims asserted against it, and management currently believes that the outcome of these contingencies will not be material, either individually or in the aggregate, to Webster or its consolidated financial position.
Note 20: Subsequent Events
On April 27, 2022, the Board of Directors increased the Company's authority to repurchase shares of its common stock by $600.0 million in shares under its existing common stock repurchase program, which permits shares to be repurchased in open market or privately negotiated transactions, through block trades, and pursuant to any adopted predetermined trading plan, subject to the availability and trading price of goodsstock, general market conditions, alternative uses for capital, regulatory considerations, and services.Webster's financial performance. As of the date of this Quarterly Report on Form 10-Q, the remaining repurchase authority under the Company's common stock repurchase program is $601.2 million.
The Company has evaluated subsequent events from the date of the Condensed Consolidated Financial Statements and accompanying Notes thereto, through the date of issuance, and determined that other than the above, there were no other significant events identified requiring recognition or disclosure. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The required information is set forth above,Information regarding quantitative and qualitative disclosures about market risk can be found in Part I within Note 14: Derivative Financial Instruments in the Notes to the Consolidated Financial Statements contained in Item 1. Financial Statements, and under the section captioned "Asset/Liability Management and Market Risk" contained 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 isare incorporated herein by reference.
ITEM 4. CONTROLS AND PROCEDURES
AsEvaluation of September 30, 2017, the Company carried outDisclosure Controls and Procedures
Management has performed an evaluation, under the supervision and with the participation of the Company's management, including its Chief Executive Officer and its Chief Financial Officer, of the effectiveness of the Company's disclosure controls and procedures, (asas defined in Rules 13a-15(e) orand 15d-15(e) of the Securities Exchange Act of 1934).1934. Based on thisthat evaluation, managementthe Chief Executive Officer and Chief Financial Officer concluded that ourthe Company's disclosure controls and procedures designed to ensure that (i) the information required to be disclosed in the reports the Company files under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms, and (ii) such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure, were effective for the quarter ended March 31, 2022.
Changes in Internal Control over Financial Reporting
On January 31, 2022, Webster completed its previously announced merger with Sterling. During the first quarter of 2022, management commenced an evaluation of the design and operating effectiveness of internal controls over financial reporting related to the Sterling acquired business. The evaluation of changes to processes, technology systems, and other components of internal control over financial reporting were not effective as of September 30, 2017 as a result of an identified material weakness, as described in the Company's 2016 Form 10-K, resulting from the aggregation of control deficiencies in management’s review of the allowance for loan loss model including certain process level controls preventing unapproved changes in modeling assumptions as well as the precision of management’s review over the valuation of allowance for loan and lease losses balance. This material weakness did not result in any misstatement of the Company's consolidated financial statements for any period presented. The Company's remediation efforts related to this material weakness arethe Sterling acquired business is ongoing.
DuringExcept for the quarter ended September 30, 2017, the company implemented a new accounting system which streamlines trade input and valuation activities related to its investment securities and derivative portfolios. The change in how transactions are processed has further enhanced process controls and procedures. In addition, as further described below, the Company continued to enhance its control environmentchanges made in connection with its allowance for loan and lease loss process. Excluding these changes,Sterling merger, there were no other changes in the Company’sto Webster's internal control over financial reporting that occurred during the period covered by this reportquarter ended March 31, 2022, that have materially affected, or arewould be reasonably likely to materially affect, the Company’sWebster's internal control over financial reporting.
Remediation Plan for Material Weakness in Internal Control Over Financial Reporting
In response to the material weakness identified above, the Company has implemented changes to its internal control over financial reporting, including changes to personnel responsible for the allowance for loan loss process, strengthening the design of the ALLL internal controls and enhancing communication protocols. The Company has engaged the use of a third party expert to test the operating effectiveness of the ALLL internal control environment. As of the date of this filing, the Company has not concluded that the material weakness has been fully remediated.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, Webster and its subsidiaries are subject to certainInformation regarding legal proceedings can be found within Note 19: Commitments and claimsContingencies in the ordinary course of business. Management presently believes that the ultimate outcome of these proceedings, individually andNotes to Consolidated Financial Statements contained in the aggregate, will not be material to Webster or its consolidated financial position. Webster establishes an accrual for specific legal matters when it determines that the likelihood of an unfavorable outcomePart I - Item 1. Financial Statements, which 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.incorporated herein by reference.
ITEM 1A. RISK FACTORS
During the nine months ended September 30, 2017, there wereThere have been no material changes to the risk factors previously disclosed in Webster's Annual Report on Form 10-K for the year ended December 31, 2016.2021.
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 offor 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 September 30, 2017:March 31, 2022:
| | | | | | | | | | | | | | | | | |
| 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) | | | |
| January | 3,946 | $ | 62.24 | — | $ | 123,443,785 | | | |
| February | 156,716 | 60.44 | — | 123,443,785 | | | |
| March | 2,331,874 | 56.37 | 2,173,936 | 1,238,298 | | | |
| Total | 2,492,536 | 56.64 | 2,173,936 | 1,238,298 | | | |
|
| | | | | | | | | | | | | | | | |
| 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 (1) | | Total Number of Warrants Purchased (2) | Average Price Paid Per Warrant |
| July 1-31, 2017 | 128,464 |
| $ | 52.22 |
| 128,238 |
| $ | 8,792,599 |
| | — |
| $ | — |
|
| August 1-31, 2017 | 93,762 |
| 52.14 |
| 93,762 |
| 3,903,923 |
| | — |
| — |
|
| September 1-30, 2017 | — |
| — |
| — |
| 3,903,923 |
| | — |
| — |
|
| Total | 222,226 |
| 52.18 |
| 222,000 |
| 3,903,923 |
| | — |
| — |
|
| |
(1) | The maximum dollar amount available for repurchase under the plans or programs, at September 30, 2017, in the table above, reflects the amount remaining under the common stock repurchase program authorized by the Company's Board(1)During the three months ended March 31, 2022, 318,600 shares out of Directors on December 6, 2012. In addition, on October 24, 2017, the Company's Board of Directors approved a new common stock repurchase program which authorizes management to repurchase, in open market or privately negotiated transactions, subject to market conditions and other factors, up to a maximum of $100 million of common stock. Both programs will remain in effect until fully utilized or until modified, superseded, or terminated. |
Of the total number of shares purchased, during the three months ended September 30, 2017, 226 shares were acquired at market prices outside of the Company's repurchase program and were related to stock compensation plan activity, at market prices.
| |
(2) | On June 3, 2011, the Company announced that, with approval from its Board of Directors, it had repurchased a significant number of the warrants issued as part of Webster's participation in the U.S. Treasury's Capital Purchase Program in a public auction conducted on behalf of the U.S. Treasury. The Board approved plan provides for additional repurchases from time-to-time, as permitted by securities laws and other legal requirements. There remain 9,777 outstanding warrants to purchase a share (1:1) of the Company's common stock, which carry an exercise price of $18.28 per share and expire on November 21, 2018. |
Restrictions on Dividendsactivity.
Holders of the Company's(2)Webster maintains a common stock are entitled to receive such dividends asrepurchase program, which was announced on October 29, 2019 and approved by the Board of Directors, may declare outthat authorized management to purchase up to $200.0 million shares of funds legally available for such payments. Also, as a bank holding company, the ability to declare and pay dividends is dependent on certain federal regulatory considerations. See Note 10: Regulatory Matters in the Notes to Condensed Consolidated Financial Statements contained elsewhere in this report for additional information.
The Company has 5,060,000 outstanding Depository Shares, each representing 1/1000th interest in a share of 6.40% Series E Non-Cumulative Perpetual Preferred Stock, par value $.01 per share, with a liquidation preference of $25,000 per share (or $25 per depository share). The Series E Preferred Stock is redeemable at Webster's option, in whole or in part, on December 15, 2017, or any dividend payment date thereafter, or in whole but not in part, upon a "regulatory capital treatment event" as defined in the Prospectus Supplement. The terms of the Series E Preferred Stock prohibit the Company from declaring or paying any cash dividends on its common stock unless Webster has declaredas of March 31, 2022, in either open market or privately negotiated transactions, through block trades, and paid full dividends onpursuant to any adopted predetermined trading plan, subject to the Series E Preferred Stockavailability and trading price of stock, general market conditions, alternative uses for capital, regulatory considerations, and Webster's financial performance. On April 27, 2022, the most recently completed dividend period.Board of Directors increased Webster's authority to repurchase shares of its common stock by $600.0 million in shares under its the repurchase program. This program will remain in effect until fully utilized or until modified, superseded, or terminated.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS
TheA list of exhibits to this Quarterly Report on Form 10-Q areis set forth on the below.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Exhibit Number | | Exhibit Description | | Exhibit Included | | Incorporated by Reference |
| | | Form | | Exhibit | | Filing Date |
| 2 | | | | | | 8-K | | 2.1 | | 4/23/2021 |
| 3 | | Certificate of Incorporation and Bylaws. | | | | | | | | |
| 3.1 | | | | | | 10-Q | | 3.1 | | 8/9/2016 |
| 3.2 | | | | | | 8-K | | 3.2 | | 2/1/2022 |
| 3.3 | | | | | | 8-K | | 3.1 | | 6/11/2008 |
| 3.4 | | | | | | 8-K | | 3.1 | | 11/24/2008 |
| 3.5 | | | | | | 8-K | | 3.1 | | 7/31/2009 |
| 3.6 | | | | | | 8-K | | 3.2 | | 7/31/2009 |
| 3.7 | | | | | | 8-A12B | | 3.3 | | 12/4/2012 |
| 3.8 | | | | | | 8-A12B | | 3.3 | | 12/12/2017 |
| 3.9 | | | | | | 8-A12B | | 3.4 | | 2/1/2022 |
| 3.10 | | | | | | 8-K | | 3.1 | | 3/17/2020 |
| 3.11 | | | | | | 8-K | | 3.5 | | 2/1/2022 |
| 31.1 | | | | X | | | | | | |
| 31.2 | | | | X | | | | | | |
| 32.1 | | | | X (1) | | | | | | |
| 32.2 | | | | X (1) | | | | | | |
| 101 | | The following financial information from the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2022 formatted in Inline Extensible Business Reporting Language (iXBRL) includes: (i) Cover Page, (ii) Condensed Consolidated Balance Sheets, (iii) Condensed Consolidated Statements Of Income, (iv) Condensed Consolidated Statements Of Comprehensive Income, (v) Condensed Consolidated Statements Of Shareholders' Equity, (vi) Condensed Consolidated Statements Of Cash Flows, and (vii) Notes to Condensed Consolidated Financial Statements, tagged in summary and in detail. | | X | | | | | | |
| 104 | | Cover Page Interactive Data File (formatted as iXBRL and contained in Exhibit 101) | | X | | | | | | |
(1)Exhibit Index immediately preceding such exhibitsis furnished herewith and are incorporated herein by reference.
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: November 6, 2017 | | | By: | /s/ James C. Smith |
| | | | James C. Smith |
| | | | Chairman and Chief Executive Officer |
| | | | (Principal Executive Officer) |
| | | | |
Date: November 6, 2017 | | | By: | /s/ Glenn I. MacInnes |
| | | | Glenn I. MacInnes |
| | | | Executive Vice President and Chief Financial Officer |
| | | | (Principal Financial Officer) |
| | | | |
Date: November 6, 2017 | | | By: | /s/ Albert J. Wang |
| | | | Albert J. Wang |
| | | | Senior Vice President and Chief Accounting Officer |
| | | | (Principal Accounting Officer) |
| | | | |
WEBSTER FINANCIAL CORPORATION
EXHIBIT INDEX
|
| | | | | | | | | | |
| Exhibit Number | | Exhibit Description | | Filed Herewith | | 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 |
| 3.7 | | | | | | 8-K | | 3.1 | | 6/12/2014 |
| 10.1 * | | | | | | 8-K | | 10.1 | | 9/19/2017 |
| 31.1 | | | | X | | | | | | |
| 31.2 | | | | X | | | | | | |
| 32.1 + | | | | X | | | | | | |
| 32.2 + | | | | X | | | | | | |
| 101.INS | | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embeded within the Inline XBRL document | | | | | | | | |
| 101.SCH | | XBRL Taxonomy Extension Schema Document | | X | | | | | | |
| 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document | | X | | | | | | |
| 101.DEF | | XBRL Taxonomy Extension Definitions Linkbase Document | | X | | | | | | |
| 101.LAB | | XBRL Taxonomy Extension Label Linkbase Document | | X | | | | | | |
| 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document | | X | | | | | | |
* This exhibit is a management contract, or compensatory plan, or arrangement in which directors or executive officers are eligible to participate.
+ This exhibit shall not be deemed "filed"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.
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: May 13, 2022 | | | By: | /s/ John R. Ciulla |
| | | | John R. Ciulla |
| | | | President, Chief Executive Officer, and Director |
| | | | (Principal Executive Officer) |
| | | | |
| Date: May 13, 2022 | | | By: | /s/ Glenn I. MacInnes |
| | | | Glenn I. MacInnes |
| | | | Executive Vice President and Chief Financial Officer |
| | | | (Principal Financial Officer) |
| | | | |
| Date: May 13, 2022 | | | By: | /s/ Albert J. Wang |
| | | | Albert J. Wang |
| | | | Executive Vice President and Chief Accounting Officer |
| | | | (Principal Accounting Officer) |
| | | | |