WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
| | | | | | | | | | | |
| Nine months ended September 30, |
(In thousands) | 2022 | | 2021 |
Operating Activities: | | | |
Net income | $ | 399,532 | | | $ | 297,826 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Provision (benefit) for credit losses | 237,619 | | | (39,500) | |
Deferred income tax (benefit) | (49,239) | | | (692) | |
Stock-based compensation expense | 43,231 | | | 10,076 | |
Common stock contribution to charitable foundation | 10,500 | | | — | |
Depreciation and amortization of property and equipment and intangible assets | 62,403 | | | 27,071 | |
(Accretion) and amortization of interest-earning assets and borrowings | (27,025) | | | 102,648 | |
Amortization of low-income housing tax credit investments | 31,671 | | | 2,942 | |
Amortization of mortgage servicing assets | 2,151 | | | 4,295 | |
Reduction of right-of-use lease assets | 47,874 | | | 4,074 | |
Net (gain) on sale, net of write-downs, of foreclosed properties and repossessed assets | (1,010) | | | (367) | |
Net loss (gain) on sale, net of write-downs, of property and equipment | 6,507 | | | (98) | |
Net loss on sale of investment securities | 2,234 | | | — | |
Originations of loans held for sale | (29,628) | | | (192,948) | |
Proceeds from sale of loans held for sale | 33,886 | | | 199,991 | |
Net (gain) on mortgage banking activities | (529) | | | (4,523) | |
Net (gain) on sale of loans not originated for sale | (3,135) | | | (1,278) | |
(Increase) in cash surrender value of life insurance policies | (22,694) | | | (10,802) | |
(Gain) from life insurance policies | (2,494) | | | (1,350) | |
Net decrease in derivative contract assets and liabilities | 539,257 | | | 140,991 | |
| | | |
Net (increase) in accrued interest receivable and other assets | (51,300) | | | (84,781) | |
Net (decrease) increase in accrued expenses and other liabilities | (169,146) | | | 10,594 | |
Net cash provided by operating activities | 1,060,665 | | | 464,169 | |
Investing Activities: | | | |
Purchases of available-for-sale securities | (1,099,810) | | | (857,820) | |
Proceeds from principal payments, maturities, and calls of available-for-sale securities | 612,783 | | | 729,877 | |
Proceeds from sale of available-for-sale securities | 65,330 | | | — | |
Purchases of held-to-maturity securities | (963,655) | | | (1,203,951) | |
Proceeds from principal payments, maturities, and calls of held-to-maturity securities | 627,887 | | | 1,007,842 | |
Net (increase) decrease in Federal Home Loan Bank and Federal Reserve Bank stock | (150,706) | | | 1,658 | |
Alternative investments (capital calls), net of distributions | (7,811) | | | (8,897) | |
Net (increase) in loans | (5,526,220) | | | (66,526) | |
Proceeds from sale of loans not originated for sale | 648,573 | | | 61,274 | |
Proceeds from sale of foreclosed properties and repossessed assets | 2,071 | | | 1,285 | |
Proceeds from sale of property and equipment | 300 | | | 2,912 | |
Additions to property and equipment | (18,526) | | | (11,229) | |
Proceeds from life insurance policies | 17,002 | | | 5,074 | |
Net cash paid for acquisition of Bend | (54,407) | | | — | |
Net cash received in merger with Sterling | 513,960 | | | — | |
Net cash (used for) investing activities | (5,333,229) | | | (338,501) | |
| | | |
See accompanying Notes to Condensed Consolidated Financial Statements. |
| | | |
| | | | | | | | | | | |
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited), continued |
|
| Nine months ended September 30, |
(In thousands) | 2022 | | 2021 |
Financing Activities: | | | |
Net increase in deposits | 889,964 | | | 2,689,995 | |
Proceeds from Federal Home Loan Bank advances | 13,150,000 | | | 180,470 | |
Repayments of Federal Home Loan Bank advances | (9,650,280) | | | (200,300) | |
Proceeds from extinguishment of borrowings | 2,548 | | | — | |
Net increase (decrease) in securities sold under agreements to repurchase and other borrowings | 560,786 | | | (339,484) | |
| | | |
| | | |
Dividends paid to common shareholders | (178,161) | | | (108,586) | |
Dividends paid to preferred shareholders | (9,562) | | | (5,906) | |
Exercise of stock options | 635 | | | 3,469 | |
| | | |
Common stock repurchase program | (319,266) | | | — | |
Common shares acquired related to stock compensation plan activity | (22,545) | | | (4,271) | |
| | | |
Net cash provided by financing activities | 4,424,119 | | | 2,215,387 | |
Net increase in cash and cash equivalents | 151,555 | | | 2,341,055 | |
Cash and cash equivalents at beginning of period | 461,570 | | | 263,104 | |
Cash and cash equivalents at end of period | $ | 613,125 | | | $ | 2,604,159 | |
| | | |
Supplemental disclosure of cash flow information: | | | |
Interest paid | $ | 114,542 | | | $ | 42,567 | |
Income taxes paid | 129,926 | | | 107,812 | |
Non-cash investing and financing activities: | | | |
Transfer of loans and leases to foreclosed properties and repossessed assets | $ | 163 | | | $ | 1,048 | |
Transfer of loans and leases to loans-held-for-sale | 621,922 | | | 74,923 | |
Unsettled purchases of investment securities | — | | | 284,713 | |
Merger with Sterling: | | | |
Tangible assets acquired | 27,434,111 | | | — | |
Goodwill and other intangible assets | 2,149,532 | | | — | |
Liabilities assumed | 24,403,343 | | | — | |
Common stock issued | 5,041,182 | | | — | |
Preferred stock exchanged | 138,942 | | | — | |
Acquisition of Bend: | | | |
Tangible assets acquired | 16,597 | | | — | |
Goodwill and other intangible assets | 38,966 | | | — | |
Liabilities assumed | 290 | | | — | |
| | | |
| | | |
| | | |
| | | |
See accompanying Notes to Condensed Consolidated Financial Statements.
Note 1: Summary of Significant Accounting Policies
Nature of Operations
Webster Financial Corporation is a bank holding company and financial holding company under the BHC Act, incorporated under the laws of Delaware in 1986, and headquartered in Stamford, Connecticut. Webster Bank is the principal consolidated subsidiary of Webster Financial Corporation. Webster Bank, and its HSA Bank division, deliver a wide range of banking, investment, and financial services to individuals, families, and businesses. Webster Bank serves consumer and business customers with mortgage lending, financial planning, trust, and investment services through a distribution network consisting of banking centers, ATMs, a customer care center, and a full range of web and mobile-based banking services throughout the northeastern U.S. from New York to Massachusetts, with certain businesses operating in extended geographies. Webster Bank also offers equipment financing, warehouse lending, commercial real estate lending, asset-based lending, and treasury management solutions. HSA Bank is a leading provider of HSAs, and delivers health reimbursement arrangements and flexible spending and commuter benefit account administration services to employers and individuals in all 50 states.
Basis of Presentation
The unaudited condensed consolidated financial statements of Webster have been prepared in accordance with GAAP for interim financial information and Article 10 of Regulation S-X. Certain information and footnote disclosures required by GAAP for complete financial statements have been omitted or condensed. Therefore, the condensed consolidated financial statements should be read in conjunction with Webster's Annual Report on Form 10-K for the year ended December 31, 2021. The results of operations for the three and nine months ended September 30, 2022 are not necessarily indicative of the future results that may be attained for the entire year or other interim periods.
In the opinion of management, all necessary adjustments have been reflected to present fairly the financial position, results of operations, and cash flows for the reporting periods presented. Intercompany transactions and balances have been eliminated in consolidation. Assets under administration or assets under management that Webster holds or manages in a fiduciary or agency capacity for customers are not included in the consolidated financial statements.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current period presentation. These reclassifications did not have a significant impact on the Company's consolidated financial statements.
Use of Estimates
The preparation of the consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Business Combinations
Business combinations are accounted for under the acquisition method, in which the identifiable assets acquired and liabilities assumed are generally measured and recognized at fair value as of the acquisition date, with the excess of the purchase price over the fair value of the net assets acquired recognized as goodwill. Items such as acquired ROU lease assets and operating lease liabilities as lessee, employee benefit plans, and income-tax related balances are recognized in accordance with other applicable GAAP, which may result in measurements that differ from fair value. Business combinations are included in the consolidated financial statements from the respective dates of acquisition. Historical reporting periods reflect only the results of legacy Webster operations. Merger-related costs are expensed in the period incurred and presented within the applicable non-interest expense category. Additional information regarding Webster's mergers and acquisitions can be found within
Note 2: Mergers and Acquisitions.
Purchased Credit-Deteriorated Loans and Leases
Purchased credit-deteriorated (PCD) loans and leases are defined as those that have experienced a more-than-insignificant deterioration in credit quality since origination. Webster considers a variety of factors to evaluate and identify whether acquired loans are PCD, including but not limited to, nonaccrual status, delinquency, TDR classification, partial charge-offs, decreases in FICO scores, risk rating downgrades, and other factors. Upon acquisition, expected credit losses are added to the fair value of individual PCD loans and leases to determine the amortized cost basis. After initial recognition, any changes to the estimate of expected credit losses, favorable or unfavorable, are recorded as a provision for credit loss during the period of change.
PCD accounting is also applied to loans and leases previously charged-off by the acquiree if Webster has contractual rights to the cash flows at the acquisition date. Webster recognizes an additional ACL for amounts previously charged-off by the acquiree with a corresponding increase to the amortized costs basis of the acquired asset. Balances deemed to be uncollectible are immediately charged-off in accordance with Webster’s charge-off policies, resulting in the establishment of the initial ACL for PCD loans and leases to be recorded net of these uncollectible balances.
Relevant Accounting Standards Issued But Not Yet Adopted
ASU No. 2022-02—Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures
In March 2022, the Financial Accounting Standards Board (FASB) issued ASU No. 2022-02, which eliminates the accounting guidance for TDRs by creditors in Subtopic 310-40, Receivables—Troubled Debt Restructurings by Creditors, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. Specifically, rather than applying the recognition and measurement guidance for TDRs, an entity must apply the loan refinancing and restructuring guidance in paragraphs 310-20-35-9 through 35-11 to determine whether a modification results in a new loan or a continuation of an existing loan. In addition, ASU No. 2022-02 requires that an entity disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20, Financial Instruments—Credit Losses—Measured at Amortized Cost in the vintage disclosures required by paragraph 326-20-50-6.
ASU No. 2022-02 is effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years, with early adoption permitted. The amendments should be applied prospectively, however, an entity has the option to apply a modified retrospective transition method related to the recognition and measurement of TDRs, which would result in a cumulative-effect adjustment to retained earnings in the period of adoption. Webster is currently evaluating the impact of adoption on the Company's consolidated financial statements and disclosures.
ASU No. 2022-03—Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions
In June 2022, the FASB issued ASU No. 2022-03—Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions, which clarifies that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security, and therefore, is not considered in measuring fair value. The amendments also clarify that an entity cannot, as a separate unit of account, recognize and measure a contractual sale restriction, and require the following disclosures for equity securities subject to contractual sale restrictions: (i) the fair value of equity securities subject to contractual sale restrictions reflected on the balance sheet; (ii) the nature and remaining duration of the restriction(s); and (iii) the circumstances that could cause a lapse in the restriction(s).
ASU No. 2022-03 is effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years, with early adoption permitted. For all entities except investment companies, the amendments should be applied prospectively with any adjustments from the adoption of the amendments recognized in earnings and disclosed on the date of adoption. Webster is currently evaluating the impact of adoption on the Company's consolidated financial statements and disclosures.
Note 2: Mergers and Acquisitions
Merger with Sterling Bancorp
On January 31, 2022, Webster completed its previously announced merger with Sterling pursuant to an agreement and plan of merger dated as of April 18, 2021 (the merger agreement), in which Sterling merged with and into Webster, with Webster continuing as the surviving corporation. Following the merger, on February 1, 2022, Sterling National Bank, a wholly-owned subsidiary of Sterling, merged with and into Webster Bank, with Webster Bank continuing as the surviving bank. Sterling was a full-service regional bank headquartered in Pearl River, New York, that primarily served the Greater New York metropolitan area. The merger expanded Webster's geographic footprint and combined two complementary organizations to create one of the largest commercial banks in the northeast U.S.
Each share of Sterling common stock issued and outstanding immediately prior to the merger, other than certain shares held by Webster and Sterling, was converted into the right to receive a fixed 0.4630 share of Webster common stock. In connection with the completion of the merger and in accordance with the merger agreement, the number of authorized shares of Webster common stock was increased from 200.0 million shares to 400.0 million shares as of January 31, 2022. Cash was also paid to Sterling common shareholders in lieu of fractional shares, as applicable.
In addition, each share of Sterling 6.50% Series A Non-Cumulative Perpetual Preferred Stock issued and outstanding immediately prior to the merger was converted into the right to receive one share of newly created Webster 6.50% Series G Non-Cumulative Perpetual Preferred Stock, having substantially the same terms. On January 31, 2022, Webster registered and issued 5,400,000 depositary shares, each representing 1/40th interest in a share of 6.50% Series G Non-Cumulative Preferred Perpetual Stock, par value $0.01 per share, with a liquidation preference equal to $1,000 per share (equivalent to $25 per depositary share) (the Series G Preferred Stock). The Series G Preferred Stock ranks on parity with Webster 5.25% Series F Non-Cumulative Preferred Perpetual Stock, par value $0.01 per share, with a liquidation preference of $25,000 per share (equivalent to $25 per depositary share), and senior to Webster common stock, with respect to the payment of dividends and distributions upon the liquidation, dissolution, or winding-up of Webster.
Series G Preferred Stock dividends are payable quarterly on the fifteenth day of each January, April, July, and October, if and when declared by the Board of Directors. Webster may redeem the Series G Preferred Stock at its option, in whole or in part, subject to the approval of Federal Reserve Board, on any dividend payment date, or in whole but not in part, upon the occurrence of a regulatory capital treatment event, at a redemption price equal to the liquidation preference plus any declared and unpaid dividends, without accumulation of any undeclared dividends. As of the date of this Quarterly Report on
Form 10-Q, Webster has no plans to redeem its Series G Preferred Stock.
Further, certain equity awards granted under Sterling's equity compensation plans were converted into a corresponding award with respect to Webster common stock, generally subject to the same terms and conditions, with the number of shares underlying such awards adjusted based on the 0.4630 fixed exchange ratio.
The following table summarizes the determination of the purchase price consideration:
| | | | | |
(In thousands, except share and price per share data) | |
Webster common stock issued | 87,965,239 | |
Price per share of Webster common stock on January 31, 2022 | $ | 56.81 | |
Consideration for outstanding common stock | 4,997,305 | |
Consideration for preferred stock exchanged | 138,942 | |
Consideration for replacement equity awards (1) | 43,877 | |
Cash in lieu of fractional shares | 176 | |
Total purchase price consideration | $ | 5,180,300 | |
(1)The fair value of the replacement equity awards issued by Webster and included in the consideration transferred pertain to services performed prior to the merger effective date. The fair value attributed to services performed after the merger effective date will be recognized over the required service vesting period for each award and recorded as compensation and benefits expense on the consolidated statements of income. Webster recognized an incremental $2.6 million and $16.4 million of stock compensation expense related to the replacement equity awards during the three and nine months ended September 30, 2022, respectively.
The merger was accounted for as a business combination. Accordingly, the purchase price has been allocated to the assets acquired and liabilities assumed based on their fair values as of the merger effective date. The determination of fair value requires management to make estimates about discount rates, future expected cash flows, market conditions, and other future events that are highly subjective in nature and are subject to change. Fair value estimates of the assets acquired and liabilities assumed may be adjusted for a period up to one year (the measurement period) from the closing date of the merger if new information is obtained about facts and circumstances that existed as of the merger effective date that, if known, would have affected the measurement of the amounts recognized as of that date.
Webster considers its valuations of loans and leases, tax receivables and payables, and certain other assets and other liabilities to be preliminary, as management continues to identify and assess information regarding the nature of these assets acquired and liabilities assumed, including extended information gathering, management review procedures, and any new information that may arise as a result of integration activities. Accordingly, the amounts recorded for current and DTAs and liabilities are also considered preliminary, as Webster continues to evaluate the nature and extent of permanent and temporary differences between the book and tax bases of the assets acquired and liabilities assumed. While the Company believes that the information available as of January 31, 2022, provides a reasonable basis for estimating fair value, it is possible that additional information may become available during the measurement period that would result in changes to the fair values presented. Any measurement period adjustments identified would be recognized in the corresponding reporting period.
The following table summarizes the preliminary allocation of the purchase price to the fair value of the identifiable assets acquired and liabilities assumed from Sterling at January 31, 2022:
| | | | | | | | | | | | | |
(In thousands) | | | Unpaid Principal Balance | | Fair Value |
Purchase price consideration | | | | | $ | 5,180,300 | |
Assets: | | | | | |
Cash and due from banks | | | | | 510,929 | |
Interest-bearing deposits | | | | | 3,207 | |
Investment securities available-for-sale | | | | | 4,429,948 | |
Federal Home Loan Bank and Federal Reserve Bank Stock | | | | | 150,502 | |
Loans held for sale | | | | | 23,517 | |
Loans and leases: | | | | | |
Commercial non-mortgage | | | $ | 5,570,782 | | | 5,527,657 | |
Asset-based | | | 694,137 | | | 683,958 | |
Commercial real estate | | | 6,790,600 | | | 6,656,405 | |
Multi-family | | | 4,303,381 | | | 4,255,906 | |
Equipment financing | | | 1,350,579 | | | 1,314,311 | |
Warehouse lending | | | 647,767 | | | 643,754 | |
Residential | | | 1,313,785 | | | 1,281,637 | |
Home equity | | | 132,758 | | | 122,553 | |
Other consumer | | | 12,559 | | | 12,525 | |
Total loans and leases | | | $ | 20,816,348 | | | 20,498,706 | |
Deferred tax assets, net | | | | | (52,130) | |
Premises and equipment (1) | | | | | 264,421 | |
Other intangible assets | | | | | 210,100 | |
Bank-owned life insurance policies | | | | | 645,510 | |
Accrued interest receivable and other assets | | | | | 959,501 | |
Total assets acquired | | | | | $ | 27,644,211 | |
Liabilities: | | | | | |
Non-interest-bearing deposits | | | | | $ | 6,620,248 | |
Interest-bearing deposits | | | | | 16,643,755 | |
Securities sold under agreements to repurchase and other borrowings | | | | | 27,184 | |
Long-term debt | | | | | 516,881 | |
| | | | | |
Accrued expenses and other liabilities (1) | | | | | 595,275 | |
Total liabilities assumed | | | | | $ | 24,403,343 | |
Net assets acquired | | | | | 3,240,868 | |
Goodwill | | | | | $ | 1,939,432 | |
(1)Includes $100.0 million of ROU lease assets and $106.9 million of operating lease liabilities reported within premises and equipment and accrued expenses and other liabilities, respectively, which were measured based upon the estimated present value of the remaining lease payments. In addition, ROU lease assets were adjusted for favorable and unfavorable terms of the lease when compared to market terms, as applicable.
In connection with the merger, Webster recorded $1.9 billion of goodwill, which represents the excess of the purchase price over the fair value of the net assets acquired. Information regarding the allocation of goodwill to the Company's reportable segments, as well as the carrying amounts and amortization of the core deposit intangible and customer relationship intangible assets, can be found within Note 16: Segment Reporting and Note 6: Goodwill and Other Intangible Assets, respectively.
The following is a description of the valuation methodologies used to estimate the fair values of the significant assets acquired and liabilities assumed:
Cash and due from banks and interest-bearing deposits. The carrying amount of these assets is a reasonable estimate of fair value based on the short-term nature of these assets.
Investment securities available-for-sale. The fair values for investment securities available-for-sale were based on quoted market prices, where available. If quoted market prices were not available, fair value estimates are based on observable inputs, including quoted market prices for similar instruments. Investment securities held-to-maturity were reclassified to investment securities available-for-sale based on the Company's intent at closing.
Loans and leases. The fair values for loans and leases were estimated using a discounted cash flow methodology that considered factors including the type of loan or lease and the related collateral, classification status, fixed or variable interest rate, remaining term, amortization status, and current discount rates. In addition, the PD, LGD, and prepayment assumptions that were derived based on loan and lease characteristics, historical loss experience, comparable market data, and current and forecasted economic conditions were used to estimate expected credit losses. Loans and leases generally were valued individually. The discount rates used for loans and leases were based on current market rates for new originations or comparable loans and leases and include adjustments for liquidity. The discount rate did not include credit losses as that was included as a reduction to the estimated cash flows.
Premises and equipment. The fair values for land and buildings were based on appraised values using the cost approach, which estimates the price a buyer would pay if they were to rebuild or reconstruct a similar property on a comparable piece of land.
Intangible assets. A core deposit intangible asset represents the value of relationships with deposit clients. The fair value of the core deposit intangible asset was estimated using a net cost savings method, a form of discounted cash flow methodology that gave appropriate consideration to expected client attrition rates and other applicable adjustments to the projected deposit balance, the interest cost and net maintenance cost associated with the client deposit base, alternative cost of funds, and a discount rate used to discount the future economic benefits of the core deposit intangible asset to present value. The core deposit intangible asset is being amortized on an accelerated basis over 10 years based upon the period over which the estimated economic benefits are estimated to be received. Customer relationship intangible assets for payroll finance, factoring receivables finance, and wealth businesses were estimated using a discounted cash flow methodology that reflects the estimated value of the future net earnings for each relationship with adjustments for attrition. The customer relationship intangible assets are being amortized on an accelerated basis over their estimated useful life of 10 years.
Bank-owned life insurance policies. The cash surrender value of these insurance policies is a reasonable estimate of fair value since it reflects the amount that would be realized by the contract owner upon discontinuance or surrender.
Deposits. The fair values used for the demand and savings deposits by definition equal the amount payable on demand at the merger date. The fair values for time deposits were estimated using a discounted cash flow methodology that applies interest rates currently being offered to the contractual interest rates on such time deposits.
Securities sold under agreements to repurchase and other borrowings. The carrying amount of these liabilities is a reasonable estimate of fair value based on the short-term nature of these liabilities.
Long-term debt. The fair values of long-term debt instruments are estimated based on quoted market prices for the instrument, if available, or for similar instruments, if not available, or by using a discounted cash flow methodology based on current incremental borrowing rates for similar types of instruments.
PCD Loans and Leases
Purchased loans and leases that have experienced more-than-insignificant deterioration in credit quality since origination are considered PCD. For PCD loans and leases, the initial estimate of expected credit losses was established through an adjustment to the unpaid principal balance and non-credit discount at acquisition. Subsequent to the merger effective date, Webster recorded an ACL for non-PCD loans and leases of $175.1 million through an increase to the provision for credit losses. There was no carryover of Sterling's previously recorded ACL on loans and leases.
The following table reconciles the unpaid principal balance to the fair value of PCD loans and leases by portfolio segment:
| | | | | | | | | | | | | | | | | |
(In thousands) | Commercial | | Consumer | | Total |
Unpaid principal balance | $ | 3,394,963 | | | $ | 541,471 | | | $ | 3,936,434 | |
ACL at acquisition | (115,464) | | | (20,852) | | | (136,316) | |
Non-credit (discount) | (40,947) | | | (2,784) | | | (43,731) | |
Fair value | 3,238,552 | | | 517,835 | | | 3,756,387 | |
Supplemental Pro Forma Financial Information (Unaudited)
The following table summarizes supplemental pro forma financial information giving effect to the merger as if it had been completed on January 1, 2021:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
(In thousands) | 2022 | | 2021 | | 2022 | | 2021 |
Net interest income | $ | 538,125 | | | $ | 440,300 | | | $ | 1,436,867 | | | $ | 1,344,827 | |
Non-interest income | 113,636 | | | 120,961 | | | 349,405 | | | 347,928 | |
Net income | 239,569 | | | 181,980 | | | 636,174 | | | 368,051 | |
The supplemental pro forma financial information does not necessarily reflect the results of operations that would have occurred had Webster merged with Sterling on January 1, 2021. The supplemental pro forma financial information includes the impact of (i) accreting and amortizing the discounts and premiums associated with the estimated fair value adjustments to acquired loans and leases, investment securities, deposits, and long-term debt, (ii) the amortization of recognized intangible assets, (iii) the elimination of Sterling's historical accretion and amortization of discounts and premiums and deferred origination fees and costs on loans and leases, (iv) the elimination of Sterling's historical accretion and amortization of discounts and premiums on investment securities, and (v) the related estimated income tax effects. Costs savings and other business synergies related to the merger are not included in the supplemental pro forma financial information.
In addition, the supplemental pro forma financial information was adjusted for merger-related expenses, as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
(In thousands) | 2022 | | 2021 | | 2022 | | 2021 |
Compensation and benefits (1) | $ | 5,770 | | | $ | 7,731 | | | $ | 71,472 | | | $ | 8,197 | |
Occupancy (2) | 4,389 | | | — | | | 35,744 | | | — | |
Technology and equipment (3) | 1,478 | | | 33 | | | 21,375 | | | 33 | |
Professional and outside services (4) | 10,792 | | | 2,028 | | | 59,073 | | | 18,315 | |
Marketing | 64 | | | — | | | 199 | | | — | |
Other expense (5) | 3,043 | | | 55 | | | 12,808 | | | 349 | |
Total merger-related expenses | $ | 25,536 | | | $ | 9,847 | | | $ | 200,671 | | | $ | 26,894 | |
(1)Comprised primarily of severance and employee retention costs, and executive synergy stock awards.
(2)Comprised primarily of charges associated with Webster’s corporate real estate consolidation strategy, which was developed and launched in the second quarter of 2022. Under the consolidation plan, Webster has arranged to close 14 locations in order to reduce the Company's corporate real estate facility square footage by approximately 45% by the end of the year. During the three and nine months ended September 30, 2022, respectively, the Company recognized a combined $4.3 million and $12.0 million in related exit costs and accelerated depreciation on property and equipment. The amount for the nine months ended September 30, 2022 also includes $23.1 million in ROU asset impairment charges, which were calculated as the difference between the estimated fair value of the assets determined using a discounted cash flow technique, relative to their book value.
(3)Comprised primarily of technology contract termination fees.
(4)Comprised primarily of advisory, legal, accounting, and other professional fees.
(5)Comprised primarily of disposals on property and equipment, transfer tax, and other miscellaneous expenses.
Webster's operating results for the three and nine months ended September 30, 2022 includes the operating results of acquired assets and assumed liabilities of Sterling subsequent to the merger on January 31, 2022. Due to the various conversions of Sterling systems during the three and nine months ended September 30, 2022, as well as other streamlining and integration of operating activities into those of the Company, historical reporting for the former Sterling operations after January 31, 2022 is impracticable, and thus disclosures of Sterling's revenue and earnings since the merger effective date that are included in the condensed consolidated statements of income for the reporting period is impracticable.
Bend Financial, Inc. Acquisition
On February 18, 2022, Webster acquired 100% of the equity interests of Bend, a cloud-based platform solution provider for HSAs, in exchange for cash of $55.3 million. The acquisition accelerates Webster’s efforts underway to deliver enhanced user experiences at HSA Bank. The transaction was accounted for as a business combination, and resulted in the addition of $19.3 million in net assets, which primarily comprises $15.9 million of internal use software and a $3.0 million customer relationship intangible asset.
Note 3: Investment Securities
Available-for-Sale
The following tables summarize the amortized cost and fair value of available-for-sale debt securities by major type: | | | | | | | | | | | | | | | | |
| At September 30, 2022 |
(In thousands) | Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value (1) | | |
U.S. Treasury notes | $ | 755,414 | | $ | — | | $ | (42,151) | | $ | 713,263 | | | |
Government agency debentures | 311,982 | | — | | (42,954) | | 269,028 | | | |
Municipal bonds and notes | 1,842,985 | | — | | (145,840) | | 1,697,145 | | | |
Agency CMO | 68,886 | | — | | (5,025) | | 63,861 | | | |
Agency MBS | 2,533,669 | | 21 | | (336,341) | | 2,197,349 | | | |
Agency CMBS | 1,697,243 | | — | | (241,324) | | 1,455,919 | | | |
CMBS | 949,535 | | — | | (26,607) | | 922,928 | | | |
CLO | 7,219 | | — | | (16) | | 7,203 | | | |
Corporate debt | 797,931 | | — | | (95,759) | | 702,172 | | | |
Private label MBS | 49,408 | | — | | (5,098) | | 44,310 | | | |
Other | 12,532 | | — | | (666) | | 11,866 | | | |
Available-for-sale debt securities | $ | 9,026,804 | | $ | 21 | | $ | (941,781) | | $ | 8,085,044 | | | |
| | | | | | |
| At December 31, 2021 |
(In thousands) | Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value (1) | | |
U.S. Treasury notes | $ | 398,664 | | $ | — | | $ | (1,698) | | $ | 396,966 | | |
Agency CMO | 88,109 | | 2,326 | | (51) | | 90,384 | | |
Agency MBS | 1,568,293 | | 36,130 | | (11,020) | | 1,593,403 | | |
Agency CMBS | 1,248,548 | | 2,537 | | (18,544) | | 1,232,541 | | |
CMBS | 887,640 | | 506 | | (1,883) | | 886,263 | | |
CLO | 21,860 | | — | | (13) | | 21,847 | | |
Corporate debt | 14,583 | | — | | (1,133) | | 13,450 | | |
Available-for-sale debt securities | $ | 4,227,697 | | $ | 41,499 | | $ | (34,342) | | $ | 4,234,854 | | | |
(1)Fair value represents net carrying value. No ACL has been recorded on available-for-sale debt securities at September 30, 2022 and December 31, 2021, as the securities held are high credit quality and investment grade.
The increase of $3.9 billion in available-for-sale debt securities from December 31, 2021 to September 30, 2022, is primarily attributed to $4.4 billion of investment securities acquired from Sterling in the merger, all of which were classified as
available-for-sale based on Webster's intent at closing, and purchases exceeding paydown activities, partially offset by an increase in net unrealized losses. Accrued interest receivable of $42.8 million and $7.5 million at September 30, 2022 and December 31, 2021, respectively, is excluded from amortized cost and is reported within accrued interest receivable and other assets on the accompanying Condensed Consolidated Balance Sheets.
Unrealized Losses
The following tables summarize the gross unrealized losses and fair value of available-for-sale debt securities by length of time each major security type has been in a continuous unrealized loss position:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| At September 30, 2022 |
| Less Than 12 Months | | 12 Months or More | | Total |
(Dollars in thousands) | Fair Value | Unrealized Losses | | Fair Value | Unrealized Losses | | Number of Holdings | Fair Value | Unrealized Losses |
U.S. Treasury notes | $ | 713,263 | | $ | (42,151) | | | $ | — | | $ | — | | | 23 | $ | 713,263 | | $ | (42,151) | |
Government agency debentures | 269,028 | | (42,954) | | | — | | — | | | 20 | 269,028 | | (42,954) | |
Municipal bonds and notes | 1,696,419 | | (145,840) | | | — | | — | | | 499 | 1,696,419 | | (145,840) | |
Agency CMO | 62,951 | | (5,013) | | | 910 | | (12) | | | 39 | 63,861 | | (5,025) | |
Agency MBS | 1,794,195 | | (252,060) | | | 401,864 | | (84,281) | | | 460 | 2,196,059 | | (336,341) | |
Agency CMBS | 991,740 | | (154,725) | | | 464,179 | | (86,599) | | | 132 | 1,455,919 | | (241,324) | |
CMBS | 534,261 | | (14,954) | | | 388,667 | | (11,653) | | | 53 | 922,928 | | (26,607) | |
CLO | — | | — | | | 7,203 | | (16) | | | 1 | 7,203 | | (16) | |
Corporate debt | 693,493 | | (94,125) | | | 8,679 | | (1,634) | | | 106 | 702,172 | | (95,759) | |
Private label MBS | 44,310 | | (5,098) | | | — | | — | | | 3 | 44,310 | | (5,098) | |
Other | 11,866 | | (666) | | | — | | — | | | 4 | 11,866 | | (666) | |
Available-for-sale debt securities in unrealized loss position | $ | 6,811,526 | | $ | (757,586) | | | $ | 1,271,502 | | $ | (184,195) | | | 1,340 | $ | 8,083,028 | | $ | (941,781) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| At December 31, 2021 |
| Less Than Twelve Months | | Twelve Months or Longer | | Total |
(Dollars in thousands) | Fair Value | Unrealized Losses | | Fair Value | Unrealized Losses | | Number of Holdings | Fair Value | Unrealized Losses |
U.S. Treasury notes | $ | 396,966 | | $ | (1,698) | | | $ | — | | $ | — | | | 8 | $ | 396,966 | | $ | (1,698) | |
Agency CMO | 7,895 | | (51) | | | — | | — | | | 2 | 7,895 | | (51) | |
Agency MBS | 506,602 | | (7,354) | | | 110,687 | | (3,666) | | | 70 | 617,289 | | (11,020) | |
Agency CMBS | 632,213 | | (6,163) | | | 335,480 | | (12,381) | | | 28 | 967,693 | | (18,544) | |
CMBS | 724,762 | | (1,744) | | | 81,253 | | (139) | | | 50 | 806,015 | | (1,883) | |
CLO | — | | — | | | 21,848 | | (13) | | | 1 | 21,848 | | (13) | |
Corporate debt | 4,203 | | (76) | | | 9,247 | | (1,057) | | | 3 | 13,450 | | (1,133) | |
Available-for-sale debt securities in unrealized loss position | $ | 2,272,641 | | $ | (17,086) | | | $ | 558,515 | | $ | (17,256) | | | 162 | $ | 2,831,156 | | $ | (34,342) | |
Webster assesses each available-for-sale debt security that is in an unrealized loss position to determine whether the decline in fair value below the amortized cost basis resulted from a credit loss or other factors. The increase in unrealized losses from December 31, 2021 to September 30, 2022 is primarily due to increased portfolio size from the merger with Sterling, and higher market rates. Market prices will approach par as the securities approach maturity.
At September 30, 2022, Webster had the intent to hold available-for-sale debt securities with unrealized losses through the anticipated recovery period, and it was more-likely-than-not that the Company would not have to sell these securities before recovery of their amortized cost basis. The issuers of these securities have not, to the Company’s knowledge, established any cause for default on these securities. As a result, the Company expects to recover the securities' entire amortized cost basis. Accordingly, no available-for-sale debt securities were in non-accrual status and there was no ACL recorded at both September 30, 2022 and December 31, 2021.
Contractual Maturities
The following table summarizes the amortized cost and fair value of available-for-sale debt securities by contractual maturity: | | | | | | | | | | | |
| At September 30, 2022 |
(In thousands) | Amortized Cost | | Fair Value |
Due in one year or less | $ | 59,790 | | | $ | 58,824 | |
Due after one year through five years | 1,452,511 | | | 1,361,398 | |
Due after five through ten years | 1,437,643 | | | 1,306,402 | |
Due after ten years | 6,076,860 | | | 5,358,420 | |
Total available-for-sale debt securities | $ | 9,026,804 | | | $ | 8,085,044 | |
Available-for-sale debt securities that are not due at a single maturity date have been categorized based on the maturity date of the underlying collateral. Actual principal cash flows may differ from this categorization as borrowers have the right to repay their obligations with or without prepayment penalties.
Sales of Available-for Sale Debt Securities
During the three and nine months ended September 30, 2022, Webster sold Municipal bonds and notes classified as
available-for-sale for proceeds of $65.3 million, which resulted in net realized losses on sale of $2.2 million. There were no sales during three and nine months ended September 30, 2021.
Other Information
The following table summarizes available-for-sale debt securities pledged for deposits, borrowings, and other purposes:
| | | | | | | | | | | |
(In thousands) | At September 30, 2022 | | At December 31, 2021 |
Available-for-sale debt securities pledged for deposits, at fair value | $ | 3,678,364 | | $ | 855,323 |
Available-for-sale debt securities pledged for borrowings and other, at fair value | 1,282,501 | | 924,841 |
Total available-for-sale debt securities pledged | $ | 4,960,865 | | $ | 1,780,164 |
At September 30, 2022, Webster had callable available-for-sale debt securities with an aggregate carrying value of $3.0 billion.
Held-to-Maturity
The following tables summarize the amortized cost, fair value, and ACL on held-to-maturity debt securities by major type:
| | | | | | | | | | | | | | | | | | | | | | | |
| At September 30, 2022 |
(In thousands) | Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | | Allowance | Net Carrying Value |
Agency CMO | $ | 29,854 | | $ | — | | $ | (2,063) | | $ | 27,791 | | | $ | — | | $ | 29,854 | |
Agency MBS | 2,701,984 | | 674 | | (379,332) | | 2,323,326 | | | — | | 2,701,984 | |
Agency CMBS | 2,691,955 | | — | | (372,838) | | 2,319,117 | | | — | | 2,691,955 | |
Municipal bonds and notes | 930,390 | | 208 | | (92,284) | | 838,314 | | | 209 | | 930,181 | |
CMBS | 151,864 | | — | | (10,293) | | 141,571 | | | — | | 151,864 | |
Held-to-maturity debt securities | $ | 6,506,047 | | $ | 882 | | $ | (856,810) | | $ | 5,650,119 | | | $ | 209 | | $ | 6,505,838 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| At December 31, 2021 |
(In thousands) | Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | | Allowance | Net Carrying Value |
Agency CMO | $ | 42,405 | | $ | 655 | | $ | (25) | | $ | 43,035 | | | $ | — | | $ | 42,405 | |
Agency MBS | 2,901,593 | | 71,444 | | (11,788) | | 2,961,249 | | | — | | 2,901,593 | |
Agency CMBS | 2,378,475 | | 11,202 | | (43,844) | | 2,345,833 | | | — | | 2,378,475 | |
Municipal bonds and notes | 705,918 | | 51,572 | | — | | 757,490 | | | 214 | | 705,704 | |
CMBS | 169,948 | | 3,381 | | — | | 173,329 | | | — | | 169,948 | |
Held-to-maturity debt securities | $ | 6,198,339 | | $ | 138,254 | | $ | (55,657) | | $ | 6,280,936 | | | $ | 214 | | $ | 6,198,125 | |
Accrued interest receivable of $19.7 million and $21.2 million at September 30, 2022 and December 31, 2021, respectively, is excluded from amortized cost and is reported in accrued interest receivable and other assets on the accompanying Condensed Consolidated Balance Sheets.
An ACL on held-to-maturity debt securities is recorded for certain Municipal bonds and notes to account for expected lifetime credit losses. Agency securities represent obligations issued by a U.S. government-sponsored enterprise or other
federally-related entity and are either explicitly or implicitly guaranteed and therefore, assumed to be zero loss.
Held-to-maturity debt securities with gross unrealized losses and no ACL are considered to be of high credit quality, and therefore, zero credit loss is recorded as of September 30, 2022.
The following table summarizes the activity in the ACL on held-to-maturity debt securities: | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
(In thousands) | 2022 | | 2021 | | 2022 | | 2021 |
Balance, beginning of period | $ | 210 | | $ | 382 | | $ | 214 | | $ | 299 |
| | | | | | | |
(Benefit) for credit losses | (1) | | (148) | | (5) | | (65) |
Balance, end of period | $ | 209 | | $ | 234 | | $ | 209 | | $ | 234 |
Contractual Maturities
The following table summarizes the amortized cost and fair value of held-to-maturity debt securities by contractual maturity: | | | | | | | | | | | |
| At September 30, 2022 |
(In thousands) | Amortized Cost | | Fair Value |
Due in one year or less | $ | 2,158 | | | $ | 2,155 | |
Due after one year through five years | 52,383 | | | 52,315 | |
Due after five years through ten years | 334,065 | | | 312,347 | |
Due after ten years | 6,117,441 | | | 5,283,302 | |
Total held-to-maturity debt securities | $ | 6,506,047 | | | $ | 5,650,119 | |
Held-to-maturity debt securities that are not due at a single maturity date have been categorized based on the maturity date of the underlying collateral. Actual principal cash flows may differ from this categorization as borrowers have the right to repay their obligations with or without prepayment penalties.
Credit Quality Information
The Company monitors the credit quality of held-to-maturity debt securities through credit ratings provided by Standard & Poor's Rating Services (S&P), Moody's Investor Services (Moody's), Fitch Ratings, Inc., Kroll Bond Rating Agency, or DBRS Inc. Credit ratings express opinions about the credit quality of a debt security, and are updated at each quarter end. Investment grade debt securities are rated BBB- or higher by S&P, or Baa3 or higher by Moody's, and are generally considered by the rating agencies and market participants to be of low credit risk. Conversely, debt securities rated below investment grade, which are labeled as speculative grade by the rating agencies, are considered to have distinctively higher credit risk than investment grade debt securities. There were no speculative grade held-to-maturity debt securities at September 30, 2022 and
December 31, 2021. Held-to-maturity debt securities that are not rated are collateralized with U.S. Treasury obligations.
The following tables summarize the amortized cost basis of held-to-maturity debt securities based on their lowest publicly available credit rating:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2022 |
| Investment Grade | | |
(In thousands) | Aaa | Aa1 | Aa2 | Aa3 | A1 | A2 | A3 | Baa2 | | Not Rated |
Agency CMO | $ | — | | $ | 29,854 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | | $ | — | |
Agency MBS | — | | 2,701,984 | | — | | — | | — | | — | | — | | — | | | — | |
Agency CMBS | — | | 2,691,955 | | — | | — | | — | | — | | — | | — | | | — | |
Municipal bonds and notes | 336,528 | | 163,482 | | 255,616 | | 117,095 | | 38,349 | | 4,165 | | — | | 95 | | | 15,060 | |
CMBS | 151,864 | | — | | — | | — | | — | | — | | — | | — | | | — | |
Held-to-maturity debt securities | $ | 488,392 | | $ | 5,587,275 | | $ | 255,616 | | $ | 117,095 | | $ | 38,349 | | $ | 4,165 | | $ | — | | $ | 95 | | | $ | 15,060 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| Investment Grade | | |
(In thousands) | Aaa | Aa1 | Aa2 | Aa3 | A1 | A2 | A3 | Baa2 | | Not Rated |
Agency CMO | $ | — | | $ | 42,405 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | | $ | — | |
Agency MBS | — | | 2,901,593 | | — | | — | | — | | — | | — | | — | | | — | |
Agency CMBS | — | | 2,378,475 | | — | | — | | — | | — | | — | | — | | | — | |
Municipal bonds and notes | 207,426 | | 119,804 | | 227,106 | | 104,232 | | 35,878 | | 8,260 | | — | | 95 | | | 3,117 | |
CMBS | 169,948 | | — | | — | | — | | — | | — | | — | | — | | | — | |
Held-to-maturity debt securities | $ | 377,374 | | $ | 5,442,277 | | $ | 227,106 | | $ | 104,232 | | $ | 35,878 | | $ | 8,260 | | $ | — | | $ | 95 | | | $ | 3,117 | |
At September 30, 2022 and December 31, 2021, there were no held-to-maturity debt securities past due under the terms of their agreements or in non-accrual status.
Other Information
The following table summarizes held-to-maturity debt securities pledged for deposits, borrowings, and other purposes:
| | | | | | | | | | | |
(In thousands) | At September 30, 2022 | | At December 31, 2021 |
Held-to-maturity debt securities pledged for deposits, at amortized cost | $ | 2,026,305 | | $ | 1,834,117 |
Held-to-maturity debt securities pledged for borrowings and other, at amortized cost | 269,920 | | 1,243,139 |
Total held-to-maturity debt securities pledged | $ | 2,296,225 | | $ | 3,077,256 |
At September 30, 2022, Webster had callable held-to-maturity debt securities with an aggregate carrying value of $0.9 billion.
Note 4: Loans and Leases
The following table summarizes loans and leases by portfolio segment and class: | | | | | | | | | | | |
(In thousands) | At September 30, 2022 | | At December 31, 2021 |
Commercial non-mortgage | $ | 15,148,507 | | | $ | 6,882,480 | |
Asset-based | 1,803,719 | | | 1,067,248 | |
Commercial real estate | 12,742,888 | | | 5,463,321 | |
Multi-family | 6,119,731 | | | 1,139,859 | |
Equipment financing | 1,764,289 | | | 627,058 | |
Warehouse lending | 894,438 | | | — | |
Commercial portfolio | 38,473,572 | | | 15,179,966 | |
Residential | 7,617,955 | | | 5,412,905 | |
Home equity | 1,662,756 | | | 1,593,559 | |
Other consumer | 69,592 | | | 85,299 | |
Consumer portfolio | 9,350,303 | | | 7,091,763 | |
Loans and leases | $ | 47,823,875 | | | $ | 22,271,729 | |
The increase of $25.6 billion in loans and leases from December 31, 2021 to September 30, 2022 is primarily attributed to the $20.5 billion of gross loans and leases acquired from Sterling in the merger, which included a $317.6 million purchase discount. The carrying amount of loans and leases at September 30, 2022 and December 31, 2021 includes net unamortized
(discounts)/premiums and net unamortized deferred (fees)/costs totaling $(83.4) million and $12.3 million, respectively. Accrued interest receivable of $175.8 million and $50.7 million at September 30, 2022 and December 31, 2021, respectively, is excluded from the carrying amount of loans and leases and is reported within accrued interest receivable and other assets on the accompanying Condensed Consolidated Balance Sheets. At September 30, 2022, Webster had pledged $10.0 billion of eligible loans as collateral to support borrowing capacity at the FHLB.
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 September 30, 2022 |
(In thousands) | 30-59 Days Past Due and Accruing | 60-89 Days Past Due and Accruing | 90 or More Days Past Due and Accruing | Non-accrual | Total Past Due and Non-accrual | Current | Total Loans and Leases |
Commercial non-mortgage | $ | 12,270 | | $ | 3,958 | | $ | 703 | | $ | 61,598 | | $ | 78,529 | | $ | 15,069,978 | | $ | 15,148,507 | |
Asset-based | — | | — | | — | | 25,093 | | 25,093 | | 1,778,626 | | 1,803,719 | |
Commercial real estate | 5,172 | | 134 | | — | | 41,961 | | 47,267 | | 12,695,621 | | 12,742,888 | |
Multi-family | 677 | | 86 | | — | | 1,972 | | 2,735 | | 6,116,996 | | 6,119,731 | |
Equipment financing | 3,261 | | 1,358 | | — | | 13,328 | | 17,947 | | 1,746,342 | | 1,764,289 | |
Warehouse lending | — | | — | | — | | — | | — | | 894,438 | | 894,438 | |
Commercial portfolio | 21,380 | | 5,536 | | 703 | | 143,952 | | 171,571 | | 38,302,001 | | 38,473,572 | |
Residential | 8,969 | | 3,527 | | — | | 25,309 | | 37,805 | | 7,580,150 | | 7,617,955 | |
Home equity | 4,083 | | 1,157 | | — | | 30,700 | | 35,940 | | 1,626,816 | | 1,662,756 | |
Other consumer | 321 | | 169 | | — | | 272 | | 762 | | 68,830 | | 69,592 | |
Consumer portfolio | 13,373 | | 4,853 | | — | | 56,281 | | 74,507 | | 9,275,796 | | 9,350,303 | |
Total | $ | 34,753 | | $ | 10,389 | | $ | 703 | | $ | 200,233 | | $ | 246,078 | | $ | 47,577,797 | | $ | 47,823,875 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| At December 31, 2021 |
(In thousands) | 30-59 Days Past Due and Accruing | 60-89 Days Past Due and Accruing | 90 or More Days Past Due and Accruing | Non-accrual | Total Past Due and Non-accrual | Current | Total Loans and Leases |
Commercial non-mortgage | $ | 3,729 | | $ | 4,524 | | $ | 1,977 | | $ | 59,607 | | $ | 69,837 | | $ | 6,812,643 | | $ | 6,882,480 | |
Asset-based | — | | — | | — | | 2,086 | | 2,086 | | 1,065,162 | | 1,067,248 | |
Commercial real estate | 508 | | 417 | | 519 | | 5,046 | | 6,490 | | 5,456,831 | | 5,463,321 | |
Multi-family | — | | — | | — | | — | | — | | 1,139,859 | | 1,139,859 | |
Equipment financing | 1,034 | | — | | — | | 3,728 | | 4,762 | | 622,296 | | 627,058 | |
Commercial portfolio | 5,271 | | 4,941 | | 2,496 | | 70,467 | | 83,175 | | 15,096,791 | | 15,179,966 | |
Residential | 3,212 | | 368 | | — | | 15,747 | | 19,327 | | 5,393,578 | | 5,412,905 | |
Home equity | 3,467 | | 1,600 | | — | | 23,489 | | 28,556 | | 1,565,003 | | 1,593,559 | |
Other consumer | 379 | | 181 | | — | | 224 | | 784 | | 84,515 | | 85,299 | |
Consumer portfolio | 7,058 | | 2,149 | | — | | 39,460 | | 48,667 | | 7,043,096 | | 7,091,763 | |
Total | $ | 12,329 | | $ | 7,090 | | $ | 2,496 | | $ | 109,927 | | $ | 131,842 | | $ | 22,139,887 | | $ | 22,271,729 | |
The following table provides additional information on non-accrual loans and leases: | | | | | | | | | | | | | | | | | |
| At September 30, 2022 | | At December 31, 2021 |
(In thousands) | Non-accrual | Non-accrual with No Allowance | | Non-accrual | Non-accrual with No Allowance |
Commercial non-mortgage | $ | 61,598 | | $ | 27,002 | | | $ | 59,607 | | $ | 4,802 | |
Asset-based | 25,093 | | 1,525 | | | 2,086 | | 2,086 | |
Commercial real estate | 41,961 | | 4,028 | | | 5,046 | | 4,310 | |
Multi-family | 1,972 | | 1,111 | | | — | | — | |
Equipment financing | 13,328 | | 1,955 | | | 3,728 | | — | |
| | | | | |
Commercial portfolio | 143,952 | | 35,621 | | | 70,467 | | 11,198 | |
Residential | 25,309 | | 9,540 | | | 15,747 | | 10,584 | |
Home equity | 30,700 | | 17,416 | | | 23,489 | | 18,920 | |
Other consumer | 272 | | 3 | | | 224 | | 2 | |
Consumer portfolio | 56,281 | | 26,959 | | | 39,460 | | 29,506 | |
Total | $ | 200,233 | | $ | 62,580 | | | $ | 109,927 | | $ | 40,704 | |
Interest on non-accrual loans and leases that would have been recognized as additional interest income had the loans and leases been current in accordance with their original terms totaled $7.6 million and $2.4 million for the three months ended September 30, 2022 and 2021, respectively, and $14.1 million and $7.2 million for the nine months ended September 30, 2022 and 2021, 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 three months ended September 30, |
| 2022 | | 2021 |
(In thousands) | Commercial Portfolio | Consumer Portfolio | Total | | Commercial Portfolio | Consumer Portfolio | Total |
ACL on loans and leases: | | | | | | | |
Balance, beginning of period | $ | 511,745 | | $ | 59,754 | | $ | 571,499 | | | $ | 263,071 | | $ | 44,874 | | $ | 307,945 | |
| | | | | | | |
| | | | | | | |
Provision (benefit) | 34,513 | | (3,161) | | 31,352 | | | 7,681 | | 217 | | 7,898 | |
Charge-offs | (31,356) | | (1,453) | | (32,809) | | | (1,723) | | (2,053) | | (3,776) | |
Recoveries | 1,413 | | 2,870 | | 4,283 | | | 142 | | 2,713 | | 2,855 | |
Balance, end of period | $ | 516,315 | | $ | 58,010 | | $ | 574,325 | | | $ | 269,171 | | $ | 45,751 | | $ | 314,922 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| At or for the nine months ended September 30, |
| 2022 | | 2021 |
(In thousands) | Commercial Portfolio | Consumer Portfolio | Total | | Commercial Portfolio | Consumer Portfolio | Total |
ACL on loans and leases: | | | | | | | |
Balance, beginning of period | $ | 257,877 | | $ | 43,310 | | $ | 301,187 | | | $ | 312,244 | | $ | 47,187 | | $ | 359,431 | |
| | | | | | | |
Initial allowance for PCD loans and leases (1) | 78,376 | | 9,669 | | 88,045 | | | — | | — | | — | |
Provision (benefit) | 230,881 | | 1,267 | | 232,148 | | | (37,049) | | (2,386) | | (39,435) | |
Charge-offs | (61,361) | | (3,469) | | (64,830) | | | (8,638) | | (7,835) | | (16,473) | |
Recoveries | 10,542 | | 7,233 | | 17,775 | | | 2,614 | | 8,785 | | 11,399 | |
Balance, end of period | $ | 516,315 | | $ | 58,010 | | $ | 574,325 | | | $ | 269,171 | | $ | 45,751 | | $ | 314,922 | |
Individually evaluated for impairment | 36,394 | | 13,278 | | 49,672 | | | 7,791 | | 4,308 | | 12,099 | |
Collectively evaluated for impairment | $ | 479,921 | | $ | 44,732 | | $ | 524,653 | | | $ | 261,380 | | $ | 41,443 | | $ | 302,823 | |
(1)Represents the establishment of the initial reserve for PCD loans and leases, which is reported net of $48.3 million of day one charge-offs recognized at the date of acquisition in accordance with GAAP.
Credit Quality Indicators
To measure credit risk for the commercial portfolio, the Company employs a dual grade credit risk grading system for estimating the PD and LGD. The credit risk grade system assigns a rating to each borrower and to the facility, which together form a Composite Credit Risk Profile. The credit risk grade system categorizes borrowers by common financial characteristics that measure the credit strength of borrowers and facilities by common structural characteristics. The Composite Credit Risk Profile has ten grades, with each grade corresponding to a progressively greater risk of loss. Grades (1) to (6) are considered pass ratings, and grades (7) to (10) are considered criticized, as defined by the regulatory agencies. A (7) "Special Mention" rating has a potential weakness that, if left uncorrected, may result in deterioration of the repayment prospects for the asset. A (8) "Substandard" rating has a well-defined weakness that jeopardizes the full repayment of the debt. A (9) "Doubtful" rating has all of the same weaknesses as a substandard asset with the added characteristic that the weakness makes collection or liquidation in full given current facts, conditions, and values improbable. Assets classified as a (10) "Loss" rating are considered uncollectible and are charged-off. Risk ratings, which are assigned to differentiate risk within the portfolio, are reviewed on an ongoing basis and revised to reflect changes in a borrower's current financial position and 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 September 30, 2022 |
(In thousands) | 2022 | 2021 | 2020 | 2019 | 2018 | Prior | Revolving Loans Amortized Cost Basis | Total |
Commercial non-mortgage: | | | | | | | | |
Pass | $ | 4,106,108 | | $ | 2,132,870 | | $ | 1,120,386 | | $ | 883,826 | | $ | 685,660 | | $ | 890,405 | | $ | 4,906,060 | | $ | 14,725,315 | |
Special mention | 73,417 | | 13,288 | | — | | 310 | | 1,118 | | 14,781 | | 43,220 | | 146,134 | |
Substandard | 25,231 | | 1,442 | | 72,161 | | 38,086 | | 71,694 | | 18,809 | | 46,113 | | 273,536 | |
Doubtful | — | | 4 | | — | | — | | — | | — | | 3,518 | | 3,522 | |
Commercial non-mortgage | 4,204,756 | | 2,147,604 | | 1,192,547 | | 922,222 | | 758,472 | | 923,995 | | 4,998,911 | | 15,148,507 | |
Asset-based: | | | | | | | | |
Pass | 8,072 | | 7,610 | | 16,883 | | 15,729 | | 14,561 | | 56,370 | | 1,563,434 | | 1,682,659 | |
Special mention | — | | — | | — | | — | | — | | — | | 40,279 | | 40,279 | |
Substandard | — | | — | | 10,017 | | 1,525 | | — | | — | | 69,239 | | 80,781 | |
Asset-based | 8,072 | | 7,610 | | 26,900 | | 17,254 | | 14,561 | | 56,370 | | 1,672,952 | | 1,803,719 | |
Commercial real estate: | | | | | | | | |
Pass | 2,428,963 | | 2,248,840 | | 1,760,942 | | 1,803,958 | | 1,128,337 | | 2,873,117 | | 107,178 | | 12,351,335 | |
Special mention | 21,974 | | 8,267 | | 33,548 | | 22,300 | | 91,283 | | 60,346 | | — | | 237,718 | |
Substandard | — | | 1,502 | | 8,904 | | 29,282 | | 24,376 | | 89,736 | | — | | 153,800 | |
Doubtful | — | | — | | — | | 1 | | — | | 34 | | — | | 35 | |
Commercial real estate | 2,450,937 | | 2,258,609 | | 1,803,394 | | 1,855,541 | | 1,243,996 | | 3,023,233 | | 107,178 | | 12,742,888 | |
Multi-family: | | | | | | | | |
Pass | 1,309,097 | | 1,123,973 | | 453,324 | | 698,885 | | 489,177 | | 1,843,835 | | 68,623 | | 5,986,914 | |
Special mention | — | | 37,668 | | — | | 95 | | 40,506 | | 9,915 | | 9,276 | | 97,460 | |
Substandard | — | | — | | 386 | | 919 | | 12,760 | | 21,292 | | — | | 35,357 | |
| | | | | | | | |
| | | | | | | | |
Multi-family | 1,309,097 | | 1,161,641 | | 453,710 | | 699,899 | | 542,443 | | 1,875,042 | | 77,899 | | 6,119,731 | |
Equipment financing: | | | | | | | | |
Pass | 328,553 | | 382,901 | | 378,176 | | 364,598 | | 127,688 | | 126,879 | | — | | 1,708,795 | |
Special mention | — | | 195 | | 573 | | 1,691 | | 6,826 | | 1,128 | | — | | 10,413 | |
Substandard | 481 | | 5,854 | | 18,694 | | 5,758 | | 5,884 | | 8,410 | | — | | 45,081 | |
Equipment financing | 329,034 | | 388,950 | | 397,443 | | 372,047 | | 140,398 | | 136,417 | | — | | 1,764,289 | |
Warehouse lending: | | | | | | | | |
Pass | — | | — | | — | | — | | — | | — | | 894,438 | | 894,438 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Warehouse lending | — | | — | | — | | — | | — | | — | | 894,438 | | 894,438 | |
Commercial portfolio | $ | 8,301,896 | | $ | 5,964,414 | | $ | 3,873,994 | | $ | 3,866,963 | | $ | 2,699,870 | | $ | 6,015,057 | | $ | 7,751,378 | | $ | 38,473,572 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| At December 31, 2021 |
(In thousands) | 2021 | 2020 | 2019 | 2018 | 2017 | Prior | Revolving Loans Amortized Cost Basis | Total |
Commercial non-mortgage: | | | | | | | | |
Pass | $ | 2,270,320 | | $ | 1,179,620 | | $ | 757,343 | | $ | 581,633 | | $ | 292,637 | | $ | 275,789 | | $ | 1,182,562 | | $ | 6,539,904 | |
Special mention | 14,216 | | 22,892 | | 37,877 | | 15,575 | | 9,721 | | 15,399 | | 27,808 | | 143,488 | |
Substandard | 3,660 | | 46,887 | | 30,437 | | 69,963 | | 5,255 | | 19,483 | | 23,403 | | 199,088 | |
| | | | | | | | |
Commercial non-mortgage | 2,288,196 | | 1,249,399 | | 825,657 | | 667,171 | | 307,613 | | 310,671 | | 1,233,773 | | 6,882,480 | |
Asset-based: | | | | | | | | |
Pass | 7,609 | | 19,141 | | 12,810 | | 13,456 | | 6,113 | | 25,850 | | 920,496 | | 1,005,475 | |
Special mention | — | | — | | — | | 675 | | — | | — | | 59,012 | | 59,687 | |
Substandard | — | | — | | 2,086 | | — | | — | | — | | — | | 2,086 | |
Asset-based | 7,609 | | 19,141 | | 14,896 | | 14,131 | | 6,113 | | 25,850 | | 979,508 | | 1,067,248 | |
Commercial real estate: | | | | | | | | |
Pass | 1,152,431 | | 733,220 | | 1,146,149 | | 594,180 | | 384,664 | | 1,136,384 | | 55,044 | | 5,202,072 | |
Special mention | 95 | | 3,084 | | — | | 84,475 | | 51,536 | | 79,096 | | — | | 218,286 | |
Substandard | — | | 82 | | 227 | | 373 | | 13,874 | | 28,407 | | — | | 42,963 | |
Commercial real estate | 1,152,526 | | 736,386 | | 1,146,376 | | 679,028 | | 450,074 | | 1,243,887 | | 55,044 | | 5,463,321 | |
Multi-family: | | | | | | | | |
Pass | 222,875 | | 135,924 | | 185,087 | | 322,688 | | 17,054 | | 203,558 | | 566 | | 1,087,752 | |
Special mention | — | | — | | — | | 35,201 | | — | | — | | — | | 35,201 | |
Substandard | — | | 400 | | — | | 6,933 | | — | | 9,573 | | — | | 16,906 | |
Multi-family | 222,875 | | 136,324 | | 185,087 | | 364,822 | | 17,054 | | 213,131 | | 566 | | 1,139,859 | |
Equipment financing: | | | | | | | | |
Pass | 231,762 | | 188,031 | | 93,547 | | 41,276 | | 14,864 | | 32,588 | | — | | 602,068 | |
Special mention | — | | 108 | | 2,229 | | 3,341 | | — | | 600 | | — | | 6,278 | |
Substandard | — | | 8,388 | | 4,756 | | 2,612 | | 332 | | 2,624 | | — | | 18,712 | |
Equipment financing | 231,762 | | 196,527 | | 100,532 | | 47,229 | | 15,196 | | 35,812 | | — | | 627,058 | |
Commercial portfolio | $ | 3,902,968 | | $ | 2,337,777 | | $ | 2,272,548 | | $ | 1,772,381 | | $ | 796,050 | | $ | 1,829,351 | | $ | 2,268,891 | | $ | 15,179,966 | |
To measure credit risk for the consumer portfolio, the most relevant credit characteristic is the FICO score, which is a widely used credit scoring system that ranges from 300 to 850. A lower FICO score is indicative of higher credit risk and a higher FICO score is indicative of lower credit risk. FICO scores are updated at least on a quarterly basis.
The following tables summarize the amortized cost basis of consumer loans by FICO score and origination year:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| At September 30, 2022 |
(In thousands) | 2022 | 2021 | 2020 | 2019 | 2018 | Prior | Revolving Loans Amortized Cost Basis | Total |
Residential: | | | | | | | | |
800+ | $ | 334,705 | | $ | 911,161 | | $ | 449,160 | | $ | 161,434 | | $ | 33,136 | | $ | 1,006,403 | | $ | — | | $ | 2,895,999 | |
740-799 | 786,495 | | 1,008,396 | | 336,307 | | 119,615 | | 39,329 | | 769,948 | | — | | 3,060,090 | |
670-739 | 308,253 | | 359,002 | | 115,708 | | 59,946 | | 18,853 | | 407,928 | | — | | 1,269,690 | |
580-669 | 32,779 | | 44,896 | | 14,772 | | 8,598 | | 3,283 | | 150,773 | | — | | 255,101 | |
579 and below | 10,329 | | 4,800 | | 1,401 | | 60,694 | | 1,453 | | 58,398 | | — | | 137,075 | |
Residential | 1,472,561 | | 2,328,255 | | 917,348 | | 410,287 | | 96,054 | | 2,393,450 | | — | | 7,617,955 | |
Home equity: | | | | | | | | |
800+ | 19,190 | | 34,258 | | 27,296 | | 8,379 | | 12,193 | | 55,519 | | 482,328 | | 639,163 | |
740-799 | 21,246 | | 37,099 | | 18,237 | | 7,772 | | 10,382 | | 36,451 | | 417,840 | | 549,027 | |
670-739 | 13,616 | | 18,679 | | 8,092 | | 3,693 | | 7,218 | | 33,343 | | 256,835 | | 341,476 | |
580-669 | 2,016 | | 2,832 | | 1,383 | | 1,616 | | 1,114 | | 13,264 | | 75,542 | | 97,767 | |
579 and below | 443 | | 390 | | 659 | | 590 | | 707 | | 5,047 | | 27,487 | | 35,323 | |
Home equity | 56,511 | | 93,258 | | 55,667 | | 22,050 | | 31,614 | | 143,624 | | 1,260,032 | | 1,662,756 | |
Other consumer: | | | | | | | | |
800+ | 363 | | 246 | | 783 | | 1,229 | | 425 | | 108 | | 21,121 | | 24,275 | |
740-799 | 646 | | 2,761 | | 2,544 | | 3,227 | | 1,287 | | 889 | | 10,816 | | 22,170 | |
670-739 | 820 | | 770 | | 3,404 | | 5,281 | | 1,535 | | 281 | | 5,321 | | 17,412 | |
580-669 | 169 | | 211 | | 424 | | 1,019 | | 263 | | 72 | | 1,560 | | 3,718 | |
579 and below | 54 | | 116 | | 110 | | 200 | | 62 | | 31 | | 1,444 | | 2,017 | |
Other consumer | 2,052 | | 4,104 | | 7,265 | | 10,956 | | 3,572 | | 1,381 | | 40,262 | | 69,592 | |
Consumer portfolio | $ | 1,531,124 | | $ | 2,425,617 | | $ | 980,280 | | $ | 443,293 | | $ | 131,240 | | $ | 2,538,455 | | $ | 1,300,294 | | $ | 9,350,303 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| At December 31, 2021 |
(In thousands) | 2021 | 2020 | 2019 | 2018 | 2017 | Prior | Revolving Loans Amortized Cost Basis | Total |
Residential: | | | | | | | | |
800+ | $ | 590,238 | | $ | 428,118 | | $ | 161,664 | | $ | 35,502 | | $ | 105,198 | | $ | 735,517 | | $ | — | | $ | 2,056,237 | |
740-799 | 1,083,608 | | 421,380 | | 154,960 | | 32,172 | | 95,662 | | 456,722 | | — | | 2,244,504 | |
670-739 | 374,460 | | 135,146 | | 73,499 | | 25,099 | | 34,550 | | 227,863 | | — | | 870,617 | |
580-669 | 38,644 | | 13,782 | | 9,348 | | 3,056 | | 9,000 | | 71,811 | | — | | 145,641 | |
579 and below | 9,478 | | 1,051 | | 49,252 | | 390 | | 2,519 | | 33,216 | | — | | 95,906 | |
Residential | 2,096,428 | | 999,477 | | 448,723 | | 96,219 | | 246,929 | | 1,525,129 | | — | | 5,412,905 | |
Home equity: | | | | | | | | |
800+ | 35,678 | | 30,157 | | 9,591 | | 16,347 | | 11,068 | | 58,189 | | 463,334 | | 624,364 | |
740-799 | 42,430 | | 22,030 | | 9,413 | | 13,317 | | 7,711 | | 33,777 | | 409,518 | | 538,196 | |
670-739 | 17,493 | | 9,162 | | 5,889 | | 8,220 | | 5,802 | | 31,160 | | 233,744 | | 311,470 | |
580-669 | 1,773 | | 1,397 | | 1,298 | | 1,066 | | 1,329 | | 15,042 | | 66,361 | | 88,266 | |
579 and below | 380 | | 446 | | 725 | | 1,060 | | 434 | | 5,666 | | 22,552 | | 31,263 | |
Home equity | 97,754 | | 63,192 | | 26,916 | | 40,010 | | 26,344 | | 143,834 | | 1,195,509 | | 1,593,559 | |
Other consumer: | | | | | | | | |
800+ | 463 | | 1,343 | | 2,398 | | 916 | | 231 | | 118 | | 10,160 | | 15,629 | |
740-799 | 2,588 | | 5,408 | | 8,303 | | 2,985 | | 379 | | 77 | | 9,528 | | 29,268 | |
670-739 | 1,061 | | 7,034 | | 13,602 | | 3,859 | | 607 | | 412 | | 5,644 | | 32,219 | |
580-669 | 256 | | 1,083 | | 2,550 | | 735 | | 216 | | 211 | | 1,267 | | 6,318 | |
579 and below | 147 | | 87 | | 215 | | 159 | | 40 | | 21 | | 1,196 | | 1,865 | |
Other consumer | 4,515 | | 14,955 | | 27,068 | | 8,654 | | 1,473 | | 839 | | 27,795 | | 85,299 | |
Consumer portfolio | $ | 2,198,697 | | $ | 1,077,624 | | $ | 502,707 | | $ | 144,883 | | $ | 274,746 | | $ | 1,669,802 | | $ | 1,223,304 | | $ | 7,091,763 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Collateral Dependent Loans and Leases
A loan or lease is considered collateral dependent when the borrower is experiencing financial difficulty and repayment is substantially expected to be provided through the operation or sale of collateral. At September 30, 2022 and
December 31, 2021, the carrying amount of collateral dependent commercial loans and leases totaled $77.2 million and $16.6 million, respectively, and the carrying amount of collateral dependent consumer loans totaled $46.3 million and $34.9 million, respectively. Commercial non-mortgage, asset-based, and equipment financing loans and leases are generally secured by machinery and equipment, inventory, receivables, or other non-real estate assets, whereas commercial real estate, multi-family, warehouse lending, residential, home equity, and other consumer loans are secured by real estate. The ACL for collateral dependent loans and leases is individually assessed based on the fair value of the collateral less costs to sell at the reporting date. At September 30, 2022 and December 31, 2021, the collateral value associated with collateral dependent loans and leases totaled $147.9 million and $86.0 million, respectively.
Troubled Debt Restructurings
The following table summarizes information related to TDRs: | | | | | | | | | | | |
(In thousands) | At September 30, 2022 | | At December 31, 2021 |
Accrual status | $ | 105,703 | | | $ | 110,625 | |
Non-accrual status | 65,041 | | | 52,719 | |
Total TDRs | $ | 170,744 | | | $ | 163,344 | |
| | | |
Additional funds committed to borrowers in TDR status | $ | 1,193 | | | $ | 5,975 | |
Specific reserves for TDRs included in the ACL on loans and leases: | | | |
Commercial portfolio | $ | 7,274 | | | $ | 9,017 | |
Consumer portfolio | 3,863 | | | 3,745 | |
The respective portions of commercial and consumer TDRs deemed to be uncollectible and charged off were zero and $0.1 million during the three months ended September 30, 2022, and $1.1 million and zero during the three months ended September 30, 2021. The respective portions of commercial and consumer TDRs deemed to be uncollectible and charged off were $10.0 million and $0.2 million during the nine months ended September 30, 2022, and $3.0 million and $0.3 million during the nine months ended September 30, 2021.
The following table summarizes loans and leases modified as TDRs by class and modification type: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
(Dollars in thousands) | Number of Contracts | Recorded Investment (1) | | Number of Contracts | Recorded Investment (1) | | Number of Contracts | Recorded Investment (1) | | Number of Contracts | Recorded Investment (1) |
Commercial non-mortgage | | | | | | | | | | | |
Extended maturity | 1 | $ | 24 | | 1 | $ | 48 | | 3 | $ | 121 | | 8 | $ | 605 |
| | | | | | | | | | | |
Maturity/rate combined | 3 | 322 | | 2 | 94 | | 8 | 765 | | 8 | 304 |
Other (2) | 15 | 17,408 | | — | — | | 16 | 40,372 | | 3 | 114 |
Commercial real estate | | | | | | | | | | | |
Extended maturity | — | — | | — | — | | — | — | | 1 | 183 |
| | | | | | | | | | | |
| | | | | | | | | | | |
Equipment financing | | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Other (2) | — | — | | — | — | | 1 | 1,157 | | — | — |
Residential | | | | | | | | | | | |
Extended maturity | — | — | | — | — | | 1 | 893 | | 1 | 99 |
Maturity/rate combined | 1 | 124 | | — | — | | 1 | 124 | | 2 | 401 |
Other (2) | 1 | 298 | | — | — | | 7 | 3,060 | | 2 | 233 |
Home equity | | | | | | | | | | | |
Extended maturity | — | — | | — | — | | — | — | | 1 | 28 |
Adjusted interest rate | — | — | | — | — | | 1 | 74 | | — | — |
Maturity/rate combined | 3 | 1,515 | | — | — | | 14 | 2,239 | | 6 | 1,025 |
Other (2) | 6 | 444 | | 3 | 153 | | 30 | 1,777 | | 17 | 1,121 |
Total TDRs | 30 | $ | 20,135 | | 6 | $ | 295 | | 82 | $ | 50,582 | | 49 | $ | 4,113 |
(1)Post-modification balances approximate pre-modification balances. The aggregate amount of charge-offs due to restructurings was not significant.
(2)Other includes covenant modifications, forbearance, discharges under Chapter 7 bankruptcy, or other concessions.
For the three and nine months ended September 30, 2022, there were 5 loans and leases with an aggregated amortized cost of $0.9 million that were modified as TDRs within the previous 12 months and for which there was a payment default. For the three and nine months ended September 30, 2021, there were no significant loans and leases modified as TDRs within the previous 12 months and for which there was a payment default.
Note 5: 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 residential mortgage loans sold are included in mortgage banking activities on the accompanying Condensed Consolidated Statements of Income.
The following table summarizes information related to mortgage banking activities: | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
(In thousands) | 2022 | | 2021 | | 2022 | | 2021 |
Net gain on sale | $ | 26 | | | $ | 1,063 | | | $ | 529 | | | $ | 4,523 | |
Origination fees | 22 | | | 313 | | | 194 | | | 1,231 | |
Fair value adjustment | 38 | | | 149 | | | (107) | | | (268) | |
Mortgage banking activities | $ | 86 | | | $ | 1,525 | | | $ | 616 | | | $ | 5,486 | |
| | | | | | | |
Proceeds from sale | $ | 1,053 | | | $ | 52,256 | | | $ | 33,886 | | | $ | 199,991 | |
Loans sold with servicing rights retained | 147 | | | 50,643 | | | 30,464 | | | 192,421 | |
Under certain circumstances, Webster may decide to sell loans that were not originated or otherwise acquired with the intent to sell. During the three months ended September 30, 2022 and 2021, Webster sold commercial loans not originated for sale for proceeds of $530.1 million and $12.2 million, respectively, which resulted in net (losses) gains on sale of $(0.1) million and $0.6 million, respectively. During the nine months ended September 30, 2022 and 2021, Webster sold commercial loans not originated for sale for proceeds of $648.6 million and $61.3 million, respectively, which resulted in net gains on sale of $3.1 million and $1.3 million, respectively.
In addition, Webster may retain servicing rights on its residential mortgage loans sold in the normal course of business. At both September 30, 2022 and December 31, 2021, the aggregate principal balance of residential mortgage loans serviced for others totaled $2.0 billion. Mortgage servicing assets are held at the lower of cost, net of accumulated amortization, or fair market value, and are included in accrued interest receivable and other assets on the accompanying Consolidated Balance Sheets. Webster assesses mortgage servicing assets for impairment each quarter and establishes or adjusts the valuation allowance to the extent that amortized cost exceeds the estimated fair market value.
The following table presents the change in the carrying amount for mortgage servicing assets: | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
(In thousands) | 2022 | | 2021 | | 2022 | | 2021 |
Beginning balance | $ | 8,592 | | | $ | 11,501 | | | $ | 9,237 | | | $ | 13,422 | |
Additions (1) | 1,627 | | | 483 | | | 2,751 | | | 1,685 | |
Amortization (2) | (382) | | | (1,363) | | | (2,151) | | | (4,295) | |
Adjustment to valuation allowance | — | | | (454) | | | — | | | (645) | |
Ending balance | $ | 9,837 | | | $ | 10,167 | | | $ | 9,837 | | | $ | 10,167 | |
(1)In connection with the Sterling merger, Webster acquired $0.9 million of mortgage servicing assets on January 31, 2022.
Loan servicing fees, net of mortgage servicing rights amortization, were $1.3 million and $0.4 million for the three months ended September 30, 2022 and 2021, respectively, and $2.9 million and $1.2 million for the nine months ended
September 30, 2022 and 2021, respectively, and are included in loan and lease related fees on the accompanying Condensed Consolidated Statements of Income. Information regarding the fair value of loans held for sale and mortgage servicing assets can be found within Note 14: Fair Value Measurements.
Note 6: Goodwill and Other Intangible Assets
Goodwill
The following table summarizes changes in the carrying amount of goodwill:
| | | | | | | | | | | | | | | |
(In thousands) | | | At September 30, 2022 | | At December 31, 2021 |
Balance, beginning of period | | | | | $ | 538,373 | | | $ | 538,373 | |
Sterling merger | | | | | 1,939,432 | | | — | |
Bend acquisition | | | | | 35,966 | | | — | |
Balance, end of period | | | | | $ | 2,513,771 | | | $ | 538,373 | |
Information regarding goodwill by reportable segment can be found within Note 16: Segment Reporting.
Other Intangible Assets
The following table summarizes other intangible assets: | | | | | | | | | | | | | | | | | | | | | | | |
| At September 30, 2022 | | At December 31, 2021 |
(In thousands) | Gross Carrying Amount (1) | Accumulated Amortization | Net Carrying Amount | | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount |
Core deposits | $ | 145,725 | | $ | 32,022 | | $ | 113,703 | | | $ | 26,625 | | $ | 18,516 | | $ | 8,109 | |
Customer relationships | 115,000 | | 21,434 | | 93,566 | | | 21,000 | | 11,240 | | 9,760 | |
Total other intangible assets | $ | 260,725 | | $ | 53,456 | | $ | 207,269 | | | $ | 47,625 | | $ | 29,756 | | $ | 17,869 | |
(1)In connection with the Sterling merger and Bend acquisition, Webster recorded a $119.1 million core deposit intangible and $94.0 million of customer relationship intangibles, all of which are being amortized on an accelerated basis over a period of
10 years.
The remaining estimated aggregate future amortization expense for other intangible assets as of September 30, 2022 is as follows: | | | | | |
(In thousands) | Amortization Expense |
Remainder of 2022 | $ | 8,230 | |
2023 | 30,315 | |
2024 | 24,442 | |
2025 | 21,455 | |
2026 | 21,455 | |
Thereafter | 101,372 | |
Note 7: Deposits
The following table summarizes deposits by type: | | | | | | | | | | | |
(In thousands) | At September 30, 2022 | | At December 31, 2021 |
Non-interest-bearing: | | | |
Demand | $ | 13,849,812 | | | $ | 7,060,488 | |
Interest-bearing: | | | |
Health savings accounts | 7,889,310 | | | 7,397,582 | |
Checking | 9,203,220 | | | 4,182,497 | |
Money market | 11,156,579 | | | 3,718,953 | |
Savings | 9,340,372 | | | 5,689,739 | |
Time deposits | 2,569,594 | | | 1,797,770 | |
Total interest-bearing | $ | 40,159,075 | | | $ | 22,786,541 | |
Total deposits | $ | 54,008,887 | | | $ | 29,847,029 | |
| | | |
Time deposits, money market, and interest-bearing checking obtained through brokers | $ | 613,305 | | | $ | 120,392 | |
Aggregate amount of time deposit accounts that exceeded the FDIC limit | 551,132 | | | 256,522 | |
Demand deposit overdrafts reclassified as loan balances | 9,148 | | | 1,577 | |
The following table summarizes the scheduled maturities of time deposits: | | | | | |
(In thousands) | At September 30, 2022 |
Remainder of 2022 | $ | 827,351 | |
2023 | 1,353,411 | |
2024 | 161,239 | |
2025 | 134,877 | |
2026 | 59,115 | |
Thereafter | 33,601 | |
Total time deposits | $ | 2,569,594 | |
Note 8: Borrowings
The following table summarizes securities sold under agreements to repurchase and other borrowings: | | | | | | | | | | | | | | | | | |
| At September 30, 2022 | | At December 31, 2021 |
(Dollars in thousands) | Total Outstanding | Rate | | Total Outstanding | Rate |
Securities sold under agreements to repurchase (1): | | | | | |
Original maturity of one year or less | $ | 312,089 | | 0.11 | % | | $ | 474,896 | | 0.11 | % |
Original maturity of greater than one year, non-callable (2) | — | | — | | | 200,000 | | 1.32 | |
Total securities sold under agreements to repurchase (1) | 312,089 | | 0.11 | | | 674,896 | | 0.47 | |
Federal funds purchased | 953,325 | | 3.17 | | | — | | — | |
| | | | | |
Securities sold under agreements to repurchase and other borrowings | $ | 1,265,414 | | 2.41 | | | $ | 674,896 | | 0.47 | |
(1)Webster has the right of offset with respect to all repurchase agreement assets and liabilities. Total securities sold under agreements to repurchase are presented as gross transactions, as only liabilities are outstanding for the periods presented.
(2)During the three months September 30, 2022, Webster and its repurchase agreement counterparty agreed to fully extinguish two $100 million long-term, structured repurchase agreements. As a result, a net fee of $2.5 million was paid to Webster, which was recognized as a gain and recorded within other non-interest income on the Condensed Consolidated Statements of Operations.
Securities sold under agreements to repurchase are used as a source of borrowed funds and are collateralized by Agency MBS and corporate bonds. The Company's repurchase agreement counterparties are limited to primary dealers in government securities, and commercial and municipal customers through the Corporate Treasury function. Webster may also purchase unsecured term and overnight federal funds to satisfy its short-term liquidity needs.
The following table summarizes information for FHLB advances: | | | | | | | | | | | | | | | | | |
| At September 30, 2022 | | At December 31, 2021 |
(Dollars in thousands) | Total Outstanding | Weighted- Average Contractual Coupon Rate | | Total Outstanding | Weighted- Average Contractual Coupon Rate |
Maturing within 1 year | $ | 3,500,145 | | 3.03 | % | | $ | 90 | | — | % |
After 1 but within 2 years | 122 | | 2.51 | | | 202 | | 2.95 | |
After 2 but within 3 years | — | | — | | | — | | — | |
After 3 but within 4 years | — | | — | | | — | | — | |
After 4 but within 5 years | — | | — | | | — | | — | |
After 5 years | 10,450 | | 2.03 | | | 10,705 | | 2.03 | |
Total FHLB advances | $ | 3,510,717 | | 3.03 | | | $ | 10,997 | | 2.03 | |
| | | | | |
Aggregate carrying value of assets pledged as collateral | $ | 9,973,866 | | | | $ | 7,556,034 | | |
Remaining borrowing capacity at FHLB | 3,513,563 | | | | 5,087,294 | | |
Webster Bank may borrow up to the amount of eligible mortgages and securities that have been pledged as collateral to secure FHLB advances, which primarily include certain residential and commercial real estate loans and home equity lines of credit. Webster Bank was in compliance with its FHLB collateral requirements at both September 30, 2022 and December 31, 2021.
The following table summarizes long-term debt: | | | | | | | | | | | | | | |
(Dollars in thousands) | At September 30, 2022 | | At December 31, 2021 |
4.375% | Senior fixed-rate notes due February 15, 2024 | $ | 150,000 | | | $ | 150,000 | |
4.100% | Senior fixed-rate notes due March 25, 2029 (1) | 334,796 | | | 338,811 | |
4.000% | Subordinated fixed-to-floating rate notes due December 30, 2029 | 274,000 | | | — | |
3.875% | Subordinated fixed-to-floating rate notes due November 1, 2030 | 225,000 | | | — | |
Junior subordinated debt Webster Statutory Trust I floating-rate notes due September 17, 2033 (2) | 77,320 | | | 77,320 | |
Total senior and subordinated debt | 1,061,116 | | | 566,131 | |
Discount on senior fixed-rate notes | (811) | | | (974) | |
Debt issuance cost on senior fixed-rate notes | (1,924) | | | (2,226) | |
Premium on subordinated fixed-to-floating rate notes | 16,463 | | | — | |
Long-term debt | $ | 1,074,844 | | | $ | 562,931 | |
(1)Webster de-designated its fair value hedging relationship on these senior notes in 2020. A basis adjustment of $34.8 million and $38.8 million at September 30, 2022 and December 31, 2021, respectively, is included in the carrying value and is being amortized over the remaining life of the senior notes.
(2)The interest rate on the Webster Statutory Trust I floating-rate notes, which varies quarterly based on 3-month LIBOR plus 2.95%, was 6.48% and 3.17% at September 30, 2022 and December 31, 2021, respectively.
Webster assumed $274.0 million in aggregate principal amount of 4.00% fixed-to-floating rate subordinated notes due on December 30, 2029 (the 2029 subordinated notes) in connection with the Sterling merger. The 2029 subordinated notes were issued by Sterling on December 16, 2019 through a public offering, and are redeemable at a price equal to the total principal amount plus any accrued and unpaid interest thereon, in whole or in part by Webster on December 30, 2024, or any interest payment date thereafter, upon the occurrence of certain specified events. Until December 30, 2024, the interest rate is fixed at 4.00% and payable semi-annually in arrears on each June 30 and December 30. From December 30, 2024 through the earlier of maturity or redemption, the 2029 subordinated notes will bear interest at a floating rate per annum equal to three-month term SOFR plus 253 basis points, payable quarterly in arrears on each March 30, June 30, September 30, and December 30.
In addition, Webster assumed $225.0 million in aggregate principal amount of 3.875% fixed-to-floating rate subordinated notes due on November 1, 2030 (the 2030 subordinated notes) in connection with the Sterling merger. The 2030 subordinated notes were issued by Sterling on October 30, 2020 through a public offering, and are redeemable at a price equal to the total principal amount plus any accrued and unpaid interest thereon, in whole or in part by Webster on December 30, 2024, or any interest payment date thereafter, upon the occurrence of certain specified events. Until November 1, 2025, the interest rate is fixed at 3.875% and payable semi-annually in arrears on each May 1 and December 30. From November 1, 2025 through the earlier of maturity or redemption, the 2030 subordinated notes will bear interest at a floating rate per annum equal to three-month term SOFR plus 369 basis points, payable quarterly in arrears on each February 1, May 1, August 1, and November 1.
Webster recorded the 2029 and 2030 subordinated notes at their estimated fair value of $281.0 million and $235.9 million, respectively, on the merger effective date. The purchase premiums are being amortized into interest expense over the remaining lives of the subordinated notes.
Note 9: Accumulated Other Comprehensive (Loss) Income, Net of Tax
The following tables summarize the changes in each component of accumulated other comprehensive (loss) income, net of tax:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | |
| Three months ended September 30, 2022 | | Nine months ended September 30, 2022 |
(In thousands) | Securities Available For Sale | Derivative Instruments | Defined Benefit Pension and Other Postretirement Benefit Plans | Total | | Securities Available For Sale | Derivative Instruments | Defined Benefit Pension and Other Postretirement Benefit Plans | Total |
Balance, beginning of period | $ | (445,616) | | $ | (2,082) | | $ | (33,634) | | $ | (481,332) | | | $ | 4,536 | | $ | 6,070 | | $ | (33,186) | | $ | (22,580) | |
Other comprehensive (loss) before reclassifications | (243,872) | | (14,416) | | (248) | | (258,536) | | | (694,024) | | (24,099) | | (1,295) | | (719,418) | |
Amounts reclassified from accumulated other comprehensive (loss) | 1,641 | | 717 | | 609 | | 2,967 | | | 1,641 | | 2,248 | | 1,208 | | 5,097 | |
Other comprehensive (loss) income, net of tax | (242,231) | | (13,699) | | 361 | | (255,569) | | | (692,383) | | (21,851) | | (87) | | (714,321) | |
Balance, end of period | $ | (687,847) | | $ | (15,781) | | $ | (33,273) | | $ | (736,901) | | | $ | (687,847) | | $ | (15,781) | | $ | (33,273) | | $ | (736,901) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, 2021 | | Nine months ended September 30, 2021 |
(In thousands) | Securities Available For Sale | Derivative Instruments | Defined Benefit Pension and Other Postretirement Benefit Plans | Total | | Securities Available For Sale | Derivative Instruments | Defined Benefit Pension and Other Postretirement Benefit Plans | Total |
Balance, beginning of period | $ | 35,598 | | $ | 13,894 | | $ | (43,602) | | $ | 5,890 | | | $ | 67,424 | | $ | 19,918 | | $ | (45,086) | | $ | 42,256 | |
Other comprehensive (loss) before reclassifications | (3,394) | | (2,560) | | — | | (5,954) | | | (35,220) | | (10,205) | | — | | (45,425) | |
Amounts reclassified from accumulated other comprehensive (loss) | — | | 829 | | 743 | | 1,572 | | | — | | 2,450 | | 2,227 | | 4,677 | |
Other comprehensive (loss) income, net of tax | (3,394) | | (1,731) | | 743 | | (4,382) | | | (35,220) | | (7,755) | | 2,227 | | (40,748) | |
Balance, end of period | $ | 32,204 | | $ | 12,163 | | $ | (42,859) | | $ | 1,508 | | | $ | 32,204 | | $ | 12,163 | | $ | (42,859) | | $ | 1,508 | |
The following table further summarizes the amounts reclassified from accumulated other comprehensive (loss) income: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | Nine months ended | Associated Line Item on the Condensed Consolidated Statements of Income |
Accumulated Other Comprehensive (Loss) Income Components | September 30, | | September 30, |
2022 | | 2021 | | 2022 | | 2021 |
(In thousands) | | | | | | | | |
Securities available-for-sale: | | | | | | | | |
Net realized (losses) | $ | (2,234) | | | $ | — | | | $ | (2,234) | | | $ | — | | (Loss) on sale of investment securities, net |
| | | | | | | | |
| | | | | | | | |
Tax benefit | 593 | | | — | | | 593 | | | — | | Income tax expense |
Net of tax | $ | (1,641) | | | $ | — | | | $ | (1,641) | | | $ | — | | |
Derivative instruments: | | | | | | | | |
Hedge terminations | $ | (76) | | | $ | (76) | | | $ | (229) | | | $ | (229) | | Interest expense |
Premium amortization | (909) | | | (1,046) | | | (2,856) | | | (3,088) | | Interest income |
Tax benefit | 268 | | | 293 | | | 837 | | | 867 | | Income tax expense |
Net of tax | $ | (717) | | | $ | (829) | | | $ | (2,248) | | | $ | (2,450) | | |
Defined benefit pension and other postretirement benefit plans: | | | | | | | | |
Actuarial loss amortization | $ | (835) | | | $ | (1,008) | | | $ | (1,657) | | | $ | (3,023) | | Other non-interest expense |
Tax benefit | 226 | | | 265 | | | 449 | | | 796 | | Income tax expense |
Net of tax | $ | (609) | | | $ | (743) | | | $ | (1,208) | | | $ | (2,227) | | |
Note 10: 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 ACL.
At September 30, 2022 and December 31, 2021, Webster Financial Corporation and Webster Bank were both classified as
well-capitalized. Management believes that no events or changes have occurred subsequent to quarter-end that would change this designation.
The following tables provides information on the capital ratios for Webster Financial Corporation and Webster Bank: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| At September 30, 2022 |
| Actual (1) | | Minimum Requirement | | Well Capitalized |
(Dollars in thousands) | Amount | Ratio | | Amount | Ratio | | Amount | Ratio |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Webster Financial Corporation | | | | | | | | |
CET1 risk-based capital | $ | 5,637,725 | | 10.80 | % | | $ | 2,348,463 | | 4.5 | % | | $ | 3,392,224 | | 6.5 | % |
Total risk-based capital | 6,984,237 | | 13.38 | | | 4,175,045 | | 8.0 | | | 5,218,807 | | 10.0 | |
Tier 1 risk-based capital | 5,921,704 | | 11.35 | | | 3,131,284 | | 6.0 | | | 4,175,045 | | 8.0 | |
Tier 1 leverage capital | 5,921,704 | | 8.98 | | | 2,637,840 | | 4.0 | | | 3,297,301 | | 5.0 | |
Webster Bank | | | | | | | | |
CET1 risk-based capital | $ | 6,487,577 | | 12.46 | % | | $ | 2,342,827 | | 4.5 | % | | $ | 3,384,084 | | 6.5 | % |
Total risk-based capital | 6,957,328 | | 13.36 | | | 4,165,026 | | 8.0 | | | 5,206,283 | | 10.0 | |
Tier 1 risk-based capital | 6,487,577 | | 12.46 | | | 3,123,770 | | 6.0 | | | 4,165,026 | | 8.0 | |
Tier 1 leverage capital | 6,487,577 | | 9.85 | | | 2,634,102 | | 4.0 | | | 3,292,628 | | 5.0 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| At December 31, 2021 |
| Actual (1) | | Minimum Requirement | | Well Capitalized |
(Dollars in thousands) | Amount | Ratio | | Amount | Ratio | | Amount | Ratio |
Webster Financial Corporation | | | | | | | | |
CET1 risk-based capital | $ | 2,804,290 | | 11.72 | % | | $ | 1,076,871 | | 4.5 | % | | $ | 1,555,480 | | 6.5 | % |
Total risk-based capital | 3,265,064 | | 13.64 | | | 1,914,436 | | 8.0 | | | 2,393,046 | | 10.0 | |
Tier 1 risk-based capital | 2,949,327 | | 12.32 | | | 1,435,827 | | 6.0 | | | 1,914,436 | | 8.0 | |
Tier 1 leverage capital | 2,949,327 | | 8.47 | | | 1,393,607 | | 4.0 | | | 1,742,008 | | 5.0 | |
Webster Bank | | | | | | | | |
CET1 risk-based capital | $ | 3,034,883 | | 12.69 | % | | $ | 1,075,920 | | 4.5 | % | | $ | 1,554,107 | | 6.5 | % |
Total risk-based capital | 3,273,300 | | 13.69 | | | 1,912,747 | | 8.0 | | | 2,390,934 | | 10.0 | |
Tier 1 risk-based capital | 3,034,883 | | 12.69 | | | 1,434,560 | | 6.0 | | | 1,912,747 | | 8.0 | |
Tier 1 leverage capital | 3,034,883 | | 8.72 | | | 1,392,821 | | 4.0 | | | 1,741,026 | | 5.0 | |
(1)In accordance with regulatory capital rules, Webster elected an option to delay the estimated impact of the adoption of CECL on its regulatory capital over a two-year deferral period, which ended on January 1, 2022, and a subsequent three-year transition period ending on December 31, 2024. Therefore, the December 31, 2021 capital ratios and amounts exclude the impact of the increased ACL on loans and leases, held-to-maturity debt securities, and unfunded loan commitments related to the adoption of CECL on January 1, 2020, adjusted for an approximation of the after-tax provision for credit losses attributable to CECL relative to the incurred loss methodology during the deferral period. During the three year transition period, capital ratios will begin to phase out the aggregate amount of the capital benefit provided in the initial two years. For 2022, 2023, and 2024, Webster is allowed 75%, 50%, and 25% of the capital benefit as of December 31, 2021, respectively, with full absorption occurring in 2025.
Dividend Restrictions
Webster Financial Corporation is dependent upon dividends from Webster Bank to provide funds for the payment of dividends to shareholders and to provide for other cash requirements. Dividends paid by the Bank are subject to various federal and state regulatory limitations. Express approval by the OCC is required if the effect of dividends declared would cause the regulatory capital of the Bank to fall below specified minimum levels or if the amount would exceed the net income for that year combined with the undistributed net income for the preceding two years. Webster Bank paid $250.0 million and $375.0 million in dividends to Webster Financial Corporation for the three and nine months ended September 30, 2022, and $40.0 million and $160.0 million for the three and nine months ended September 30, 2021, respectively, for 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 FRB 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 September 30, 2022 and December 31, 2021.
Note 11: Variable Interest Entities
Webster has an investment interest in the following entities that meet the definition of a variable interest entity.
Consolidated
Rabbi Trust. The Company established a Rabbi Trust to meet the obligations due under its Deferred Compensation Plan for Directors and Officers and to mitigate expense volatility. The funding of the Rabbi Trust and the discontinuation of the Deferred Compensation Plan for Directors and Officers occurred during 2012. In connection with the Sterling merger, Webster acquired assets held in a separate Rabbi Trust that had been previously established to fund obligations due under the Greater New York Savings Bank Directors' Retirement Plan, which was also assumed from Sterling.
Investments held in the Rabbi Trusts consist primarily of mutual funds that invest in equity and fixed income securities. Webster is considered the primary beneficiary of these Rabbi Trusts as it has the power to direct the activities of the Rabbi Trusts that most significantly impact its economic performance and it has the obligation to absorb losses and/or the right to receive benefits of the Rabbi Trusts that could potentially be significant.
The Rabbi Trusts' assets are included in accrued interest receivable and other assets on the accompanying Condensed Consolidated Balance Sheets. Investment earnings are included in other non-interest income, and depending on the nature of the underlying assets in the Rabbi Trusts, fair value changes are either recognized in other non-interest income or in other comprehensive (loss) income, net of tax, on the accompanying Condensed Consolidated Statements of Income or on the accompanying Condensed Consolidated Statements of Comprehensive Income, respectively. Information regarding the fair value of the Rabbi Trusts' investments can be found within Note 14: Fair Value Measurements.
Non-Consolidated
Tax Credit Finance Investments. Webster makes non-marketable equity investments in entities that sponsor affordable housing and other community development projects that qualify for the Low Income Housing Tax Credit (LIHTC) Program pursuant to Section 42 of the Internal Revenue Code. The purpose of these investments is not only to assist the Bank in meeting its responsibilities under the CRA, but also to provide a return, primarily through the realization of tax benefits. While Webster's investment in an entity may exceed 50% of its outstanding equity interests, the entity is not consolidated as the Company is not the primary beneficiary. Webster has determined that it is not the primary beneficiary due to its inability to direct the activities that most significantly impact economic performance and the Company does not have the obligation to absorb losses and/or the right to receive benefits. Webster applies the proportional amortization method to subsequently measure its investments in qualified affordable housing projects.
The following table summarizes Webster's LIHTC investments and related unfunded commitments:
| | | | | | | | | | | |
(In thousands) | September 30, 2022 | | December 31, 2021 |
Gross investment in LIHTC (1) | $ | 707,619 | | | $ | 68,635 | |
Accumulated amortization | (56,887) | | | (25,216) | |
Net investment in LIHTC | $ | 650,732 | | | $ | 43,419 | |
| | | |
Unfunded commitments for LIHTC investments (1) | $ | 311,282 | | | $ | 11,106 | |
(1)In connection with the Sterling merger, Webster acquired $515.6 million of LIHTC investments and assumed $267.3 million of unfunded commitments for LIHTC investments on January 31, 2022.
The aggregate carrying value of Webster's LIHTC investments is included in accrued interest receivable and other assets on the accompanying Condensed Consolidated Balance Sheets, and represents the Company's maximum exposure to loss. The related unfunded commitments are included in accrued expenses and other liabilities on the accompanying Condensed Consolidated Balance Sheets. In addition to those acquired from Sterling, there were $123.4 million of net commitments approved to fund LIHTC investments during the nine months ended September 30, 2022, and $10.6 million during the nine months ended September 30, 2021.
Webster Statutory Trust. Webster owns all the outstanding common stock of Webster Statutory Trust, a financial vehicle that has issued, and in the future may issue, trust preferred securities. The Company is not the primary beneficiary of Webster Statutory Trust. Webster Statutory Trust's only assets are junior subordinated debentures that are issued by the Company, which were acquired using the proceeds from the issuance of trust preferred securities and common stock. The junior subordinated debentures are included in long-term debt on the accompanying Condensed Consolidated Balance Sheets, and the related interest expense is reported as interest expense on long-term debt on the accompanying Condensed Consolidated Statements of Income. Additional information regarding these junior subordinated debentures can be found within Note 8: Borrowings.
Other Non-Marketable Investments. Webster invests in alternative investments comprising interests in non-public entities that cannot be redeemed since the investment is distributed as the underlying equity is liquidated. The ultimate timing and amount of these distributions cannot be predicted with reasonable certainty. For each of these alternative investments that is classified as a variable interest entity, the Company has determined that it is not the primary beneficiary due to its inability to direct the activities that most significantly impact economic performance. The aggregate carrying value of Webster's other non-marketable investments was $124.3 million and $61.5 million at September 30, 2022 and December 31, 2021, respectively, which is included in accrued interest receivable and other assets on the accompanying Condensed Consolidated Balance Sheets, and its maximum exposure to loss, including unfunded commitments, was $219.1 million and $95.9 million, respectively. Information regarding the fair value of other non-marketable investments can be found within Note 14: Fair Value Measurements.
Additional Information regarding Webster's consolidation of variable interest entities can be found within Note 1: Summary of Significant Accounting Policies in the Consolidated Financial Statements contained in Part II - Item 8. Financial Statements and Supplementary Data of the Company's Annual Reporting on Form 10-K for the year ended December 31, 2021.
Note 12: Earnings Per Common Share
The following table summarizes the calculation of basic and diluted earnings per common share: | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
(In thousands, except per share data) | 2022 | | 2021 | | 2022 | | 2021 |
Net income | $ | 233,968 | | | $ | 95,713 | | | $ | 399,532 | | | $ | 297,826 | |
Less: Preferred stock dividends | 4,162 | | | 1,968 | | | 11,756 | | | 5,906 | |
Net income available to common shareholders | 229,806 | | | 93,745 | | | 387,776 | | | 291,920 | |
Less: Earnings allocated to participating securities | 2,128 | | | 574 | | | 3,562 | | | 1,661 | |
Earnings applicable to common shareholders | $ | 227,678 | | | $ | 93,171 | | | $ | 384,214 | | | $ | 290,259 | |
| | | | | | | |
Weighted-average common shares outstanding - basic | 173,868 | | | 90,038 | | | 165,743 | | | 89,960 | |
Effect of dilutive securities | 76 | | | 194 | | | 70 | | | 226 | |
Weighted-average common shares outstanding - diluted | 173,944 | | | 90,232 | | | 165,813 | | | 90,186 | |
| | | | | | | |
Basic earnings per common share | $ | 1.31 | | | $ | 1.03 | | | $ | 2.32 | | | $ | 3.23 | |
Diluted earnings per common share | 1.31 | | | 1.03 | | | 2.32 | | | 3.22 | |
Earnings per common share is calculated under the two-class method in which all earnings (distributed and undistributed) are allocated to common stock and participating securities based on their respective rights to receive dividends. Webster may grant restricted stock, restricted stock units, non-qualified stock options, incentive stock options, or stock appreciation rights to certain employees and directors under its stock-based compensation programs, which entitle recipients to receive
non-forfeitable dividends during the vesting period on a basis equivalent to the dividends paid to holders of common stock. These unvested awards meet the definition of participating securities.
Potential common shares from stock options and performance-based restricted stock awards that were not included in the computation of dilutive earnings per common share because they were anti-dilutive under the treasury stock method were 97,294 and 330,688 for the three and nine months ended September 30, 2022, respectively, and zero and 47,161 for the three and nine months ended September 30, 2021, respectively.
Note 13: Derivative Financial Instruments
Derivative Positions and Offsetting
Derivatives Designated in Hedge Relationships. Interest rate swaps allow the Company to change the fixed or variable nature of an interest rate without the exchange of the underlying notional amount. Certain pay fixed/receive variable interest rate swaps are designated as cash flow hedges to effectively convert variable-rate debt into fixed-rate debt, while certain receive fixed/pay variable interest rate swaps are designated as fair value hedges to effectively convert fixed-rate long-term debt into variable-rate debt. Certain purchased options are designated as cash flow hedges. Purchased options allow the Company to limit the potential adverse impact of variable interest rates by establishing a cap or 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 tables present the notional amounts and fair values, including accrued interest, of derivative positions: | | | | | | | | | | | | | | | | | |
| At September 30, 2022 |
| Asset Derivatives | | Liability Derivatives |
(In thousands) | Notional Amounts | Fair Value | | Notional Amounts | Fair Value |
Designated as hedging instruments: | | | | | |
Interest rate derivatives (1) | $ | 850,000 | | $ | 243 | | | $ | 2,000,000 | | $ | 16,377 | |
Not designated as hedging instruments: | | | | | |
Interest rate derivatives (1) | 6,731,008 | | 217,613 | | | 6,721,716 | | 409,950 | |
Mortgage banking derivatives (2) | 4,445 | | 36 | | | 476 | | 3 | |
Other (3) | 155,206 | | 1,601 | | | 485,375 | | 447 | |
Total not designated as hedging instruments | 6,890,659 | | 219,250 | | | 7,207,567 | | 410,400 | |
Gross derivative instruments, before netting | $ | 7,740,659 | | 219,493 | | | $ | 9,207,567 | | 426,777 | |
Less: Master netting agreements | | 16,877 | | | | 16,877 | |
Cash collateral | | 185,968 | | | | — | |
Total derivative instruments, after netting | | $ | 16,648 | | | | $ | 409,900 | |
| | | | | |
| At December 31, 2021 |
| Asset Derivatives | | Liability Derivatives |
(In thousands) | Notional Amounts | Fair Value | | Notional Amounts | Fair Value |
Designated as hedging instruments: | | | | | |
Interest rate derivatives (1) | $ | 1,000,000 | | $ | 17,583 | | | $ | — | | $ | — | |
Not designated as hedging instruments: | | | | | |
Interest rate derivatives (1) | 4,463,048 | | 141,243 | | | 4,372,846 | | 21,570 | |
Mortgage banking derivatives (2) | 14,212 | | 80 | | | — | | — | |
Other (3) | 76,755 | | 211 | | | 374,688 | | 214 | |
Total not designated as hedging instruments | 4,554,015 | | 141,534 | | | 4,747,534 | | 21,784 | |
Gross derivative instruments, before netting | $ | 5,554,015 | | 159,117 | | | $ | 4,747,534 | | 21,784 | |
Less: Master netting agreements | | 6,364 | | | | 6,364 | |
Cash collateral | | 19,272 | | | | 2,119 | |
Total derivative instruments, after netting | | $ | 133,481 | | | | $ | 13,301 | |
(1)Balances related to clearing houses are presented as a single unit of account. In accordance with their rule books, clearing houses legally characterize variation margin payments as settlement of derivatives rather than collateral against derivative positions. At September 30, 2022 and December 31, 2021, notional amounts of interest rate swaps cleared through clearing houses include $2.9 billion and $0.4 billion for asset derivatives, respectively, and zero and $2.6 billion for liability derivatives, respectively. The related fair values approximate zero.
(2)Notional amounts related to residential loans exclude approved floating rate commitments of $2.8 million and $1.0 million at September 30, 2022 and December 31, 2021, respectively.
(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 $103.7 million and $66.0 million for asset derivatives and $464.7 million and $338.2 million for liability derivatives at September 30, 2022 and December 31, 2021, respectively, that have insignificant related fair values.
The following tables present fair value positions transitioned from gross to net upon applying counterparty netting agreements: | | | | | | | | | | | | | | | | | | | | |
| At September 30, 2022 |
(In thousands) | Gross Amount Recognized | Derivative Offset Amount | Cash Collateral Received/Pledged | Net Amount Presented | | Amounts Not Offset |
Asset derivatives | $ | 219,245 | | $ | 16,877 | | $ | 185,968 | | $ | 16,400 | | | $ | 16,771 | |
Liability derivatives | 16,877 | | 16,877 | | — | | — | | | 852 | |
| | | | | | |
| At December 31, 2021 |
(In thousands) | Gross Amount Recognized | Derivative Offset Amount | Cash Collateral Received/Pledged | Net Amount Presented | | Amounts Not Offset |
Asset derivatives | $ | 25,636 | | $ | 6,364 | | $ | 19,272 | | $ | — | | | $ | 51 | |
Liability derivatives | 8,483 | | 6,364 | | 2,119 | | — | | | 428 | |
Derivative Activity
The following table summarizes the income statement effect of derivatives designated as cash flow hedges: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Recognized In | Three months ended September 30, | | Nine months ended September 30, |
(In thousands) | Net Interest Income | 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Interest rate derivatives | Long-term debt | $ | (76) | | | $ | (90) | | | $ | (229) | | | $ | (334) | |
Interest rate derivatives | Interest and fees on loans and leases | (483) | | | 2,706 | | | 3,320 | | | 7,933 | |
Net recognized on cash flow hedges | $ | (559) | | | $ | 2,616 | | | $ | 3,091 | | | $ | 7,599 | |
The following table summarizes information related to a fair value hedging adjustment: | | | | | | | | | | | | | | | | | | | | | | | |
Condensed Consolidated Balance Sheet Line Item in Which Hedged Item is Located | Carrying Amount of Hedged Item | | Cumulative Amount of Fair Value Hedging Adjustment Included in Carrying Amount |
(In thousands) | At September 30, 2022 | | At December 31, 2021 | | At September 30, 2022 | | At December 31, 2021 |
Long-term debt | $ | 334,796 | | | $ | 338,811 | | | $ | 34,796 | | | $ | 38,811 | |
The following table summarizes the income statement effect of derivatives not designated as hedging instruments: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Recognized In | Three months ended September 30, | | Nine months ended September 30, |
(In thousands) | Non-interest Income | 2022 | | 2021 | | 2022 | | 2021 |
Interest rate derivatives | Other income | $ | 6,032 | | | $ | 2,727 | | | $ | 25,291 | | | $ | 7,132 | |
Mortgage banking derivatives | Mortgage banking activities | 31 | | | 38 | | | (47) | | | (556) | |
Other | Other income | 3,196 | | | 611 | | | 4,620 | | | 780 | |
Total not designated as hedging instruments | $ | 9,259 | | | $ | 3,376 | | | $ | 29,864 | | | $ | 7,356 | |
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 September 30, 2022, the remaining unamortized balance of time-value premiums was $3.5 million. Over the next twelve months, an estimated $2.8 million decrease to interest expense will be reclassified from (AOCL) AOCI relating to cash flow hedges, and an estimated $0.3 million increase to interest expense will be reclassified from (AOCL) AOCI relating to hedge terminations. At September 30, 2022, the remaining unamortized loss on terminated cash flow hedges is $0.4 million. The maximum length of time over which forecasted transactions are hedged is 4.5 years. Additional information about cash flow hedge activity impacting (AOCL) AOCI and the related amounts reclassified to interest expense is provided in Note 9: 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 14: Fair Value Measurements.
Derivative Exposure. At September 30, 2022, the Company had $64.8 million in initial margin collateral posted at clearing houses. In addition, $186.8 million of cash collateral received is included in cash and due from banks on the accompanying Condensed Consolidated Balance Sheets. Webster regularly evaluates the credit risk of its derivative customers, taking into account the likelihood of default, net exposures, and remaining contractual life, among other related factors. Credit risk exposure is mitigated as transactions with customers are generally secured by the same collateral of the underlying transactions. Current net credit exposure relating to interest rate derivatives with Webster Bank customers was $0.2 million at
September 30, 2022. In addition, the Company monitors potential future exposure, representing its best estimate of exposure to remaining contractual maturity. The potential future exposure relating to interest rate derivatives with Webster Bank customers totaled $85.9 million at September 30, 2022. Webster has incorporated a valuation adjustment to reflect nonperformance risk in the fair value measurement of its derivatives, which totaled $9.5 million and $(0.4) million at September 30, 2022 and December 31, 2021, respectively. Various factors impact changes in the valuation adjustment over time, including changes in the credit spreads of the parties to the contracts, as well as changes in market rates and volatilities, which affect the total expected exposure of the derivative instruments.
Note 14: Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The determination of fair value may require the use of estimates when quoted market prices are not available. Fair value estimates made at a specific point in time are based on management’s judgments regarding future expected losses, current economic conditions, the risk characteristics of each financial instrument, and other subjective factors that cannot be determined with precision.
The framework for measuring fair value provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The three levels within the fair value hierarchy are as follows:
•Level 1: Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that Webster has the ability to access at the measurement date.
•Level 2: Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in inactive markets, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, rate volatility, prepayment speeds, and credit ratings), or inputs that are derived principally from or corroborated by market data, correlation, or other means.
•Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement. This includes certain pricing models or other similar techniques that require significant management judgment or estimation.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Available-for-Sale Investment Securities. When unadjusted quoted prices are available in an active market, Webster classifies available-for-sale investment securities within Level 1 of the fair value hierarchy. U.S. Treasury notes have a readily determinable fair value, and therefore are classified within Level 1 of the fair value hierarchy.
When quoted market prices are not available, Webster employs an independent pricing service that utilizes matrix pricing to calculate fair value. These fair value measurements consider observable data such as dealer quotes, market spreads, cash flows, yield curves, live trading levels, trade execution data, market consensus prepayments speeds, credit information, and the respective terms and conditions for debt instruments. Management maintains procedures to monitor the pricing service's results and has a process in place to challenge their valuations and methodologies that appear unusual or unexpected. Government agency debentures, municipal bonds and notes, Agency CMO, Agency MBS, Agency CMBS, CMBS, CLO, corporate debt, private label MBS, and other securities available-for-sale are classified within Level 2 of the fair value hierarchy.
Derivative Instruments. The fair values presented for derivative instruments include any accrued interest. Foreign exchange contracts are valued based on unadjusted quoted prices in active markets and accordingly are classified within Level 1 of the fair value hierarchy. Except for mortgage banking derivatives, all other derivative instruments are valued using third-party valuation software, which considers the present value of cash flows discounted using observable forward rate assumptions. The resulting fair value is then validated against valuations performed by independent third parties. These derivative instruments are classified within Level 2 of the fair value hierarchy.
Mortgage Banking Derivatives. Webster uses forward sales of mortgage loans and mortgage-backed securities to manage the risk of loss associated with its mortgage loan commitments and mortgage loans held for sale. Prior to closing and funding certain single-family residential mortgage loans, an interest rate lock commitment is generally extended to the borrower. During this in-between time period, Webster is subject to the risk that market interest rates may change. If rates rise, investors generally will pay less to purchase mortgage loans, which would result in a reduction in the gain on sale of the loans, or possibly a loss. In an effort to mitigate this risk, forward delivery sales commitments are established in which Webster agrees to either deliver whole mortgage loans to various investors or issue mortgage-backed securities. The fair value of mortgage banking derivatives is determined based on current market prices for similar assets in the secondary market. Accordingly, mortgage banking derivatives are classified within Level 2 of the fair value hierarchy.
Originated Loans Held For Sale. Webster has elected to measure originated loans held for sale at fair value under the fair value option per ASC Topic 825, Financial Instruments. Electing to measure originated loans held for sale at fair value reduces certain timing differences and better reflects the price Webster would expect to receive from the sale of these loans. The fair value of originated loans held for sale is based on quoted market prices of similar loans sold in conjunction with securitization transactions. Accordingly, originated loans held for sale are classified within Level 2 of the fair value hierarchy.
The following table compares the fair value to the unpaid principal balance of originated loans held for sale: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| At September 30, 2022 | | At December 31, 2021 |
(In thousands) | Fair Value | | Unpaid Principal Balance | | Difference | | Fair Value | | Unpaid Principal Balance | | Difference |
Originated loans held for sale | $ | 898 | | | $ | 1,080 | | | $ | (182) | | | $ | 4,694 | | | $ | 5,034 | | | $ | (340) | |
Rabbi Trust Investments. Investments held in each of the Rabbi Trusts consist primarily of mutual funds that invest in equity and fixed income securities. Shares of these mutual funds are valued based on the net asset value (NAV) as reported by the trustee of the funds, which represents quoted prices in active markets. Webster has elected to measure the Rabbi Trusts' investments at fair value. Accordingly, the Rabbi Trusts' investments are classified within Level 1 of the fair value hierarchy. At September 30, 2022, the cost basis of the Rabbi Trusts' investments was $10.3 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 September 30, 2022, equity investments with a readily determinable fair value had a carrying amount of $0.5 million and no remaining unfunded commitment. During the three and nine months ended September 30, 2022, there were write-downs in fair value of $0.2 million and $1.4 million, respectively, associated with these alternative investments.
Equity investments that do not have a readily available fair value may qualify for the NAV practical expedient if they meet certain requirements. Webster's alternative investments measured at NAV consist of investments in non-public entities that cannot be redeemed since investments are distributed as the underlying equity is liquidated. Alternative investments measured at NAV are not classified within the fair value hierarchy. At September 30, 2022, these alternative investments had a carrying amount of $75.2 million and a remaining unfunded commitment of $76.1 million.
The following tables summarize the fair values of assets and liabilities measured at fair value on a recurring basis: | | | | | | | | | | | | | | | |
| At September 30, 2022 |
(In thousands) | Level 1 | Level 2 | Level 3 | | Total |
Financial Assets: | | | | | |
Available-for-sale investment securities: | | | | | |
U.S. Treasury notes | $ | 713,263 | | $ | — | | $ | — | | | $ | 713,263 | |
Government agency debentures | — | | 269,028 | | — | | | 269,028 | |
Municipal bonds and notes | — | | 1,697,145 | | — | | | 1,697,145 | |
Agency CMO | — | | 63,861 | | — | | | 63,861 | |
Agency MBS | — | | 2,197,349 | | — | | | 2,197,349 | |
Agency CMBS | — | | 1,455,919 | | — | | | 1,455,919 | |
CMBS | — | | 922,928 | | — | | | 922,928 | |
CLO | — | | 7,203 | | — | | | 7,203 | |
Corporate debt | — | | 702,172 | | — | | | 702,172 | |
Private label MBS | — | | 44,310 | | — | | | 44,310 | |
Other | — | | 11,866 | | — | | | 11,866 | |
Total available-for-sale investment securities | 713,263 | | 7,371,781 | | — | | | 8,085,044 | |
Gross derivative instruments, before netting (1) | 1,591 | | 217,902 | | — | | | 219,493 | |
Originated loans held for sale | — | | 898 | | — | | | 898 | |
Investments held in Rabbi Trust | 12,250 | | — | | — | | | 12,250 | |
Alternative investments (2) | 522 | | — | | — | | | 75,728 | |
Total financial assets | $ | 727,626 | | $ | 7,590,581 | | $ | — | | | $ | 8,393,413 | |
Financial Liabilities: | | | | | |
Gross derivative instruments, before netting (1) | $ | 296 | | $ | 426,481 | | $ | — | | | $ | 426,777 | |
| | | | | | | | | | | | | | | |
| At December 31, 2021 |
(In thousands) | Level 1 | Level 2 | Level 3 | | Total |
Financial Assets: | | | | | |
Available-for-sale investment securities: | | | | | |
U.S. Treasury notes | $ | 396,966 | | $ | — | | $ | — | | | $ | 396,966 | |
Agency CMO | — | | 90,384 | | — | | | 90,384 | |
Agency MBS | — | | 1,593,403 | | — | | | 1,593,403 | |
Agency CMBS | — | | 1,232,541 | | — | | | 1,232,541 | |
CMBS | — | | 886,263 | | — | | | 886,263 | |
CLO | — | | 21,847 | | — | | | 21,847 | |
Corporate debt | — | | 13,450 | | — | | | 13,450 | |
Total available-for-sale investment securities | 396,966 | | 3,837,888 | | — | | | 4,234,854 | |
Gross derivative instruments, before netting (1) | 187 | | 158,930 | | — | | | 159,117 | |
Originated loans held for sale | — | | 4,694 | | — | | | 4,694 | |
Investments held in Rabbi Trust | 3,416 | | — | | — | | | 3,416 | |
Alternative investments (2) | 1,877 | | — | | — | | | 27,732 | |
Total financial assets | $ | 402,446 | | $ | 4,001,512 | | $ | — | | | $ | 4,429,813 | |
Financial Liabilities: | | | | | |
Gross derivative instruments, before netting (1) | $ | 141 | | $ | 21,643 | | $ | — | | | $ | 21,784 | |
(1)Additional information regarding the impact of netting derivative assets and derivative liabilities, as well as the impact from offsetting cash collateral paid to the same derivative counterparties, can be found within Note 13: Derivative Financial Instruments.
(2)Certain alternative investments are recorded at NAV. Assets measured at NAV are not classified within the fair value hierarchy.
Assets Measured at Fair Value on a Non-Recurring Basis
Webster measures certain assets at fair value on a non-recurring basis. The following is a description of the valuation methodologies used for assets measured at fair value on a non-recurring basis.
Alternative Investments. The measurement alternative has been elected for alternative investments without readily determinable fair values that do not qualify for the NAV practical expedient. The measurement alternative requires investments to be measured at cost minus impairment, if any, plus or minus adjustments resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer. Accordingly, these alternative investments are classified within Level 2 of the fair value hierarchy. At September 30, 2022, the carrying amount of these alternative investments was $31.1 million. There were $0.5 million of net write-ups due to observable price changes and $0.2 million of write-downs due to impairment during both the three and nine months ended September 30, 2022.
Loans Transferred to Held for Sale. Once a decision has been made to sell loans not previously classified as held for sale, these loans are transferred into the held for sale category and carried at the lower of cost or fair value. At the time of transfer into held for sale classification, any amount by which cost exceeds fair value is accounted for as a valuation allowance. This activity generally pertains to commercial loans with observable inputs, and therefore, are classified within Level 2 of the fair value hierarchy. However, should these loans include adjustments for changes in loan characteristics based on unobservable inputs, the loans would then be classified within Level 3 of the fair value hierarchy. At September 30, 2022, there were no loans transferred to held for sale on the Condensed Consolidated Balance Sheet.
Collateral Dependent Loans and Leases. Loans and leases for which repayment is substantially expected to be provided through the operation or sale of collateral are considered collateral dependent, and are valued based on the estimated fair value of the collateral, less estimated costs to sell at the reporting date, using customized discounting criteria. Accordingly, collateral dependent loans and leases are classified within Level 3 of the fair value hierarchy.
Other Real Estate Owned and Repossessed Assets. Other real estate owned (OREO) and repossessed assets are held at the lower of cost or fair value and are considered to be measured at fair value when recorded below cost. The fair value of OREO is calculated using independent appraisals or internal valuation methods, less estimated selling costs, and may consider available pricing guides, auction results, and price opinions. Certain repossessed assets may also require assumptions about factors that are not observable in an active market when determining fair value. Accordingly, OREO and repossessed assets are classified within Level 3 of the fair value hierarchy. At September 30, 2022, the total book value of OREO and repossessed assets was $2.1 million. In addition, the amortized cost of consumer loans secured by residential real estate property that were in process of foreclosure at September 30, 2022 was $9.7 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, and CMBS are classified within Level 2 of the fair value hierarchy.
Loans and Leases, net. Except for collateral dependent loans and leases, the fair value of loans and leases held for investment is estimated using a discounted cash flow methodology, based on future prepayments and market interest rates inclusive of an illiquidity premium for comparable loans and leases. The associated cash flows are then adjusted for associated credit risks and other potential losses, as appropriate. Loans and leases are classified within Level 3 of the fair value hierarchy.
Mortgage Servicing Assets. Mortgage servicing assets are initially measured at fair value and subsequently measured using the amortization method. Webster assess mortgage servicing assets for impairment each quarter and establishes or adjusts the valuation allowance to the extent that amortized cost exceeds the estimated fair market value. Fair value is calculated as the present value of estimated future net servicing income and relies on market based assumptions for loan prepayment speeds, servicing costs, discount rates, and other economic factors. Accordingly, the primary risk inherent in valuing mortgage servicing assets is the impact of fluctuating interest rates on the related servicing revenue stream. Mortgage servicing assets are classified within Level 3 of the fair value hierarchy.
Deposit Liabilities. The fair value of deposit liabilities, which comprises demand deposits, interest-bearing checking, savings, health savings, and money market accounts, reflects the amount payable on demand at the reporting date. Deposit liabilities are classified within Level 2 of the fair value hierarchy.
Time Deposits. The fair value of fixed-maturity certificates of deposit is estimated using rates that are currently offered for deposits with similar remaining maturities. Time deposits are classified within Level 2 of the fair value hierarchy.
Securities Sold Under Agreements to Repurchase and Other Borrowings. The fair value of securities sold under agreements to repurchase and other borrowings that mature within 90 days approximates their carrying value. The fair value of securities sold under agreements to repurchase and other borrowings that mature after 90 days is estimated using a discounted cash flow methodology based on current market rates and adjusted for associated credit risks, as appropriate. Securities sold under agreements to repurchase and other borrowings are classified within Level 2 of the fair value hierarchy.
Federal Home Loan Bank Advances and Long-Term Debt. The fair value of FHLB advances and long-term debt is estimated using a discounted cash flow methodology in which discount rates are matched with the time period of the expected cash flows and adjusted for associated credit risks, as appropriate. FHLB advances and long-term debt are classified within Level 2 of the fair value hierarchy.
The following table summarizes the carrying amounts, estimated fair values, and classifications within the fair value hierarchy of selected financial instruments and mortgage servicing assets:
| | | | | | | | | | | | | | | | | | | | | | | |
| At September 30, 2022 | | At December 31, 2021 |
(In thousands) | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
Assets: | | | | | | | |
Level 1 | | | | | | | |
Cash and cash equivalents | $ | 613,125 | | | $ | 613,125 | | | $ | 461,570 | | | $ | 461,570 | |
Level 2 | | | | | | | |
Held-to-maturity investment securities | 6,505,838 | | | 5,650,119 | | | 6,198,125 | | | 6,280,936 | |
Level 3 | | | | | | | |
Loans and leases, net | 47,249,550 | | | 45,896,000 | | | 21,970,542 | | | 21,702,732 | |
Mortgage servicing assets | 9,837 | | | 27,550 | | | 9,237 | | | 12,527 | |
Liabilities: | | | | | | | |
Level 2 | | | | | | | |
Deposit liabilities | $ | 51,439,293 | | | $ | 51,439,293 | | | $ | 28,049,259 | | | $ | 28,049,259 | |
Time deposits | 2,569,594 | | | 2,503,396 | | | 1,797,770 | | | 1,794,829 | |
Securities sold under agreements to repurchase and other borrowings | 1,265,414 | | | 1,243,251 | | | 674,896 | | | 676,581 | |
FHLB advances | 3,510,717 | | | 3,509,221 | | | 10,997 | | | 11,490 | |
Long-term debt (1) | 1,074,844 | | | 1,030,390 | | | 562,931 | | | 515,912 | |
(1)Any unamortized premiums/discounts, debt issuance costs, or basis adjustments to long-term debt, as applicable, are excluded from the determination of fair value.
Note 15: Retirement Benefit Plans
Defined Benefit Pension and Other Postretirement Benefits
The following tables summarize the components of net periodic benefit (income) cost: | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, |
| 2022 | | 2021 |
(In thousands) | Pension Plan | SERP | OPEB | | Pension Plan | SERP | OPEB |
Service cost | $ | — | | $ | — | | $ | 9 | | | $ | — | | $ | — | | $ | — | |
Interest cost | 1,441 | | 17 | | 194 | | | 1,166 | | 7 | | 4 | |
Expected return on plan assets | (3,669) | | — | | — | | | (3,595) | | — | | — | |
Amortization of actuarial loss (gain) | 821 | | 7 | | 7 | | | 1,019 | | 8 | | (20) | |
Net periodic benefit (income) cost | $ | (1,407) | | $ | 24 | | $ | 210 | | | $ | (1,410) | | $ | 15 | | $ | (16) | |
| | | | | | | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| Nine months ended September 30, |
| 2022 | | 2021 |
(In thousands) | Pension Plan | SERP | Other Benefits | | Pension Plan | SERP | Other Benefits |
Service cost | $ | — | | $ | — | | $ | 24 | | | $ | — | | $ | — | | $ | — | |
Interest cost | 4,198 | | 49 | | 551 | | | 3,498 | | 20 | | 12 | |
Expected return on plan assets | (11,006) | | — | | — | | | (10,786) | | — | | — | |
Amortization of actuarial loss (gain) | 1,667 | | 20 | | (30) | | | 3,058 | | 25 | | (60) | |
Net periodic benefit (income) cost | $ | (5,141) | | $ | 69 | | $ | 545 | | | $ | (4,230) | | $ | 45 | | $ | (48) | |
The components of net periodic benefit (income) cost are included within other non-interest expense on the accompanying Condensed Consolidated Statements of Income. The weighted-average expected long-term rate of return on plan assets for the nine months ended September 30, 2022 was 5.50%, as determined at the beginning of the year.
In connection with the Sterling merger, Webster assumed the benefit obligations of Sterling's pension and other postretirement benefit plans, which included the Astoria Excess and Supplemental Benefit Plans, Astoria Directors' Retirement Plan, Greater New York Savings Bank Directors' Retirement Plan, Astoria Bank Retiree Health Care Plan, and the Sterling Other Postretirement Life Insurance and Other Plans, totaling $30.5 million as of January 31, 2022. The underfunded status of these plans is included in accrued expenses and other current liabilities on the Condensed Consolidated Balance Sheets.
Note 16: Segment Reporting
Webster's operations are organized into three reportable segments that represent its primary businesses: Commercial Banking, HSA Bank, and Consumer Banking. These segments reflect how executive management responsibilities are assigned, how discrete financial information is evaluated, the type of customer served, and how products and services are provided. Certain Treasury activities, along with the amounts required to reconcile profitability metrics to those reported in accordance with GAAP, are included in the Corporate and Reconciling category.
Effective January 1, 2022, Webster realigned its investment services operations from Commercial Banking to Consumer Banking to better serve its customers and deliver operational efficiencies. Under this realignment, $125.4 million of deposits and $4.3 billion of assets under administration (off-balance sheet) were reassigned from Commercial Banking to Consumer Banking. There was no goodwill reallocation nor goodwill impairment as a result of the reorganization. In addition, the non-interest expense allocation methodology was modified to exclude certain overhead and merger-related costs that are not directly related to segment performance. Prior period results of operations have been recasted accordingly to reflect the realignment.
As discussed in Note 2: Mergers and Acquisitions, Webster acquired Sterling on January 31, 2022, and the allocation of the purchase price is considered preliminary. Accordingly, of the total $1.9 billion in preliminary goodwill recorded, $1.7 billion and $0.2 million was preliminarily allocated to Commercial Banking and Consumer Banking, respectively. The $36.0 million of goodwill recorded in connection with the Bend acquisition was allocated entirely to HSA Bank.
Segment Reporting Methodology
Webster uses an internal profitability reporting system to generate information by reportable segment, which is based on a series of management estimates for funds transfer pricing and allocations for non-interest expense, provision for credit losses, income taxes, and equity capital. These estimates and allocations, certain of which are subjective in nature, are periodically reviewed and refined. Changes in estimates and allocations that affect the results of any one reportable segment do not affect the consolidated financial position or results of operations of Webster as a whole. The full profitability measurement reports, which are prepared for each reportable segment, reflect non-GAAP reporting methodologies. The differences between full profitability and GAAP results are reconciled in the Corporate and Reconciling category.
Webster allocates interest income and interest expense to each business through an internal matched maturity Funds Transfer Pricing (FTP) process. The goal of the FTP allocation is to encourage loan and deposit growth consistent with the Webster’s overall profitability objectives. The FTP process considers the specific interest rate risk and liquidity risk of financial instruments and other assets and liabilities in each line of business. Loans and leases are assigned an FTP rate for funds used and deposits are assigned an FTP rate for funds provided. The allocation considers the origination date and the earlier of the maturity date or the repricing date of a financial instrument to assign an FTP rate for loans and leases and deposits originated each day. The FTP process transfers the corporate interest rate risk exposure to the treasury function included within the Corporate and Reconciling category, where such exposures are centrally managed.
Webster allocates a majority of non-interest expense to each reportable segment using an activity and driver-based costing process. Costs, including shared services and back-office support areas, are analyzed, pooled by process, and assigned to the appropriate reportable segment. The combination of direct revenue, direct expenses, funds transfer pricing, and allocations of non-interest expense, produces PPNR, which is the basis the segments are reviewed by executive management.
Webster also allocates the provision for credit losses to each reportable segment based on management's estimate of the inherent loss content in each of the specific loan and lease portfolios. The ACL on loans and leases is included in total assets within the Corporate and Reconciling category. Merger-related expenses and strategic initiatives charges are also generally included in the Corporate and Reconciling category.
The following tables present balance sheet information, including the appropriate allocations, for Webster's reportable segments and the Corporate and Reconciling category: | | | | | | | | | | | | | | | | | | | | | |
| At September 30, 2022 |
(In thousands) | Commercial Banking | HSA Bank | Consumer Banking | | | Corporate and Reconciling | Consolidated Total |
Goodwill | $ | 1,865,887 | | $ | 57,779 | | $ | 590,105 | | | | $ | — | | $ | 2,513,771 | |
Total assets | 40,907,410 | | 122,112 | | 10,120,063 | | | | 17,902,981 | | 69,052,566 | |
| | | | | | | |
| At December 31, 2021 |
(In thousands) | Commercial Banking | HSA Bank | Consumer Banking | | | Corporate and Reconciling | Consolidated Total |
Goodwill | $ | 131,000 | | $ | 21,813 | | $ | 385,560 | | | | $ | — | | $ | 538,373 | |
Total assets | 15,398,159 | | 73,564 | | 7,663,921 | | | | 11,779,955 | | 34,915,599 | |
The following tables present results of operations, including the appropriate allocations, for Webster’s reportable segments and the Corporate and Reconciling category: | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
| Three months ended September 30, 2022 |
(In thousands) | Commercial Banking | HSA Bank | Consumer Banking | | Corporate and Reconciling | Consolidated Total |
Net interest income | $ | 333,554 | | $ | 58,567 | | $ | 195,748 | | | $ | (36,866) | | $ | 551,003 | |
Non-interest income | 40,497 | | 25,842 | | 33,842 | | | 13,455 | | 113,636 | |
Non-interest expense | 102,415 | | 36,725 | | 109,588 | | | 81,343 | | 330,071 | |
Pre-tax, pre-provision net revenue | 271,636 | | 47,684 | | 120,002 | | | (104,754) | | 334,568 | |
Provision (benefit) for credit losses | 33,341 | | — | | (1,989) | | | 5,179 | | 36,531 | |
Income (loss) before income taxes | 238,295 | | 47,684 | | 121,991 | | | (109,933) | | 298,037 | |
Income tax expense (benefit) | 59,574 | | 12,779 | | 31,718 | | | (40,002) | | 64,069 | |
Net income (loss) | $ | 178,721 | | $ | 34,905 | | $ | 90,273 | | | $ | (69,931) | | $ | 233,968 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | |
| Three months ended September 30, 2021 |
(In thousands) | Commercial Banking | HSA Bank | Consumer Banking | | Corporate and Reconciling | Consolidated Total |
Net interest income | $ | 152,012 | | $ | 42,074 | | $ | 98,572 | | | $ | (62,967) | | $ | 229,691 | |
Non-interest income | 22,782 | | 24,756 | | 24,292 | | | 11,945 | | 83,775 | |
Non-interest expense | 50,244 | | 32,374 | | 73,212 | | | 24,407 | | 180,237 | |
Pre-tax, pre-provision net revenue | 124,550 | | 34,456 | | 49,652 | | | (75,429) | | 133,229 | |
Provision (benefit) for credit losses | 5,099 | | — | | 2,799 | | | (148) | | 7,750 | |
Income (loss) before income taxes | 119,451 | | 34,456 | | 46,853 | | | (75,281) | | 125,479 | |
Income tax expense (benefit) | 30,579 | | 9,199 | | 11,151 | | | (21,163) | | 29,766 | |
Net income (loss) | $ | 88,872 | | $ | 25,257 | | $ | 35,702 | | | $ | (54,118) | | $ | 95,713 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | |
| Nine months ended September 30, 2022 |
(In thousands) | Commercial Banking | HSA Bank | Consumer Banking | | Corporate and Reconciling | Consolidated Total |
Net interest income | $ | 954,044 | | $ | 152,702 | | $ | 511,712 | | | $ | (186,547) | | $ | 1,431,911 | |
Non-interest income | 128,670 | | 79,352 | | 92,541 | | | 38,041 | | 338,604 | |
Non-interest expense | 294,375 | | 110,674 | | 312,464 | | | 330,570 | | $ | 1,048,083 | |
Pre-tax, pre-provision net revenue | 788,339 | | $ | 121,380 | | 291,789 | | | (479,076) | | 722,432 | |
Provision (benefit) for credit losses | 238,054 | | — | | (5,906) | | | 5,471 | | 237,619 | |
Income (loss) before income tax expense | 550,285 | | 121,380 | | 297,695 | | | (484,547) | | 484,813 | |
Income tax expense (benefit) | 133,966 | | 32,530 | | 77,352 | | | (158,567) | | 85,281 | |
Net income (loss) | $ | 416,319 | | $ | 88,850 | | $ | 220,343 | | | $ | (325,980) | | $ | 399,532 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | |
| Nine months ended September 30, 2021 |
(In thousands) | Commercial Banking | HSA Bank | Consumer Banking | | Corporate and Reconciling | Consolidated Total |
Net interest income | $ | 434,087 | | $ | 126,376 | | $ | 281,012 | | | $ | (167,168) | | $ | 674,307 | |
Non-interest income | 59,536 | | 78,315 | | 71,262 | | | 24,121 | | 233,234 | |
Non-interest expense | 142,803 | | 100,802 | | 222,672 | | | 88,970 | | 555,247 | |
Pre-tax, pre-provision net revenue | 350,820 | | 103,889 | | 129,602 | | | (232,017) | | 352,294 | |
(Benefit) for credit losses | (37,602) | | — | | (1,833) | | | (65) | | (39,500) | |
Income (loss) before income tax expense | 388,422 | | 103,889 | | 131,435 | | | (231,952) | | 391,794 | |
Income tax expense (benefit) | 99,436 | | 27,738 | | 31,282 | | | (64,488) | | 93,968 | |
Net income (loss) | $ | 288,986 | | $ | 76,151 | | $ | 100,153 | | | $ | (167,464) | | $ | 297,826 | |
Note 17: Revenue from Contracts with Customers
The following tables summarize revenues recognized in accordance with ASC Topic 606, Revenue from Contracts with Customers. These disaggregated amounts, together with sources of other non-interest income that are subject to other GAAP topics, have been reconciled to non-interest income by reportable segment as presented within Note 16: Segment Reporting.
| | | | | | | | | | | | | | | | | |
| Three months ended September 30, 2022 |
(In thousands) | Commercial Banking | HSA Bank | Consumer Banking | Corporate and Reconciling | Consolidated Total |
Non-interest Income: | | | | | |
Deposit service fees | $ | 7,573 | | $ | 24,008 | | $ | 18,728 | | $ | 498 | | $ | 50,807 | |
Loan and lease related fees (1) | 5,623 | | — | | — | | — | | 5,623 | |
Wealth and investment services | 2,672 | | — | | 8,756 | | (9) | | 11,419 | |
Other income | — | | 1,834 | | 413 | | — | | 2,247 | |
Revenue from contracts with customers | 15,868 | | 25,842 | | 27,897 | | 489 | | 70,096 | |
Other sources of non-interest income | 24,629 | | — | | 5,945 | | 12,966 | | 43,540 | |
Total non-interest income | $ | 40,497 | | $ | 25,842 | | $ | 33,842 | | $ | 13,455 | | $ | 113,636 | |
| | | | | | | | | | | | | | | | | |
| Three months ended September 30, 2021 |
(In thousands) | Commercial Banking | HSA Bank | Consumer Banking | Corporate and Reconciling | Consolidated Total |
Non-interest Income: | | | | | |
Deposit service fees | $ | 4,206 | | $ | 22,886 | | $ | 13,079 | | $ | 87 | | $ | 40,258 | |
Wealth and investment services | 3,067 | | — | | 6,926 | | (8) | | 9,985 | |
Other income | — | | 1,870 | | 626 | | — | | 2,496 | |
Revenue from contracts with customers | 7,273 | | 24,756 | | 20,631 | | 79 | | 52,739 | |
Other sources of non-interest income | 15,509 | | — | | 3,661 | | 11,866 | | 31,036 | |
Total non-interest income | $ | 22,782 | | $ | 24,756 | | $ | 24,292 | | $ | 11,945 | | $ | 83,775 | |
| | | | | | | | | | | | | | | | | |
| | | | | |
| Nine months ended September 30, 2022 |
(In thousands) | Commercial Banking | HSA Bank | Consumer Banking | Corporate and Reconciling | Consolidated Total |
Non-interest Income: | | | | | |
Deposit service fees | $ | 21,905 | | $ | 74,091 | | $ | 53,057 | | $ | 966 | | $ | 150,019 | |
Loan and lease related fees (1) | 16,198 | | — | | — | | — | | 16,198 | |
Wealth and investment services | 8,576 | | — | | 24,706 | | (22) | | 33,260 | |
Other income | — | | 5,261 | | 1,083 | | — | | 6,344 | |
Revenue from contracts with customers | 46,679 | | 79,352 | | 78,846 | | 944 | | 205,821 | |
Other sources of non-interest income | 81,991 | | — | | 13,695 | | 37,097 | | 132,783 | |
Total non-interest income | $ | 128,670 | | $ | 79,352 | | $ | 92,541 | | $ | 38,041 | | $ | 338,604 | |
| | | | | | | | | | | | | | | | | |
| | | | | |
| Nine months ended September 30, 2021 |
(In thousands) | Commercial Banking | HSA Bank | Consumer Banking | Corporate and Reconciling | Consolidated Total |
Non-interest Income: | | | | | |
Deposit service fees | $ | 12,400 | | $ | 72,382 | | $ | 37,127 | | $ | 257 | | $ | 122,166 | |
Wealth and investment services | 9,029 | | — | | 20,472 | | (26) | | 29,475 | |
Other income | — | | 5,933 | | 1,753 | | — | | 7,686 | |
Revenue from contracts with customers | 21,429 | | 78,315 | | 59,352 | | 231 | | 159,327 | |
Other sources of non-interest income | 38,107 | | — | | 11,910 | | 23,890 | | 73,907 | |
Total non-interest income | $ | 59,536 | | $ | 78,315 | | $ | 71,262 | | $ | 24,121 | | $ | 233,234 | |
(1)A portion of loan and lease related fees comprises income generated from factored receivables and payroll financing activities that is within the scope of ASC Topic 606. These revenue streams were new to Webster as of the first quarter of 2022 due to the businesses acquired in connection with the Sterling merger.
Contracts with customers did not generate significant contract assets and liabilities at September 30, 2022 and
December 31, 2021.
Revenue Streams
Deposit service fees consist of fees earned from customer deposit accounts, such as account maintenance fees, insufficient funds, and other transactional service charges. Performance obligations for account maintenance services are satisfied on a monthly basis at a fixed transaction price, whereas performance obligations for other deposit service charges resulting from various customer-initiated transactions are satisfied at a point-in-time when the service is rendered. Payment for deposit service fees is generally received immediately or in the following month through a direct charge to the customers' accounts. On occasion, Webster may waive certain fees for its customers. Fee waivers are recognized as a reduction to revenue in the period the waiver is granted to the customer. Due to the insignificance of the amounts waived, Webster does not reduce its transaction price to reflect any variable consideration.
The deposit service fees revenue stream also includes interchange fees earned from debit and credit card transactions. The transaction price for interchange services is based on the transaction value and the interchange rate set by the card network. Performance obligations for interchange fees are satisfied at a point-in-time when the cardholders' transaction is authorized and settled. Payment for interchange fees is generally received immediately or in the following month.
Factored receivables non-interest income consists of fees earned from accounts receivable management services. Webster factors accounts receivable, with and without recourse, for customers whereby the Company purchases their accounts receivable at a discount and assumes the risk, as applicable, and ownership of the assets through direct cash receipt from the end consumer. Factoring services are performed in exchange for a non-refundable fee at a transaction price based on a percentage of the gross invoice amount of each receivable purchased, subject to a minimum required amount. The performance obligation for factoring services is generally satisfied at a point-in-time when the receivable is assigned to Webster. However, should the commission earned not meet or exceed the minimum required annual amount, the difference between that and the actual amount is recognized at the end of the contract term. Other fees associated with factoring receivables may include wire transfer and technology fees, field examination fees, and Uniform Commercial Code fees, where the performance obligations are satisfied at a point-in-time when the services are rendered. Payment from the customer for factoring services is generally received immediately or within the following month.
Payroll finance non-interest income consists of fees earned from performing payroll financing and business process outsourcing services, including full back-office technology and tax accounting services, along with payroll preparation, making payroll tax payments, invoice billings, and collections for independently-owned temporary staffing companies nationwide. Performance obligations for payroll finance and business processing activities are either satisfied upon completion of the support services or as payroll remittances are made on behalf of customers to fund their employee payroll, which generally occurs on a weekly basis. The agreed-upon transaction price is based on a fixed-percentage per the terms of the contract, which could be subject to a hold-back reserve to provide for any balances that are assessed to be at risk of collection. When Webster collects on amounts due from end consumers on behalf of its customers and at the time of financing payroll, the Company retains the agreed-upon transaction price payable for the performance of its services and remits an amount to the customer net of any advances and payroll tax withholdings, as applicable.
Wealth and investment services consist of fees earned from asset management, trust administration, and investment advisory services, and through facilitating securities transactions. Performance obligations for asset management and trust administration services are satisfied on a monthly or quarterly basis at a transaction price based on a percentage of the period-end market value of the assets under administration. Payment for asset management and trust administration services is generally received a few days after period-end through a direct charge to the customers' accounts. Performance obligations for investment advisory services are satisfied over the period in which the services are provided through a time-based measurement of progress, and the agreed-upon transaction price with the customer varies depending on the nature of the services performed. Performance obligations for facilitating securities transactions are satisfied at a point-in-time when the securities are sold at a transaction price that is based on a percentage of the contract value. Payment for both investment advisory services and facilitating securities transactions may be received in advance of the service, but generally is received immediately or in the following period, in arrears.
Note 18: Commitments and Contingencies
Credit-Related Financial Instruments
In the normal course of business, Webster offers financial instruments with off-balance sheet risk to meet the financing needs of its customers. These transactions include commitments to extend credit, standby letters of credit, and commercial letters of credit, which involve, to varying degrees, elements of credit risk.
The following table summarizes the outstanding amounts of credit-related financial instruments with off-balance sheet risk: | | | | | | | | | | | |
(In thousands) | At September 30, 2022 | | At December 31, 2021 |
Commitments to extend credit | $ | 10,809,256 | | | $ | 6,870,095 | |
Standby letters of credit | 382,988 | | | 224,061 | |
Commercial letters of credit | 57,368 | | | 58,175 | |
Total credit-related financial instruments with off-balance sheet risk | $ | 11,249,612 | | | $ | 7,152,331 | |
Webster enters into contractual commitments to extend credit to its customers, such as revolving credit arrangements, term loan commitments, and short-term borrowing agreements, generally with fixed expiration dates or other termination clauses and that require payment of a fee. Substantially all of the 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 Condensed Consolidated Balance Sheets to provide for the unused portion of commitments to lend that are not unconditionally cancellable by Webster. Under the CECL methodology, the calculation of the allowance generally includes the probability of funding to occur and a corresponding estimate of expected lifetime credit losses on amounts assumed to be funded. Loss calculation factors are consistent with those for funded loans using PD and LGD applied to the underlying borrower's risk and facility grades, a draw down factor applied to utilization rates, relevant forecast information, and management's qualitative factors.
The following table summarizes the activity in the ACL on unfunded loan commitments:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
(In thousands) | 2022 | | 2021 | | 2022 | | 2021 |
Balance, beginning of period | $ | 20,149 | | | $ | 11,974 | | | $ | 13,104 | | | $ | 12,755 | |
ACL assumed from Sterling | — | | | — | | | 6,749 | | | — | |
Provision (benefit) for credit losses | 5,180 | | | 196 | | | 5,476 | | | (585) | |
Balance, end of period | $ | 25,329 | | | $ | 12,170 | | | $ | 25,329 | | | $ | 12,170 | |
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 19: Subsequent Events
The Company has evaluated subsequent events from the date of the Condensed Consolidated Financial Statements and accompanying Notes thereto, through the date of issuance, and determined that no significant events were identified requiring recognition or disclosure.