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. It also offers equipment financing, commercial real estate lending, asset-based lending, and treasury and payment solutions, primarily in the eastern U.S. HSA Bank is a leading provider of HSAs, and also 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 accompanying consolidated financial statements have been prepared in accordance with GAAP, and include the accounts of Webster Financial Corporation and all other entities in which the Company has a controlling financial interest. Intercompany transactions and balances have been eliminated in consolidation. Assets that the Company holds or manages in a fiduciary or agency capacity for customers, referred to as assets under administration or assets under management, are not included on the accompanying Consolidated Balance Sheets.
Certain prior period amounts have been reclassified to conform to the current year's presentation. These reclassifications did not have a significant impact on the Company's consolidated financial statements.
Principles of Consolidation
The purpose of consolidated financial statements is to present the results of operations and the financial position of the Company and its subsidiaries as if the consolidated group were a single economic entity. In accordance with the applicable accounting guidance for consolidations, the consolidated financial statements include any voting interest entity (VOE) in which the Company has a controlling financial interest and any variable interest entity (VIE) for which the Company is deemed to be the primary beneficiary. The Company generally consolidates its VOEs if the Company, directly or indirectly, owns more than 50% of the outstanding voting shares of the entity and the non-controlling shareholders do not hold any substantive participating or controlling rights. The Company evaluates VIEs to understand the purpose and design of the entity, and its involvement in the ongoing activities of the VIE, and will consolidate the VIE if it has (i) the power to direct the activities of the VIE that most significantly affect the VIE's economic performance, and (ii) an obligation to absorb losses of the VIE, or the right to receive benefits from the VIE, that could potentially be significant to the VIE. The Company accounts for unconsolidated partnerships and certain other investments using the equity method of accounting if it has the ability to significantly influence the operating and financial policies of the investee. This is generally presumed to exist when the Company owns between 20% and 50% of a corporation, or when it has greater than 3% to 5% interest in a limited partnership or similarly structured entity. Additional information regarding consolidated and unconsolidated VIEs can be found within Note 2: Variable Interest Entities.
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.
Cash and Cash Equivalents
Cash and cash equivalents is comprised of cash and due from banks and interest-bearing deposits. Cash equivalents have a maturity of three months or less.
Cash and due from banks includes cash on hand, certain deposits at the FRB of Boston, and cash due from banks. Restricted cash related to Federal Reserve System requirements and cash collateral received on derivative positions are included in cash and due from banks.
Interest-bearing deposits includes deposits at the FRB of Boston in excess of reserve requirements, if any, and federal funds sold to other financial institutions. Federal funds sold essentially represents an uncollateralized loan. Therefore, the Company regularly evaluates the credit risk associated with the other financial institutions to ensure that Webster does not become exposed to any significant credit risk on these cash equivalents.
Investments in Debt Securities
Debt security transactions are recognized on the trade date, which is the date the order to buy or sell the security is executed. Investments in debt securities are classified as available-for-sale or held-to-maturity at the time of purchase. Any classification change subsequent to the trade date is reviewed for compliance with corporate objectives and accounting policies.
Debt securities classified as available-for-sale are recorded at fair value with unrealized gains and losses recorded as a component of other comprehensive income (OCI) or other comprehensive loss (OCL). If a debt security is transferred from available-for-sale to held-to-maturity, it is recorded at fair value at the time of transfer and any respective gain or loss would be recorded as a separate component of OCI or OCL and amortized as an adjustment to interest income over the remaining life of the security. Debt securities classified as available-for-sale are reviewed for credit losses when the fair value of a security falls below the amortized cost basis and the decline is evaluated to determine if any portion is attributable to credit loss. The decline in fair value attributable to credit loss is recorded directly to earnings, with a corresponding allowance for credit loss, limited to the amount that fair value is less than the amortized cost. If the credit quality subsequently improves, previously recorded allowance amounts may be reversed. An available-for-sale debt security will be placed on non-accrual status if collection of principal and interest in accordance with contractual terms is doubtful. When the Company intends to sell an impaired available-for-sale debt security, or if it is more likely than not that the Company will be required to sell the security prior to recovery of the amortized cost basis, the entire fair value adjustment will immediately be recognized in earnings through non-interest income. The gain or loss on sale is calculated using the carrying value plus any related accumulated OCI or OCL balance associated with the securities sold.
Debt securities classified as held-to-maturity are those in which Webster has the ability and intent to hold to maturity. Debt securities classified as held-to-maturity are recorded at amortized cost net of unamortized premiums and discounts. Discount accretion income and premium amortization expense are recognized as interest income using the effective interest method, with consideration given to prepayment assumptions on mortgage backed securities. Premiums are amortized to the earliest call date for debt securities purchased at a premium, with explicit, non-contingent call features and are callable at a fixed price and preset date. Debt securities classified as held-to-maturity are reviewed for credit losses under the CECL model with an allowance recorded on the balance sheet for expected lifetime credit losses. The ACL is calculated on a pooled basis using statistical models which include forecasted scenarios of future economic conditions. Forecasts revert to long-run loss rates implicitly through the economic scenario, generally over three years. If the risk for a particular security no longer matches the collective assessment pool, it is removed and individually assessed for credit deterioration. The non-accrual policy for held-to-maturity debt securities is the same as for available-for-sale debt securities.
A zero credit loss assumption is maintained for U.S. Treasuries and agency-backed securities in both the available-for-sale and held-to-maturity portfolios, as applicable. This assumption is subject to quarterly review to ensure it remains appropriate. Additional information regarding investments in debt securities can be found within Note 4: Investment Securities.
Investments in Equity Securities
The Company’s accounting treatment for unconsolidated equity investments differs for those with and without readily determinable fair values. Equity investments with readily determinable fair values are recorded at fair value with changes in fair value recorded in non-interest income. For equity investments without readily determinable fair values, the Company elected the measurement alternative, and therefore carries these investments at cost, less impairment, if any, plus or minus changes in observable prices. Certain equity investments that do not have a readily available fair value may qualify for net asset value (NAV) measurement based on specific requirements. The Company's alternative investments accounted for at NAV consist of investments in non-public entities that generally cannot be redeemed since the Company’s investments are distributed as the underlying equity is liquidated. On a quarterly basis, the Company reviews its equity investments without readily determinable fair values for impairment. If the equity investment is considered impaired, an impairment loss equal to the amount by which the carrying value exceeds its fair value is recorded through a charge to earnings. The impairment loss may be reversed in a subsequent period if there are observable transactions for the identical or similar investment of the same issuer at a higher amount than the carrying amount that was established when the impairment was recognized. Impairments, as well as upward or downward adjustments resulting from observable price changes in orderly transactions for identical or similar investments, are included in non-interest income.
Equity investments in entities that finance affordable housing and other community development projects provide a return primarily through the realization of tax benefits. The Company applies the proportional amortization method to account for its investments in qualified affordable housing projects.
Investment in Federal Home Loan Bank and Federal Reserve Bank Stock
Webster Bank is a member of the FHLB and the Federal Reserve System, and is required to maintain an investment in capital stock of both the FHLB and FRB. Based on redemption provisions, FHLB and FRB stock has no quoted market value and is carried at cost. Membership stock is reviewed for impairment if economic circumstances would warrant review.
Loans Held for Sale
Loans that are classified as held for sale at the time of origination are accounted for under the fair value option. Loans not originated for sale but subsequently transferred to held for sale are valued at the lower of cost or fair value and are valued on an individual asset basis. Any cost amount in excess of fair value is recorded as a valuation allowance and recognized as a reduction of other non-interest income. Gains or losses on the sale of loans held for sale are recorded either as part of mortgage banking activities or other income. Cash flows from the sale of loans that were originated sale are presented as operating cash flows. Cash flows from the sale of loans originated for investment then subsequently transferred to held for sale are presented as investing cash flows. Additional information regarding mortgage banking activities and loans sold can be found within Note 6: Transfers and Servicing of Financial Assets.
Transfers and Servicing of Financial Assets
Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is generally considered to have been surrendered when: (i) the transferred assets are legally isolated from the Company or its consolidated affiliates, even in bankruptcy or other receivership, (ii) the transferee has the right to pledge or exchange the assets with no conditions that constrain the transferee and provide more than a trivial benefit to the Company, and (iii) the Company does not maintain the obligation or unilateral ability to reclaim or repurchase the assets.
The Company sells financial assets in the normal course of business, the majority of which are residential mortgage loan sales, primarily to government-sponsored enterprises through established programs, commercial loan sales through participation agreements, and other individual or portfolio loan and securities sales. In accordance with accounting guidance for asset transfers, the Company considers any ongoing involvement with transferred assets in determining whether the assets can be derecognized from the balance sheet. With the exception of servicing, the Company’s continuing involvement with financial assets sold is minimal, and generally is limited to market customary representation and warranty clauses covering certain characteristics of the mortgage loans sold and the Company's origination process. The gain or loss on sale depends on the previous carrying amount of the transferred financial assets, the consideration received, and any other assets obtained or liabilities incurred in exchange for the transferred assets.
When the Company sells financial assets, it may retain servicing rights and/or other interests in the financial assets. Servicing assets and any other interests held by the Company are recorded at fair value upon transfer, and subsequently carried at the lower of cost or fair value. Additional information regarding transfers of financial assets and mortgage servicing assets can be found within Note 6: Transfers and Servicing of Financial Assets.
Loans and Leases
Loans and leases are stated at the principal amount outstanding, net of amounts charged off, unearned income, unamortized premiums and discounts, and deferred loan and lease fees or costs, which are recognized as yield adjustments using the interest method. These yield adjustments are amortized over the contractual life of the related loans and leases and are adjusted for prepayments, as applicable. Interest on loans and leases is credited to interest income as earned based on the interest rate applied to principal amounts outstanding. Cash flows from loans and leases are presented as investing cash flows.
Non-accrual Loans
Loans and leases are placed on non-accrual status when collection of principal and interest in accordance with contractual terms is doubtful, which generally occurs when principal or interest payments become 90 days delinquent unless the loan or lease is well secured and in the process of collection, or sooner if circumstances indicate that the borrower may be unable to meet contractual principal or interest payments. Residential real estate loans, excluding loans fully insured against loss and in the process of collection, and consumer loans, are placed on non-accrual status at 90 days past due, or at the date when the Company is notified that the borrower is discharged in bankruptcy. Commercial non-mortgage, asset-based, commercial real estate, and equipment finance loans and leases are subject to a detailed review when they reach 90 days past due to determine accrual status, or when payment is uncertain and a specific consideration is made to put a loan or lease on non-accrual status.
When loans and leases are placed on non-accrual status, the accrual of interest is discontinued, and any unpaid accrued interest is reversed and charged against interest income. If ultimate repayment of a non-accrual loan or lease is expected, any payments received are applied in accordance with contractual terms. If ultimate repayment is not expected on commercial non-mortgage, asset-based, commercial real estate, and equipment finance loans and leases, any payment received on a non-accrual loan or lease is applied to principal until the unpaid balance has been fully recovered. Any excess is then credited to interest income when received. If the Company determines, through a current valuation analysis, that principal can be recovered on residential real estate and consumer loans, interest payments are taken into income as received on a cash basis.
Loans are generally removed from non-accrual status when they become current as to principal and interest or demonstrate a period of performance under contractual terms, and in the opinion of management, are fully collectible as to principal and interest. Pursuant to regulatory guidance, a loan discharged under Chapter 7 of the U.S. bankruptcy code is removed from non-accrual status when the bank expects full repayment of the remaining pre-discharged contractual principal and interest, and had at least six consecutive months of current payments. Additional information regarding non-accrual loans and leases can be found within Note 5: Loans and Leases.
Allowance for Credit Losses on Loans and Leases
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. The ACL is established through a provision charged to expense. Executive management reviews and advises on the adequacy of the allowance, which is maintained at a level that management deems sufficient to be sufficient to cover expected credit losses within the loan and lease portfolios. The Company has elected to present accrued interest receivable separately from the amortized cost basis on the consolidated balance sheets and does not estimate an ACL on accrued interest as policies are in place to ensure timely write-offs and non-accruals.
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. 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) framework. Expected 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. The Company’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, and credit risk ratings.
The Company employs a dual grade credit risk grading system for estimating the PD and the LGD for its commercial portfolio. 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 s 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 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 outlook, 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.
For its consumer portfolio, 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. For portfolio monitoring purposes, the Company estimates the current value of property secured as collateral for home equity and residential first mortgage lending products on an ongoing basis. The estimate is based on home price indices compiled by the S&P/Case-Shiller Home Price Indices. Real estate price data is applied to the loan portfolios taking into account the age of the most recent valuation and geographic area.
The Company’s models incorporate a single economic forecast scenario and macroeconomic assumptions over a two year reasonable and supportable forecast period. After the reasonable and supportable forecast period, the credit loss model gradually reverts to historical loss rates for the remaining life of the loans and leases on a straight-line basis over a one year reversion period. Historical loss rates are based on approximately 10 years of recently available data and are updated annually. 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 and principal paydowns (the combination of contractual repayments and voluntary prepayments). 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.
Macroeconomic variables are used as inputs to the loss models and are selected based on the correlation of the variables to credit losses for each class of financing receivable as follows: the commercial model uses unemployment, gross domestic product, and retail sales (for commercial unfunded); the residential model uses the Case-Shiller Home Price Index; the home equity loan and line of credit models use interest rate spreads between U.S. Treasuries and corporate bonds and, in addition, the home equity loan model also uses the Federal Housing Finance Agency Home Price Index; and the personal loan and credit line models use the Case-Shiller Home Price Index and Federal Housing Finance Agency Home Price Index. There were no changes to the macroeconomic variables used in the loss models in the current year. Forecasted economic scenarios are sourced from a third party. Data from the baseline forecast scenario is used as the input to the modeled loss calculation. Changes in forecasts of macroeconomic variables will impact expectations of lifetime credit losses calculated by the loss models. However, the impact of changes in macroeconomic forecasts may be different for each portfolio and will reflect the credit quality and nature of the underlying assets at that time.
To further refine the expected loss estimate, qualitative factors are used reflecting consideration of credit concentration, credit quality trends, the quality of internal loan reviews, the nature and volume of portfolio growth, staffing levels, underwriting exceptions, and other economic considerations that are not reflected in the base loss model. Management may apply additional qualitative adjustments to reflect other relevant facts and circumstances that impact expected credit losses. These economic and qualitative inputs are used to forecast expected losses over the reasonable and supportable forecast period.
In addition to the above considerations, the ACL calculation includes expectations of prepayments and recoveries. Extensions, renewals, and modifications are not included in the collective assessment. However, if there is a reasonable expectation of a TDR, the loan is removed from the collective assessment pool and is individually assessed.
Individually Assessed Loans and Leases. When loans and leases no longer match the risk characteristics of the collectively assessed pool, they are removed from the collectively assessed population and individually assessed for credit losses. Generally, all non-accrual loans, TDRs, potential TDRs, loans with a charge-off, and collateral dependent loans where the borrower is experiencing financial difficulty, are individually assessed.
Individual assessment for collateral dependent commercial loans facing financial difficulty is based on the fair value of the collateral less estimated cost to sell, the present value of the expected cash flows from the operation of the collateral, or a scenario weighted approach of both of these methods. If a loan is not collateral dependent, the individual assessment is based on a discounted cash flow approach. For collateral dependent commercial loans and leases, Webster's process requires the Company to determine the fair value of the collateral by obtaining a third-party appraisal or asset valuation, an interim valuation analysis, blue book reference, or other internal methods. Fair value of the collateral for commercial loans is reevaluated quarterly. Whenever the Company has a third-party real estate appraisal performed by independent licensed appraisers, a licensed in-house appraisal officer or qualified individual reviews these appraisals for compliance with the Financial Institutions Reform Recovery and Enforcement Act and the Uniform Standards of Professional Appraisal Practice.
Individual assessments for residential and home equity loans are based on a discounted cash flow approach or the fair value of collateral less the estimated costs to sell. Other consumer loans are individually assessed using a loss factor approach based on historical loss rates. For residential and consumer collateral dependent loans, a third-party appraisal is obtained upon loan default. Fair value of the collateral for residential and consumer collateral dependent loans is reevaluated every six months, by either obtaining a new appraisal or other internal valuation method. Fair value is also reassessed, with any excess amount charged off, for residential and home equity loans that reach 180 days past due per Federal Financial Institutions Examination Council guidelines.
A fair value shortfall relative to the amortized cost balance is reflected as a valuation allowance within the ACL on loans and leases. Subsequent to an appraisal or other fair value estimate, should reliable information come to management's attention that the value has declined further, an additional allowance may be recorded to reflect the particular situation, thereby increasing the ACL on loans and leases. If the credit quality subsequently improves, the allowance is reversed up to a maximum of the previously recorded credit losses. Any individually assessed loan for which no specific valuation allowance is necessary is the result of either sufficient cash flow or sufficient collateral coverage relative to the amortized cost. Additional information regarding the ACL on loans and leases can be found within Note 5: Loans and Leases.
Before the adoption of CECL on January 1, 2020, the allowance for loan and lease losses (ALLL) was determined under the ALLL incurred loss model, which reflected management’s best estimate of probable losses that may be incurred within the existing loan and lease portfolio as of the related balance sheet date. The ALLL consists of three elements: (i) specific valuation allowances established for probable losses on impaired loans and leases; (ii) quantitative valuation allowances calculated using loss experience for like loans and leases with similar characteristics and trends, adjusted, as necessary, to reflect the impact of current conditions; and (iii) qualitative factors determined based on general economic conditions and other factors that may be internal or external to the Company. The reserve level reflects management’s view of trends in losses, portfolio quality, and economic, political, and regulatory conditions. While management utilized its best judgment based on the information available at the time, the ultimate adequacy of the allowance was dependent upon a variety of factors that were beyond the Company’s control, which included the performance its portfolio, economic conditions, interest rate sensitivity, and other external factors.
The process for estimating probable losses under the ALLL approach was based on predictive models that measured the current risk profile of the loan and lease portfolio and combined the measurement with other quantitative and qualitative factors. To measure credit risk for the commercial, commercial real estate, and equipment financing portfolios, the Company employed a dual grade credit risk grading system for estimating the PD and the LGD. The credit risk grade system under the ALLL model is the same as described under the CECL approach. For the Company's consumer portfolio, credit risk factors are also consistent with the factors used in the CECL approach. Back-testing was performed to compare original estimated losses and actual observed losses, resulting in ongoing refinements. The balance resulting from this process, together with specific valuation allowances, determined the overall reserve level.
Charge-off of Uncollectible Loans
Any loan may be charged-off if a loss confirming event has occurred or if there is a period of extended delinquency. Loss confirming events usually involve the receipt of specific adverse information about the borrower and may include bankruptcy when unsecured, foreclosure, or receipt of an asset valuation indicating a shortfall between the value of the collateral and the book value of the loan when the collateral is the sole source of repayment. The Company generally will charge-off commercial loans when it is determined that the specific loan or a portion thereof is uncollectible. This determination is based on facts and circumstances of the individual loan and normally includes considering the viability of the related business, the value of any collateral, the ability and willingness of any guarantors to perform, and the overall financial condition of the borrower. The Company generally will charge-off residential real estate loans to the estimated fair value of its collateral, net of selling costs, when becoming 180 days past due.
Allowance for Credit Losses on Unfunded Loan Commitments
The ACL on unfunded loan commitments provides for potential exposure inherent with funding the unused portion of legal commitments to lend that are not unconditionally cancellable by the Company. Accounting for unfunded loan commitments follows the CECL model. The calculation of the allowance includes the probability of funding to occur and a corresponding estimate of expected lifetime credit losses on amounts assumed to be funded. Loss calculation factors are consistent with the ACL methodology for funded loans using the PD and LGD applied to the underlying borrower risk and facility grades, a draw down factor applied to utilization rates, relevant forecast information, and management's qualitative factors. The ACL on unfunded credit commitments is included within accrued expenses and other liabilities on the accompanying Consolidated Balance Sheets and the related credit expense is reported as a component of other non-interest expense on the accompanying Consolidated Statements of Income. Additional information regarding the ACL on unfunded loan commitments can be found within Note 23: Commitments and Contingencies.
Troubled Debt Restructurings
A modified loan is considered a TDR when the following two conditions are met: (i) the borrower is experiencing financial difficulty, and (ii) the modification constitutes a concession. The Company considers all aspects of the restructuring in determining whether a concession has been granted, including the borrower's ability to access funds at a market rate. In general, a concession exists when the modified terms of the loan are more attractive to the borrower than standard market terms. Modified terms are dependent upon the financial position and needs of the individual borrower. The most common types of modifications include covenant modifications and forbearance. Loans for which the borrower has been discharged under Chapter 7 bankruptcy are considered collateral dependent TDRs, impaired at the date of discharge, and charged down to the fair value of collateral less cost to sell, if management considers that loss potential likely exists.
The Company’s policy is to place consumer loan 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 when determining whether or not to place them on non-accrual status. Loans qualify for return to accrual status once they have demonstrated performance with the restructured terms of the loan agreement for a minimum of six months. TDRs are individually assessed loans and reported as TDRs for the remaining life of the loan. TDR classification may be removed if the borrower demonstrates compliance with the modified terms for a minimum of six months and through a fiscal year-end, and the restructuring agreement specifies a market rate of interest equal to that which would be provided to a borrower with similar credit at the time of restructuring. In the limited circumstance that a loan is removed from TDR classification, it is the Company’s policy to continue to base its measure of loan impairment on the contractual terms specified by the loan agreement. Additional information regarding TDRs can be found within Note 5: Loans and Leases.
Foreclosed and Repossessed Assets
Real estate acquired through foreclosure or completion of a deed in lieu of foreclosure and other assets acquired through repossession are recorded at fair value less estimated cost to sell at the date of transfer. Subsequent to the acquisition date, the foreclosed and repossessed assets are carried at the lower of cost or fair value less estimated selling costs and are included within other assets on the accompanying Consolidated Balance Sheets. Independent appraisals generally are obtained to substantiate fair value and may be subject to adjustment based upon historical experience or specific geographic trends impacting the property. Upon transfer to other real estate owned (OREO), the excess of the loan balance over fair value less cost to sell is charged off against the ACL. Subsequent write-downs in value, maintenance costs as incurred, and gains or losses upon sale are charged to non-interest expense on the accompanying Consolidated Statements of Income.
Property and Equipment
Property and equipment is carried at cost, less accumulated depreciation and amortization. Depreciation and amortization is computed on a straight-line basis over the estimated useful lives of the assets, as illustrated in the following table. If shorter, leasehold improvements are amortized over the terms of the respective leases.
| | | | | | | | | | | | | | |
| Minimum | | Maximum | |
Building and Improvements | 5 | - | 40 | years |
Leasehold improvements | 5 | - | 20 | years |
Fixtures and equipment | 5 | - | 10 | years |
Data processing and software | 3 | - | 7 | years |
Repairs and maintenance costs are expensed as incurred, while significant improvements are capitalized. Property and equipment that is actively marketed for sale is reclassified to assets held for disposition. The cost and accumulated depreciation and amortization of property and equipment that is sold, retired, or otherwise disposed of, is eliminated from accounts and any resulting gain or loss is recorded as non-interest income or non-interest expense, respectively, on the accompanying Consolidated Statements of Income Additional information regarding property and equipment can be found within Note 7: Premises and Equipment.
Leasing
A ROU asset and corresponding lease liability are recognized at the lease commencement date when the Company is a lessee. ROU lease assets are included in premises and equipment on the accompanying Consolidated Balance Sheets. A ROU asset reflects the present value of the future minimum lease payments adjusted for any initial direct costs, incentives, or other payments prior to the lease commencement date. A lease liability represents a legal obligation to make lease payments and is determined by the present value of the future minimum lease payments, discounted using the rate implicit in the lease or the Company’s incremental borrowing rate. Variable lease payments that are dependent on an index or rate are initially measured using the index or rate at the commencement date and are included in the measurement of the lease liability. Renewal options are not included as part of the ROU asset or lease liability unless the option is deemed reasonably certain to exercise.
For real estate leases, lease components and non-lease components are accounted for as a single lease component. For equipment leases, lease and non-lease components are accounted for separately. Operating lease expense is comprised of operating lease costs and variable lease costs, net of sublease income, and is reflected as part of occupancy within non-interest expense on the accompanying Consolidated Statements of Income. Operating lease expense is recorded on a straight-line basis. Additional information regarding the Company's lessee arrangements can be found within Note 8: Leasing.
Goodwill
Goodwill represents the excess purchase price of businesses acquired over the fair value of the identifiable net assets acquired and is assigned to specific reporting units. Goodwill is not subject to amortization but rather is evaluated for impairment annually, or more frequently if events occur or circumstances change indicating it would more likely than not result in a reduction of the fair value of the reporting units below their carrying value, including goodwill.
Goodwill may be evaluated for impairment by performing a qualitative assessment. If the qualitative assessment indicates that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill, or, if for any other reason the Company determines to it be appropriate, then a quantitative assessment will be performed. The quantitative assessment process utilizes an income and market approach to arrive at an indicated fair value range for the reporting units. The fair value calculated for each reporting unit is compared to its carrying amount, including goodwill, to ascertain if goodwill impairment exists. If the fair value exceeds the carrying amount, including goodwill for a reporting unit, it is not considered impaired. If the fair value is below the carrying amount, including goodwill for a reporting unit, then an impairment charge is recognized for the amount by which the carrying amount exceeds the calculated fair value, up to but not exceeding the amount of goodwill allocated to the reporting unit. The resulting amount is charged to non-interest expense on the accompanying Consolidated Statements of Income.
The Company completed a qualitative assessment for its reporting units during its most recent annual impairment review. Based on this qualitative assessment, the Company determined that there was no evidence of impairment to the balance of its goodwill. Additional information regarding goodwill can be found within Note 9: Goodwill and Other Intangible Assets.
Other Intangible Assets
Other intangible assets represent purchased assets that lack physical substance but can be distinguished from goodwill because of contractual or other legal rights, or because it is capable of being sold or exchanged either separately or in combination with a related contract, asset, or liability. Other intangible assets with finite useful lives, such as core deposits and customer relationships, are amortized to non-interest expense over their estimated useful lives and are evaluated for impairment whenever events occur or circumstances change indicating the carrying amount of the asset may not be recoverable. Additional information regarding other intangible assets can be found within Note 9: Goodwill and Other Intangible Assets.
Cash Surrender Value of Life Insurance
Bank-owned life insurance represents the cash surrender value of life insurance policies on certain current and former employees of Webster. Cash surrender value increases and decreases are recorded in non-interest income. Death benefit proceeds in excess of the cash surrender value are recorded in other non-interest income upon the death of the insured.
Securities Sold Under Agreements to Repurchase
These agreements are accounted for as secured financing transactions since Webster maintains effective control over the transferred investment securities and the transfer meets the other criteria for such treatment. Obligations to repurchase the sold investment securities are reflected as a liability on the accompanying Consolidated Balance Sheets. The investment securities sold with agreement to repurchase to wholesale dealers are transferred to a custodial account for the benefit of the dealer or to the bank with whom each transaction is executed. The dealers or banks may sell, loan, or otherwise hypothecate such securities to other parties in the normal course of their operations and agree to resell to Webster the same securities at the maturity date of the agreements. Webster also enters into repurchase agreements with Bank customers. The investment securities sold with agreement to repurchase to Bank customers are not transferred, but internally pledged to the repurchase agreement transaction. Additional information regarding securities sold under agreements to repurchase can be found within Note 12: Borrowings.
Revenue From Contracts With Customers
Revenue from contracts with customers comprises non-interest income earned in exchange for services provided to customers and is recognized either when services are completed or as they are rendered. These revenue streams include deposit service fees, wealth and investment services, and an insignificant portion of other non-interest income on the accompanying Consolidated Statements of Income. The Company identifies the performance obligations included in its contracts with customers, determines the transaction price, allocates the transaction price to the performance obligations, as applicable, and recognizes revenue when the performance obligations are satisfied. Services provided over a period of time are generally transferred to customers evenly over the term of the contracts, and revenue is recognized evenly over the period the services are provided. Contract assets are included in accrued interest receivable and other assets on the accompanying Consolidated Balance Sheets. Payment terms vary by services offered, and generally the time between the completion of performance obligations and receipt of payment is not significant. Additional information regarding contracts with customers can be found within Note 22: Revenue from Contracts with Customers.
Share-Based Compensation
Webster maintains stock compensation plans in which restricted stock, restricted stock units, non-qualified stock options, incentive stock options, or stock appreciation rights may be granted to employees and directors. Share awards are issued from available treasury shares. Stock compensation expense is recognized over the required service vesting period for each award based on the grant-date fair value, net of estimated forfeitures (which is adjusted for actual forfeitures when they occur), and is included as a component of compensation and benefits on the accompanying Consolidated Statements of Income. Share awards are generally subject to a 3-year vesting period, while certain conditions provide for a 1-year vesting period. For restricted stock and restricted stock unit awards, fair value is measured using the closing price of Webster's common stock at the grant date. For certain performance-based restricted stock awards, fair value is measured using the Monte Carlo valuation methodology, which provides for the 3-year performance period. These awards ultimately vest in a range from 0% to 150% of the target number of shares under the grant. Compensation expense is subject to adjustment based on management's assessment of Webster's return on equity performance relative to the target number of shares condition. Stock option awards use the Black-Scholes Option-Pricing Model to measure fair value at the grant date. Excess tax benefits or tax deficiencies results when tax return deductions differ from recognized compensation cost determined using the grant-date fair value approach for financial statement purposes. Dividends are paid on time-based shares upon grant and are non-forfeitable, while dividends are accrued on performance-based awards and paid with the vested shares when the performance target is met. Additional information regarding share-based compensation can be found within Note 20: Share-Based Plans.
Income Taxes
Income tax expense (benefit) is comprised of two components, current and deferred. The current component represents income taxes payable or refundable for the current period based on applicable tax laws, and the deferred component represents the tax effects of temporary differences between amounts recognized for financial accounting and tax purposes. DTAs and deferred tax liabilities (DTLs) reflect the tax effects of such differences that are anticipated to result in taxable or deductible amounts in the future when the temporary differences reverse. DTAs are recognized if it is more likely than not that they will be realized, and may be reduced by a valuation allowance if it is more likely than not that all or some portion will not be realized.
Uncertain tax positions that meet a more likely than not recognition threshold are initially and subsequently measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon settlement with a taxing authority based on knowledge of all relevant information. The determination of whether or not a tax position meets the more likely than not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to management judgment. Webster recognizes interest and penalties on uncertain tax positions and interest on refundable income taxes as a component of income tax expense and other non-interest income, respectively, on the accompanying Consolidated Statements of Income. Additional information regarding income taxes can be found within Note 10: Income Taxes.
Earnings per Common Share
Earnings per common share is calculated under the two-class method. Basic earnings per common share is computed by dividing earnings applicable to common shareholders by the weighted-average number of common shares outstanding, excluding outstanding participating securities, during the pertinent period. Certain unvested restricted stock awards are considered participating securities as they have non-forfeitable rights to dividends. Diluted earnings per common share is computed using the weighted-average number of shares determined for the basic earnings per common share computation plus the dilutive effect of shares resulting from stock compensation and warrants for common stock using the treasury stock method. A reconciliation between the weighted-average common shares used in calculating basic earnings per common share and the weighted-average common shares used in calculating diluted earnings per common share can be found within Note 16: Earnings Per Common Share.
Comprehensive Income (Loss)
Comprehensive income (loss) includes all changes in shareholders’ equity during the period, except those resulting from transactions with shareholders. Comprehensive income consists of net income and the after-tax effect of the following items: changes in net unrealized gain (loss) on securities available-for-sale, changes in net unrealized gain (loss) on derivative instruments, and changes in net actuarial gain (loss) related to defined benefit pension and other postretirement benefit plans. Comprehensive income is reported on the accompanying Consolidated Statements of Shareholders' Equity and the accompanying Consolidated Statements of Comprehensive Income. Additional information regarding comprehensive income can be found within Note 14: Accumulated Other Comprehensive (Loss) Income, Net of Tax.
Derivative Instruments and Hedging Activities
Derivatives are recognized at fair value and are included in accrued interest receivable and other assets and accrued expenses and other liabilities, as applicable, on the accompanying Consolidated Balance Sheets. The value of exchange-traded contracts is based on quoted market prices whereas non-exchange traded contracts are valued based on dealer quotes, pricing models, discounted cash flow methodologies, or similar techniques in which the determination of fair value may require management judgment or estimation. Cash flows from derivative financial instruments are included in net cash provided by operating activities on the accompanying Consolidated Statements of Cash Flows.
Derivatives Designated in Hedge Relationships. The Company uses derivatives to hedge exposures or to modify interest rate characteristics for certain balance sheet accounts under its interest rate risk management strategy. The Company designates derivatives in qualifying hedge relationships as fair value or cash flow hedges for accounting purposes. Derivative financial instruments receive hedge accounting treatment if they are qualified and properly designated as a hedge, and remain highly effective in offsetting changes in the fair value or cash flows attributable to the risk being hedged, both at hedge inception and on an ongoing basis throughout the life of the hedge. Quarterly prospective and retrospective assessments are performed to ensure hedging relationships continue to be highly effective. If a hedge relationship is no longer highly effective, hedge accounting would be discontinued.
The change in fair value on a derivative that is designated and qualifies as a fair value hedge, as well as the offsetting change in fair value on the hedged item attributable to the risk being hedged, is recognized in earnings. The gain or loss on a derivative that is designated and qualifies as a cash flow hedge is initially recorded as a component of accumulated other comprehensive loss, net of tax (AOCL), and either subsequently reclassified to interest income as hedged interest payments are received or to interest expense as hedged interest payments are made during the same period in which the hedged transaction affects earnings.
Derivatives Not Designated in Hedge Relationships. The Company also enters into derivative transactions that are not designated in hedge relationships. Derivative financial instruments not designated in hedge relationships are recorded at fair value with changes in fair value recognized in other non-interest income on the accompanying Consolidated Statements of Income.
Offsetting Assets and Liabilities. The Company presents derivative assets and derivative liabilities with the same counterparty and the related variation margin of cash collateral on a net basis on the accompanying Consolidated Balance Sheets. Cash collateral relating to initial margin is included in accrued interest receivable and other assets on the accompanying Consolidated Balance Sheets. Securities collateral is not offset. The Company clears all dealer eligible contracts through the Chicago Mercantile Exchange (CME) and has elected to record non-cleared derivative positions subject to a legally enforceable master netting agreement on a net basis. Additional information regarding derivatives can be found within Note 17: Derivative Financial Instruments.
Fair Value Measurements
The Company measures many of its assets and liabilities on a fair value basis in accordance with Accounting Standards Codification (ASC) Topic 820, Fair Value Measurement. 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. Fair value is used to measure certain assets and liabilities on a recurring basis when fair value is the primary basis of accounting, and on a non-recurring basis when evaluating assets or liabilities for impairment. Additional information regarding the Company's policies and methodology used to measure fair value can be found within Note 18: Fair Value Measurements.
Employee Retirement Benefit Plans
Webster Bank sponsors a defined contribution postretirement benefit plan offering traditional 401(k) and Roth 401(k) options to employees who have attained age 21 beginning 90 days after hire. Expenses to maintain the plan, as well as employer matching contributions, are charged to compensation and benefits on the accompanying Consolidated Statements of Income.
Webster Bank had offered a qualified noncontributory defined benefit pension plan and a non-qualified supplemental executive retirement plan (SERP) to eligible employees and key executives who met certain age and service requirements. Both the pension plan and the SERP were frozen effective December 31, 2007. Pension contributions are funded in accordance with the requirements of the Employee Retirement Income Security Act. Webster Bank also provides for other post-employment medical and life insurance benefits (OPEB) to certain retired employees. Net periodic benefit costs, which are based upon actuarial computations of current and future benefits for eligible employees, are charged to other non-interest expense on the accompanying Consolidated Statements of Income. The funded status of the plans' is recorded as an asset when over-funded or a liability when under-funded. Additional information regarding the defined benefit pension and postretirement benefit plans can be found within Note 19: Retirement Benefit Plans.
Recently Adopted Accounting Standards Updates (ASUs)
Effective January 1, 2021, the following new accounting guidance was adopted by the Company:
ASU No. 2019-12, Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes.
The Accounting Standards Update (the Update) provides simplification to the accounting for income taxes related to a variety of topics and makes minor codification improvements. Changes include a requirement that the effects of an enacted change in tax law be reflected in the computation of the annual effective tax rate in the first interim period that includes the enactment date of the new legislation and clarification on presentation of non-income based taxes.
The Company adopted the Update on January 1, 2021 on a prospective basis. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements.
ASU No. 2021-01, Reference Rate Reform (Topic 848) - Scope.
The Update clarifies that certain optional expedients and exceptions provided for in ASU No. 2020-04 for applying GAAP to contract modifications and hedging relationships apply to derivatives that are affected by the discounting transition. The amendments are elective and apply to all entities that have derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform. The Update was effective upon issuance for application on either a retrospective basis as of any date from the beginning of an interim period that includes or is subsequent to March 22, 2020, or on a prospective basis beginning on January 7, 2021.
The Company adopted the Update on a prospective basis. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements.
Accounting Standards Issued but not yet Adopted
The Company has adopted all applicable ASUs issued by the FASB as of December 31, 2021.
Note 2: Variable Interest Entities
Webster has an investment interest in the following entities that each meet the definition of a variable interest entity.
Consolidated
Rabbi Trust. The Company established a Rabbi Trust to satisfy its obligations due under the 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.
Investments held in the Rabbi Trust consist primarily of mutual funds that invest in equity and fixed income securities. Webster is considered the primary beneficiary of the Rabbi Trust as it has the power to direct the activities of the Rabbi Trust that most significantly impact its economic performance and it has the obligation to absorb losses and/or right to receive benefits of the Rabbi Trust that could potentially be significant.
The Rabbi Trust's assets and the Company's deferred compensation plan obligation are included in accrued interest receivable and other assets and accrued expenses and other liabilities, respectively, on the accompanying Consolidated Balance Sheets. Investment earnings, including appreciation (depreciation) in fair value, and changes in the deferred compensation obligation, are included in other non-interest income and compensation and benefits, respectively, on the accompanying Consolidated Statements of Income. Information regarding the fair value of investments held in the Rabbi Trust can be found within Note 18: 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 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 right to receive benefits. Webster applies the proportional amortization method to subsequently measure its investments in qualified affordable housing projects.
At December 31, 2021 and 2020, the aggregate carrying value of Webster's tax credit finance investments was $43.4 million and $37.2 million, respectively, which is included in accrued interest receivable and other assets on the accompanying Consolidated Balance Sheets, and represents the Company's maximum exposure to loss. At December 31, 2021 and 2020, unfunded commitments of $11.1 million and $10.2 million were recognized, respectively, and are included in accrued expenses and other liabilities on the accompanying Consolidated Balance Sheets. During the years ended December 31, 2021 and 2019, Webster approved additional commitments of $10.1 million and $17.2 million, respectively, to fund tax credit finance investments. There were no such commitments approved during the year ended December 31, 2020.
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 issued 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 Consolidated Balance Sheets, and the related interest expense is reported as interest expense on long-term debt on the accompanying Consolidated Statements of Income. Additional information regarding these junior subordinated debentures can be found within Note 12: 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. At December 31, 2021 and 2020, the aggregate carrying value of Webster's other non-marketable investments was $61.5 million and $34.3 million, respectively, and its maximum exposure to loss, including unfunded commitments, was $95.9 million and $72.7 million, respectively. Information regarding the fair value other non-marketable investments can be found within Note 18: Fair Value Measurements.
Webster's equity interests in Other Non-Marketable Investments, as well as in Tax Credit-Finance Investments and Webster Statutory Trust, are included in accrued interest receivable and other assets on the accompanying Consolidated Balance Sheets. Information regarding the Company's accounting policy for its consolidation of variable interest entities can be found under the section captioned "Principles of Consolidation" within Note 1: Summary of Significant Accounting Policies.
Note 3: Business Developments
Merger with Sterling Bancorp
Effective 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. Pursuant to the merger agreement, 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.
At the effective time of the merger, each share of Sterling common stock outstanding, 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.
In addition, at the effective time of the merger, each outstanding share of Sterling 6.50% Series A Non-Cumulative Perpetual Preferred Stock 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. Webster registered and issued 135,000 depositary shares on January 31, 2022, 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) (Series G Preferred Stock). The Series G Preferred Stock ranks on parity with Webster's 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) (Series F Preferred Stock), and senior to Webster common stock, with respect to the payment of dividends and distributions upon the liquidation, dissolution, or winding-up of Webster. Additional information regarding Webster's Series F Preferred Stock can be found within Note 13: Shareholders' Equity.
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. Additional information regarding Webster's equity compensation plans can be found within Note 20: Share-Based Plans.
Webster also assumed Sterling's long-term obligations with respect to $274.0 million in aggregate principal amount of 4.00% fixed-to-floating rate subordinated notes due 2029 issued by Sterling on December 16, 2019, and $225.0 million in aggregate principal amount of 3.875% fixed-to-floating rate subordinated notes due 2030 issued by Sterling on October 30, 2020.
The transaction will be accounted for as a business combination. Accordingly, the purchase price will be 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. Given the close proximity between the transaction closing date and Webster’s Annual Report on Form 10-K, the preliminary purchase price allocation has not yet been completed. Management expects to complete the initial accounting for its merger with Sterling, including the purchase price allocation, later in the first quarter of 2022. As a result, the estimated fair values of the assets acquired and liabilities assumed, the valuation techniques and inputs used to measure and develop the fair values, and any goodwill recorded will be disclosed in Webster’s Quarterly Report on Form 10-Q for the period ended March 31, 2022, along with supplemental pro forma financial information as if the merger with Sterling had occurred as of January 1, 2020.
During the year ended December 31, 2021, Webster incurred merger-related expenses totaling $37.5 million, which consisted primarily of professional fees for investment banking, legal, and consulting, and employee severance and retention costs. Merger-related expenses are recorded as either professional and outside services, or other non-interest expense on the accompanying Consolidated Statements of Income.
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. The acquisition accelerates Webster’s efforts underway to deliver enhanced user experiences at HSA Bank. The transaction will be accounted for as a business combination and the assets acquired and liabilities assumed will be reported at fair value. Webster plans to complete the initial purchase price allocation in the first quarter of 2022, which is not expected to have a material impact on the Company's consolidated financial statements.
Strategic Initiatives
During the fourth quarter of 2020, Webster launched a strategic plan 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.
Costs incurred related to the execution of these strategic initiatives consisted of the following for the years ended December 31:
| | | | | | | | | | | |
| Years ended December 31, |
(In thousands) | 2021 | | 2020 |
Severance and other benefits | $ | (1,562) | | | $ | 17,860 | |
Professional fees and other related charges | 8,569 | | | 10,788 | |
ROU lease asset impairment | 1,198 | | | 11,954 | |
Other (1) | (1,037) | | | 2,055 | |
Total strategic initiatives costs | $ | 7,168 | | | $ | 42,657 | |
(1)Other includes accelerated depreciation and operating lease costs for all periods presented, gain on sale of banking centers and early lease terminations in 2021, and write-downs of property and equipment in 2020.
Severance and other benefits costs are recorded as compensation and benefits, ROU lease asset impairment charges are recorded as occupancy, professional fees and other related charges are recorded as either occupancy or professional and outside services, and other is recorded as either occupancy, technology and equipment, or other non-interest expense on the accompanying Consolidated Statements of Income.
The following table summarizes the changes in accrued expenses and other liabilities associated with these strategic initiatives:
| | | | | | | | | | | | | | | | | |
| Year ended December 31, 2021 |
(In thousands) | Severance and other benefits | | Professional fees and other related charges | | Total |
Balance at December 31, 2019 | $ | — | | | $ | — | | | $ | — | |
Additions charged to expense | 17,860 | | | 10,788 | | | 28,648 | |
Cash payments | (185) | | | (8,668) | | | (8,853) | |
Balance at December 31, 2020 | $ | 17,675 | | | $ | 2,120 | | | $ | 19,795 | |
Additions charged to expense | 2,340 | | | 8,569 | | | 10,909 | |
Adjustments (1) | (3,902) | | | — | | | (3,902) | |
Cash payments | (10,994) | | | (8,962) | | | (19,956) | |
Balance at December 31, 2021 | $ | 5,119 | | | $ | 1,727 | | | $ | 6,846 | |
| | | | | |
(1)Changes in employee retention assumptions during the third quarter of 2021 resulted in a release of the Company's previously recorded severance accrual.
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 December 31, 2021 |
(In thousands) | Amortized Cost (1) | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value (2) |
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 | |
| | | | |
| At December 31, 2020 |
(In thousands) | Amortized Cost (1) | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value (2) |
Agency CMO | $ | 148,711 | | $ | 6,000 | | $ | (98) | | $ | 154,613 | |
Agency MBS | 1,389,100 | | 68,598 | | (289) | | 1,457,409 | |
Agency CMBS | 1,092,430 | | 26,317 | | (1,514) | | 1,117,233 | |
CMBS | 512,759 | | 1,082 | | (5,823) | | 508,018 | |
CLO | 76,693 | | — | | (310) | | 76,383 | |
Corporate debt | 14,557 | | — | | (1,437) | | 13,120 | |
Available-for-sale debt securities | $ | 3,234,250 | | $ | 101,997 | | $ | (9,471) | | $ | 3,326,776 | |
(1)Accrued interest receivable of $7.5 million at both December 31, 2021 and 2020 is excluded from amortized cost and is reported within accrued interest receivable and other assets on the accompanying Consolidated Balance Sheets.
(2)Fair value represents net carrying value. No ACL has been recorded on available-for-sale debt securities at December 31, 2021 and 2020, as the securities held are high credit quality and investment grade.
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 and for which an ACL has not been recorded: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| At December 31, 2021 |
| 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 | $ | 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) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| At December 31, 2020 |
| 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 |
Agency CMO | $ | 13,137 | | $ | (49) | | | $ | 5,944 | | $ | (49) | | | 5 | $ | 19,081 | | $ | (98) | |
Agency MBS | 33,742 | | (219) | | | 4,561 | | (70) | | | 30 | 38,303 | | (289) | |
Agency CMBS | 376,330 | | (1,514) | | | — | | — | | | 8 | 376,330 | | (1,514) | |
CMBS | 409,591 | | (5,486) | | | 23,167 | | (337) | | | 38 | 432,758 | | (5,823) | |
CLO | 57,728 | | (265) | | | 18,655 | | (45) | | | 4 | 76,383 | | (310) | |
Corporate debt | 4,100 | | (166) | | | 9,020 | | (1,271) | | | 3 | 13,120 | | (1,437) | |
Available-for-sale debt securities in unrealized loss position | $ | 894,628 | | $ | (7,699) | | | $ | 61,347 | | $ | (1,772) | | | 88 | $ | 955,975 | | $ | (9,471) | |
Available-for-sale debt securities in a continuous unrealized loss position have been assessed for impairment. Since the Company does not intend to sell nor will it be required to sell these securities prior to their anticipated recovery, and as the securities are investment grade, management concluded that no impairment is required. The increase in unrealized losses from 2020 to 2021 is primarily due to portfolio activity and higher market rates. Market prices will approach par as the securities approach maturity. There were no available-for-sale debt securities in non-accrual status at December 31, 2021 and 2020.
Contractual Maturities
The following table summarizes the amortized cost and fair value of available-for-sale debt securities by contractual maturity: | | | | | | | | | | | |
| At December 31, 2021 |
(In thousands) | Amortized Cost | | Fair Value |
Maturing within 1 year | $ | — | | | $ | — | |
After 1 year through 5 years | 401,668 | | | 400,037 | |
After 5 years through 10 years | 113,288 | | | 113,260 | |
After 10 years | 3,712,741 | | | 3,721,557 | |
Available-for-sale debt securities | $ | 4,227,697 | | | $ | 4,234,854 | |
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 prepay 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 year ended December 31, 2021. During the year ended December 31, 2020, the Company sold available-for-sale debt securities for cash proceeds of $9.0 million, which resulted in gross realized gains of $8 thousand. During the year ended December 31, 2019, the Company sold available-for-sale debt securities for cash proceeds of $70.1 million, which resulted in gross realized gains of $773 thousand and gross realized losses of $744 thousand ($29 thousand net gain on sale).
Held-to-Maturity
The following table summarizes the amortized cost, fair value, and ACL of held-to-maturity debt securities by major type:
| | | | | | | | | | | | | | | | | | | | | | | |
| At December 31, 2021 |
(In thousands) | Amortized Cost (1) | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | | Allowance for Credit Losses | 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 | |
| | | | | | | |
| At December 31, 2020 |
(In thousands) | Amortized Cost (1) | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | | Allowance for Credit Losses | Net Carrying Value |
Agency CMO | $ | 91,622 | | $ | 1,785 | | $ | (241) | | $ | 93,166 | | | $ | — | | $ | 91,622 | |
Agency MBS | 2,419,751 | | 137,863 | | (84) | | 2,557,530 | | | — | | 2,419,751 | |
Agency CMBS | 2,101,227 | | 60,484 | | (2,213) | | 2,159,498 | | | — | | 2,101,227 | |
Municipal bonds and notes | 739,507 | | 60,371 | | (3) | | 799,875 | | | 299 | | 739,208 | |
CMBS | 216,081 | | 9,214 | | — | | 225,295 | | | — | | 216,081 | |
Held-to-maturity debt securities | $ | 5,568,188 | | $ | 269,717 | | $ | (2,541) | | $ | 5,835,364 | | | $ | 299 | | $ | 5,567,889 | |
(1)Accrued interest receivable of $21.2 million and $22.1 million at December 31, 2021 and December 31, 2020, respectively, is excluded from amortized cost and is reported within accrued interest receivable and other assets on the accompanying 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 December 31, 2021. 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: | | | | | | | | | | | |
| Years ended December 31, |
(In thousands) | 2021 | | 2020 |
Balance, beginning of period (1) | $ | 299 | | $ | — |
Adoption of CECL | — | | 397 |
(Benefit) for credit losses | (85) | | (98) |
Balance, end of period | $ | 214 | | $ | 299 |
(1)The Company adopted CECL on January 1, 2020. The prior period beginning balance did not have an allowance recorded under the applicable GAAP for that period.
Contractual Maturities
The table summarizes the amortized cost and fair value of held-to-maturity debt securities by contractual maturity:
| | | | | | | | | | | |
| At December 31, 2021 |
(In thousands) | Amortized Cost | | Fair Value |
Maturing within 1 year | $ | 180 | | | $ | 180 | |
After 1 year through 5 years | 7,425 | | | 7,712 | |
After 5 years through 10 years | 292,727 | | | 304,190 | |
After 10 years | 5,898,007 | | | 5,968,854 | |
Held-to-maturity debt securities | $ | 6,198,339 | | | $ | 6,280,936 | |
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 prepay 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, and 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 December 31, 2021 and 2020. 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 credit rating made publicly available:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| At December 31, 2021 |
| Investment Grade | | |
(In thousands) | Aaa | Aa1 | Aa2 | Aa3 | A1 | A2 | A3 | Baa2 | | Not Rated |
Agency CMOs | $ | — | | $ | 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 December 31, 2020 |
| Investment Grade | | |
(In thousands) | Aaa | Aa1 | Aa2 | Aa3 | A1 | A2 | A3 | Baa2 | | Not Rated |
Agency CMOs | $ | — | | $ | 91,622 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | | $ | — | |
Agency MBS | — | | 2,419,751 | | — | | — | | — | | — | | — | | — | | | — | |
Agency CMBS | — | | 2,101,227 | | — | | — | | — | | — | | — | | — | | | — | |
Municipal bonds and notes | 209,376 | | 165,056 | | 201,081 | | 115,619 | | 33,264 | | 8,475 | | 2,066 | | 190 | | | 4,380 | |
CMBS | 216,081 | | — | | — | | — | | — | | — | | — | | — | | | — | |
Held-to-maturity debt securities | $ | 425,457 | | $ | 4,777,656 | | $ | 201,081 | | $ | 115,619 | | $ | 33,264 | | $ | 8,475 | | $ | 2,066 | | $ | 190 | | | $ | 4,380 | |
| | | | | | | | | | |
At December 31, 2021 and 2020, there were no held-to-maturity debt securities past due under the terms of their agreements or in non-accrual status.Other Information
At December 31, 2021, Webster had callable CMBS, collateralized loan obligation securities (CLO), corporate debt, and municipal bonds and notes with an aggregate carrying value of $1.6 billion. The Company considers this prepayment risk in the evaluation of its interest rate risk profile.
Available-for-sale and held-to-maturity debt securities with carrying values of $1.8 billion and $3.1 billion, respectively, at December 31, 2021, and $1.3 billion and $2.6 billion, respectively, at December 31, 2020, were pledged to secure public funds, trust deposits, repurchase agreements, and other purposes, as required or permitted by law.
Note 5: Loans and Leases
The following table summarizes loans and leases by portfolio segment and class: | | | | | | | | | | | |
| At December 31, |
(In thousands) | 2021 | | 2020 |
Commercial non-mortgage | $ | 6,882,480 | | | $ | 7,085,076 | |
Asset-based | 1,067,248 | | | 890,598 | |
Commercial real estate | 6,603,180 | | | 6,322,637 | |
Equipment financing | 627,058 | | | 602,224 | |
Commercial portfolio | 15,179,966 | | | 14,900,535 | |
Residential | 5,412,905 | | | 4,782,016 | |
Home equity | 1,593,559 | | | 1,802,865 | |
Other consumer | 85,299 | | | 155,799 | |
Consumer portfolio | 7,091,763 | | | 6,740,680 | |
Loans and leases | $ | 22,271,729 | | | $ | 21,641,215 | |
The carrying amount of loans and leases includes net unamortized deferred costs/(fees) and net unamortized discounts/(premiums) of $12.3 million and $(10.5) million at December 31, 2021 and 2020, respectively. The net change from 2020 to 2021 is primarily attributed to increased deferred fees in 2020 due to PPP loans. Accrued interest receivable of $50.7 million and $57.8 million at December 31, 2021 and 2020, respectively, is excluded from the carrying amount of loans and leases and is reported within accrued interest receivable and other assets on the accompanying Consolidated Balance Sheets. At December 31, 2021, Webster had pledged $7.8 billion of eligible loans as collateral to support its borrowing capacity at both the FHLB of Boston and the FRB of Boston.
Non-Accrual and Past Due Loans and Leases
The following tables summarize the aging of accrual and non-accrual loans and leases by class: | | | | | | | | | | | | | | | | | | | | | | | |
| 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 | | 6,596,690 | | 6,603,180 | |
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 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| At December 31, 2020 |
(In thousands) | 30-59 Days Past Due and Accruing | 60-89 Days Past Due and Accruing | 90 or More Days Past Due and Accruing | Non-accrual | Total Past Due and Non-accrual | Current | Total Loans and Leases |
Commercial non-mortgage | $ | 612 | | $ | 903 | | $ | 445 | | $ | 64,073 | | $ | 66,033 | | $ | 7,019,043 | | $ | 7,085,076 | |
Asset-based | 1,174 | | — | | — | | 2,594 | | 3,768 | | 886,830 | | 890,598 | |
Commercial real estate | 2,400 | | 619 | | — | | 21,231 | | 24,250 | | 6,298,387 | | 6,322,637 | |
Equipment financing | 5,107 | | 2,308 | | — | | 7,299 | | 14,714 | | 587,510 | | 602,224 | |
Commercial portfolio | 9,293 | | 3,830 | | 445 | | 95,197 | | 108,765 | | 14,791,770 | | 14,900,535 | |
Residential | 4,334 | | 6,330 | | — | | 41,081 | | 51,745 | | 4,730,271 | | 4,782,016 | |
Home equity | 5,500 | | 1,771 | | — | | 31,030 | | 38,301 | | 1,764,564 | | 1,802,865 | |
Other consumer | 878 | | 601 | | — | | 652 | | 2,131 | | 153,668 | | 155,799 | |
Consumer portfolio | 10,712 | | 8,702 | | — | | 72,763 | | 92,177 | | 6,648,503 | | 6,740,680 | |
Total | $ | 20,005 | | $ | 12,532 | | $ | 445 | | $ | 167,960 | | $ | 200,942 | | $ | 21,440,273 | | $ | 21,641,215 | |
The following table provides additional information on non-accrual loans and leases: | | | | | | | | | | | | | | | | | |
| At December 31, |
| 2021 | | 2020 |
(In thousands) | Non-accrual | Non-accrual With No Allowance | | Non-accrual | Non-accrual With No Allowance |
Commercial non-mortgage | $ | 59,607 | | $ | 4,802 | | | $ | 64,073 | | $ | 16,985 | |
Asset-based | 2,086 | | 2,086 | | | 2,594 | | — | |
Commercial real estate | 5,046 | | 4,310 | | | 21,231 | | 15,529 | |
Equipment financing | 3,728 | | — | | | 7,299 | | 2,983 | |
Commercial portfolio | 70,467 | | 11,198 | | | 95,197 | | 35,497 | |
Residential | 15,747 | | 10,584 | | | 41,081 | | 29,843 | |
Home equity | 23,489 | | 18,920 | | | 31,030 | | 24,091 | |
Other consumer | 224 | | 2 | | | 652 | | 2 | |
Consumer portfolio | 39,460 | | 29,506 | | | 72,763 | | 53,936 | |
Total | $ | 109,927 | | $ | 40,704 | | | $ | 167,960 | | $ | 89,433 | |
Interest on non-accrual loans that would have been recognized as additional interest income had the loans been current in accordance with their original terms totaled $11.0 million, $9.7 million, and $11.3 million for the years ended December 31, 2021, 2020, and 2019, respectively.
Allowance for Credit Losses on Loans and Leases
The following tables summarize the change in the ACL on loans and leases by portfolio segment:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| At or for the Years ended December 31, |
| 2021 | | 2020 | | 2019 |
(In thousands) | Commercial Portfolio | Consumer Portfolio | Total | | Commercial Portfolio | Consumer Portfolio | Total | | Commercial Portfolio | Consumer Portfolio | Total |
ACL on loans and leases: | | | | | | | | | | | |
Beginning balance | $ | 312,244 | | $ | 47,187 | | $ | 359,431 | | | $ | 161,669 | | $ | 47,427 | | $ | 209,096 | | | $ | 164,073 | | $ | 48,280 | | $ | 212,353 | |
Adoption of CECL | — | | — | | — | | | 34,024 | | 23,544 | | 57,568 | | | — | | — | | — | |
(Benefit) provision | (48,651) | | (5,764) | | (54,415) | | | 156,336 | | (18,488) | | 137,848 | | | 29,174 | | 8,626 | | 37,800 | |
Charge-offs | (9,437) | | (9,217) | | (18,654) | | | (42,925) | | (12,408) | | (55,333) | | | (33,327) | | (19,153) | | (52,480) | |
Recoveries | 3,721 | | 11,104 | | 14,825 | | | 3,140 | | 7,112 | | 10,252 | | | 1,749 | | 9,674 | | 11,423 | |
Ending balance | $ | 257,877 | | $ | 43,310 | | $ | 301,187 | | | $ | 312,244 | | $ | 47,187 | | $ | 359,431 | | | $ | 161,669 | | $ | 47,427 | | $ | 209,096 | |
Individually assessed ACL | 16,965 | | 4,108 | | 21,073 | | | 11,687 | | 4,450 | | 16,137 | | | 9,428 | | 4,821 | | 14,249 | |
Collectively assessed ACL | $ | 240,912 | | $ | 39,202 | | $ | 280,114 | | | $ | 300,557 | | $ | 42,737 | | $ | 343,294 | | | $ | 152,241 | | $ | 42,606 | | $ | 194,847 | |
The $58.2 million decrease in the ACL on loans and leases from 2020 to 2021 is primarily due to improvements in the forecasted economic outlook and favorable credit trends, which were negatively affected by the emergence of the COVID-19 pandemic in 2020 and resulted in a release of reserves in 2021, partially offset by reserves on newly originated loans and leases.
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 outlook, 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 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 | 1,375,306 | | 869,144 | | 1,331,236 | | 916,868 | | 401,718 | | 1,339,942 | | 55,610 | | 6,289,824 | |
Special mention | 95 | | 3,084 | | — | | 119,676 | | 51,536 | | 79,096 | | — | | 253,487 | |
Substandard | — | | 482 | | 227 | | 7,306 | | 13,874 | | 37,980 | | — | | 59,869 | |
Commercial real estate | 1,375,401 | | 872,710 | | 1,331,463 | | 1,043,850 | | 467,128 | | 1,457,018 | | 55,610 | | 6,603,180 | |
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 | |
Total 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 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| At December 31, 2020 |
(In thousands) | 2020 | 2019 | 2018 | 2017 | 2016 | Prior | Revolving Loans Amortized Cost Basis | Total |
Commercial non-mortgage: | | | | | | | | |
Pass | $ | 2,771,373 | | $ | 1,052,080 | | $ | 907,110 | | $ | 481,321 | | $ | 231,280 | | $ | 218,001 | | $ | 936,592 | | $ | 6,597,757 | |
Special mention | 32,535 | | 33,969 | | 62,034 | | 435 | | 8,357 | | 13,757 | | 38,496 | | 189,583 | |
Substandard | 54,716 | | 51,798 | | 66,324 | | 36,159 | | 15,535 | | 23,957 | | 49,084 | | 297,573 | |
Doubtful | — | | — | | — | | 163 | | — | | — | | — | | 163 | |
Commercial non-mortgage | 2,858,624 | | 1,137,847 | | 1,035,468 | | 518,078 | | 255,172 | | 255,715 | | 1,024,172 | | 7,085,076 | |
Asset-based: | | | | | | | | |
Pass | 26,344 | | 15,960 | | 23,123 | | 11,333 | | 10,963 | | 16,484 | | 741,336 | | 845,543 | |
Special mention | — | | — | | 775 | | — | | — | | — | | 41,687 | | 42,462 | |
Substandard | — | | 2,504 | | — | | — | | — | | — | | 89 | | 2,593 | |
Asset-based | 26,344 | | 18,464 | | 23,898 | | 11,333 | | 10,963 | | 16,484 | | 783,112 | | 890,598 | |
Commercial real estate: | | | | | | | | |
Pass | 965,582 | | 1,461,201 | | 1,242,322 | | 527,931 | | 554,630 | | 1,165,331 | | 28,113 | | 5,945,110 | |
Special mention | 27 | | 10,385 | | 70,704 | | 37,539 | | 35,617 | | 69,832 | | — | | 224,104 | |
Substandard | 817 | | 1,132 | | 21,923 | | 73,621 | | 2,962 | | 52,968 | | — | | 153,423 | |
Commercial real estate | 966,426 | | 1,472,718 | | 1,334,949 | | 639,091 | | 593,209 | | 1,288,131 | | 28,113 | | 6,322,637 | |
Equipment financing: | | | | | | | | |
Pass | 249,370 | | 135,263 | | 68,092 | | 26,433 | | 43,469 | | 22,879 | | — | | 545,506 | |
Special mention | 7,934 | | 11,043 | | 6,981 | | 1,220 | | 1,577 | | 788 | | — | | 29,543 | |
Substandard | 7,483 | | 6,169 | | 5,749 | | 2,460 | | 4,743 | | 571 | | — | | 27,175 | |
Equipment financing | 264,787 | | 152,475 | | 80,822 | | 30,113 | | 49,789 | | 24,238 | | — | | 602,224 | |
Total commercial portfolio | $ | 4,116,181 | | $ | 2,781,504 | | $ | 2,475,137 | | $ | 1,198,615 | | $ | 909,133 | | $ | 1,584,568 | | $ | 1,835,397 | | $ | 14,900,535 | |
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 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 | |
Total consumer portfolio | 2,198,697 | | 1,077,624 | | 502,707 | | 144,883 | | 274,746 | | 1,669,802 | | 1,223,304 | | 7,091,763 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| At December 31, 2020 |
(In thousands) | 2020 | 2019 | 2018 | 2017 | 2016 | Prior | Revolving Loans Amortized Cost Basis | Total |
Residential: | | | | | | | | |
800+ | $ | 360,336 | | $ | 283,755 | | $ | 61,048 | | $ | 178,849 | | $ | 268,044 | | $ | 805,537 | | $ | — | | $ | 1,957,569 | |
740-799 | 654,973 | | 288,173 | | 58,249 | | 133,416 | | 176,286 | | 492,720 | | — | | 1,803,817 | |
670-739 | 199,329 | | 118,620 | | 39,125 | | 75,375 | | 76,666 | | 248,268 | | — | | 757,383 | |
580-669 | 17,151 | | 19,389 | | 8,884 | | 11,843 | | 12,225 | | 96,333 | | — | | 165,825 | |
579 and below | — | | 36,498 | | 673 | | 3,278 | | 3,179 | | 53,794 | | — | | 97,422 | |
Residential | 1,231,789 | | 746,435 | | 167,979 | | 402,761 | | 536,400 | | 1,696,652 | | — | | 4,782,016 | |
Home equity: | | | | | | | | |
800+ | 30,604 | | 16,567 | | 25,205 | | 14,439 | | 17,192 | | 59,956 | | 542,600 | | 706,563 | |
740-799 | 34,797 | | 13,565 | | 19,715 | | 11,073 | | 12,839 | | 43,802 | | 434,271 | | 570,062 | |
670-739 | 13,753 | | 8,855 | | 10,761 | | 10,206 | | 7,318 | | 44,025 | | 275,691 | | 370,609 | |
580-669 | 1,708 | | 2,172 | | 2,660 | | 2,234 | | 2,316 | | 16,680 | | 86,126 | | 113,896 | |
579 and below | 129 | | 919 | | 880 | | 1,070 | | 1,073 | | 7,163 | | 30,501 | | 41,735 | |
Home equity | 80,991 | | 42,078 | | 59,221 | | 39,022 | | 40,738 | | 171,626 | | 1,369,189 | | 1,802,865 | |
Other consumer: | | | | | | | | |
800+ | 2,827 | | 5,725 | | 2,610 | | 658 | | 115 | | 190 | | 7,171 | | 19,296 | |
740-799 | 12,317 | | 21,036 | | 8,925 | | 1,493 | | 457 | | 263 | | 5,119 | | 49,610 | |
670-739 | 14,761 | | 31,952 | | 11,843 | | 2,284 | | 665 | | 228 | | 8,403 | | 70,136 | |
580-669 | 2,344 | | 5,419 | | 2,360 | | 793 | | 194 | | 124 | | 1,570 | | 12,804 | |
579 and below | 608 | | 982 | | 500 | | 183 | | 37 | | 215 | | 1,428 | | 3,953 | |
Other consumer | 32,857 | | 65,114 | | 26,238 | | 5,411 | | 1,468 | | 1,020 | | 23,691 | | 155,799 | |
Total consumer portfolio | 1,345,637 | | 853,627 | | 253,438 | | 447,194 | | 578,606 | | 1,869,298 | | 1,392,880 | | 6,740,680 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
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 December 31, 2021 and 2020, the carrying amount of collateral dependent commercial loans and leases totaled $16.6 million and $42.1 million, respectively, and the carrying amount of collateral dependent consumer loans totaled $34.9 million and $60.8 million, respectively. Commercial non-mortgage, asset-based, and equipment financing loans and leases are generally secured by machinery and equipment, inventories, receivables, or other non-real estate assets, whereas commercial real estate, 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 December 31, 2021 and 2020, the collateral value on collateral dependent loans and leases totaled $86.0 million and $150.3 million, respectively.
Troubled Debt Restructurings
The following table summarizes information related to TDRs: | | | | | | | | | | | |
| At December 31, |
(Dollars in thousands) | 2021 | | 2020 |
Accrual status | $ | 110,625 | | | $ | 140,089 | |
Non-accrual status | 52,719 | | | 95,338 | |
Total TDRs | $ | 163,344 | | | $ | 235,427 | |
| | | |
Additional funds committed to borrowers in TDR status | $ | 5,975 | | | $ | 12,895 | |
Specific reserves for TDRs included in the ACL on loans and leases: | | | |
Commercial portfolio | $ | 9,017 | | | $ | 8,657 | |
Consumer portfolio | 3,745 | | | 4,071 | |
| | | |
The respective portions of commercial and consumer TDRs deemed to be uncollectible and charged-off were $3.0 million and $0.4 million during the year ended December 31, 2021, $17.6 million and $0.8 million during the year ended December 31, 2020, and $20.3 million and $1.5 million during the year ended December 31, 2019.
The following table summarizes loans and leases modified as TDRs by class and modification type: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years ended December 31, |
| 2021 | | 2020 | | 2019 |
| Number of Contracts | Recorded Investment (1) | | Number of Contracts | Recorded Investment (1) | | Number of Contracts | Recorded Investment (1) |
(Dollars in thousands) |
Commercial non-mortgage | | | | | | | | |
Extended maturity | 8 | | $ | 605 | | | 11 | | $ | 1,070 | | | 15 | | $ | 2,413 | |
Adjusted interest rate | — | | — | | | 1 | | 96 | | | 2 | | 112 | |
Maturity/rate combined | 9 | | 352 | | | 7 | | 607 | | | 11 | | 673 | |
Other (2) | 12 | | 14,160 | | | 24 | | 40,128 | | | 28 | | 65,186 | |
Commercial real estate | | | | | | | | |
Extended maturity | 1 | | 183 | | | 1 | | 72 | | | 3 | | 8,356 | |
Maturity/rate combined | — | | — | | | 2 | | 377 | | | — | | — | |
Other (2) | 1 | | 1,582 | | | 3 | | 306 | | | 3 | | 4,816 | |
Residential | | | | | | | | |
Extended maturity | 1 | | 99 | | | 3 | | 485 | | | 7 | | 1,327 | |
Maturity/rate combined | 2 | | 401 | | | 10 | | 1,133 | | | 15 | | 2,241 | |
Other (2) | 3 | | 280 | | | 26 | | 4,215 | | | 8 | | 1,001 | |
Home equity | | | | | | | | |
Extended maturity | 85 | | 1,809 | | | 3 | | 188 | | | 6 | | 599 | |
Maturity/rate combined | 6 | | 1,025 | | | 5 | | 334 | | | 4 | | 140 | |
Other (2) | 22 | | 1,481 | | | 96 | | 6,680 | | | 34 | | 1,907 | |
Total TDRs | 150 | | $ | 21,977 | | | 192 | | $ | 55,691 | | | 136 | | $ | 88,771 | |
(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 years ended December 31, 2021 and 2019, there were no significant loans and leases modified as TDRs within the previous 12 months and for which there was a payment default. For the year ended December 31, 2020, there were 4 commercial non-mortgage loans and leases that were modified as TDRs within the previous 12 months and for which there was a payment default with an aggregated amortized cost of $12.4 million.
Note 6: Transfers and Servicing of Financial Assets
Webster originates and sells residential mortgage loans in the normal course of business, 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 loans sold are included in mortgage banking activities on the accompanying Consolidated Statements of Income.
The following table provides information related to mortgage banking activities: | | | | | | | | | | | | | | | | | |
| Years ended December 31, |
(In thousands) | 2021 | | 2020 | | 2019 |
Proceeds from sale | $ | 247,634 | | | $ | 486,341 | | | $ | 216,239 | |
Loans sold with servicing rights retained | 237,834 | | | 464,736 | | | 199,114 | |
| | | | | |
Net gain on sale | $ | 5,192 | | | $ | 15,305 | | | $ | 4,031 | |
Ancillary fees | 1,440 | | | 3,230 | | | 1,614 | |
Fair value option adjustment | (413) | | | (240) | | | 470 | |
Under certain circumstances, Webster may decide to sell loans that were not originated with the intent to sell. During the years ended December 31, 2021, 2020, and 2019, the Company sold commercial and consumer loans not originated for sale for cash proceeds of $82.2 million, $9.2 million, and $20.9 million, respectively, which resulted in net gains on sale of $3.9 million, $0.3 million, and $0.7 million, respectively.
In addition, Webster may retain servicing rights on its residential mortgage loans sold in the normal course of business. At December 31, 2021 and 2020, the aggregate principal balance of residential mortgage loans serviced for others totaled $2.0 billion and $2.3 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. The Company 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: | | | | | | | | | | | | | | | | | |
| Years ended December 31, |
(In thousands) | 2021 | | 2020 | | 2019 |
Beginning balance | $ | 13,422 | | | $ | 17,484 | | | $ | 21,215 | |
Additions | 2,053 | | | 4,373 | | | 3,587 | |
Amortization | (5,593) | | | (6,562) | | | (7,318) | |
Adjustment to valuation allowance | (645) | | | (1,873) | | | — | |
Ending balance | $ | 9,237 | | | $ | 13,422 | | | $ | 17,484 | |
Loan servicing fees, net of mortgage servicing assets amortization and adjustments to the valuation allowance, were $1.7 million, $1.5 million, and $1.9 million for the years ended December 31, 2021, 2020, and 2019, respectively, and are included in loan and lease related fees on the accompanying Consolidated Statements of Income. Information regarding the fair value of loans held for sale and mortgage servicing assets can be found within Note 18: Fair Value Measurements.
As provided for in its sales agreements, the Company may be required to repurchase a loan in the event of certain breaches in representations and warranties on the underlying loans sold, or in the event the borrower defaults within 90 days of sale. Webster records a reserve for loan repurchases within accrued expenses and other liabilities on the accompanying Consolidated Balance Sheets to provide for any potential losses that may be incurred through repurchasing a loan in connection with its mortgage banking activities. The reserve comprises both existing and anticipated loan repurchase requests, as well as specific reserves for current identifiable losses and estimated recoveries on any underlying collateral. The provision recorded at the time of sale is netted against the gain or loss recognized in mortgage banking activities, whereas any incremental provision subsequently recorded is included in other non-interest expense on the accompanying Consolidated Statements of Income.
The following table summarizes the activity in the reserve for loan repurchases: | | | | | | | | | | | | | | | | | |
| Years ended December 31, |
(In thousands) | 2021 | | 2020 | | 2019 |
Beginning balance | $ | 747 | | | $ | 508 | | | $ | 674 | |
Provision | 73 | | | 141 | | | 1,865 | |
Repurchased loans and settlements (charged-off) recovered, net | (72) | | | 98 | | | (2,031) | |
Ending balance | $ | 748 | | | $ | 747 | | | $ | 508 | |
(1)The increased provision and corresponding charge-off in 2019 was related to a discrete legal settlement in connection with previously sold loans.
Note 7: Premises and Equipment
The following table summarizes the components of premises and equipment: | | | | | | | | | | | |
| At December 31, |
(In thousands) | 2021 | | 2020 |
Land | $ | 9,436 | | | $ | 9,436 | |
Buildings and improvements | 67,501 | | | 70,195 | |
Leasehold improvements | 65,606 | | | 71,332 | |
Fixtures and equipment | 64,890 | | | 73,730 | |
Data processing and software | 105,516 | | | 270,780 | |
Property and equipment | 312,949 | | | 495,473 | |
Less: Accumulated depreciation and amortization | (228,318) | | | (396,211) | |
Property and equipment, net | 84,631 | | | 99,262 | |
ROU lease assets, net | 119,926 | | | 127,481 | |
Premises and equipment, net | $ | 204,557 | | | $ | 226,743 | |
Depreciation and amortization of property and equipment was $31.4 million, $32.5 million, and $33.7 million for the years ended December 31, 2021, 2020, and 2019, respectively, and is included in occupancy and technology and equipment expense on the accompanying Consolidated Statements of Income.
Additional information regarding ROU lease assets can be found within Note 8: Leasing.
The following table summarizes activity in assets held for disposition: | | | | | | | | | | | |
| Years ended December 31, |
(In thousands) | 2021 | | 2020 |
Beginning balance | $ | 2,654 | | | $ | — | |
Transfers (to) from property and equipment | (38) | | | 2,654 | |
| | | |
Sales | (2,126) | | | — | |
Ending balance | $ | 490 | | | $ | 2,654 | |
There was no significant activity in assets held for disposition during 2019. Assets held for disposition is included in accrued interest receivable and other assets on the accompanying Consolidated Balance Sheets.
Note 8: Leasing
Lessor Arrangements
Webster leases certain types of machinery and equipment to its customers through direct financing leases as part of its equipment financing portfolio. These leases generally have remaining lease terms of 1 to 10 years, and include options for the lessee to purchase the lease asset near or at the end of the lease term. Webster recognized interest income from its lessor activities of $7.5 million, $7.1 million, and $5.5 million for the years ended December 31, 2021, 2020, and 2019, respectively. Additional information regarding Webster's equipment financing portfolio can be found within Note 5: Loans and Leases.
The following table summarizes the components of Webster's net investment in its direct financing leases: | | | | | | | | |
| At December 31, |
(In thousands) | 2021 | 2020 |
Lease receivables | $ | 196,632 | $ | 207,508 |
Unguaranteed residual values | 19,748 | 28,609 |
Total net investment | $ | 216,380 | $ | 236,117 |
The undiscounted scheduled maturities reconciled to the total net investment are as follows:
| | | | | | |
(In thousands) | | At December 31, 2021 |
| | |
2022 | | $ | 68,008 |
2023 | | 59,554 |
2024 | | 39,325 |
2025 | | 29,534 |
2026 | | 21,687 |
Thereafter | | 16,636 |
Total lease payments receivable | | 234,744 |
Present value adjustment | | (18,364) |
Total net investment | | $ | 216,380 |
Lessee Arrangements
Webster enters into operating leases in the normal course of business, primarily for office space, banking centers, and other operational activities. These leases generally have remaining lease terms of one to fifteen years. Webster does not have any significant sub-leases nor finance leases in which it is the lessee.
The following table summarizes Webster's ROU lease assets and operating lease liabilities: | | | | | | | | | | | | | | |
| | | At December 31, |
(In thousands) | Consolidated Balance Sheet Line Item | | 2021 | 2020 |
ROU lease assets | Premises and equipment, net | | $ | 119,926 | $ | 127,481 |
Operating lease liabilities | Operating lease liabilities | | 144,804 | 158,280 |
ROU lease asset impairments totaled $1.2 million and $12.0 million for the years ended December 31, 2021 and 2020, respectively, which is recorded in occupancy on the accompanying Consolidated Statements of Income. The increased charge in 2020 was due to Webster's decision to close leased banking centers as part of its strategic initiatives. There were no ROU lease asset impairments during the year ended December 31, 2019.
The following table summarizes the components of operating lease expense and other relevant information: | | | | | | | | | | | |
| At or for the Years ended December 31, |
(In thousands) | 2021 | 2020 | 2019 |
Lease Cost: | | | |
Operating lease costs | $ | 26,076 | $ | 30,339 | $ | 29,908 |
Variable lease costs | 4,860 | 5,577 | 4,889 |
Sublease income | (554) | (557) | (577) |
Total operating lease expense | $ | 30,382 | $ | 35,359 | $ | 34,220 |
| | | |
Other Information: | | | |
Cash paid for amounts included in the measurement of operating lease liabilities | $ | 30,487 | $ | 31,212 | $ | 31,223 |
ROU lease assets obtained in exchange for operating lease liabilities | 15,226 | 9,211 | 22,948 |
Weighted-average remaining lease term (years) | 7.50 | 8.04 | 8.39 |
Weighted-average discount rate | 3.04 | % | 3.19 | % | 3.31 | % |
The undiscounted scheduled maturities reconciled to total operating lease liabilities are as follows: | | | | | | |
(In thousands) | At December 31, 2021 | |
2022 | $ | 25,895 | |
2023 | 26,539 | |
2024 | 23,767 | |
2025 | 21,792 | |
2026 | 18,656 | |
Thereafter | 48,009 | |
Total operating lease payments | 164,658 | |
Present value adjustment | (19,854) | |
Total operating lease liabilities | $ | 144,804 | |
Note 9: Goodwill and Other Intangible Assets
There has been no change in the carrying amount for goodwill during the year ended December 31, 2021. Information regarding goodwill by reportable segment can be found within Note 21: Segment Reporting.
Other intangible assets by reportable segment consisted of the following: | | | | | | | | | | | | | | | | | | | | | | | |
| At December 31, |
| 2021 | | 2020 |
(In thousands) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount |
HSA Bank - Core deposits | $ | 26,625 | | $ | 18,516 | | $ | 8,109 | | | $ | 26,625 | | $ | 15,618 | | $ | 11,007 | |
HSA Bank - Customer relationships | 21,000 | | 11,240 | | 9,760 | | | 21,000 | | 9,624 | | 11,376 | |
Total other intangible assets | $ | 47,625 | | $ | 29,756 | | $ | 17,869 | | | $ | 47,625 | | $ | 25,242 | | $ | 22,383 | |
The remaining estimated aggregate future amortization expense for other intangible assets is as follows at December 31, 2021: | | | | | |
(In thousands) | |
2022 | $ | 4,410 | |
2023 | 4,315 | |
2024 | 2,084 | |
2025 | 2,084 | |
2026 | 2,084 | |
Thereafter | 2,892 | |
Note 10: Income Taxes
Income tax expense reflects the following expense (benefit) components: | | | | | | | | | | | | | | | | | |
| Years ended December 31, |
(In thousands) | 2021 | | 2020 | | 2019 |
Current: | | | | | |
Federal | $ | 109,621 | | | $ | 73,172 | | | $ | 84,447 | |
State and local | 20,374 | | | 17,417 | | | 18,595 | |
Total current | 129,995 | | | 90,589 | | | 103,042 | |
Deferred: | | | | | |
Federal | (9,844) | | | (23,799) | | | 811 | |
State and local | 4,846 | | | (7,437) | | | 116 | |
Total deferred | (4,998) | | | (31,236) | | | 927 | |
| | | | | |
Total federal | 99,777 | | | 49,373 | | | 85,258 | |
Total state and local | 25,220 | | | 9,980 | | | 18,711 | |
Income tax expense | $ | 124,997 | | | $ | 59,353 | | | $ | 103,969 | |
Included in the Company's income tax expense for the years ended December 31, 2021, 2020, and 2019, are net tax credits of approximately $2.6 million, $1.1 million, and $4.8 million, respectively, along with a $0.4 million benefit from operating loss carryforwards in 2021. The deferred federal benefit in 2021 reflects the effects of elections Webster made on its 2020 federal tax return to defer cost recovery deductions, which did not impact deferred state and local expense to any significant degree.
The $2.6 million of net tax credits in 2021 includes $0.5 million for increases in federal and state research tax credits previously estimated for and recognized in 2020. The $4.8 million of net tax credits in 2019 includes $3.0 million related to federal and state research tax credits, $2.4 million of which relates to the Company’s qualifying technology expenditures incurred before 2019.
The following table reflects a reconciliation of reported income tax expense to the amount that would result from applying the federal statutory rate of 21.0%:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years ended December 31, |
| 2021 | | 2020 | | 2019 |
(Dollars in thousands) | Amount | Percent | | Amount | Percent | | Amount | Percent |
Income tax expense at federal statutory rate | $ | 112,111 | | 21.0 | % | | $ | 58,795 | | 21.0 | % | | $ | 102,205 | | 21.0 | % |
Reconciliation to reported income tax expense: | | | | | | | | |
SALT expense, net of federal | 19,924 | | 3.7 | | | 7,884 | | 2.8 | | | 14,782 | | 3.0 | |
Tax-exempt interest income, net | (6,814) | | (1.3) | | | (7,181) | | (2.6) | | | (6,752) | | (1.4) | |
Increase in cash surrender value of life insurance | (3,030) | | (0.6) | | | (3,058) | | (1.1) | | | (3,069) | | (0.6) | |
Tax deficiencies (excess tax benefits), net | (1,479) | | (0.3) | | | 484 | | 0.2 | | | (2,251) | | (0.4) | |
Non-deductible FDIC Deposit insurance premiums | 2,064 | | 0.4 | | | 2,172 | | 0.8 | | | 1,904 | | 0.4 | |
Non-deductible merger-related expenses | 3,451 | | 0.7 | | | — | | — | | | — | | — | |
Other, net | (1,230) | | (0.2) | | | 257 | | 0.1 | | | (2,850) | | (0.6) | |
Income tax expense and effective tax rate | $ | 124,997 | | 23.4 | % | | $ | 59,353 | | 21.2 | % | | $ | 103,969 | | 21.4 | % |
The following table reflects the significant components of the DTAs, net: | | | | | | | | | | | |
| At December 31, |
(In thousands) | 2021 | | 2020 |
Deferred tax assets: | | | |
Allowance for loan and lease losses | $ | 78,905 | | | $ | 93,791 | |
Net operating loss and credit carry forwards | 64,366 | | | 66,840 | |
Compensation and employee benefit plans | 22,840 | | | 27,643 | |
Lease liabilities under operating leases | 38,130 | | | 41,679 | |
| | | |
| | | |
| | | |
Other | 12,790 | | | 8,750 | |
Gross deferred tax assets | 217,031 | | | 238,703 | |
Valuation allowance | 37,374 | | | 37,374 | |
Total deferred tax assets, net of valuation allowance | $ | 179,657 | | | $ | 201,329 | |
Deferred tax liabilities: | | | |
Net unrealized gain on securities available for sale | $ | 1,885 | | | $ | 24,364 | |
Net unrealized gain on derivatives | 2,584 | | | 7,616 | |
ROU assets under operating leases | 31,580 | | | 33,569 | |
Equipment financing leases | 21,193 | | | 38,511 | |
Premises and equipment | 879 | | | 6,735 | |
| | | |
Goodwill and other intangible assets | 5,690 | | | 5,954 | |
Other | 6,441 | | | 3,294 | |
Gross deferred tax liabilities | 70,252 | | | 120,043 | |
Deferred tax assets, net | $ | 109,405 | | | $ | 81,286 | |
The Company's DTAs, net increased by $28.1 million during 2021, primarily reflecting the $5.0 million deferred tax benefit and a $23.2 million benefit allocated directly to AOCI. The decreases in the equipment financing leases and premises and equipment DTLs during 2021 reflect elections Webster made on its 2020 federal tax return to defer cost recovery deductions.
The valuation allowance of $37.4 million at both December 31, 2021 and 2020 is attributable to SALT net operating loss carryforwards, which approximated $1.1 billion at December 31, 2021 and are scheduled to expire in varying amounts during tax years 2024 through 2032. The valuation allowance has been established for approximately $630.8 million of those net operating loss carryforwards estimated to expire unused.
Management believes it is more likely than not that the results of future operations will generate sufficient taxable income to realize its total DTAs, net of the valuation allowance. Although taxable income in prior years is no longer able to be included as a source of taxable income, due to the general repeal of the carryback of net operating losses under the Tax Cuts and Jobs Act of 2017, significant positive evidence remains in support of management's conclusion regarding the realizability of the Company's DTAs, including projected future reversals of existing taxable temporary differences and book-taxable income levels in recent and projected in future years. There can, however, be no assurance that any specific level of future income will be generated or that the Company’s DTAs will ultimately be realized.
A DTL of $15.3 million has not been recognized for certain thrift bad-debt reserves, established before 1988, that would become taxable upon the occurrence of certain events: distributions by Webster Bank in excess of certain earnings and profits; the redemption of Webster Bank’s stock; or liquidation. Webster does not expect any of those events to occur. At December 31, 2021 the cumulative taxable temporary differences applicable to those reserves approximated $58.0 million.
The following table reflects a reconciliation of the beginning and ending balances of unrecognized tax benefits (UTBs): | | | | | | | | | | | | | | | | | |
| Years ended December 31, |
(In thousands) | 2021 | | 2020 | | 2019 |
Beginning balance | $ | 4,252 | | | $ | 4,813 | | | $ | 2,856 | |
Additions as a result of tax positions taken during the current year | 294 | | | 87 | | | 1,106 | |
Additions as a result of tax positions taken during prior years | 434 | | | 572 | | | 1,744 | |
Reductions as a result of tax positions taken during prior years | (186) | | | (694) | | | (238) | |
Reductions relating to settlements with taxing authorities | (267) | | | (130) | | | (18) | |
Reductions as a result of lapse of statute of limitation periods | (278) | | | (396) | | | (637) | |
Ending balance | $ | 4,249 | | | $ | 4,252 | | | $ | 4,813 | |
At December 31, 2021, 2020, and 2019, there were $3.5 million, $3.5 million, and $3.9 million, respectively, of UTBs that if recognized would affect the effective tax rate.
Webster recognizes interest and penalties related to UTBs, where applicable, in income tax expense. Webster recognized an expense of $0.3 million during the year ended December 31, 2021, and a benefit of $0.1 million for both the years ended December 31, 2020 and 2019. At December 31, 2021 and 2020, the Company had accrued interest and penalties related to UTBs of $1.9 million and $1.7 million respectively.
Webster has determined it is reasonably possible that its total UTBs could decrease by an amount in the range of $1.6 million to $2.6 million by the end of 2022 as a result of potential lapses in statute-of-limitation periods and/or potential settlements with taxing authorities concerning various apportionment, tax-base, and research tax credit determinations.
Webster's federal tax returns for all years subsequent to 2016 remain open to examination. Webster's tax returns filed in its principal state tax jurisdictions of Connecticut, Massachusetts, New York, and Rhode Island for years subsequent to 2014, or 2017, are either under or remain open to examination.
Note 11: Deposits
The following table summarizes deposits by type: | | | | | | | | | | | |
| At December 31, |
(In thousands) | 2021 | | 2020 |
Non-interest-bearing: | | | |
Demand | $ | 7,060,488 | | | $ | 6,155,592 | |
Interest-bearing: | | | |
Health savings accounts | 7,397,582 | | | 7,120,017 | |
Checking | 4,182,497 | | | 3,652,763 | |
Money market | 3,718,953 | | | 2,940,215 | |
Savings | 5,689,739 | | | 4,979,031 | |
Time deposits | 1,797,770 | | | 2,487,818 | |
Total interest-bearing | 22,786,541 | | | 21,179,844 | |
Total deposits | $ | 29,847,029 | | | $ | 27,335,436 | |
| | | |
Time deposits and interest-bearing checking obtained through brokers | $ | 120,392 | | | $ | 720,440 | |
Aggregate amount of time deposit accounts that exceeded the FDIC limit | 256,522 | | | 504,543 | |
Demand deposit overdrafts reclassified as loan balances | 1,577 | | | 2,007 | |
The scheduled maturities of time deposits are as follows: | | | | | |
(In thousands) | At December 31, 2021 |
2022 | $ | 1,566,257 | |
2023 | 115,321 | |
2024 | 46,432 | |
2025 | 49,849 | |
2026 | 19,911 | |
| |
Total time deposits | $ | 1,797,770 | |
Note 12: Borrowings
Total borrowed funds were $1.2 billion and $1.7 billion at December 31, 2021 and 2020, respectively. The components of Webster's borrowings are discussed further below.
The following table summarizes securities sold under agreements to repurchase and other borrowings: | | | | | | | | | | | | | | | | | |
| At December 31, |
| 2021 | | 2020 |
(Dollars in thousands) | Total Outstanding | Rate | | Total Outstanding | Rate |
Securities sold under agreements to repurchase (1): | | | | | |
Original maturity of one year or less | $ | 474,896 | | 0.11 | % | | $ | 269,330 | | 0.13 | % |
Original maturity of greater than one year, non-callable | 200,000 | | 1.32 | | | 200,000 | | 0.84 | |
Total securities sold under agreements to repurchase | 674,896 | | 0.47 | | | 469,330 | | 0.43 | |
Federal funds purchased | — | | — | | | 526,025 | | 0.08 | |
Securities sold under agreements to repurchase and other borrowings | $ | 674,896 | | 0.47 | % | | $ | 995,355 | | 0.25 | % |
(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. Webster'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 term and overnight federal funds to satisfy its short-term liquidity needs.
The following table summarizes information for FHLB advances: | | | | | | | | | | | | | | | | | |
| At December 31, |
| 2021 | | 2020 |
(Dollars in thousands) | Total Outstanding | Weighted-Average Contractual Coupon Rate | | Total Outstanding | Weighted-Average Contractual Coupon Rate |
Maturing within 1 year | $ | 90 | | — | % | | $ | 25,000 | | 0.38 | % |
After 1 year but within 2 years | 202 | | 2.95 | | | 110 | | — | |
After 2 years but within 3 years | — | | — | | | 215 | | 2.95 | |
After 3 years but within 4 years | — | | — | | | 50,000 | | 1.59 | |
After 4 years but within 5 years | — | | — | | | 50,000 | | 1.42 | |
After 5 years | 10,705 | | 2.03 | | | 7,839 | | 2.66 | |
FHLB advances | $ | 10,997 | | 2.03 | % | | $ | 133,164 | | 1.36 | % |
| | | | | |
Aggregate carrying value of assets pledged as collateral | $ | 7,556,034 | | | | $ | 7,387,054 | | |
Remaining borrowing capacity at FHLB | 5,087,294 | | | | 4,689,642 | | |
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 December 31, 2021 and 2020.
The following table summarizes long-term debt: | | | | | | | | | | | | | | |
| At December 31, |
(Dollars in thousands) | 2021 | | 2020 |
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) | 338,811 | | | 344,164 | |
Junior subordinated debt Webster Statutory Trust I floating-rate notes due September 17, 2033 (2) | 77,320 | | | 77,320 | |
Total senior and subordinated debt | 566,131 | | | 571,484 | |
Discount on senior fixed-rate notes | (974) | | | (1,193) | |
Debt issuance cost on senior fixed-rate notes | (2,226) | | | (2,628) | |
Long-term debt | $ | 562,931 | | | $ | 567,663 | |
(1)Webster de-designated its fair value hedging relationship on these senior notes in 2020. A basis adjustment of $38.8 million and $44.2 million at December 31, 2021 and 2020, 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 3.17% and 3.18% at December 31, 2021 and 2020, respectively.
Note 13: Shareholders' Equity
The following table summarizes the changes in Webster's preferred shares, common shares, and treasury shares for the year ended December 31, 2021: | | | | | | | | | | | | | | | | | | |
| | Preferred Stock Series F | | Common Stock Issued | Treasury Stock Held | Common Stock Outstanding |
Balance at January 1, 2021 | | 6,000 | | | 93,686,311 | | 3,487,389 | | 90,198,922 | |
Restricted share activity | | — | | | — | | (154,281) | | 154,281 | |
Stock options exercised | | — | | | — | | (230,418) | | 230,418 | |
| | | | | | |
Balance at December 31, 2021 | | 6,000 | | | 93,686,311 | | 3,102,690 | | 90,583,621 | |
Common Stock
Webster maintains a common stock repurchase program, which was announced on October 29, 2019 and approved by the Board of Directors, that authorizes management to purchase up to $200.0 million of its common stock in either open market or privately negotiated transactions, subject to market conditions and other factors. Due to the effects of the COVID-19 pandemic on the economic environment, Webster had temporarily suspended repurchases of its common stock under the program in 2020. Further, as part of the Company's executed merger agreement with Sterling dated as of April 18, 2021, Webster was restricted from repurchasing any shares under the program through the close of the transaction. Now that the transaction has closed effective January 31, 2022, Webster has resumed its common stock repurchase program subject to prevailing market conditions. At December 31, 2021, the remaining repurchase authority under the common stock repurchase program was $123.4 million.
Preferred Stock
At December 31, 2021, Webster had 6,000,000 depositary shares outstanding, each representing 1/1000th ownership interest in a share of its Series F Preferred Stock. Dividends on the Series F Preferred Stock are non-cumulative and are not mandatory. If declared by the Board of Directors (or a duly authorized committee thereof), Webster pays dividends quarterly in arrears on the fifteenth day of each March, June, September, and December, at a rate equal to 5.25% of the $25,000 per share liquidation amount per annum. If the Board of Directors (or a duly authorized committee thereof) does not declare a dividend on the Series F Preferred Stock in respect of a dividend period, a dividend will not accrue and Webster has no obligation to pay any dividend for that period, regardless as to whether a dividend is declared for a future period on the Series F Preferred stock or any other series of Webster preferred stock. The terms of the Series F Preferred Stock prohibit Webster from declaring or paying any cash dividends on its common stock, and from repurchasing, redeeming, or otherwise acquiring Webster common stock or any other series of Webster preferred stock to which it ranks on parity with, unless dividends have been declared and paid in full on the Series F Preferred Stock for the most recent dividend period.
The Series F Preferred Stock is perpetual and has no maturity date, and is not subject to any mandatory redemption, sinking fund, or other similar provisions. Webster may redeem the Series F Preferred Stock at its option, in whole or in part, subject to the approval of the Federal Reserve Board, on December 15, 2022, or any dividend payment date thereafter, or in whole but not in part, upon the occurrence of a regulatory capital treatment event as defined in the Prospectus Supplement, at a redemption price equal to the liquidation preference plus any declared and unpaid dividends, without accumulation of any undeclared dividends. Except with respect to certain non-payment events and changes to the terms of the Series F Preferred Stock, holders of Series F Preferred Stock have no voting rights nor preemptive or conversion rights. The Series F Preferred Stock is not convertible or exchangeable for shares of any other class of Webster stock.
Additional information regarding Webster's common and preferred stock, including the subsequent changes as a result of the Company's merger with Sterling, can be found within Note 3: Business Developments.
Note 14: 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: | | | | | | | | | | | | | | |
(In thousands) | Securities Available For Sale | Derivative Instruments | Defined Benefit Pension and Other Postretirement Benefit Plans | Total |
Balance at December 31, 2018 | $ | (71,374) | | $ | (9,313) | | $ | (49,965) | | $ | (130,652) | |
Other comprehensive income (loss) before reclassifications | 88,647 | | (4,945) | | 1,622 | | 85,324 | |
Amounts reclassified from accumulated other comprehensive (loss) | (22) | | 5,074 | | 4,204 | | 9,256 | |
Other comprehensive income, net of tax | 88,625 | | 129 | | 5,826 | | 94,580 | |
Balance at December 31, 2019 | 17,251 | | (9,184) | | (44,139) | | (36,072) | |
Other comprehensive income (loss) before reclassifications | 50,179 | | 20,667 | | (3,887) | | 66,959 | |
Amounts reclassified from accumulated other comprehensive income (loss) | (6) | | 8,435 | | 2,940 | | 11,369 | |
Other comprehensive income (loss), net of tax | 50,173 | | 29,102 | | (947) | | 78,328 | |
Balance at December 31, 2020 | 67,424 | | 19,918 | | (45,086) | | 42,256 | |
Other comprehensive (loss) income before reclassifications | (62,888) | | (17,109) | | 8,876 | | (71,121) | |
Amounts reclassified from accumulated other comprehensive income (loss) | — | | 3,261 | | 3,024 | | 6,285 | |
Other comprehensive (loss) income, net of tax | (62,888) | | (13,848) | | 11,900 | | (64,836) | |
Balance at December 31, 2021 | $ | 4,536 | | $ | 6,070 | | $ | (33,186) | | $ | (22,580) | |
The following table further summarizes the amounts reclassified from accumulated other comprehensive (loss) income: | | | | | | | | | | | | | | | | | | | | |
| Years ended December 31, | |
Accumulated Other Comprehensive Income (Loss) Components | 2021 | | 2020 | | 2019 | Associated Line Item in the Consolidated Statement Of Income |
(In thousands) | | | | | | |
Securities available-for-sale: | | | | | | |
Net unrealized holding gains | $ | — | | | $ | 8 | | | $ | 29 | | Gain on sale of investment securities, net |
| | | | | | |
| | | | | | |
Tax (expense) | — | | | (2) | | | (7) | | Income tax expense |
Net of tax | $ | — | | | $ | 6 | | | $ | 22 | | |
Derivative instruments: | | | | | | |
Hedge terminations | $ | (4,109) | | | $ | (7,884) | | | $ | (5,509) | | Interest expense |
Premium amortization | (306) | | | (3,536) | | | (1,323) | | Interest income |
Tax benefit | 1,154 | | | 2,985 | | | 1,758 | | Income tax expense |
Net of tax | $ | (3,261) | | | $ | (8,435) | | | $ | (5,074) | | |
Defined benefit pension and other postretirement benefit plans: | | | | | | |
Actuarial net loss amortization | $ | (4,102) | | | $ | (3,976) | | | $ | (5,706) | | Other non-interest expense |
Tax benefit | 1,078 | | | 1,036 | | | 1,502 | | Income tax expense |
Net of tax | $ | (3,024) | | | $ | (2,940) | | | $ | (4,204) | | |
The following tables summarize each component of other comprehensive (loss) income and the related tax effects: | | | | | | | | | | | |
| Year ended December 31, 2021 |
(In thousands) | Amount Before Tax | Tax Benefit (Expense) | Amount Net of Tax |
Securities available-for-sale: | | | |
Net unrealized holding (losses) arising during the year | $ | (85,368) | | $ | 22,480 | | $ | (62,888) | |
| | | |
Total securities available-for-sale | (85,368) | | 22,480 | | (62,888) | |
Derivative instruments: | | | |
Net unrealized (losses) arising during the year | (23,216) | | 6,107 | | (17,109) | |
Reclassification adjustment for net realized losses included in net income | 4,415 | | (1,154) | | 3,261 | |
Total derivative instruments | (18,801) | | 4,953 | | (13,848) | |
Defined benefit pension and other postretirement benefit plans: | | | |
Net actuarial gain arising during the year | 12,052 | | (3,176) | | 8,876 | |
Reclassification adjustment for net actuarial loss amortization included in net income | 4,102 | | (1,078) | | 3,024 | |
Total defined benefit pension and postretirement benefit plans | 16,154 | | (4,254) | | 11,900 | |
Other comprehensive (loss), net of tax | $ | (88,015) | | $ | 23,179 | | $ | (64,836) | |
| | | |
| Year ended December 31, 2020 |
(In thousands) | Amount Before Tax | Tax Benefit (Expense) | Amount Net of Tax |
Securities available-for-sale: | | | |
Net unrealized holding gains arising during the year | $ | 68,116 | | $ | (17,937) | | $ | 50,179 | |
Reclassification adjustment for net realized gains included in net income | (8) | | 2 | | (6) | |
Total securities available-for-sale | 68,108 | | (17,935) | | 50,173 | |
Derivative instruments: | | | |
Net unrealized gains arising during the year | 27,683 | | (7,016) | | 20,667 | |
Reclassification adjustment for net realized losses included in net income | 11,420 | | (2,985) | | 8,435 | |
Total derivative instruments | 39,103 | | (10,001) | | 29,102 | |
Defined benefit pension and other postretirement benefit plans: | | | |
Net actuarial loss arising during the year | (5,262) | | 1,375 | | (3,887) | |
Reclassification adjustment for net actuarial loss amortization included in net income | 3,976 | | (1,036) | | 2,940 | |
Total defined benefit pension and postretirement benefit plans | (1,286) | | 339 | | (947) | |
Other comprehensive income, net of tax | $ | 105,925 | | $ | (27,597) | | $ | 78,328 | |
| | | |
| Year ended December 31, 2019 |
(In thousands) | Amount Before Tax | Tax Benefit (Expense) | Amount Net of Tax |
Securities available-for-sale: | | | |
Net unrealized holding gains arising during the year | $ | 120,333 | | $ | (31,686) | | $ | 88,647 | |
Reclassification adjustment for net realized gains included in net income | (29) | | 7 | | (22) | |
Total securities available-for-sale | 120,304 | | (31,679) | | 88,625 | |
Derivative instruments: | | | |
Net unrealized (losses) arising during the year | (6,672) | | 1,727 | | (4,945) | |
Reclassification adjustment for net realized losses included in net income | 6,832 | | (1,758) | | 5,074 | |
Total derivative instruments | 160 | | (31) | | 129 | |
Defined benefit pension and other postretirement benefit plans: | | | |
Net actuarial gain arising during the year | 2,202 | | (580) | | 1,622 | |
Reclassification adjustment for net actuarial loss amortization included in net income | 5,706 | | (1,502) | | 4,204 | |
Total defined benefit pension and postretirement benefit plans | 7,908 | | (2,082) | | 5,826 | |
Other comprehensive income, net of tax | $ | 128,372 | | $ | (33,792) | | $ | 94,580 | |
Note 15: 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 December 31, 2021 and 2020, both Webster Financial Corporation and Webster Bank were classified as well-capitalized. Management believes that no events or changes have occurred subsequent to year-end that would change this designation.
The following table provides information on the capital ratios for Webster Financial Corporation and Webster Bank: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 | |
| At December 31, 2020 |
| Actual (1) | | Minimum Requirement | | Well Capitalized |
(Dollars in thousands) | Amount | Ratio | | Amount | Ratio | | Amount | Ratio |
Webster Financial Corporation | | | | | | | | |
CET1 risk-based capital | $ | 2,543,131 | | 11.35 | % | | $ | 1,008,512 | | 4.5 | % | | $ | 1,456,739 | | 6.5 | % |
Total risk-based capital | 3,045,652 | | 13.59 | | | 1,792,910 | | 8.0 | | | 2,241,137 | | 10.0 | |
Tier 1 risk-based capital | 2,688,168 | | 11.99 | | | 1,344,682 | | 6.0 | | | 1,792,910 | | 8.0 | |
Tier 1 leverage capital | 2,688,168 | | 8.32 | | | 1,291,980 | | 4.0 | | | 1,614,975 | | 5.0 | |
Webster Bank | | | | | | | | |
CET1 risk-based capital | $ | 2,791,474 | | 12.46 | % | | $ | 1,008,027 | | 4.5 | % | | $ | 1,456,039 | | 6.5 | % |
Total risk-based capital | 3,071,505 | | 13.71 | | | 1,792,048 | | 8.0 | | | 2,240,060 | | 10.0 | |
Tier 1 risk-based capital | 2,791,474 | | 12.46 | | | 1,344,036 | | 6.0 | | | 1,792,048 | | 8.0 | |
Tier 1 leverage capital | 2,791,474 | | 8.65 | | | 1,291,415 | | 4.0 | | | 1,614,268 | | 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 ending on January 1, 2022, and subsequent three-year transition period ending on December 31, 2024. As a result, capital ratios and amounts exclude the impact of the increased ACL on loans and leases, held-to-maturity debt securities, and unfunded loan commitments attributed 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 to the incurred loss methodology during the deferral period.
Dividend Restrictions
Webster Financial Corporation is dependent upon dividends from Webster Bank to provide funds for 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 years ended December 31, 2021 and 2020, Webster Bank paid $200.0 million and $20.0 million in dividends 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 December 31, 2021 and 2020.
Note 16: Earnings Per Common Share
The following table summarizes the calculation of basic and diluted earnings per common share: | | | | | | | | | | | | | | | | | |
| Years ended December 31, |
(In thousands, except per share data) | 2021 | | 2020 | | 2019 |
Earnings for basic and diluted earnings per common share: | | | | | |
Net income | $ | 408,864 | | | $ | 220,621 | | | $ | 382,723 | |
Less: Preferred stock dividends | 7,875 | | | 7,875 | | | 7,875 | |
Net income available to common shareholders | 400,989 | | | 212,746 | | | 374,848 | |
Less: Earnings allocated to participating securities | 2,302 | | | 1,272 | | | 1,863 | |
Earnings applicable to common shareholders | $ | 398,687 | | | $ | 211,474 | | | $ | 372,985 | |
| | | | | |
Shares: | | | | | |
Weighted-average common shares outstanding - basic | 89,983 | | | 89,967 | | | 91,559 | |
Effect of dilutive securities (1) | 223 | | | 184 | | | 323 | |
Weighted-average common shares outstanding - diluted | 90,206 | | | 90,151 | | | 91,882 | |
| | | | | |
Earnings per common share: | | | | | |
Basic | $ | 4.43 | | | $ | 2.35 | | | $ | 4.07 | |
Diluted | 4.42 | | | 2.35 | | | 4.06 | |
(1)Includes stock options and performance-based restricted stock for all periods presented.
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 performance-based restricted stock awards that were not included in the computation of dilutive earnings per common share because they were anti-dilutive (the exercise price is greater than the weighted-average market price) under the treasury stock method were 56,829, 43,508, and 73,347 for the years ended December 31, 2021, 2020, and 2019, respectively. Additional information regarding the potential common shares excluded from the effect of dilutive securities can be found in Note 20: Share-Based Plans.
Note 17: 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 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 | |
| | | | | |
| At December 31, 2020 |
| 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 | | $ | 40,854 | | | $ | 25,000 | | $ | 110 | |
Not designated as hedging instruments: | | | | | |
Interest rate derivatives (1) | 4,421,627 | | 297,085 | | | 4,468,153 | | 12,203 | |
Mortgage banking derivatives (2) | 40,771 | | 855 | | | — | | — | |
Other (3) | 108,987 | | 264 | | | 360,497 | | 377 | |
Total not designated as hedging instruments | 4,571,385 | | 298,204 | | | 4,828,650 | | 12,580 | |
Gross derivative instruments, before netting | $ | 5,571,385 | | 339,058 | | | $ | 4,853,650 | | 12,690 | |
Less: Master netting agreements | | 7,748 | | | | 7,748 | |
Cash collateral | | 33,972 | | | | 4,550 | |
Total derivative instruments, after netting | | $ | 297,338 | | | | $ | 392 | |
(1)Balances related to CME are presented as a single unit of account. In accordance with its rule book, CME legally characterizes variation margin payments as settlement of derivatives rather than collateral against derivative positions. Notional amounts of interest rate swaps cleared through CME include $0.4 billion and $0.1 billion for asset derivatives and $2.6 billion and $3.2 billion for liability derivatives at December 31, 2021 and 2020, respectively. The related fair values approximate zero.
(2)Notional amounts related to residential loans exclude approved floating rate commitments of $1.0 million at December 31, 2021.
(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 $66.0 million and $80.5 million for asset derivatives and $338.2 million and $338.9 million for liability derivatives at December 31, 2021 and 2020, 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 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 | |
| | | | | | |
| At December 31, 2020 |
(In thousands) | Gross Amount | Offset Amount | Net Amount on Balance Sheet | | Amounts Not Offset | Net Amounts |
Asset derivatives | $ | 41,774 | | $ | 41,720 | | $ | 54 | | | $ | 666 | | $ | 720 | |
Liability derivatives | 12,352 | | 12,298 | | 54 | | | 265 | | 319 | |
Derivative Activity
The following table summarizes the income statement effect of derivatives designated as cash flow hedges:
| | | | | | | | | | | | | | | | | | | | |
| Recognized In | Years ended December 31, |
(In thousands) | Net Interest Income | 2021 | | 2020 | | 2019 |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Interest rate derivatives | Long-term debt | $ | 411 | | | $ | 8,206 | | | $ | 4,241 | |
Interest rate derivatives | Interest and fees on loans and leases | (10,676) | | | (6,373) | | | 1,314 | |
Net recognized on cash flow hedges | | $ | (10,265) | | | $ | 1,833 | | | $ | 5,555 | |
The following table summarizes information related to a fair value hedging adjustment:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
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 |
| | At December 31, | | At December 31, |
(In thousands) | | 2021 | | 2020 | | 2021 | | 2020 |
Long-term debt | | $ | 338,811 | | | $ | 344,164 | | | $ | 38,811 | | | $ | 44,164 | |
The following table summarizes the income statement effect of derivatives not designated as hedging instruments: | | | | | | | | | | | | | | | | | | | | |
| Recognized In | Years ended December 31, |
(In thousands) | Non-interest Income | 2021 | | 2020 | | 2019 |
Interest rate derivatives | Other income | $ | 10,369 | | | $ | 11,068 | | | $ | 8,477 | |
Mortgage banking derivatives | Mortgage banking activities | (776) | | | 636 | | | (6) | |
Other | Other income | 878 | | | (1,696) | | | 1,100 | |
Total not designated as hedging instruments | $ | 10,471 | | | $ | 10,008 | | | $ | 9,571 | |
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 December 31, 2021, the remaining unamortized balance of time-value premiums was $5.8 million. Over the next twelve months, an estimated $7.2 million decrease to interest expense will be reclassified from AOCI (AOCL) relating to cash flow hedges, and an estimated $306 thousand increase to interest expense will be reclassified from AOCI (AOCL) relating to hedge terminations. At December 31, 2021, the remaining unamortized loss on terminated cash flow hedges is $650 thousand. The maximum length of time over which forecasted transactions are hedged is 2.6 years. Additional information about cash flow hedge activity impacting AOCI (AOCL) and the related amounts reclassified to interest expense is provided in Note 14: 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 18: Fair Value Measurements.
Derivative Exposure. At December 31, 2021, the Company had $59.9 million in initial margin collateral posted at CME. In addition, $19.7 million of cash collateral received is included in cash and due from banks in the accompanying 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 $133.4 million at December 31, 2021. 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 $34.1 million at December 31, 2021. The Company has incorporated a credit valuation adjustment to reflect nonperformance risk in the fair value measurement of its derivatives. The credit valuation adjustment was $0.4 million and $3.0 million as of December 31, 2021 and December 31, 2020, respectively. Various factors impact changes in the credit 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 18: 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, by 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.
An asset or liability's fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques maximize the use of relevant observable inputs and minimize the use of unobservable inputs.
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 valuation 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. Agency collateralized mortgage obligations (Agency CMO), Agency MBS, Agency CMBS, CMBS, CLO, and corporate debt 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 residential mortgage loans held for sale at fair value under the fair value option per ASC Topic 825, Financial Instruments. Electing to measure originated residential mortgage 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 residential mortgage loans held for sale is based on quoted market prices of similar loans sold in conjunction with securitization transactions. Accordingly, originated residential mortgage loans held for sale are classified within Level 2 of the fair value hierarchy.
The following table compares the fair value to unpaid principal balance of originated residential mortgage loans held for sale: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| At December 31, |
| 2021 | | 2020 |
(In thousands) | Fair Value | | Unpaid Principal Balance | | Difference | | Fair Value | | Unpaid Principal Balance | | Difference |
Originated loans held for sale | $ | 4,694 | | | $ | 5,034 | | | $ | (340) | | | $ | 14,000 | | | $ | 13,511 | | | $ | 489 | |
Investments Held in Rabbi Trust. Investments held in the Rabbi Trust 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 represent quoted prices in active markets. Webster has elected to measure the investments held in the Rabbi Trust at fair value. Accordingly, investments held in the Rabbi Trust are classified within Level 1 of the fair value hierarchy. At December 31, 2021, the cost basis of the investments held in the Rabbi Trust was $1.6 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 December 31, 2021, equity investments with a readily determinable fair value had a carrying amount of $1.9 million and no remaining unfunded commitment. During the year ended December 31, 2021, there was a net change in fair value of $0.5 million associated with these alternative investments.
Equity investments that do not have a readily determinable 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 December 31, 2021, these alternative investments had a carrying amount of $25.9 million and a remaining unfunded commitment of $14.1 million.
The following table summarizes the fair values of assets and liabilities measured at fair value on a recurring basis:
| | | | | | | | | | | | | | |
| 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 | |
| | | | | | | | | | | | | | |
| At December 31, 2020 |
(In thousands) | Level 1 | Level 2 | Level 3 | Total |
Financial Assets: | | | | |
Available-for-sale investment securities: | | | | |
Agency CMO | $ | — | | $ | 154,613 | | $ | — | | $ | 154,613 | |
Agency MBS | — | | 1,457,409 | | — | | 1,457,409 | |
Agency CMBS | — | | 1,117,233 | | — | | 1,117,233 | |
CMBS | — | | 508,018 | | — | | 508,018 | |
CLO | — | | 76,383 | | — | | 76,383 | |
Corporate debt | — | | 13,120 | | — | | 13,120 | |
Total available-for-sale investment securities | — | | 3,326,776 | | — | | 3,326,776 | |
Gross derivative instruments, before netting (1) | 205 | | 338,853 | | — | | 339,058 | |
Originated loans held for sale | — | | 14,000 | | — | | 14,000 | |
Investments held in Rabbi Trust | 4,811 | | — | | — | | 4,811 | |
Alternative investments (2) | — | | — | | — | | 11,112 | |
Total financial assets held at fair value | $ | 5,016 | | $ | 3,679,629 | | $ | — | | $ | 3,695,757 | |
Financial Liabilities: | | | | |
Gross derivative instruments, before netting (1) | $ | 218 | | $ | 12,472 | | $ | — | | $ | 12,690 | |
(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 in Note 17: 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 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 December 31, 2021, the carrying amount of these alternative investments was $25.8 million, of which $5.8 million are considered to be measured at fair value as a result of $4.4 million in write-ups due to observable price changes and a $0.3 million write-down due to impairment during the current period.
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. 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 December 31, 2021, the total book value of OREO and repossessed assets was $2.8 million. In addition, the amortized cost of consumer loans secured by residential real estate property that are in the process of foreclosure at December 31, 2021 was $7.5 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, 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 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. 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 December 31, |
| 2021 | | 2020 |
(In thousands) | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
Assets: | | | | | | | |
Level 1 | | | | | | | |
Cash and cash equivalents | $ | 461,570 | | | $ | 461,570 | | | $ | 263,104 | | | $ | 263,104 | |
Level 2 | | | | | | | |
Held-to-maturity investment securities | 6,198,125 | | | 6,280,936 | | | 5,567,889 | | | 5,835,364 | |
Level 3 | | | | | | | |
Loans and leases, net | 21,970,542 | | | 21,702,732 | | | 21,281,784 | | | 21,413,397 | |
Mortgage servicing assets | 9,237 | | | 12,527 | | | 13,422 | | | 14,362 | |
Liabilities: | | | | | | | |
Level 2 | | | | | | | |
Deposit liabilities | $ | 28,049,259 | | | $ | 28,049,259 | | | $ | 24,847,618 | | | $ | 24,847,618 | |
Time deposits | 1,797,770 | | | 1,794,829 | | | 2,487,818 | | | 2,494,601 | |
Securities sold under agreements to repurchase and other borrowings | 674,896 | | | 676,581 | | | 995,355 | | | 1,000,189 | |
FHLB advances | 10,997 | | | 11,490 | | | 133,164 | | | 139,035 | |
Long-term debt (1) | 562,931 | | | 515,912 | | | 567,663 | | | 538,407 | |
(1)The unamortized discount and debt issuance costs on senior fixed-rate notes and any adjustments made to the carrying amount of long-term debt for basis adjustments, as applicable, are excluded from the determination of fair value.
Note 19: Retirement Benefit Plans
Defined Benefit Pension and Postretirement Benefit Plans
Webster Bank had offered a qualified noncontributory defined benefit pension plan and a SERP to eligible employees and key executives who met certain age and service requirements. Both the pension plan and the SERP were frozen effective December 31, 2007. Only those employees who were hired prior to January 1, 2007 and who became participants of the plans prior to January 1, 2008 have accrued benefits under the plans. Webster Bank also provides for other post-employment medical and life insurance benefits (OPEB) to certain retired employees. The plans' measurement date coincides with Webster's December 31 fiscal year end.
The following table summarizes the changes in the benefit obligation, fair value of plan assets, and funded status of the defined benefit pension and postretirement benefit plans at December 31:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pension Plan | | SERP | | OPEB |
(In thousands) | 2021 | 2020 | | 2021 | 2020 | | 2021 | 2020 |
Change in benefit obligation: | | | | | | | | |
Beginning balance | $ | 266,414 | | $ | 241,404 | | | $ | 2,046 | | $ | 1,935 | | | $ | 1,998 | | $ | 2,399 | |
| | | | | | | | |
Interest cost | 4,663 | | 6,511 | | | 30 | | 46 | | | 19 | | 46 | |
Actuarial (gain) loss | (11,131) | | 27,376 | | | (77) | | 194 | | | 32 | | (307) | |
Benefits paid | (9,683) | | (8,877) | | | (126) | | (129) | | | (145) | | (140) | |
Ending balance | 250,263 | | 266,414 | | | 1,873 | | 2,046 | | | 1,904 | | 1,998 | |
Change in plan assets: | | | | | | | | |
Beginning balance | 266,268 | | 239,621 | | | — | | — | | | — | | — | |
Actual return on plan assets | 15,261 | | 35,524 | | | — | | — | | | — | | — | |
Employer contributions | — | | — | | | 126 | | 129 | | | 145 | | 140 | |
Benefits paid | (9,683) | | (8,877) | | | (126) | | (129) | | | (145) | | (140) | |
Ending balance | 271,846 | | 266,268 | | | — | | — | | | — | | — | |
Funded status (1) | $ | 21,583 | | $ | (146) | | | $ | (1,873) | | $ | (2,046) | | | $ | (1,904) | | $ | (1,998) | |
(1)The overfunded (underfunded) status of each plan is respectively included in accrued interest receivable and other assets or accrued expenses and other liabilities on the accompanying Consolidated Balance Sheets, as applicable.
The following table summarizes the weighted-average assumptions used to determine the benefit obligation at December 31: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pension Plan | | SERP | | OPEB |
| 2021 | 2020 | | 2021 | 2020 | | 2021 | 2020 |
Discount rate | 2.65 | % | 2.29 | % | | 2.45 | % | 1.91 | % | | 1.99 | % | 1.40 | % |
Assumed healthcare cost trend rate | n/a | n/a | | n/a | n/a | | 6.25 | % | 6.50 | % |
The following table summarizes the amounts recorded in accumulated other comprehensive (loss) income that have not yet been recognized in net periodic benefit (income) cost at December 31:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pension Plan | | SERP | | OPEB |
(In thousands) | 2021 | 2020 | | 2021 | 2020 | | 2021 | 2020 |
Net actuarial loss (gain) | $ | 41,792 | | $ | 57,902 | | | $ | 658 | | $ | 773 | | | $ | (620) | | $ | (690) | |
Deferred tax benefit (expense) | 8,636 | | 12,881 | | | 136 | | 172 | | | (128) | | (153) | |
Net amount recorded in (AOCL) AOCI | $ | 33,156 | | $ | 45,021 | | | $ | 522 | | $ | 601 | | | $ | (492) | | $ | (537) | |
The following table summarizes the components of net periodic benefit (income) cost for the years ended December 31: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pension Plan | | SERP | | OPEB |
(In thousands) | 2021 | 2020 | 2019 | | 2021 | 2020 | 2019 | | 2021 | 2020 | 2019 |
| | | | | | | | | | | |
Interest cost | 4,663 | | 6,511 | | 7,941 | | | 30 | | 46 | | 65 | | | 19 | | 46 | | 85 | |
Expected return on plan assets | (14,385) | | (13,522) | | (11,436) | | | — | | — | | — | | | — | | — | | — | |
Amortization of actuarial (gain) loss | 4,102 | | 4,027 | | 5,705 | | | 38 | | 23 | | 14 | | | (38) | | (74) | | (13) | |
Net periodic benefit (income) cost (1) | $ | (5,620) | | $ | (2,984) | | $ | 2,210 | | | $ | 68 | | $ | 69 | | $ | 79 | | | $ | (19) | | $ | (28) | | $ | 72 | |
(1)Net periodic benefit (income) cost is included in other non-interest expense on the accompanying Consolidated Statements of Income.
The following table summarizes the weighted-average assumptions used to determine net periodic benefit (income) cost for the years ended December 31: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pension Plan | | SERP | | OPEB |
| 2021 | 2020 | 2019 | | 2021 | 2020 | 2019 | | 2021 | 2020 | 2019 |
Discount rate | 2.29 | % | 3.07 | % | 4.12 | % | | 1.91 | % | 2.82 | % | 3.95 | % | | 1.40 | % | 2.50 | % | 3.69 | % |
Expected long-term rate of return on plan assets | 5.50 | % | 5.75 | % | 6.00 | % | | n/a | n/a | n/a | | n/a | n/a | n/a |
Assumed healthcare cost trend rate (1) | n/a | n/a | n/a | | n/a | n/a | n/a | | 6.50 | % | 6.50 | % | 6.50 | % |
(1)The assumed healthcare cost trend rate used to measure the expected cost of benefits covered by the OPEB for 2022 is 6.25%. The rate to which the healthcare cost trend rate is assumed to decline (ultimate trend rate) along with the year that the ultimate trend rate will be reached is 4.40% in 2030.
The discount rates used to determine the benefit obligation and net periodic benefit (income) cost for Webster's defined benefit pension and postretirement benefit plans were selected by reference to a high-quality bond yield curve, using a full yield curve approach, and matched to the timing and amount of each plan's expected benefit payments.
The following table summarizes amounts recognized in other comprehensive (loss) income, including reclassification adjustments, for the years ended December 31:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pension Plan | | SERP | | OPEB |
(In thousands) | 2021 | 2020 | 2019 | | 2021 | 2020 | 2019 | | 2021 | 2020 | 2019 |
Net actuarial (gain) loss | $ | (12,008) | | $ | 5,375 | | $ | (2,263) | | | $ | (77) | | $ | 194 | | $ | 164 | | | $ | 33 | | $ | (307) | | $ | (103) | |
Amounts reclassified from (AOCL) AOCI | (4,102) | | (4,027) | | (5,705) | | | (38) | | (23) | | (14) | | | 38 | | 74 | | 13 | |
Total (gain) loss recognized in (OCL) OCI | $ | (16,110) | | $ | 1,348 | | $ | (7,968) | | | $ | (115) | | $ | 171 | | $ | 150 | | | $ | 71 | | $ | (233) | | $ | (90) | |
At December 31, 2021, the expected future benefit payments for the defined benefit pension and postretirement benefits plans are as follows: | | | | | | | | | | | |
(In thousands) | Pension Plan | SERP | OPEB |
2022 | $ | 9,969 | | $ | 116 | | $ | 270 | |
2023 | 10,345 | | 117 | | 247 | |
2024 | 10,787 | | 128 | | 224 | |
2025 | 11,207 | | 126 | | 201 | |
2026 | 11,587 | | 124 | | 179 | |
Thereafter | 62,419 | | 581 | | 609 | |
Asset Management
The pension plan invests primarily in common collective trusts and registered investment companies. However, the pension plan's investment policy guidelines also allow for the investment in cash and cash equivalents, fixed income securities, and equity securities. Common collective trusts and registered investment companies are both benchmarked against the Standard & Poor's 500 Index. Incremental benchmarks used to assess the common collective trusts include the S&P 400 Mid Cap Index, Russell 200 Index, MSCI ACWI ex U.S. Index, and the Barclay's Capital U.S. Long Credit Index. The standard deviation should not exceed that of the composite index. The pension plan's investment strategy and asset allocations are monitored by the Company's Retirement Plans Committee with the assistance of external investment advisors, and the investment portfolio is rebalanced, as appropriate. The target asset allocation percentages for the year ended December 31, 2021 were 64.5% fixed-income investments and 35.5% equity investments. The actual asset allocation percentages for the year ended December 31, 2021 were 63.6% fixed-income investments, 35.7% equity investments, and 0.7% cash and cash equivalents.
The overall investment objective of the pension plan is to maintain a diversified portfolio with a targeted expected long-term rate of return on plan assets of approximately 5.50%. The expected long-term rate of return on plans assets is the average rate of return expected to be realized on funds invested or expected to be invested to provide for the benefits included in the benefit obligation. The expected long-term rate of return on plans assets is established at the beginning of the year based upon historical and projected returns for each asset category. Depending on market conditions, the expected long-term rate of return on plan assets may exceed or fall short of the targeted percentage.
Fair Value Measurement
The following is a description of the valuation methodologies used for the pension plan's assets measured at fair value:
Common Collective Trusts. Common collective trusts are valued based on the NAV as reported by the trustee of the funds. The funds' underlying investments, which primarily comprise fixed-income debt securities and open-end mutual funds, are valued using quoted market prices in active markets or unobservable inputs for similar assets. Therefore, common collective trusts are classified as Level 2 within the fair value hierarchy. Transactions may occur daily within a trust. If a full redemption of the trust were to be initiated, the investment advisor reserves the right to temporarily delay withdrawals from the trust in order to ensure that the liquidation of securities is carried out in an orderly business manner.
Registered Investment Companies. Registered investment companies are valued at the daily closing price as reported by the funds. Registered investment companies held by the pension plan are quoted in an active market and are classified as Level 1 within the fair value hierarchy.
Cash and Cash Equivalents. Cash and cash equivalents are recorded at cost plus accrued interest, which approximates fair value given the short time frame to maturity, and are classified as Level 1 within the fair value hierarchy.
The following table sets forth by level within the fair value hierarchy the pension plan's assets at fair value: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| At December 31, |
| 2021 | | 2020 |
(In thousands) | Level 1 | Level 2 | Level 3 | Total | | Level 1 | Level 2 | Level 3 | Total |
Common collective trusts | — | | 230,923 | | — | | 230,923 | | | — | | 225,762 | | — | | 225,762 | |
Registered investment companies | $ | 39,082 | | $ | — | | $ | — | | $ | 39,082 | | | $ | 39,645 | | $ | — | | $ | — | | $ | 39,645 | |
Cash and cash equivalents | 1,841 | | — | | — | | 1,841 | | | 861 | | — | | — | | 861 | |
Total pension plan assets | $ | 40,923 | | $ | 230,923 | | $ | — | | $ | 271,846 | | | $ | 40,506 | | $ | 225,762 | | $ | — | | $ | 266,268 | |
Multiple-Employer Defined Benefit Pension Plan
Webster Bank participates in a multi-employer plan that provides pension benefits to former employees of a bank acquired by the Company. Participation in the plan was frozen as of September 1, 2004. The plan maintains a single trust and does not segregate the assets or liabilities of its participating employers. Minimum required employer contributions are determined by an independent actuary and are calculated using a 7-year shortfall amortization factor. There are no collective bargaining agreements or other obligations requiring contributions to the plan, nor has a funding improvement plan been implemented.
The following table summarizes information related to Webster Bank's participation in the multi-employer plan: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | | | | | | | Contributions Years Ended December 31, | | Funded Status At December 31, |
Plan Name | | Employer Identification Number | | Plan Number | | Surcharge Imposed | | 2021 | 2020 | 2019 | | 2021 | 2020 |
Pentegra Defined Benefit Plan for Financial Institutions | | 13-5645888 | | 333 | | No | | $692 | $998 | $863 | | At least 80% | At least 80% |
Webster Bank's contributions to the multi-employer plan for the years ended December 31, 2021, 2020, and 2019 did not exceed more than 5% of total plan contributions for the plan years ended June 30, 2020, 2019, and 2018. The plan's Form 5500 was not available for the plan year ended June 30, 2021 as of the date Webster's Consolidated Financial Statements were issued. As of July 1, 2021, the date of the most recent actuarial valuation, the plan administrator confirmed that Webster Bank’s portion of the multi-employer plan was $0.5 million overfunded.
Webster Bank Retirement Savings Plan
Webster Bank sponsors a defined contribution postretirement benefit plan established under Section 401(k) of the Internal Revenue Code. Employees who have attained age 21 may elect to contribute up to 75% of their eligible compensation on either a pre-tax or post-tax basis. Webster Bank makes matching contributions equal to 100% of the first 2% and 50% of the next 6% of employees’ contributions after employees have completed one year of eligible service. If an employee fails to enroll in the plan within 90 days of hire, the employee will be automatically enrolled on a pre-tax basis with a deferral rate set at 3% of eligible compensation. Compensation and benefits expense included total employer contributions under the plan of $13.1 million, $13.8 million, and $13.2 million for the years ended December 31, 2021, 2020, and 2019, respectively.
Note 20: Share-Based Plans
Webster maintains stock compensation plans consisting of restricted stock awards, stock options, and stock appreciation rights, with shareholder approval for up to 13.4 million shares of common stock, to better align the interests of its employees and directors with those of its shareholders. At December 31, 2021, there were 4.3 million shares of common stock available for grant, and no stock appreciation rights had been granted. Stock compensation expense is recognized over the required service vesting period for each award based on the grant-date fair value, net of estimated forfeitures, and is included as a component of compensation and benefits on the accompanying Consolidated Statements of Income.
The following table summarizes stock-based compensation plan activity for the year ended December 31, 2021: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Non-Vested Restricted Stock Awards Outstanding | | Stock Options Outstanding |
| Time-Based | | | | | Performance-Based | |
| Number of Shares | Weighted-Average Grant Date Fair Value | | | | | Number of Shares | Weighted-Average Grant Date Fair Value | | Number of Shares | Weighted-Average Exercise Price |
Balance at January 1, 2021 | 547,185 | | $ | 46.59 | | | | | | 250,666 | | $ | 48.77 | | | 410,701 | | $ | 23.35 | |
Granted | 195,749 | | 54.60 | | | | | | 83,853 | | 54.68 | | | — | | — | |
Vested | 186,211 | | 48.93 | | | | | | 65,213 | | 51.99 | | | — | | — | |
Forfeited | 27,439 | | 46.65 | | | | | | 2,889 | | 50.45 | | | — | | — | |
Exercised | — | | — | | | | | | — | | — | | | 303,089 | | 23.45 | |
Balance at December 31, 2021 | 529,284 | | 48.77 | | | | | | 266,417 | | 50.03 | | | 107,612 | | 23.05 | |
Restricted Stock Awards
Time-based restricted stock awards vest over the applicable service period ranging from one to three years. Under the plan, the number of time-based restricted stock awards that may be granted to an eligible individual per calendar year is limited to 100,000 shares. The fair value of time-based restricted stock awards used to determine compensation expense is measured using the closing price of Webster's common stock at the grant date.
Performance-based restricted stock awards vest after a three year performance period with a share quantity dependent on the Company's performance during that period, ranging from 0% to 150%. The total grant date fair value of performance-based restricted stock awards that had vested during the years ended December 31, 2021, 2020, and 2019 was $12.5 million, $13.5 million, and $12.5 million, respectively. The fair value of performance-based restricted stock awards used to determine compensation expense is calculated using the Monte-Carlo simulation model, which allows for the incorporation of performance conditions where 50% of the performance-based shares are based on total shareholder return as compared to Webster's compensation peer group, and where the remaining 50% of the performance-based shares are based on Webster's average return on equity during the three year vesting period. 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.
For the years ended December 31, 2021, 2020, and 2019, Webster recognized stock compensation expense, all of which pertained to its restricted stock awards, of $13.7 million, $12.2 million, and $12.6 million, respectively. The corresponding income tax benefit recognized was $5.4 million, $2.6 million, and $6.1 million for 2021, 2020, and 2019, respectively. At December 31, 2021 there was $16.0 million of unrecognized restricted stock expense related to non-vested restricted stock awards, which is expected to be recognized over a weighted-average period of 1.8 years.
Stock Options
There have been no stock options granted since 2013. Prior to that date, stock options were granted at an exercise price equal to the market value of Webster's common stock on the grant date. Each stock option grants the holder the right to acquire one share of Webster common stock over a contractual life of up to 10 years. At December 31, 2021, there were no incentive stock options outstanding and 107,612 non-qualified stock options outstanding, all of which are exercisable and have a weighted-average remaining contractual life of 1.1 years.
The total pre-tax intrinsic value of $3.5 million at December 31, 2021, or the difference between Webster's closing stock price on the last trading day of the year and the weighted-average exercise price multiplied by the number of shares, represents the aggregate intrinsic value that would have been received by the option holders had all of their outstanding vested options been exercised on December 31, 2021. For the years ended December 31, 2021, 2020, and 2019, the total intrinsic value of the options exercised was $9.0 million, $0.1 million, and $2.4 million, respectively.
Note 21: Segment Reporting
Webster’s operations are organized into three reportable segments that represent its primary businesses: Commercial Banking, HSA Bank, and Retail 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, 2021, management realigned certain of Webster's business banking and investment services operations to better serve its customers and deliver operational efficiencies. Under this realignment, the previously reported Community Banking segment was renamed Retail Banking, and $131.0 million of goodwill was reallocated, on a relative fair value basis, from Retail Banking to Commercial Banking. There was no goodwill impairment as a result of the reorganization. Prior period amounts have been recasted to reflect the realignment.
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 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 Company’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 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 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 a full-absorption costing process. Costs, including corporate overhead, are analyzed, pooled by process, and assigned to the appropriate reportable segment. The results of funds transfer pricing and allocations for non-interest expense, as well as non-interest income produces PPNR, under which 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. Business development expenses, such as merger-related and strategic initiatives costs, 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 December 31, 2021 |
(In thousands) | Commercial Banking | HSA Bank | Retail Banking | | Corporate and Reconciling | Consolidated Total |
Goodwill | $ | 131,000 | | $ | 21,813 | | $ | 385,560 | | | $ | — | | $ | 538,373 | |
Total assets | 15,400,886 | | 73,564 | | 7,663,218 | | | 11,777,931 | | 34,915,599 | |
| | | | | | |
| At December 31, 2020 |
(In thousands) | Commercial Banking | HSA Bank | Retail Banking | | Corporate and Reconciling | Consolidated Total |
Goodwill | $ | 131,000 | | $ | 21,813 | | $ | 385,560 | | | $ | — | | $ | 538,373 | |
Total assets | 14,732,792 | | 80,352 | | 7,726,287 | | | 10,051,259 | | 32,590,690 | |
The following tables present operating results, including the appropriate allocations, for Webster’s reportable segments and the Corporate and Reconciling category:
| | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, 2021 |
(In thousands) | Commercial Banking | HSA Bank | Retail Banking | | Corporate and Reconciling | Consolidated Total |
Net interest income | $ | 587,485 | | $ | 168,595 | | $ | 373,130 | | | $ | (228,121) | | $ | 901,089 | |
Non-interest income | 112,270 | | 102,814 | | 67,155 | | | 41,133 | | 323,372 | |
Non-interest expense | 257,461 | | 135,997 | | 296,260 | | | 55,382 | | 745,100 | |
Pre-tax, pre-provision net revenue | 442,294 | | 135,412 | | 144,025 | | | (242,370) | | 479,361 | |
(Benefit) for credit losses | (51,348) | | — | | (3,068) | | | (84) | | (54,500) | |
Income (loss) before income taxes | 493,642 | | 135,412 | | 147,093 | | | (242,286) | | 533,861 | |
Income tax expense (benefit) | 124,891 | | 36,155 | | 32,361 | | | (68,410) | | 124,997 | |
Net income (loss) | $ | 368,751 | | $ | 99,257 | | $ | 114,732 | | | $ | (173,876) | | $ | 408,864 | |
| | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, 2020 |
(In thousands) | Commercial Banking | HSA Bank | Retail Banking | | Corporate and Reconciling | Consolidated Total |
Net interest income | $ | 515,027 | | $ | 162,363 | | $ | 331,821 | | | $ | (117,818) | | $ | 891,393 | |
Non-interest income | 90,498 | | 100,826 | | 74,147 | | | 19,806 | | 285,277 | |
Non-interest expense | 260,953 | | 140,637 | | 317,215 | | | 40,141 | | 758,946 | |
Pre-tax, pre-provision net revenue | 344,572 | | 122,552 | | 88,753 | | | (138,153) | | 417,724 | |
Provision (benefit) for credit losses | 152,571 | | — | | (14,722) | | | (99) | | 137,750 | |
Income (loss) before income taxes | 192,001 | | 122,552 | | 103,475 | | | (138,054) | | 279,974 | |
Income tax expense (benefit) | 46,848 | | 32,721 | | 22,558 | | | (42,774) | | 59,353 | |
Net income (loss) | $ | 145,153 | | $ | 89,831 | | $ | 80,917 | | | $ | (95,280) | | $ | 220,621 | |
| | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, 2019 |
(In thousands) | Commercial Banking | HSA Bank | Retail Banking | | Corporate and Reconciling | Consolidated Total |
Net interest income | $ | 476,779 | | $ | 172,685 | | $ | 347,377 | | | $ | (41,714) | | $ | 955,127 | |
Non-interest income | 91,184 | | 97,041 | | 77,149 | | | 19,941 | | 285,315 | |
Non-interest expense | 252,485 | | 135,586 | | 317,494 | | | 10,385 | | 715,950 | |
Pre-tax, pre-provision net revenue | 315,478 | | 134,140 | | 107,032 | | | (32,158) | | 524,492 | |
Provision for credit losses | 29,714 | | — | | 8,086 | | | — | | 37,800 | |
Income (loss) before income taxes | 285,764 | | 134,140 | | 98,946 | | | (32,158) | | 486,692 | |
Income tax expense (benefit) | 70,298 | | 35,547 | | 20,581 | | | (22,457) | | 103,969 | |
Net income (loss) | $ | 215,466 | | $ | 98,593 | | $ | 78,365 | | | $ | (9,701) | | $ | 382,723 | |
Note 22: Revenue from Contracts with Customers
The following tables summarize revenues recognized in accordance with ASC Topic 606, Revenue from Contracts with Customers, along with other sources of non-interest income that subject to other GAAP topics, by reportable segment: | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, 2021 |
(In thousands) | Commercial Banking | HSA Bank | Retail Banking | | Corporate and Reconciling | Consolidated Total |
Non-interest Income: | | | | | | |
Deposit service fees | $ | 16,946 | | $ | 94,844 | | $ | 50,548 | | | $ | 372 | | $ | 162,710 | |
Wealth and investment services | 39,623 | | — | | — | | | (37) | | 39,586 | |
Other | 1,237 | | 7,970 | | 903 | | | — | | 10,110 | |
Revenue from contracts with customers | 57,806 | | 102,814 | | 51,451 | | | 335 | | 212,406 | |
Other sources of non-interest income | 54,464 | | — | | 15,704 | | | 40,798 | | 110,966 | |
Total non-interest income | $ | 112,270 | | $ | 102,814 | | $ | 67,155 | | | $ | 41,133 | | $ | 323,372 | |
| | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, 2020 |
(In thousands) | Commercial Banking | HSA Bank | Retail Banking | | Corporate and Reconciling | Consolidated Total |
Non-interest Income: | | | | | | |
Deposit service fees | $ | 14,744 | | $ | 92,693 | | $ | 48,489 | | | $ | 106 | | $ | 156,032 | |
Wealth and investment services | 32,951 | | — | | — | | | (35) | | 32,916 | |
Other | 1,174 | | 8,133 | | 482 | | | — | | 9,789 | |
Revenue from contracts with customers | 48,869 | | 100,826 | | 48,971 | | | 71 | | 198,737 | |
Other sources of non-interest income | 41,629 | | — | | 25,176 | | | 19,735 | | 86,540 | |
Total non-interest income | $ | 90,498 | | $ | 100,826 | | $ | 74,147 | | | $ | 19,806 | | $ | 285,277 | |
| | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, 2019 |
(In thousands) | Commercial Banking | HSA Bank | Retail Banking | | Corporate and Reconciling | Consolidated Total |
Non-interest Income: | | | | | | |
Deposit service fees | $ | 15,694 | | $ | 92,096 | | $ | 60,014 | | | $ | 218 | | $ | 168,022 | |
Wealth and investment services | 32,967 | | — | | — | | | (35) | | 32,932 | |
Other | 1,151 | | 4,945 | | 1,243 | | | — | | 7,339 | |
Revenue from contracts with customers | 49,812 | | 97,041 | | 61,257 | | | 183 | | 208,293 | |
Other sources of non-interest income | 41,372 | | — | | 15,892 | | | 19,758 | | 77,022 | |
Total non-interest income | $ | 91,184 | | $ | 97,041 | | $ | 77,149 | | | $ | 19,941 | | $ | 285,315 | |
| | | | | | |
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 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.
Wealth and investment services consist of fees earned from asset management, trust administration, investment advisory services, and through facilitating securities transactions. Performance obligations for asset management and trust administration services are satisfied on a monthly basis at a transaction price based on a percentage of the month-end market value of the assets under administration. Payment for asset management and trust administration services is generally received a few days after month-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 the 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 month.
These disaggregated amounts are reconciled to non-interest income as presented within Note 21: Segment Reporting. Contracts with customers did not generate significant contract assets and liabilities at December 31, 2021 and 2020.
Note 23: 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: | | | | | | | | | | | |
| At December 31, |
(In thousands) | 2021 | | 2020 |
Commitments to extend credit | $ | 6,870,095 | | | $ | 6,517,840 | |
Standby letters of credit | 224,061 | | | 207,201 | |
Commercial letters of credit | 58,175 | | | 30,522 | |
Total credit-related financial instruments with off-balance sheet risk | $ | 7,152,331 | | | $ | 6,755,563 | |
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 Company's commitments to extend credit are contingent upon its customers maintaining specific credit standards at the time of loan funding, and are 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 third 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 often secured by cash or other collateral.
Commercial letters of credit are issued to finance either domestic or foreign customer trade arrangements. As a general 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 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 the 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: | | | | | | | | | | | | | | | | | |
| Years ended December 31, |
(In thousands) | 2021 | | 2020 | | 2019 |
Balance, beginning of period | $ | 12,755 | | | $ | 2,367 | | | $ | 2,506 | |
Adoption of CECL | — | | | 9,139 | | | — | |
Provision (benefit) | 349 | | | 1,249 | | | (139) | |
Balance, end of period | $ | 13,104 | | | $ | 12,755 | | | $ | 2,367 | |
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 material adverse effect, either individually or in the aggregate, 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 24: Parent Company Financial Information
The following tables summarize condensed financial information for the Parent Company only:
| | | | | | | | | | | |
CONDENSED BALANCE SHEETS | | | |
| December 31, |
(In thousands) | 2021 | | 2020 |
Assets: | | | |
Cash and due from banks | $ | 316,193 | | | $ | 302,315 | |
| | | |
Intercompany debt securities | 150,000 | | | 150,000 | |
Investment in subsidiaries | 3,526,782 | | | 3,340,556 | |
| | | |
Alternative investments | 20,163 | | | 8,970 | |
Other assets | 3,953 | | | 8,122 | |
Total assets | $ | 4,017,091 | | | $ | 3,809,963 | |
Liabilities and shareholders’ equity: | | | |
Senior notes | $ | 485,611 | | | $ | 490,343 | |
Junior subordinated debt | 77,320 | | | 77,320 | |
Accrued interest payable | 5,861 | | | 5,862 | |
Due to subsidiaries | 488 | | | 324 | |
Other liabilities | 9,486 | | | 1,489 | |
Total liabilities | 578,766 | | | 575,338 | |
Shareholders’ equity | 3,438,325 | | | 3,234,625 | |
Total liabilities and shareholders’ equity | $ | 4,017,091 | | | $ | 3,809,963 | |
| | | | | | | | | | | | | | | | | |
CONDENSED STATEMENTS OF INCOME | | | | | |
| Years ended December 31, |
(In thousands) | 2021 | | 2020 | | 2019 |
Income: | | | | | |
Dividend income from bank subsidiary | $ | 200,000 | | | $ | 20,000 | | | $ | 360,000 | |
Interest on securities and deposits | 3,444 | | | 5,530 | | | 10,728 | |
| | | | | |
Alternative investments income (loss) | 13,033 | | | 2,467 | | | (256) | |
Other non-interest income | 75 | | | 634 | | | 382 | |
Total income | 216,552 | | | 28,631 | | | 370,854 | |
Expense: | | | | | |
Interest expense on borrowings | 16,876 | | | 18,684 | | | 21,062 | |
Non-interest expense | 32,187 | | | 16,426 | | | 15,527 | |
Total expense | 49,063 | | | 35,110 | | | 36,589 | |
Income (loss) before income taxes and equity in undistributed earnings of subsidiaries | 167,489 | | | (6,479) | | | 334,265 | |
Income tax benefit | 3,121 | | | 4,572 | | | 4,671 | |
Equity in undistributed earnings of subsidiaries | 238,254 | | | 222,528 | | | 43,787 | |
Net income | $ | 408,864 | | | $ | 220,621 | | | $ | 382,723 | |
| | | | | | | | | | | | | | | | | |
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME | | | | | |
| Years ended December 31, |
(In thousands) | 2021 | | 2020 | | 2019 |
Net income | $ | 408,864 | | | $ | 220,621 | | | $ | 382,723 | |
Other comprehensive (loss) income, net of tax: | | | | | |
| | | | | |
Derivative instruments | 226 | | | 2,622 | | | 1,479 | |
Other comprehensive (loss) income of subsidiaries | (65,062) | | | 75,706 | | | 93,101 | |
Other comprehensive (loss) income, net of tax | (64,836) | | | 78,328 | | | 94,580 | |
Comprehensive income | $ | 344,028 | | | $ | 298,949 | | | $ | 477,303 | |
| | | | | | | | | | | | | | | | | |
CONDENSED STATEMENTS OF CASH FLOWS | | | | | |
| Years ended December 31, |
(In thousands) | 2021 | | 2020 | | 2019 |
Operating activities: | | | | | |
Net income | $ | 408,864 | | | $ | 220,621 | | | $ | 382,723 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
Equity in undistributed earnings of subsidiaries | (238,254) | | | (222,528) | | | (43,787) | |
| | | | | |
| | | | | |
Other, net | 3,562 | | | 29,697 | | | 23,681 | |
Net cash provided by operating activities | $ | 174,172 | | | $ | 27,790 | | | $ | 362,617 | |
| | | | | |
Investing activities: | | | | | |
Alternative investments (capital call), net of distributions | (6,304) | | | (3,751) | | | (1,850) | |
Investment in subsidiaries | — | | | — | | | (296,000) | |
Net cash (used in) investing activities | (6,304) | | | (3,751) | | | (297,850) | |
Financing activities: | | | | | |
Issuance of long-term debt | — | | | — | | | 296,358 | |
| | | | | |
| | | | | |
| | | | | |
Cash dividends paid to common shareholders | (145,223) | | | (144,967) | | | (140,783) | |
Cash dividends paid to preferred shareholders | (7,875) | | | (7,875) | | | (7,875) | |
Exercise of stock options | 3,492 | | | 240 | | | 619 | |
| | | | | |
Common stock repurchased and acquired from stock compensation plan activity | (4,384) | | | (80,062) | | | (19,619) | |
| | | | | |
Net cash (used in) provided by financing activities | (153,990) | | | (232,664) | | | 128,700 | |
| | | | | |
Net increase (decrease) in cash and cash equivalents | 13,878 | | | (208,625) | | | 193,467 | |
Cash and cash equivalents at beginning of year | 302,315 | | | 510,940 | | | 317,473 | |
Cash and cash equivalents at end of year | $ | 316,193 | | | $ | 302,315 | | | $ | 510,940 | |
Note 25: Subsequent Events
The Company has evaluated subsequent events from the date of the Consolidated Financial Statements and accompanying Notes thereto through the date of issuance, and determined that, except for the mergers and acquisitions that are discussed within Note 3: Business Developments, no other significant events were identified requiring recognition or disclosure.