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, along with its HSA Bank Division, is a leading commercial bank in the Northeast that delivers a wide range of digital and traditional financial solutions to businesses, individuals, families, and partners across its three differentiated lines of business: Commercial Banking, HSA Bank, and Consumer Banking. While its core footprint spans from New York to Rhode Island and Massachusetts, certain businesses operate in extended geographies. HSA Bank is one of the largest providers of employee benefits solutions in the United States.
Basis of Presentation
The Consolidated Financial Statements have been prepared in accordance with GAAP, and include the accounts of the Company and all other entities in which the Company has a controlling financial interest. Intercompany transactions and balances have been eliminated in consolidation. Assets under administration or assets under management that the Company holds or manages in a fiduciary or agency capacity for customers are not included on the accompanying Consolidated Balance Sheets. Certain prior period amounts have been reclassified to conform to the current year's presentation. These reclassifications did not have a significant impact on the Company's Consolidated Financial Statements.
Principles of Consolidation
The purpose of Consolidated Financial Statements is to present the results of operations and the financial position of the Company and its subsidiaries as if the consolidated group were a single economic entity. In accordance with the applicable accounting guidance for consolidations, the Consolidated Financial Statements include any VOE in which the Company has a controlling financial interest and any VIE for which the Company is deemed to be the primary beneficiary. The Company generally consolidates its VOEs if the Company, directly or indirectly, owns more than 50% of the outstanding voting shares of the entity, and if the non-controlling stockholders do not hold any substantive participating or controlling rights. The Company evaluates VIEs to understand the purpose and design of the entity, and its involvement in the ongoing activities of the VIE, and will consolidate the VIE if it has (i) the power to direct the activities of the VIE that most significantly affect the VIE's economic performance, and (ii) an obligation to absorb losses of the VIE, or the right to receive benefits from the VIE, that could potentially be significant to the VIE. The Company accounts for unconsolidated partnerships and certain other investments using the equity method of accounting if it has the ability to significantly influence the operating and financial policies of the investee. This is generally presumed to exist when the Company owns between 20% and 50% of a corporation, or when it has greater than 3% to 5% interest in a limited partnership or similarly structured entity. Additional information regarding consolidated and non-consolidated VIEs can be found within Note 15: Variable Interest Entities.
Use of Estimates
The preparation of the Consolidated Financial Statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the 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 the Company's mergers and acquisitions can be found within
Note 2: Mergers and Acquisitions.
Cash and Cash Equivalents
Cash and cash equivalents is comprised of cash and due from banks and interest-bearing deposits. Cash equivalents have a maturity of three months or less.
Cash and due from banks includes cash on hand, certain deposits at the FRB, and cash due from banks. Restricted cash related to Federal Reserve System requirements and cash collateral received on derivative positions are included in Cash and due from banks.
Interest-bearing deposits includes deposits at the FRB in excess of reserve requirements, if any, and federal funds sold to other financial institutions.
Investments in Debt Securities
Debt security transactions are recognized on the trade date, which is the date the order to buy or sell the security is executed. Investments in debt securities are classified as AFS or HTM at the time of purchase. Any classification change subsequent to the trade date is reviewed for compliance with corporate objectives and accounting policies.
Debt securities classified as AFS are recorded at fair value with unrealized gains and losses recorded as a component of (AOCL). If a debt security is transferred from AFS to HTM, it is recorded at fair value at the time of transfer and any respective gain or loss would be recorded as a separate component of (AOCL) and amortized as an adjustment to interest income over the remaining life of the security. Debt securities classified as AFS are reviewed for credit losses when the fair value of a security falls below the amortized cost basis and the decline is evaluated to determine if any portion is attributable to credit loss. The decline in fair value attributable to credit loss is recorded directly to earnings, with a corresponding allowance for credit loss, limited to the amount that fair value is less than the amortized cost. If the credit quality subsequently improves, previously recorded allowance amounts may be reversed. An AFS debt security will be placed on non-accrual status if collection of principal and interest in accordance with contractual terms is doubtful. When the Company intends to sell an impaired AFS debt security, or if it is more likely than not that the Company will be required to sell the security prior to recovery of the amortized cost basis, the entire fair value adjustment will immediately be recognized in earnings through non-interest income. The gain or loss on sale is calculated using the carrying value plus any related accumulated (AOCL) balance associated with the securities sold.
Debt securities classified as HTM are those in which the Company has the ability and intent to hold to maturity. Debt securities classified as HTM are recorded at amortized cost net of unamortized premiums and discounts. Discount accretion income and premium amortization expense are recognized as interest income using the effective interest method, with consideration given to prepayment assumptions on mortgage backed securities. Premiums are amortized to the earliest call date for debt securities purchased at a premium, with explicit, non-contingent call features and are callable at a fixed price and preset date. Debt securities classified as HTM are reviewed for credit losses under the CECL model with an allowance recorded on the balance sheet for expected lifetime credit losses. The ACL is calculated on a pooled basis using statistical models which include forecasted scenarios of future economic conditions. Forecasts revert to long-run loss rates implicitly through the economic scenario, generally over three years. If the risk for a particular security no longer matches the collective assessment pool, it is removed and individually assessed for credit deterioration. The non-accrual policy for HTM debt securities is the same as for AFS debt securities.
A zero credit loss assumption is maintained for U.S. Treasuries and agency-backed securities in both the AFS and HTM portfolios, as applicable. This assumption is subject to quarterly review to ensure it remains appropriate. Additional information regarding investments in debt securities can be found within Note 3: Investment Securities.
Investments in Equity Securities
The Company’s accounting treatment for non-consolidated equity investments differs for those with and without readily determinable fair values. Equity investments with readily determinable fair values are recorded at fair value with changes in fair value recorded in non-interest income. For equity investments without readily determinable fair values, the Company elected the measurement alternative, and therefore carries these investments at cost, less impairment, if any, plus or minus changes in observable prices. Certain equity investments that do not have a readily available fair value may qualify for NAV measurement based on specific requirements. The Company's alternative investments accounted for at NAV consist of investments in non-public entities that generally cannot be redeemed since the Company’s investments are distributed as the underlying equity is liquidated. On a quarterly basis, the Company reviews its equity investments without readily determinable fair values for impairment. If the equity investment is considered impaired, an impairment loss equal to the amount by which the carrying value exceeds its fair value is recorded through a charge to earnings. The impairment loss may be reversed in a subsequent period if there are observable transactions for the identical or similar investment of the same issuer at a higher amount than the carrying amount that was established when the impairment was recognized. Impairments, as well as upward or downward adjustments resulting from observable price changes in orderly transactions for identical or similar investments, are included in non-interest income.
Equity investments in entities that finance affordable housing and other community development projects provide a return primarily through the realization of tax benefits. The Company applies the proportional amortization method to account for its investments in qualified affordable housing projects.
Investment in Federal Home Loan Bank and Federal Reserve Bank Stock
The Bank is a member of the FHLB and the Federal Reserve System, and is required to maintain an investment in capital stock of both the FHLB and FRB. Based on redemption provisions, FHLB and FRB stock has no quoted market value and is carried at cost. Membership stock is reviewed for impairment if economic circumstances would warrant review.
Loans Held for Sale
Loans that are classified as held for sale at the time of origination are accounted for under the fair value option. Loans not originated for sale but subsequently transferred to held for sale are valued at the lower of cost or fair value on an individual asset basis. Any cost amount in excess of fair value is recorded as a valuation allowance and recognized as a reduction of other non-interest income. Gains or losses on the sale of loans held for sale are recorded either as part of Mortgage banking activities or Other income on the accompanying Consolidated Statements of Income. Cash flows from the sale of loans that were originated for sale are presented within Operating activities on the accompanying Consolidated Statements of Cash Flows, whereas cash flows from the sale of loans that were originated for investment and then subsequently transferred to held for sale are presented within Investing activities. Additional information regarding mortgage banking activities and loans sold can be found within Note 5: Transfers and Servicing of Financial Assets.
Transfers and Servicing of Financial Assets
Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is generally considered to have been surrendered when: (i) the transferred assets are legally isolated from the Company or its consolidated affiliates, even in bankruptcy or other receivership, (ii) the transferee has the right to pledge or exchange the assets with no conditions that constrain the transferee and provide more than a trivial benefit to the Company, and (iii) the Company does not maintain the obligation or unilateral ability to reclaim or repurchase the assets.
The Company sells financial assets in the normal course of business, the majority of which are residential mortgage loan sales to government-sponsored enterprises through established programs, as well as commercial loan sales through participation agreements, and other individual or portfolio loan and securities sales. In accordance with the accounting guidance for asset transfers, the Company considers any ongoing involvement with transferred assets in determining whether the assets can be derecognized from the balance sheet. With the exception of servicing, the Company’s continuing involvement with financial assets sold is minimal, and generally is limited to market customary representation and warranty clauses covering certain characteristics of the mortgage loans that were sold, and the Company's origination process. The gain or loss on sale depends on the previous carrying amount of the transferred financial assets, the consideration received, and any other assets obtained or liabilities incurred in exchange for the transferred assets.
When the Company sells financial assets, it may retain servicing rights and/or other interests in the financial assets. Servicing assets and any other interests held by the Company are recorded at fair value upon transfer, and subsequently carried at the lower of cost or fair value. Additional information regarding transfers of financial assets and mortgage servicing assets can be found within Note 5: Transfers and Servicing of Financial Assets.
Loans and Leases
Loans and leases are stated at the principal amount outstanding, net of amounts charged-off, unamortized premiums and discounts, and deferred loan and lease fees or costs, which are recognized as yield adjustments using the effective interest method. These yield adjustments are amortized over the contractual life of the related loans and leases and are adjusted for prepayments, as applicable. Interest on loans and leases is credited to interest income as earned based on the interest rate applied to principal amounts outstanding. Amounts of cash receipts and cash payments for loans and leases are presented net within Investing activities on the Consolidated Statements of Cash Flows.
Non-accrual Loans
Loans are placed on non-accrual status when full collection of principal and interest in accordance with contractual terms is not expected based on available information, which generally occurs when principal or interest payments become 90 days delinquent unless the loan is well secured and in the process of collection, or sooner if circumstances indicate that the borrower may be unable to meet contractual principal or interest payments. The Company considers a loan to be “well-secured” when it is secured by collateral in the form of liens on or pledges of real or personal property that have a realizable value sufficient to discharge the debt in full, or when it is secured by a contractual guarantee of a financially responsible party. The Company considers a loan “in the process of collection” if collection of the debt is proceeding in due course either through legal action or through collection efforts not involving legal action that are reasonably expected to result in repayment of the debt or in its restoration to a current status in the near future.
When loans and leases are placed on non-accrual status, the accrual of interest income and the amortization or accretion of premiums, discounts, and deferred fees and costs is discontinued, and any previously accrued interest is reversed as a reduction of interest income. For commercial loans and leases, if the Company determines that repayment of non-accrual loans and leases is not expected, any payment received is applied to principal until the unpaid balance has been fully recovered. Any excess is then credited to interest income. For consumer loans, if the Company determines that principal can be repaid, interest payments are taken into income as received on a cash basis.
Loans are generally removed from non-accrual status when they become current as to principal and interest or demonstrate a period of performance under the contractual terms and, in the opinion of management, are fully collectible as to principal and interest. For commercial loans, a sustained period of repayment performance is generally required. All TDRs qualify for return to accrual status once the borrower has demonstrated performance with the restructured terms of the loan agreement for a minimum of six consecutive months. Pursuant to regulatory guidance, a loan discharged under Chapter 7 of the U.S. bankruptcy code is removed from non-accrual status when full repayment of the remaining pre-discharged contractual principal and interest is expected, and there have been at least six consecutive months of current payments. Additional information regarding
non-accrual loans and leases can be found within Note 4: Loans and Leases.
Allowance for Credit Losses on Loans and Leases
The ACL on loans and leases, which is established through a provision charged to expense, is a contra-asset account that offsets the amortized cost basis of loans and leases for the credit losses that are expected to occur over the life of the asset. Executive management reviews and advises on the adequacy of the allowance, which is maintained at a level that management deems to be sufficient to cover expected credit losses within the loan and lease portfolios. The Company has elected to present accrued interest receivable separately from the amortized cost basis of Loans and leases on the accompanying Consolidated Balance Sheets. An ACL on accrued interest for a loan is not measured as accrued interest income is reversed against interest income for non-accrual loans immediately after their non-accrual classification.
The ACL on loans and leases is determined using the CECL model, whereby an expected lifetime credit loss is recognized at the origination or purchase of an asset, including those acquired through a business combination, which is then reassessed at each reporting date over the contractual life of the asset. The calculation of expected credit losses includes consideration of past events, current conditions, and reasonable and supportable economic forecasts that affect the collectability of the reported amounts. Generally, expected credit losses are determined through a pooled, collective assessment of loans and leases with similar risk characteristics. However, if the risk characteristics of a loan or lease change such that it no longer matches that of the collectively assessed pool, it is removed from the population and individually assessed for credit losses. The total ACL on loans and leases recorded by management represents the aggregated estimated credit loss determined through both the collective and individual assessments.
Collectively Assessed Loans and Leases. Collectively assessed loans and leases are segmented based on product type, credit quality, risk ratings, and/or collateral types within its commercial and consumer portfolios, and expected losses are determined using a PD, LGD, EAD, loss rate, or discounted cash flow framework. Expected credit losses are calculated as the product of the probability of a loan defaulting, expected loss given the occurrence of a default, and the expected exposure of a loan at default. Summing the product across loans over their lives yields the lifetime expected credit losses for a given portfolio. The Company’s PD and LGD calculations are predictive models that measure the current risk profile of the loan pools using forecasts of future macroeconomic conditions, historical loss information, and credit risk ratings.
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 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.
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 factors such as past due status, employment status, collateral, geography, loans discharged in bankruptcy, and the status of first lien position loans on second lien position loans, are also considered to be consumer portfolio credit quality indicators. For portfolio monitoring purposes, the Company estimates the current value of property secured as collateral for home equity and residential first mortgage lending products on an ongoing basis. The estimate is based on home price indices compiled by the S&P/Case-Shiller Home Price Indices. Real estate price data is applied to the loan portfolios taking into account the age of the most recent valuation and geographic area.
The Company’s models incorporate a single economic forecast scenario and macroeconomic assumptions over a reasonable and supportable forecast period. The development of the reasonable and supportable forecast period assumes that each macroeconomic variable will revert to long-term expectations, with reversion characteristics unique to specific economic indicators and forecasts. Reversion towards long-term expectations generally begins two to three years from the forecast start date and is complete within three to five years. Certain models use output reversion and revert to mean historical loss rates on a straight-line basis in the third year of the forecast. Other models use input reversion and revert to the mean of macroeconomic variables in reasonable and supportable forecasts. Historical loss rates are based on approximately 10 years of recently available data and are updated annually.
The calculation of EAD follows an iterative process to determine the expected remaining principal balance of a loan based on historical paydown rates for loans of a similar segment within the same portfolio. The calculation of portfolio exposure in future quarters incorporates expected losses and principal paydowns (the combination of contractual repayments and voluntary prepayments). A portion of the collective ACL is comprised of qualitative adjustments for risk characteristics that are not reflected or captured in the quantitative models, but are likely to impact the measurement of estimated credit losses.
Macroeconomic variables are used as inputs to the loss models and are selected based on the correlation of the variables to credit losses for each class of financing receivable as follows: the commercial models use unemployment, gross domestic product, commercial real estate price indices, and retail sales (for commercial unfunded); the residential model uses the Case-Shiller Home Price Index; the home equity loan and line of credit models use interest rate spreads between U.S. Treasuries and corporate bonds and, in addition, the home equity loan model also uses the Federal Housing Finance Agency Home Price Index; and the personal loan and credit line models use the Case-Shiller Home Price Index and Federal Housing Finance Agency Home Price Index. Forecasted economic scenarios are sourced from a third party. Data from the baseline forecast scenario is used as the input to the modeled loss calculation. Changes in forecasts of macroeconomic variables will impact expectations of lifetime credit losses calculated by the loss models. However, the impact of changes in macroeconomic forecasts may be different for each portfolio and will reflect the credit quality and nature of the underlying assets at that time.
To further refine the expected loss estimate, qualitative factors are used reflecting consideration of credit concentration, credit quality trends, the quality of internal loan reviews, the nature and volume of portfolio growth, staffing levels, underwriting exceptions, and other economic considerations that are not reflected in the base loss model. Management may apply additional qualitative adjustments to reflect other relevant facts and circumstances that impact expected credit losses. These economic and qualitative inputs are used to forecast expected losses over the reasonable and supportable forecast period.
In addition to the above considerations, the ACL calculation includes expectations of prepayments and recoveries. Extensions, renewals, and modifications are not included in the collective assessment. However, if there is a reasonable expectation of a TDR, the loan is removed from the collective assessment pool and is individually assessed.
Individually Assessed Loans and Leases. When loans and leases no longer match the risk characteristics of the collectively assessed pool, they are removed from the collectively assessed population and individually assessed for credit losses. Generally, all non-accrual loans, TDRs, potential TDRs, loans with a charge-off, and collateral dependent loans where the borrower is experiencing financial difficulty, are individually assessed.
Individual assessment for collateral dependent commercial loans facing financial difficulty is based on the fair value of the collateral less estimated cost to sell, the present value of the expected cash flows from the operation of the collateral, or a scenario weighted approach of both of these methods. If a loan is not collateral dependent, the individual assessment is based on a discounted cash flow approach. For collateral dependent commercial loans and leases, the Company's process requires the Company to determine the fair value of the collateral by obtaining a third-party appraisal or asset valuation, an interim valuation analysis, blue book reference, or other internal methods. Fair value of the collateral for commercial loans is reevaluated quarterly. Whenever the Company has a third-party real estate appraisal performed by independent licensed appraisers, a licensed in-house appraisal officer or qualified individual reviews these appraisals for compliance with the Financial Institutions Reform Recovery and Enforcement Act and the Uniform Standards of Professional Appraisal Practice.
Individual assessments for residential and home equity loans are based on a discounted cash flow approach or the fair value of collateral less the estimated costs to sell. Other consumer loans are individually assessed using a loss factor approach based on historical loss rates. For residential and consumer collateral dependent loans, a third-party appraisal is obtained upon loan default. Fair value of the collateral for residential and consumer collateral dependent loans is reevaluated every six months, by either obtaining a new appraisal or other internal valuation method. Fair value is also reassessed, with any excess amount charged off, for residential and home equity loans that reach 180 days past due per Federal Financial Institutions Examination Council guidelines.
A fair value shortfall relative to the amortized cost balance is reflected as a valuation allowance within the ACL on loans and leases. Subsequent to an appraisal or other fair value estimate, should reliable information come to management's attention that the value has declined further, an additional allowance may be recorded to reflect the particular situation, thereby increasing the ACL on loans and leases. If the credit quality subsequently improves, the allowance is reversed up to a maximum of the previously recorded credit losses. Any individually assessed loan for which no specific valuation allowance is necessary is the result of either sufficient cash flow or sufficient collateral coverage relative to the amortized cost. Additional information regarding the ACL on loans and leases can be found within Note 4: Loans and Leases.
Prior to the adoption of CECL on January 1, 2020, the ALLL was determined under the ALLL incurred loss model, which reflected management’s best estimate of probable losses that may be incurred within the existing loan and lease portfolio as of the balance sheet date. The ALLL consisted of three elements: (i) specific valuation allowances established for probable losses on impaired loans and leases; (ii) quantitative valuation allowances calculated using loss experience for like loans and leases with similar characteristics and trends, adjusted, as necessary, to reflect the impact of current conditions; and (iii) qualitative factors determined based on general economic conditions and other factors that may be internal or external to the Company. The reserve level reflected management’s view of trends in losses, portfolio quality, and economic, political, and regulatory conditions. While management utilized its best judgment based on the information available at the time, the ultimate adequacy of the allowance was dependent upon a variety of factors that were beyond the Company’s control, which included the performance its portfolio, economic conditions, interest rate sensitivity, and other external factors.
The process for estimating probable losses under the ALLL approach was based on predictive models that measured the current risk profile of the loan and lease portfolio and combined the measurement with other quantitative and qualitative factors. To measure credit risk for the commercial, commercial real estate, and equipment financing portfolios, the Company employed a dual grade credit risk grading system for estimating the PD and the LGD. The credit risk grade system under the ALLL model is the same as described under the CECL approach. For the Company's consumer portfolio, credit risk factors are also consistent with the factors used in the CECL approach. Back-testing was performed to compare original estimated losses and actual observed losses, resulting in ongoing refinements. The balance resulting from this process, together with specific valuation allowances, determined the overall reserve level.
Charge-off of Uncollectible Loans
If all or a portion of a loan is deemed to be no longer collectible upon the occurrence of a loss-confirming event, a charge-off may be recognized. Charge-offs reduce the amortized cost basis of the loan with a corresponding reduction to the ACL. For commercial loans, loss confirming events usually involve the receipt of specific adverse information about the borrower. The Company will generally recognize charge-offs for commercial loans on a case-by-case basis based on the review of the entire credit relationship and financial condition of the borrower. Loss-confirming events for consumer loans, such as bankruptcy or protracted delinquency, are typically based on established thresholds rather than by specific adverse information about the borrower.
PCD Loans and Leases
PCD loans and leases are defined as those that have experienced a more-than-insignificant deterioration in credit quality since origination. The Company 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 the Company has contractual rights to the cash flows at the acquisition date. The Company 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 the Company’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.
Allowance for Credit Losses on Unfunded Loan Commitments
The ACL on unfunded loan commitments provides for potential exposure inherent with funding the unused portion of legal commitments to lend that are not unconditionally cancellable by the Company. Accounting for unfunded loan commitments follows the CECL model. The calculation of the allowance includes the probability of funding to occur and a corresponding estimate of expected lifetime credit losses on amounts assumed to be funded. Loss calculation factors are consistent with the ACL methodology for funded loans using the PD and LGD applied to the underlying borrower risk and facility grades, a draw down factor applied to utilization rates, relevant forecast information, and management's qualitative factors. The ACL on unfunded credit commitments is included within Accrued expenses and other liabilities on the accompanying Consolidated Balance Sheets. Additional information regarding the ACL on unfunded loan commitments can be found within
Note 23: Commitments and Contingencies.
Troubled Debt Restructurings
A modified loan is considered a TDR when the following two conditions are met: (i) the borrower is experiencing financial difficulty, and (ii) the modification constitutes a concession. The Company considers all aspects of the restructuring in determining whether a concession has been granted, including the borrower's ability to access funds at a market rate. In general, a concession exists when the modified terms of the loan are more attractive to the borrower than standard market terms. Modified terms are dependent upon the financial position and needs of the individual borrower. The most common types of modifications include covenant modifications and forbearance. Loans for which the borrower has been discharged under Chapter 7 bankruptcy are considered collateral dependent TDRs, impaired at the date of discharge, and charged down to the fair value of collateral less cost to sell, if management considers that loss potential likely exists.
The Company’s policy is to place consumer loan TDRs, except those that were performing prior to TDR status, on non-accrual status for a minimum period of six months. Commercial TDRs are evaluated on a case-by-case basis when determining whether or not to place them on non-accrual status. Loans qualify for return to accrual status once they have demonstrated performance with the restructured terms of the loan agreement for a minimum of six months. TDRs are individually assessed loans and reported as TDRs for the remaining life of the loan. TDR classification may be removed if the borrower demonstrates compliance with the modified terms for a minimum of six months and through a year-end, and the restructuring agreement specifies a market rate of interest equal to that which would be provided to a borrower with similar credit at the time of restructuring. In the limited circumstance that a loan is removed from TDR classification, it is the Company’s policy to continue to base its measure of loan impairment on the contractual terms specified by the loan agreement. Additional information regarding TDRs can be found within Note 4: Loans and Leases.
Foreclosed and Repossessed Assets
Real estate acquired through foreclosure or completion of a deed in lieu of foreclosure and other assets acquired through repossession are recorded at fair value less estimated cost to sell at the date of transfer. Subsequent to the acquisition date, the foreclosed and repossessed assets are carried at the lower of cost or fair value less estimated selling costs and are included within Other assets on the accompanying Consolidated Balance Sheets. Independent appraisals generally are obtained to substantiate fair value and may be subject to adjustment based upon historical experience or specific geographic trends impacting the property. Upon transfer to OREO, the excess of the loan balance over fair value less cost to sell is charged off against the ACL. Subsequent write-downs in value, maintenance costs as incurred, and gains or losses upon sale are charged to Other expense on the accompanying Consolidated Statements of Income.
Property and Equipment
Property and equipment is carried at cost, less accumulated depreciation and amortization. Depreciation and amortization is computed on a straight-line basis over the estimated useful lives of the assets, as illustrated in the following table. If shorter, leasehold improvements are amortized over the terms of the respective leases.
| | | | | | | | | | | | | | |
| Minimum | | Maximum | |
Building and improvements | 5 | - | 40 | years |
Leasehold improvements | 5 | - | 20 | years |
Furniture, fixtures, and equipment | 5 | - | 10 | years |
Data processing equipment and software | 3 | - | 7 | years |
Repairs and maintenance costs are expensed as incurred, while significant improvements are capitalized. Property and equipment that is actively marketed for sale is reclassified to assets held for disposition. The cost and accumulated depreciation and amortization of property and equipment that is sold, retired, or otherwise disposed of, is eliminated from accounts and any resulting gain or loss is recorded as Other income or Other expense, respectively, on the accompanying Consolidated Statements of Income. Additional information regarding property and equipment can be found within
Note 6: Premises and Equipment.
Operating Leasing
As lessee, ROU lease assets and their corresponding lease liabilities are recognized on the lease commencement date. A ROU asset is measured based on the present value of the future minimum lease payments, adjusted for any initial direct costs, incentives, or other payments prior to the lease commencement date. A lease liability represents a legal obligation to make lease payments and is measured based on the present value of the future minimum lease payments, discounted using the rate implicit in the lease or the Company’s incremental borrowing rate. Variable lease payments that are dependent on either an index or rate are initially measured using the index or rate at the commencement date and included in the measurement of the lease liability. Renewal options are not included as part of the ROU asset or lease liability unless the renewal option is deemed reasonably certain to exercise. ROU lease assets and operating lease liabilities are included in Premises and equipment and Accrued expenses and other liabilities, respectively, on the accompanying Consolidated Balance Sheets.
For real estate leases, lease components and non-lease components are accounted for as a single lease component if the
non-lease components are fixed and separately if they are variable. For equipment leases, lease components and non-lease components are accounted for separately. Operating lease expense, which is comprised of operating lease costs and variable lease costs, net of sublease income, is amortized on a straight-line basis and reflected as a part of Occupancy expense on the accompanying Consolidated Statements of Income. Additional information regarding the Company's lessee arrangements can be found within Note 7: Leasing.
Goodwill
Goodwill represents the excess purchase price of businesses acquired over the fair value of the identifiable net assets acquired and is assigned to specific reporting units. Goodwill is not subject to amortization but rather is evaluated for impairment annually, or more frequently if events occur or circumstances change indicating it would more likely than not result in a reduction of the fair value of the reporting units below their carrying value, including goodwill.
Goodwill may be evaluated for impairment by first performing a qualitative assessment. If the qualitative assessment indicates that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill, or, if for any other reason the Company determines to it be appropriate, then a quantitative assessment will be performed. The quantitative assessment process utilizes an income and market approach to arrive at an indicated fair value range for the reporting units. The fair value calculated for each reporting unit is compared to its carrying amount, including goodwill, to ascertain if goodwill impairment exists. If the fair value exceeds the carrying amount, including goodwill for a reporting unit, it is not considered to be impaired. If the fair value is below the carrying amount, including goodwill for a reporting unit, then an impairment charge is recognized for the amount by which the carrying amount exceeds the calculated fair value, up to but not exceeding the amount of goodwill allocated to the reporting unit. The resulting amount is charged to Other expense on the accompanying Consolidated Statements of Income.
The Company completed a qualitative assessment for its reporting units during its most recent annual impairment review. Based on this qualitative assessment, the Company determined that there was no evidence of impairment to the balance of its goodwill. Additional information regarding goodwill can be found within Note 8: Goodwill and Other Intangible Assets.
Other Intangible Assets
Other intangible assets represent purchased assets that lack physical substance but can be distinguished from goodwill because of contractual or other legal rights, or because it is capable of being sold or exchanged either separately or in combination with a related contract, asset, or liability. Other intangible assets with finite useful lives, such as core deposits and customer relationships, are amortized to non-interest expense over their estimated useful lives and are evaluated for impairment whenever events occur or circumstances change indicating that the carrying amount of the asset may not be recoverable. Additional information regarding other intangible assets can be found within Note 8: Goodwill and Other Intangible Assets.
Cash Surrender Value of Life Insurance
Bank-owned life insurance represents the cash surrender value of life insurance policies on certain current and former employees of Webster and Sterling. Cash surrender value increases and decreases are recorded in non-interest income. Death benefit proceeds in excess of the cash surrender value are recorded in other non-interest income upon the death of the insured.
Securities Sold Under Agreements to Repurchase
These agreements are accounted for as secured financing transactions since the Company maintains effective control over the transferred investment securities and the transfer meets the other criteria for such treatment. Obligations to repurchase the sold investment securities are reflected as a liability on the accompanying Consolidated Balance Sheets. The investment securities sold with agreement to repurchase to wholesale dealers are transferred to a custodial account for the benefit of the dealer or to the bank with whom each transaction is executed. The dealers or banks may sell, loan, or otherwise dispose of such securities to other parties in the normal course of their operations and agree to resell to the Company the same securities at the maturity date of the agreements. The Company also enters into repurchase agreements with Bank customers. The investment securities sold with agreement to repurchase to Bank customers are not transferred, but internally pledged to the repurchase agreement transaction. Additional information regarding securities sold under agreements to repurchase can be found within
Note 11: Borrowings.
Revenue From Contracts With Customers
Revenue from contracts with customers comprises non-interest income earned in exchange for services provided to customers and is recognized either when services are completed or as they are rendered. These revenue streams include Deposit service fees, Wealth and investment services, and non-significant portions of Loan and lease related fees and Other income on the accompanying Consolidated Statements of Income. The Company identifies the performance obligations included in its contracts with customers, determines the transaction price, allocates the transaction price to the performance obligations, as applicable, and recognizes revenue when the performance obligations are satisfied. Services provided over a period of time are generally transferred to customers evenly over the term of the contracts, and revenue is recognized evenly over the period the services are provided. Contract assets are included in accrued interest receivable and other assets on the accompanying Consolidated Balance Sheets. Payment terms vary by services offered, and generally the time between the completion of performance obligations and receipt of payment is not significant. Additional information regarding contracts with customers can be found within Note 22: Revenue from Contracts with Customers.
Share-Based Compensation
The Company maintains a stock compensation plan that provides for the grant of stock options, stock appreciation rights, restricted stock, performance-based stock, and stock units to employees and directors. Share awards are issued from available treasury shares. Stock compensation expense is recognized over the required service vesting period for each award based on the grant date fair value, and is included within Compensation and benefits expense on the accompanying Consolidated Statements of Income. Share awards are generally subject to a one-year vesting period, while certain conditions provide for a one-year vesting period. For time-based restricted stock awards and average return on equity performance-based restricted stock awards, fair value is measured using the closing price of Webster common stock at the grant date. For total stockholder return performance-based restricted stock awards, fair value is measured using the Monte Carlo simulation model. Performance-based restricted stock awards ultimately vest in a range from 0% to 150% of the target number of shares under the grant. Compensation expense may be subject to adjustment based on management's assessment of the Company's average return on equity performance relative to the target number of shares condition. Stock option awards use the Black-Scholes Option-Pricing Model to measure fair value at the grant date. Excess tax benefits or tax deficiencies result when tax return deductions differ from recognized compensation cost determined using the grant-date fair value approach for financial statement purposes. Dividends are paid on time-based shares upon grant and are non-forfeitable, while dividends are accrued on performance-based awards and paid with the vested shares when the performance target is met. Additional information regarding share-based compensation can be found within Note 20: Share-Based Plans.
Income Taxes
Income tax expense (benefit) is comprised of two components, current and deferred. The current component represents income taxes payable or refundable for the current period based on applicable tax laws, while the deferred component represents the tax effects of temporary differences between amounts recognized for financial accounting and tax purposes. DTAs and DTLs reflect the tax effects of such differences that are anticipated to result in taxable or deductible amounts in the future when the temporary differences reverse. DTAs are recognized if it is more likely than not that they will be realized, and may be reduced by a valuation allowance if it is more likely than not that all or some portion will not be realized.
Uncertain tax positions that meet a more likely than not recognition threshold are initially and subsequently measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon settlement with a taxing authority based on knowledge of all relevant information. The determination of whether or not a tax position meets the more likely than not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to management judgment. The Company recognizes interest and penalties on uncertain tax positions and interest on refundable income taxes as a component of Income tax expense and Other income, respectively, on the accompanying Consolidated Statements of Income. Additional information regarding income taxes can be found within Note 9: Income Taxes.
Earnings per Common Share
Earnings per common share is calculated under the two-class method. Basic earnings per common share is computed by dividing earnings applicable to common stockholders by the weighted-average number of common shares outstanding, excluding outstanding participating securities, during the pertinent period. Certain unvested restricted stock awards are considered participating securities as they have non-forfeitable rights to dividends. Diluted earnings per common share is computed using the weighted-average number of shares determined for the basic earnings per common share computation plus the dilutive effect of shares resulting from stock compensation and warrants for common stock using the treasury stock method. A reconciliation between the weighted-average common shares used in calculating basic earnings per common share and the weighted-average common shares used in calculating diluted earnings per common share can be found within
Note 16: Earnings Per Common Share.
Comprehensive Income (Loss)
Comprehensive income (loss) includes all changes in equity during the period, except those resulting from transactions with stockholders. Comprehensive income comprises net income and the after-tax effect changes in the following items: net unrealized gain (loss) on AFS securities, net unrealized gain (loss) on derivative instruments, and net actuarial gain (loss) related to defined benefit pension and other postretirement benefit plans. Comprehensive income is reported on the accompanying Consolidated Statements of Stockholders' Equity and the accompanying Consolidated Statements of Comprehensive Income. Additional information regarding comprehensive (loss) income can be found within
Note 13: Accumulated Other Comprehensive (Loss) Income, Net of Tax.
Derivative Instruments and Hedging Activities
Derivatives are recognized at fair value and are included in Accrued interest receivable and other assets and Accrued expenses and other liabilities, as applicable, on the accompanying Consolidated Balance Sheets. The value of exchange-traded contracts is based on quoted market prices, whereas non-exchange traded contracts are valued based on dealer quotes, pricing models, discounted cash flow methodologies, or similar techniques in which the determination of fair value may require management judgment or estimation. Net cash flows from derivative contract assets and liabilities are presented within Operating activities on the accompanying Consolidated Statements of Cash Flows.
Derivatives Designated in Hedge Relationships. The Company uses derivatives to hedge exposures or to modify interest rate characteristics for certain balance sheet accounts under its interest rate risk management strategy. The Company designates derivatives in qualifying hedge relationships either as fair value or cash flow hedges for accounting purposes. Derivative financial instruments receive hedge accounting treatment if they are qualified and properly designated as a hedge, and remain highly effective in offsetting changes in the fair value or cash flows attributable to the risk being hedged, both at hedge inception and on an ongoing basis throughout the life of the hedge. Quarterly prospective and retrospective assessments are performed to ensure hedging relationships continue to be highly effective. If a hedge relationship is no longer highly effective, hedge accounting would be discontinued.
The change in fair value on a derivative that is designated and qualifies as a fair value hedge, as well as the offsetting change in fair value on the hedged item attributable to the risk being hedged, is recognized in earnings. The gain or loss on a derivative that is designated and qualifies as a cash flow hedge is initially recorded as a component of (AOCL), and either subsequently reclassified to interest income as hedged interest payments are received or to interest expense as hedged interest payments are made during the same period in which the hedged transaction affects earnings.
Derivatives Not Designated in Hedge Relationships. The Company also enters into derivative transactions that are not designated in hedge relationships. Derivative financial instruments not designated in hedge relationships are recorded at fair value with changes in fair value recognized in Other income on the accompanying Consolidated Statements of Income.
Offsetting Assets and Liabilities. The Company presents derivative assets and derivative liabilities with the same counterparty and the related variation margin of cash collateral on a net basis on the accompanying Consolidated Balance Sheets. Cash collateral relating to initial margin is included in Accrued interest receivable and other assets. Securities collateral is not offset. The Company clears all dealer eligible contracts through clearing houses and has elected to record non-cleared derivative positions subject to a legally enforceable master netting agreement on a net basis. Additional information regarding derivatives can be found within Note 17: Derivative Financial Instruments.
Fair Value Measurements
The Company measures many of its assets and liabilities on a fair value basis in accordance with ASC Topic 820, Fair Value Measurement. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is used to measure certain assets and liabilities on a recurring basis when fair value is the primary basis of accounting, and on a non-recurring basis when evaluating assets or liabilities for impairment. Additional information regarding the Company's policies and methodologies used to measure fair value can be found within Note 18: Fair Value Measurements.
Employee Retirement Benefit Plans
The sponsors defined contribution postretirement benefit plans established under Section 401(k) of the Internal Revenue Code. Expenses to maintain the plans, as well as employer contributions, are charged to Compensation and benefits expense on the accompanying Consolidated Statements of Income.
The Bank had offered a qualified noncontributory defined benefit pension plan and a non-qualified SERP to eligible employees and key executives who met certain age and service requirements, both of which were frozen effective December 31, 2007. The Bank also provides for OPEB to certain retired employees. In connection with the merger with Sterling, the Company also assumed the benefit obligations of Sterling's non-qualified SERP and OPEB plans.
Pension contributions are funded in accordance with the requirements of the Employee Retirement Income Security Act. Net periodic benefit (income) cost, which is based upon actuarial computations of current and future benefits for eligible employees, are charged to Other expense on the accompanying Consolidated Statements of Income. The funded status of the plans is recorded as an asset when over-funded or a liability when under-funded. Additional information regarding the defined benefit pension and postretirement benefit plans can be found within Note 19: Retirement Benefit Plans.
Accounting Standards Adopted During the Current Year
ASU No. 2022-06—Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848
On December 21, 2022, the FASB issued ASU 2022-06 to defer the sunset date of the temporary, optional expedients related to the accounting for contract modifications and hedging transactions as a result of the anticipated transition away from the use of LIBOR and other interbank offered rates to alternative reference rates. In response to the United Kingdoms’s Financial Conduct Authority's extension of the cessation date of LIBOR in the United States to June 30, 2023, the FASB has deferred the expiration date of these optional expedients to December 31, 2024.
The ASU became effective upon issuance and affords the Company an extended period to utilize the currently available optional expedients related to the accounting for contract modifications and hedging transactions as a result of the anticipated transition away from the use of LIBOR and other inter-bank offered rates.
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 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. The Company adopted the Update on
January 1, 2023. The adoption of this guidance did not have a material impact on the Company's Consolidated Financial Statements.
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. The Company is currently evaluating the impact of this standard; however, the Company does not expect the adoption of this guidance to have a material impact on its Consolidated Financial Statements and disclosures.
Note 2: Mergers and Acquisitions
Merger with Sterling
On January 31, 2022, Webster completed its merger with Sterling pursuant to an Agreement and Plan of Merger dated as of April 18, 2021. Pursuant to the merger agreement, Sterling Bancorp merged with and into the Holding Company, with the Holding Company continuing as the surviving corporation. Following the merger, on February 1, 2022, Sterling National Bank, a wholly-owned subsidiary of Sterling Bancorp, merged with and into the Bank, with the 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 the Company's geographic footprint and combined two complementary organizations to create one of the largest commercial banks in the northeastern U.S.
Pursuant to the merger agreement, 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. Furthermore, 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. Cash was also paid to Sterling common stockholders 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.
The following table summarizes the determination of the purchase price consideration:
| | | | | |
(In thousands, except share and 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 the Company and included in the consideration transferred pertains to services performed prior to the merger effective date. The fair value attributed to services performed after the merger effective date is being recognized over the required service vesting period for each award and recorded as Compensation and benefits expense on the accompanying Consolidated Statements of Income.
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.
The Company considers its valuations of certain other assets and other liabilities to be preliminary, as management continues to identify and assess information regarding the nature of these assets acquired and liabilities assumed, including extended information gathering, management review procedures, and any new information that may arise as a result of integration activities. Accordingly, the amounts recorded for current and deferred taxes are also considered preliminary, as the Company continues to evaluate the nature and extent of permanent and temporary differences between the book and tax bases of these other assets acquired and other liabilities assumed. While the Company believes that the information available as of
December 31, 2022, provides a reasonable basis for estimating fair value, it is possible that additional information may become available during the remainder of the measurement period that could result in changes to the fair values presented.
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:
| | | | | | | | | | | | | |
(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 AFS | | | | | 4,429,948 | |
FHLB and FRB 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 | | | | | (51,487) | |
Premises and equipment (1) | | | | | 264,421 | |
Other intangible assets | | | | | 210,100 | |
Bank-owned life insurance policies | | | | | 645,510 | |
Accrued interest receivable and other assets | | | | | 960,893 | |
Total assets acquired | | | | | $ | 27,646,246 | |
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) | | | | | 597,643 | |
Total liabilities assumed | | | | | $ | 24,405,711 | |
Net assets acquired | | | | | 3,240,535 | |
Goodwill | | | | | $ | 1,939,765 | |
(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 with Sterling, the Company 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 asset and customer relationship intangible assets, can be found within Note 21: Segment Reporting and Note 8: 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 AFS. The fair values for investment securities AFS 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 HTM were classified as investment securities AFS 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, the Company 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: | | | | | | | | | | | | | | | |
| | | Years ended December 31, |
(In thousands) | | | | | 2022 | | 2021 |
Net interest income | | | | | $ | 1,961,005 | | | $ | 1,802,862 | |
Non-interest income | | | | | 440,783 | | | 487,301 | |
Net income | | | | | 869,639 | | | 574,927 | |
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:
| | | | | | | | | | | | | | | | | |
| | | Years ended December 31, |
(In thousands) | | | | | 2022 | | 2021 |
Compensation and benefits (1) | | | | | $ | 79,001 | | | $ | 13,987 | |
Occupancy (2) | | | | | 36,586 | | | 256 | |
Technology and equipment (3) | | | | | 24,688 | | | 290 | |
Marketing | | | | | 416 | | | — | |
Professional and outside services (4) | | | | | 73,070 | | | 22,273 | |
Other expense (5) | | | | | 32,700 | | | 648 | |
Total merger-related expenses | | | | | $ | 246,461 | | | $ | 37,454 | |
(1)Comprised primarily of employee severance and retention costs, and executive restricted stock awards.
(2)Comprised primarily of charges associated with the Company’s 2022 corporate real estate consolidation plan. Additional information regarding this corporate real estate consolidation plan can be found within Note 6: Premises and Equipment and
Note 7: Leasing.
(3)Comprised primarily of technology contract termination costs.
(4)Comprised primarily of advisory, legal, and consulting fees.
(5)Comprised primarily of disposals on property and equipment, contract termination costs, and other miscellaneous expenses.
The following table summarizes the change in accrued expenses and other liabilities for the year ended December 31, 2022, as it relates to severance and contract termination costs, which were primarily incurred in connection with the Sterling merger:
| | | | | | | | | | | | | | | | | | | | |
| | |
(In thousands) | | Severance | | Contract Termination | | Total |
Balance, beginning of period | | $ | 10,835 | | | $ | — | | | $ | 10,835 | |
Additions charged to expense | | 36,092 | | | 34,152 | | | 70,244 | |
Cash payments | | (35,014) | | | (3,790) | | | (38,804) | |
Other (1) | | (4,330) | | | — | | | (4,330) | |
Balance, end of period | | $ | 7,583 | | | $ | 30,362 | | | $ | 37,945 | |
(1)Primarily reflects the release of $4.1 million from the Company's severance accrual at the beginning of the year. In connection with the Sterling merger, the Company re-evaluated its strategic priorities as a combined organization, which resulted in modifications to the Company's strategic initiatives that were announced in December 2020.
The Company's operating results for the year ended December 31, 2022, includes the operating results of acquired assets and assumed liabilities of Sterling subsequent to the merger on January 31, 2022. Due to the various conversions of Sterling systems during the year ended December 31, 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 accompanying Consolidated Statements of Income for the reporting period is impracticable.
Bend 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 accelerated the Company’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 comprised $15.9 million of internal use software and a $3.0 million customer relationship intangible asset.
Inland Bank and Trust HSA Portfolio Acquisition
On November 7, 2022, Webster acquired a portfolio of HSAs from Inland Bank and Trust. The transaction was accounted for as an asset acquisition, and the Company received $15.6 million in both cash and deposits on the acquisition date. The Company also paid a 2.00% deposit premium based on the final settlement of deposits, which resulted in the recognition of a $0.3 million core deposit intangible asset. The accounts and associated deposits obtained from this transaction will provide stable funding for future loan growth and will increase the Company's revenues.
interLINK Acquisition
On January 11, 2023, Webster acquired interLINK, a technology-enabled deposit management platform that administers over $9 billion of deposits from FDIC-insured cash sweep programs between banks and broker/dealers and clearing firms, in exchange for cash. The acquisition provides the Company with access to a unique source of core deposit funding and scalable liquidity and adds another technology-enabled channel to its already differentiated, omnichannel deposit gathering capabilities.
The transaction will be accounted for as a business combination, and the assets acquired and liabilities assumed from interLINK will be recorded at fair value as of the acquisition date. The Company plans to complete the initial purchase price allocation in the first quarter of 2023, which is not expected to have a material impact on the Company's consolidated financial statements.
Note 3: Investment Securities
Available-for-Sale
The following table summarizes the amortized cost and fair value of AFS securities by major type: | | | | | | | | | | | | | | |
| At December 31, 2022 |
(In thousands) | Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value |
U.S. Treasury notes | $ | 755,968 | | $ | — | | $ | (38,928) | | $ | 717,040 | |
Government agency debentures | 302,018 | | — | | (43,644) | | 258,374 | |
Municipal bonds and notes | 1,719,110 | | 5 | | (85,913) | | 1,633,202 | |
Agency CMO | 64,984 | | — | | (5,019) | | 59,965 | |
Agency MBS | 2,461,337 | | 26 | | (303,339) | | 2,158,024 | |
Agency CMBS | 1,664,600 | | — | | (258,114) | | 1,406,486 | |
CMBS | 929,588 | | — | | (32,948) | | 896,640 | |
CLO | 2,108 | | — | | (1) | | 2,107 | |
Corporate debt | 795,999 | | — | | (91,587) | | 704,412 | |
Private label MBS | 48,895 | | — | | (4,646) | | 44,249 | |
Other | 12,548 | | — | | (350) | | 12,198 | |
Total AFS securities | $ | 8,757,155 | | $ | 31 | | $ | (864,489) | | $ | 7,892,697 | |
| | | | |
| At December 31, 2021 |
(In thousands) | Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value |
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 | |
Total AFS securities | $ | 4,227,697 | | $ | 41,499 | | $ | (34,342) | | $ | 4,234,854 | |
Accrued interest receivable on AFS securities of $36.9 million and $7.5 million at December 31, 2022, and 2021, respectively, is excluded from amortized cost and is reported in Accrued interest receivable and other assets on the accompanying Consolidated Balance Sheets.
Unrealized Losses
The following tables summarize the gross unrealized losses and fair value of AFS securities by length of time each major security type has been in a continuous unrealized loss position: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| At December 31, 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 | $ | 337,563 | | $ | (19,167) | | | $ | 379,477 | | $ | (19,761) | | | 23 | $ | 717,040 | | $ | (38,928) | |
Government agency debentures | 258,374 | | (43,644) | | | — | | — | | | 19 | 258,374 | | (43,644) | |
Municipal bonds and notes | 1,616,771 | | (85,913) | | | — | | — | | | 444 | 1,616,771 | | (85,913) | |
Agency CMO | 55,693 | | (4,640) | | | 4,272 | | (379) | | | 39 | 59,965 | | (5,019) | |
Agency MBS | 1,641,544 | | (206,412) | | | 515,206 | | (96,927) | | | 460 | 2,156,750 | | (303,339) | |
Agency CMBS | 485,333 | | (68,674) | | | 921,153 | | (189,440) | | | 132 | 1,406,486 | | (258,114) | |
CMBS | 273,150 | | (8,982) | | | 598,490 | | (23,966) | | | 52 | 871,640 | | (32,948) | |
CLO | — | | — | | | 2,107 | | (1) | | | 1 | 2,107 | | (1) | |
Corporate debt | 692,990 | | (89,692) | | | 8,421 | | (1,895) | | | 105 | 701,411 | | (91,587) | |
Private label MBS | 44,249 | | (4,646) | | | — | | — | | | 3 | 44,249 | | (4,646) | |
Other | 12,198 | | (350) | | | — | | — | | | 4 | 12,198 | | (350) | |
Total AFS securities in an unrealized loss position | $ | 5,417,865 | | $ | (532,120) | | | $ | 2,429,126 | | $ | (332,369) | | | 1,282 | $ | 7,846,991 | | $ | (864,489) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| At December 31, 2021 |
| 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 | $ | 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) | |
Total AFS securities in an unrealized loss position | $ | 2,272,641 | | $ | (17,086) | | | $ | 558,515 | | $ | (17,256) | | | 162 | $ | 2,831,156 | | $ | (34,342) | |
The Company assesses each AFS security that is in an unrealized loss position to determine whether the decline in fair value below the amortized cost basis is attributable to credit or other factors. The $830.1 million increase in gross unrealized losses from December 31, 2021, to December 31, 2022, is primarily due to higher market rates. Market prices will approach par as the securities approach maturity.
At December 31, 2022, the Company had the intent to hold its AFS securities with unrealized loss positions through the anticipated recovery period, and it is more-likely-than-not that the Company would not have to sell these AFS securities before the recovery of their amortized cost basis. The issuers of these AFS securities have not, to the Company’s knowledge, established any cause for default. Therefore, the Company expects to recover the entire amortized cost basis. Accordingly, there were no AFS securities in non-accrual status and no ACL recorded on AFS securities at December 31, 2022, and 2021.
Contractual Maturities
The following table summarizes the amortized cost and fair value of AFS securities by contractual maturity: | | | | | | | | | | | |
| At December 31, 2022 |
(In thousands) | Amortized Cost | | Fair Value |
Maturing within 1 year | $ | 204,757 | | | $ | 198,765 | |
After 1 year through 5 years | 1,200,088 | | | 1,127,769 | |
After 5 years through 10 years | 1,459,962 | | | 1,351,397 | |
After 10 years | 5,892,348 | | | 5,214,766 | |
Total AFS securities | $ | 8,757,155 | | | $ | 7,892,697 | |
AFS 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 Securities
The following table summarizes information from sales of AFS securities:
| | | | | | | | | | | | | | | | | |
| Years ended December 31, |
(In thousands) | 2022 | | 2021 | | 2020 |
Proceeds from sales | $ | 172,947 | | | $ | — | | | $ | 8,963 | |
| | | | | |
Gross realized gains | $ | — | | | $ | — | | | $ | 8 | |
Gross realized losses | 6,751 | | | — | | | — | |
(Loss) gain on sale of investment securities, net | $ | (6,751) | | | $ | — | | | $ | 8 | |
Other Information
The following table summarizes AFS securities pledged for deposits, borrowings, and other purposes:
| | | | | | | | | | | |
| At December 31, |
(In thousands) | 2022 | | 2021 |
AFS securities pledged for deposits, at fair value | $ | 2,573,072 | | $ | 855,323 |
AFS securities pledged for borrowings and other, at fair value | 1,195,101 | | 924,841 |
Total AFS securities pledged | $ | 3,768,173 | | $ | 1,780,164 |
At December 31, 2022, the Company had callable AFS securities with an aggregate carrying value of $2.9 billion.
Held-to-Maturity
The following table summarizes the amortized cost, fair value, and ACL of HTM securities by major type:
| | | | | | | | | | | | | | | | | | | | | | | |
| At December 31, 2022 |
(In thousands) | Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | | Allowance | Net Carrying Value |
Agency CMO | $ | 28,358 | | $ | — | | $ | (2,060) | | $ | 26,298 | | | $ | — | | $ | 28,358 | |
Agency MBS | 2,626,114 | | 827 | | (339,592) | | 2,287,349 | | | — | | 2,626,114 | |
Agency CMBS | 2,831,949 | | 845 | | (407,648) | | 2,425,146 | | | — | | 2,831,949 | |
Municipal bonds and notes | 928,845 | | 1,098 | | (47,183) | | 882,760 | | | 182 | | 928,663 | |
CMBS | 149,613 | | — | | (9,713) | | 139,900 | | | — | | 149,613 | |
Total HTM securities | $ | 6,564,879 | | $ | 2,770 | | $ | (806,196) | | $ | 5,761,453 | | | $ | 182 | | $ | 6,564,697 | |
| | | | | | | |
| 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 | |
Total HTM securities | $ | 6,198,339 | | $ | 138,254 | | $ | (55,657) | | $ | 6,280,936 | | | $ | 214 | | $ | 6,198,125 | |
Accrued interest receivable on HTM securities of $24.2 million and $21.2 million at December 31, 2022, and 2021, respectively, is excluded from amortized cost and is reported in Accrued interest receivable and other assets on the accompanying Consolidated Balance Sheets.
An ACL on HTM 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. HTM securities with gross unrealized losses and no ACL are considered to be of high credit quality. Therefore, zero credit loss is recorded at December 31, 2022, and 2021.
The following table summarizes the activity in the ACL on HTM securities: | | | | | | | | | | | | | | | | | |
| Years ended December 31, |
(In thousands) | 2022 | | 2021 | | 2020 |
Balance, beginning of period | $ | 214 | | $ | 299 | | $ | — |
Adoption of CECL | — | | — | | 397 |
(Benefit) for credit losses | (32) | | (85) | | (98) |
Balance, end of period | $ | 182 | | $ | 214 | | $ | 299 |
Contractual Maturities
The following table summarizes the amortized cost and fair value of HTM securities by contractual maturity:
| | | | | | | | | | | |
| At December 31, 2022 |
(In thousands) | Amortized Cost | | Fair Value |
Maturing within 1 year | $ | 2,195 | | | $ | 2,194 | |
After 1 year through 5 years | 53,632 | | | 54,275 | |
After 5 years through 10 years | 329,156 | | | 312,741 | |
After 10 years | 6,179,896 | | | 5,392,243 | |
Total HTM securities | $ | 6,564,879 | | | $ | 5,761,453 | |
HTM securities that are not due at a single maturity date have been categorized based on the maturity date of the underlying collateral. Actual principal cash flows may differ from this categorization as borrowers have the right to prepay their obligations with or without prepayment penalties.
Credit Quality Information
The Company monitors the credit quality of HTM securities through credit ratings provided by S&P, Moody's, Fitch Ratings, Inc., Kroll Bond Rating Agency, or DBRS Inc. Credit ratings express opinions about the credit quality of a security, and are updated at each quarter end. Investment grade 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, 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 securities. There were no speculative grade HTM securities at December 31, 2022, and 2021. HTM securities that are not rated are collateralized with U.S. Treasury obligations.
The following table summarizes the amortized cost basis of HTM securities based on their lowest publicly available credit rating:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| At December 31, 2022 |
| Investment Grade | | |
(In thousands) | Aaa | Aa1 | Aa2 | Aa3 | A1 | A2 | | Baa2 | | Not Rated |
Agency CMOs | $ | — | | $ | 28,358 | | $ | — | | $ | — | | $ | — | | $ | — | | | $ | — | | | $ | — | |
Agency MBS | — | | 2,626,114 | | — | | — | | — | | — | | | — | | | — | |
Agency CMBS | — | | 2,831,949 | | — | | — | | — | | — | | | — | | | — | |
Municipal bonds and notes | 336,035 | | 163,312 | | 255,235 | | 116,870 | | 38,177 | | 4,165 | | | — | | | 15,051 | |
CMBS | 149,613 | | — | | — | | — | | — | | — | | | — | | | — | |
Total HTM securities | $ | 485,648 | | $ | 5,649,733 | | $ | 255,235 | | $ | 116,870 | | $ | 38,177 | | $ | 4,165 | | | $ | — | | | $ | 15,051 | |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| At December 31, 2021 |
| Investment Grade | | |
(In thousands) | Aaa | Aa1 | Aa2 | Aa3 | A1 | A2 | | Baa2 | | Not Rated |
Agency CMOs | $ | — | | $ | 42,405 | | $ | — | | $ | — | | $ | — | | $ | — | | | $ | — | | | $ | — | |
Agency MBS | — | | 2,901,593 | | — | | — | | — | | — | | | — | | | — | |
Agency CMBS | — | | 2,378,475 | | — | | — | | — | | — | | | — | | | — | |
Municipal bonds and notes | 207,426 | | 119,804 | | 227,106 | | 104,232 | | 35,878 | | 8,260 | | | 95 | | | 3,117 | |
CMBS | 169,948 | | — | | — | | — | | — | | — | | | — | | | — | |
Total HTM securities | $ | 377,374 | | $ | 5,442,277 | | $ | 227,106 | | $ | 104,232 | | $ | 35,878 | | $ | 8,260 | | | $ | 95 | | | $ | 3,117 | |
| | | | | | | | | | |
At December 31, 2022, and 2021, there were no HTM debt securities past due under the terms of their agreements or in
non-accrual status.Other Information
The following table summarizes HTM securities pledged for deposits, borrowings, and other purposes:
| | | | | | | | | | | |
| At December 31, |
(In thousands) | 2022 | At | 2021 |
HTM securities pledged for deposits, at amortized cost | $ | 1,596,777 | | $ | 1,834,117 |
HTM securities pledged for borrowings and other, at amortized cost | 260,735 | | 1,243,139 |
Total HTM securities pledged | $ | 1,857,512 | | $ | 3,077,256 |
At December 31, 2022, the Company had callable HTM 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: | | | | | | | | | | | |
| At December 31, |
(In thousands) | 2022 | | 2021 |
Commercial non-mortgage | $ | 16,392,795 | | | $ | 6,882,480 | |
Asset-based | 1,821,642 | | | 1,067,248 | |
Commercial real estate | 12,997,163 | | | 5,463,321 | |
Multi-family | 6,621,982 | | | 1,139,859 | |
Equipment financing | 1,628,393 | | | 627,058 | |
Warehouse lending | 641,976 | | | — | |
Commercial portfolio | 40,103,951 | | | 15,179,966 | |
Residential | 7,963,420 | | | 5,412,905 | |
Home equity | 1,633,107 | | | 1,593,559 | |
Other consumer | 63,948 | | | 85,299 | |
Consumer portfolio | 9,660,475 | | | 7,091,763 | |
Loans and leases | $ | 49,764,426 | | | $ | 22,271,729 | |
The carrying amount of loans and leases at December 31, 2022, and 2021, includes net unamortized (discounts)/premiums and net unamortized deferred (fees)/costs totaling $(68.7) million and $12.3 million, respectively. Accrued interest receivable of $226.3 million and $50.7 million at December 31, 2022, and 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 Consolidated Balance Sheets. At December 31, 2022, the Company had pledged $13.7 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 December 31, 2022 |
(In thousands) | 30-59 Days Past Due and Accruing | 60-89 Days Past Due and Accruing | 90 or More Days Past Due and Accruing | Non-accrual | Total Past Due and Non-accrual | Current (1) | Total Loans and Leases |
Commercial non-mortgage | $ | 8,434 | | $ | 821 | | $ | 645 | | $ | 71,884 | | $ | 81,784 | | $ | 16,311,011 | | $ | 16,392,795 | |
Asset-based | 5,921 | | — | | — | | 20,024 | | 25,945 | | 1,795,697 | | 1,821,642 | |
Commercial real estate | 1,494 | | 23,492 | | 68 | | 39,057 | | 64,111 | | 12,933,052 | | 12,997,163 | |
Multi-family | 1,157 | | — | | — | | 636 | | 1,793 | | 6,620,189 | | 6,621,982 | |
Equipment financing | 806 | | 9,988 | | — | | 12,344 | | 23,138 | | 1,605,255 | | 1,628,393 | |
Warehouse lending | — | | — | | — | | — | | — | | 641,976 | | 641,976 | |
Commercial portfolio | 17,812 | | 34,301 | | 713 | | 143,945 | | 196,771 | | 39,907,180 | | 40,103,951 | |
Residential | 8,246 | | 3,083 | | — | | 25,424 | | 36,753 | | 7,926,667 | | 7,963,420 | |
Home equity | 5,293 | | 2,820 | | — | | 27,924 | | 36,037 | | 1,597,070 | | 1,633,107 | |
Other consumer | 1,028 | | 85 | | 13 | | 148 | | 1,274 | | 62,674 | | 63,948 | |
Consumer portfolio | 14,567 | | 5,988 | | 13 | | 53,496 | | 74,064 | | 9,586,411 | | 9,660,475 | |
Total | $ | 32,379 | | $ | 40,289 | | $ | 726 | | $ | 197,441 | | $ | 270,835 | | $ | 49,493,591 | | $ | 49,764,426 | |
(1)At December 31, 2022, there were $28.5 million of commercial loans that had reached their contractual maturity but were actively in the process of being refinanced with the Company. Due to the status of the refinancing, these commercial loans have been reported as current in the table above. In January 2023, $26.8 million were approved and refinanced.
| | | | | | | | | | | | | | | | | | | | | | | |
| 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 December 31, |
| 2022 | | 2021 |
(In thousands) | Non-accrual | Non-accrual With No Allowance | | Non-accrual | Non-accrual With No Allowance |
Commercial non-mortgage | $ | 71,884 | | $ | 12,598 | | | $ | 59,607 | | $ | 4,802 | |
Asset-based | 20,024 | | 1,491 | | | 2,086 | | 2,086 | |
Commercial real estate | 39,057 | | 90 | | | 5,046 | | 4,310 | |
Multi-family | 636 | | — | | | — | | — | |
Equipment financing | 12,344 | | 2,240 | | | 3,728 | | — | |
| | | | | |
Commercial portfolio | 143,945 | | 16,419 | | | 70,467 | | 11,198 | |
Residential | 25,424 | | 10,442 | | | 15,747 | | 10,584 | |
Home equity | 27,924 | | 15,193 | | | 23,489 | | 18,920 | |
Other consumer | 148 | | 5 | | | 224 | | 2 | |
Consumer portfolio | 53,496 | | 25,640 | | | 39,460 | | 29,506 | |
Total | $ | 197,441 | | $ | 42,059 | | | $ | 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 $16.9 million, $11.0 million, and $9.7 million for the years ended December 31, 2022, 2021, and 2020, respectively.
Allowance for Credit Losses on Loans and Leases
The following tables summarize the change in the ACL on loans and leases by portfolio segment:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| At or for the Years ended December 31, |
| 2022 | | 2021 | | 2020 |
(In thousands) | Commercial Portfolio | Consumer Portfolio | Total | | 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 | | | $ | 161,669 | | $ | 47,427 | | $ | 209,096 | |
Initial allowance for PCD loans and leases (1) | 78,376 | | 9,669 | | 88,045 | | | — | | — | | — | | | — | | — | | — | |
Adoption of CECL | — | | — | | — | | | — | | — | | — | | | 34,024 | | 23,544 | | 57,568 | |
Provision (benefit) | 268,295 | | 4,502 | | 272,797 | | | (48,651) | | (5,764) | | (54,415) | | | 156,336 | | (18,488) | | 137,848 | |
Charge-offs | (82,860) | | (4,662) | | (87,522) | | | (9,437) | | (9,217) | | (18,654) | | | (42,925) | | (12,408) | | (55,333) | |
Recoveries | 11,437 | | 8,797 | | 20,234 | | | 3,721 | | 11,104 | | 14,825 | | | 3,140 | | 7,112 | | 10,252 | |
Balance, end of period | $ | 533,125 | | $ | 61,616 | | $ | 594,741 | | | $ | 257,877 | | $ | 43,310 | | $ | 301,187 | | | $ | 312,244 | | $ | 47,187 | | $ | 359,431 | |
Individually assessed for credit losses | 34,793 | | 12,441 | | 47,234 | | | 16,965 | | 4,108 | | 21,073 | | | 11,687 | | 4,450 | | 16,137 | |
Collectively assessed for credit losses | $ | 498,332 | | $ | 49,175 | | $ | 547,507 | | | $ | 240,912 | | $ | 39,202 | | $ | 280,114 | | | $ | 300,557 | | $ | 42,737 | | $ | 343,294 | |
(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 December 31, 2022 |
(In thousands) | 2022 | 2021 | 2020 | 2019 | 2018 | Prior | Revolving Loans Amortized Cost Basis | Total |
Commercial non-mortgage: | | | | | | | | |
Pass | $ | 5,154,781 | | $ | 1,952,158 | | $ | 965,975 | | $ | 792,977 | | $ | 593,460 | | $ | 780,200 | | $ | 5,670,532 | | $ | 15,910,083 | |
Special mention | 104,277 | | 15,598 | | 21,168 | | 263 | | 14,370 | | 7,770 | | 40,142 | | 203,588 | |
Substandard | 28,203 | | 11,704 | | 69,954 | | 36,604 | | 70,634 | | 16,852 | | 41,917 | | 275,868 | |
Doubtful | — | | — | | — | | 1 | | — | | — | | 3,255 | | 3,256 | |
Commercial non-mortgage | 5,287,261 | | 1,979,460 | | 1,057,097 | | 829,845 | | 678,464 | | 804,822 | | 5,755,846 | | 16,392,795 | |
Asset-based: | | | | | | | | |
Pass | 19,659 | | 3,901 | | 9,424 | | 14,413 | | 5,163 | | 55,553 | | 1,551,250 | | 1,659,363 | |
Special mention | — | | — | | — | | — | | — | | — | | 80,476 | | 80,476 | |
Substandard | — | | — | | — | | 1,491 | | — | | — | | 80,312 | | 81,803 | |
Asset-based | 19,659 | | 3,901 | | 9,424 | | 15,904 | | 5,163 | | 55,553 | | 1,712,038 | | 1,821,642 | |
Commercial real estate: | | | | | | | | |
Pass | 3,420,635 | | 2,246,672 | | 1,556,185 | | 1,605,869 | | 1,058,730 | | 2,681,052 | | 97,832 | | 12,666,975 | |
Special mention | 21,878 | | 8,995 | | 7,264 | | 37,570 | | 47,419 | | 66,652 | | 1,000 | | 190,778 | |
Substandard | 519 | | 2,459 | | 216 | | 31,163 | | 47,021 | | 57,997 | | — | | 139,375 | |
Doubtful | — | | — | | — | | 1 | | — | | 34 | | — | | 35 | |
Commercial real estate | 3,443,032 | | 2,258,126 | | 1,563,665 | | 1,674,603 | | 1,153,170 | | 2,805,735 | | 98,832 | | 12,997,163 | |
Multi-family: | | | | | | | | |
Pass | 1,992,980 | | 1,057,705 | | 507,065 | | 694,066 | | 444,564 | | 1,748,337 | | 51,655 | | 6,496,372 | |
Special mention | 37,677 | | — | | — | | 95 | | 40,307 | | 726 | | 8,838 | | 87,643 | |
Substandard | — | | — | | 382 | | — | | 12,681 | | 24,904 | | — | | 37,967 | |
| | | | | | | | |
| | | | | | | | |
Multi-family | 2,030,657 | | 1,057,705 | | 507,447 | | 694,161 | | 497,552 | | 1,773,967 | | 60,493 | | 6,621,982 | |
Equipment financing: | | | | | | | | |
Pass | 388,641 | | 345,792 | | 331,419 | | 308,441 | | 98,874 | | 83,264 | | — | | 1,556,431 | |
Special mention | — | | 185 | | — | | 11,965 | | 6,775 | | 25 | | — | | 18,950 | |
Substandard | 314 | | 16,711 | | 18,436 | | 5,016 | | 5,307 | | 7,228 | | — | | 53,012 | |
Equipment financing | 388,955 | | 362,688 | | 349,855 | | 325,422 | | 110,956 | | 90,517 | | — | | 1,628,393 | |
Warehouse lending: | | | | | | | | |
Pass | — | | — | | — | | — | | — | | — | | 641,976 | | 641,976 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Warehouse lending | — | | — | | — | | — | | — | | — | | 641,976 | | 641,976 | |
Commercial portfolio | $ | 11,169,564 | | $ | 5,661,880 | | $ | 3,487,488 | | $ | 3,539,935 | | $ | 2,445,305 | | $ | 5,530,594 | | $ | 8,269,185 | | $ | 40,103,951 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 December 31, 2022 |
(In thousands) | 2022 | 2021 | 2020 | 2019 | 2018 | Prior | Revolving Loans Amortized Cost Basis | Total |
Residential: | | | | | | | | |
800+ | $ | 527,408 | | $ | 954,568 | | $ | 469,518 | | $ | 160,596 | | $ | 28,361 | | $ | 997,409 | | $ | — | | $ | 3,137,860 | |
740-799 | 963,026 | | 946,339 | | 311,295 | | 111,913 | | 43,684 | | 689,771 | | — | | 3,066,028 | |
670-739 | 381,515 | | 350,671 | | 103,999 | | 62,365 | | 18,451 | | 384,687 | | — | | 1,301,688 | |
580-669 | 40,959 | | 49,648 | | 14,484 | | 5,836 | | 2,357 | | 138,107 | | — | | 251,391 | |
579 and below | 52,464 | | 3,693 | | 2,057 | | 84,032 | | 1,299 | | 62,908 | | — | | 206,453 | |
Residential | 1,965,372 | | 2,304,919 | | 901,353 | | 424,742 | | 94,152 | | 2,272,882 | | — | | 7,963,420 | |
Home equity: | | | | | | | | |
800+ | 25,475 | | 35,129 | | 25,612 | | 7,578 | | 12,545 | | 55,352 | | 465,318 | | 627,009 | |
740-799 | 26,743 | | 35,178 | | 17,621 | | 8,111 | | 7,765 | | 32,270 | | 398,692 | | 526,380 | |
670-739 | 18,396 | | 16,679 | | 8,175 | | 3,635 | | 7,614 | | 30,060 | | 259,646 | | 344,205 | |
580-669 | 2,848 | | 3,068 | | 1,520 | | 1,456 | | 1,163 | | 13,607 | | 76,614 | | 100,276 | |
579 and below | 426 | | 386 | | 651 | | 661 | | 563 | | 4,736 | | 27,814 | | 35,237 | |
Home equity | 73,888 | | 90,440 | | 53,579 | | 21,441 | | 29,650 | | 136,025 | | 1,228,084 | | 1,633,107 | |
Other consumer: | | | | | | | | |
800+ | 495 | | 218 | | 544 | | 1,045 | | 247 | | 56 | | 19,196 | | 21,801 | |
740-799 | 888 | | 2,624 | | 1,959 | | 2,494 | | 941 | | 364 | | 12,218 | | 21,488 | |
670-739 | 977 | | 603 | | 2,480 | | 4,238 | | 1,041 | | 118 | | 6,107 | | 15,564 | |
580-669 | 211 | | 117 | | 337 | | 801 | | 173 | | 54 | | 2,223 | | 3,916 | |
579 and below | 169 | | 101 | | 29 | | 116 | | 36 | | 21 | | 707 | | 1,179 | |
Other consumer | 2,740 | | 3,663 | | 5,349 | | 8,694 | | 2,438 | | 613 | | 40,451 | | 63,948 | |
Consumer portfolio | 2,042,000 | | 2,399,022 | | 960,281 | | 454,877 | | 126,240 | | 2,409,520 | | 1,268,535 | | 9,660,475 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 December 31, 2022, and 2021, the carrying amount of collateral dependent commercial loans and leases totaled $43.8 million and $16.6 million, respectively, and the carrying amount of collateral dependent consumer loans totaled $45.2 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, residential, home equity, and other consumer loans are secured by real estate. The ACL for collateral dependent loans and leases is individually assessed based on the fair value of the collateral less costs to sell at the reporting date. At December 31, 2022, and 2021, the collateral value associated with collateral dependent loans and leases totaled $108.0 million and $86.0 million, respectively.
Troubled Debt Restructurings
The following table summarizes information related to TDRs: | | | | | | | | | | | |
| At December 31, |
(In thousands) | 2022 | | 2021 |
Accrual status | $ | 110,868 | | | $ | 110,625 | |
Non-accrual status | 83,954 | | | 52,719 | |
Total TDRs | $ | 194,822 | | | $ | 163,344 | |
| | | |
Additional funds committed to borrowers in TDR status | $ | 1,724 | | | $ | 5,975 | |
Specific reserves for TDRs included in the ACL on loans and leases: | | | |
Commercial portfolio | $ | 14,578 | | | $ | 9,017 | |
Consumer portfolio | 3,559 | | | 3,745 | |
| | | |
During the years ended December 31, 2022, 2021, and 2020, the portion of TDRs deemed to be uncollectible and charged-off totaled $14.7 million, $3.0 million, $17.6 million for the commercial portfolio, respectively, and $0.3 million, $0.4 million, and $0.8 million for the consumer portfolio, respectively.
The following table summarizes loans and leases modified as TDRs by class and modification type: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years ended December 31, |
| 2022 | | 2021 | | 2020 |
| Number of Contracts | Recorded Investment (1) | | Number of Contracts | Recorded Investment (1) | | Number of Contracts | Recorded Investment (1) |
(Dollars in thousands) |
Commercial non-mortgage: | | | | | | | | |
Extended maturity | 5 | | $ | 291 | | | 8 | | $ | 605 | | | 11 | | $ | 1,070 | |
Adjusted interest rate | — | | — | | | — | | — | | | 1 | | 96 | |
Maturity / rate combined | 8 | | 765 | | | 9 | | 352 | | | 7 | | 607 | |
Other (2) | 19 | | 52,070 | | | 12 | | 14,160 | | | 24 | | 40,128 | |
Asset-based: | | | | | | | | |
Other (2) | 1 | | 23,298 | | | — | | — | | | — | | — | |
Commercial real estate: | | | | | | | | |
Extended maturity | — | | — | | | 1 | | 183 | | | 1 | | 72 | |
Maturity / rate combined | — | | — | | | — | | — | | | 2 | | 377 | |
Other (2) | — | | — | | | 1 | | 1,582 | | | 3 | | 306 | |
Equipment financing: | | | | | | | | |
Other (2) | 3 | | 1,692 | | | — | | — | | | — | | — | |
Residential: | | | | | | | | |
Extended maturity | 2 | | 1,185 | | | 1 | | 99 | | | 3 | | 485 | |
Maturity / rate combined | 2 | | 133 | | | 2 | | 401 | | | 10 | | 1,133 | |
Other (2) | 8 | | 3,158 | | | 3 | | 280 | | | 26 | | 4,215 | |
Home equity: | | | | | | | | |
Extended maturity | — | | — | | | 85 | | 1,809 | | | 3 | | 188 | |
Adjusted interest rate | 1 | | 74 | | | — | | — | | | — | | — | |
Maturity / rate combined | 21 | | 2,623 | | | 6 | | 1,025 | | | 5 | | 334 | |
Other (2) | 37 | | 2,134 | | | 22 | | 1,481 | | | 96 | | 6,680 | |
Total TDRs | 107 | | $ | 87,423 | | | 150 | | $ | 21,977 | | | 192 | | $ | 55,691 | |
(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 year ended December 31, 2022, there were three commercial non-mortgage, two residential, and two other consumer loans with aggregated amortized costs totaling $3.6 million, $0.6 million, and $0.3 million, respectively, that were modified as TDRs within the previous twelve months and for which there was a payment default. There were no significant loans and leases modified as TDRs within the previous twelve months and for which there was a payment default during the year ended December 31, 2021. For the year ended December 31, 2020, there were four commercial non-mortgage loans with an aggregated amortized cost totaling $12.4 million that were modified as TDRs within the previous twelve months and for which there was a payment default.
Note 5: Transfers and Servicing of Financial Assets
The Company 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 Consolidated Statements of Income.
The following table summarizes information related to mortgage banking activities: | | | | | | | | | | | | | | | | | |
| Years ended December 31, |
(In thousands) | 2022 | | 2021 | | 2020 |
Net gain on sale | $ | 580 | | | $ | 5,192 | | | $ | 15,305 | |
Origination fees | 219 | | | 1,440 | | | 3,230 | |
Fair value adjustments | (94) | | | (413) | | | (240) | |
Mortgage banking activities | $ | 705 | | | $ | 6,219 | | | $ | 18,295 | |
| | | | | |
Proceeds from sale | $ | 36,335 | | | $ | 247,634 | | | $ | 486,341 | |
Loans sold with servicing rights retained | 32,056 | | | 237,834 | | | 464,736 | |
Under certain circumstances, the Company may decide to sell loans that were not originated or otherwise acquired with the intent to sell. During the years ended December 31, 2022, 2021, and 2020, the Company sold loans not originated for sale for proceeds of $679.7 million, $82.2 million, and $9.2 million, respectively, which resulted in net gains on sale of $3.3 million, $3.9 million, and $0.3 million, respectively.
In addition, the Company may retain servicing rights on its residential mortgage loans sold in the normal course of business. At both December 31, 2022, and 2021, the aggregate principal balance of residential mortgage loans serviced for others totaled $2.0 billion. Mortgage servicing rights are held at the lower of cost, net of accumulated amortization, or fair market value, and are included in Accrued interest receivable and other assets on the accompanying Consolidated Balance Sheets. The Company assesses mortgage servicing rights 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 rights: | | | | | | | | | | | | | | | | | |
| Years ended December 31, |
(In thousands) | 2022 | | 2021 | | 2020 |
Balance, beginning of period | $ | 9,237 | | | $ | 13,422 | | | $ | 17,484 | |
Acquired from Sterling | 859 | | | — | | | — | |
Additions | 289 | | | 2,053 | | | 4,373 | |
Amortization (1) | (870) | | | (5,593) | | | (6,562) | |
Adjustment to valuation allowance | — | | | (645) | | | (1,873) | |
Balance, end of period | $ | 9,515 | | | $ | 9,237 | | | $ | 13,422 | |
(1)During the year ended December 31, 2022, the Company implemented a change in the method of amortization applied to its mortgage servicing rights to better reflect the pattern of consumption, where estimated future cash flows are now assessed at the individual loan level as opposed to on a pooled basis.
Loan servicing fees, net of mortgage servicing rights amortization, were $5.9 million, $1.7 million, and $1.5 million for the years ended December 31, 2022, 2021, and 2020, respectively, and are included in Loan and lease related fees on the accompanying Consolidated Statements of Income. Information regarding loans held for sale and mortgage servicing rights can be found within Note 18: Fair Value Measurements.
Note 6: Premises and Equipment
The following table summarizes the components of premises and equipment: | | | | | | | | | | | |
| At December 31, |
(In thousands) | 2022 | | 2021 |
Land | $ | 73,916 | | | $ | 9,436 | |
Buildings and improvements | 106,180 | | | 67,501 | |
Leasehold improvements | 84,477 | | | 65,606 | |
Furniture, fixtures, and equipment | 71,542 | | | 64,890 | |
Data processing equipment and software | 128,153 | | | 105,516 | |
Property and equipment | 464,268 | | | 312,949 | |
Less: Accumulated depreciation and amortization | (225,152) | | | (228,318) | |
Property and equipment, net | 239,116 | | | 84,631 | |
ROU lease assets, net | 191,068 | | | 119,926 | |
Premises and equipment, net | $ | 430,184 | | | $ | 204,557 | |
Depreciation and amortization of property and equipment was $41.7 million, $31.4 million, and $32.5 million for the
years ended December 31, 2022, 2021, and 2020, respectively, and is included in both Occupancy and Technology and equipment expense on the accompanying Consolidated Statements of Income. Additional information regarding ROU lease assets can be found within Note 7: Leasing.
During the year ended December 31, 2022, the Company launched and completed a corporate real estate consolidation strategy in which the Company closed 14 locations in order to reduce its corporate real estate facility square footage by approximately 45%. In connection with this corporate real estate consolidation plan, the Company had arranged to sell its New Britain, Connecticut facility, which is comprised of land, buildings, and improvements, within the next twelve months. This resulted in a $1.8 million write-down to the fair market value of the property and the subsequent transfer of the property to assets held for disposition. The sale of the New Britain property is expected to close during the second quarter of 2023.
The Company also recorded a $6.3 million loss on disposals of property and equipment during the year ended
December 31, 2022, which primarily comprised internal use software and construction in progress that were acquired from Sterling in the merger, due to the Company's decision to stop further project development later in 2022.
The following table summarizes the activity in assets held for disposition: | | | | | | | | | | | | | | | | | |
| Years ended December 31, |
(In thousands) | 2022 | | 2021 | | 2020 |
Balance, beginning of period | $ | 490 | | | $ | 2,654 | | | $ | — | |
| | | | | |
Transfers from (to) property and equipment | 4,800 | | | (38) | | | 2,654 | |
Write-downs | (190) | | | — | | | — | |
Sales | (300) | | | (2,126) | | | — | |
Balance, end of period | $ | 4,800 | | | $ | 490 | | | $ | 2,654 | |
| | | | | |
Assets held for disposition are included in Accrued interest receivable and other assets on the accompanying Consolidated Balance Sheets.
Note 7: Leasing
Lessor Arrangements
The Company leases certain types of machinery and equipment to its customers through sales-type and direct financing leases as part of its equipment financing portfolio. These leases generally have remaining lease terms of six months to ten years, some of which include renewal options and/or options for the lessee to purchase the lease near or at the end of the least term. The Company recognized interest income from its sales-type and direct financing lessor activities of $15.4 million, $7.5 million, and $7.1 million for the years ended December 31, 2022, 2021, and 2020, respectively. The Company does not have any significant operating leases in which it is the lessor. Additional information regarding the Company's equipment financing portfolio can be found within Note 4: Loans and Leases.
The following table summarizes the components of the Company's net investment in its sales-type and direct financing leases: | | | | | | | | |
| At December 31, |
(In thousands) | 2022 | 2021 |
Lease receivables | $ | 330,690 | $ | 196,632 |
Unguaranteed residual values | 100,368 | 19,748 |
Total net investment | $ | 431,058 | $ | 216,380 |
The following table reconciles undiscounted future lease payments to the total sales-type and direct financing leases' net investment: | | | | | |
(In thousands) | At December 31, 2022 |
2023 | $ | 146,858 |
2024 | 91,592 |
2025 | 74,522 |
2026 | 71,950 |
2027 | 27,029 |
Thereafter | 56,598 |
Total lease payments receivable | 468,549 |
Present value adjustment | (37,491) |
Total net investment | $ | 431,058 |
Lessee Arrangements
The Company enters into operating leases in the normal course of business, primarily for office space, banking centers, and other operational activities. These leases generally have remaining lease terms of one to fifteen years. The Company does not have any significant sub-leases nor finance leases in which it is the lessee.
The following table summarizes the Company's ROU lease assets and operating lease liabilities: | | | | | | | | | | | | | | |
| | | At December 31, |
(In thousands) | Consolidated Balance Sheet Line Item | | 2022 | 2021 |
ROU lease assets | Premises and equipment, net | | $ | 191,068 | $ | 119,926 |
Operating lease liabilities | Accrued expenses and other liabilities | | 239,281 | 144,804 |
ROU lease asset impairment charges totaled $23.1 million, $1.2 million, and $12.0 million for the years ended
December 31, 2022, 2021 and 2020, respectively, and are included in Occupancy on the accompanying Consolidated Statements of Income. The impairment charge recognized during the year ended December 31, 2022, pertained to the Company's corporate real estate consolidation plan, discussed previously in Note 6: Premises and Equipment. The amount of such impairment was calculated as the difference between the estimated fair value of the assets determined using a discounted cash flow technique, relative to their book value.
The following table summarizes the components of operating lease expense and other relevant information: | | | | | | | | | | | |
| At or for the Years ended December 31, |
(In thousands) | 2022 | 2021 | 2020 |
Lease Cost: | | | |
Operating and variable lease costs | $ | 44,654 | $ | 30,936 | $ | 35,916 |
Sublease income | (1,383) | (554) | (557) |
Total operating lease expense | $ | 43,271 | $ | 30,382 | $ | 35,359 |
| | | |
Other Information: | | | |
Cash paid for amounts included in the measurement of operating lease liabilities | $ | 44,767 | $ | 30,487 | $ | 31,212 |
ROU lease assets obtained in exchange for operating lease liabilities (1) | 27,897 | 15,226 | 9,211 |
Weighted-average remaining lease term (in years) | 7.72 | 7.50 | 8.04 |
Weighted-average discount rate | 2.65 | % | 3.04 | % | 3.19 | % |
(1)Excludes ROU lease assets acquired from Sterling in the merger.
The following table reconciles undiscounted future lease payments to total operating lease liabilities: | | | | | | |
(In thousands) | At December 31, 2022 | |
2023 | $ | 40,614 | |
2024 | 40,808 | |
2025 | 36,274 | |
2026 | 32,696 | |
2027 | 27,201 | |
Thereafter | 91,369 | |
Total operating lease payments | 268,962 | |
Present value adjustment | (29,681) | |
Total operating lease liabilities | $ | 239,281 | |
Note 8: Goodwill and Other Intangible Assets
Goodwill
The following table summarizes changes in the carrying amount of goodwill:
| | | | | | | | | | | | | | | |
| | | | | At December 31, |
(In thousands) | | | 2022 | | 2021 |
Balance, beginning of period | | | | | $ | 538,373 | | | $ | 538,373 | |
Sterling merger | | | | | 1,939,765 | | | — | |
Bend acquisition | | | | | 35,966 | | | — | |
Balance, end of period | | | | | $ | 2,514,104 | | | $ | 538,373 | |
Information regarding goodwill by reportable segment can be found within Note 21: Segment Reporting.
Other Intangible Assets
The following table summarizes other intangible assets: | | | | | | | | | | | | | | | | | | | | | | | |
| At December 31, |
| 2022 | | 2021 |
(In thousands) | Gross Carrying Amount (1) | Accumulated Amortization | Net Carrying Amount | | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount |
Core deposits | $ | 146,037 | | $ | 36,710 | | $ | 109,327 | | | $ | 26,625 | | $ | 18,516 | | $ | 8,109 | |
Customer relationships | 115,000 | | 24,985 | | 90,015 | | | 21,000 | | 11,240 | | 9,760 | |
Other intangible assets | $ | 261,037 | | $ | 61,695 | | $ | 199,342 | | | $ | 47,625 | | $ | 29,756 | | $ | 17,869 | |
(1)The increase in the gross carrying amount of other intangible assets is primarily attributed to the merger with Sterling and acquisition of Bend, in which the Company recorded a combined $119.1 million in core deposits and $94.0 million of customer relationships. These other intangible assets are being amortized on an accelerated basis over a period of 10 years.
The remaining estimated aggregate future amortization expense for other intangible assets is as follows: | | | | | |
(In thousands) | At December 31, 2022 |
2023 | $ | 30,362 | |
2024 | 24,481 | |
2025 | 21,487 | |
2026 | 21,487 | |
2027 | 21,487 | |
Thereafter | 80,038 | |
Note 9: Income Taxes
Income tax expense reflects the following expense (benefit) components: | | | | | | | | | | | | | | | | | |
| Years ended December 31, |
(In thousands) | 2022 | | 2021 | | 2020 |
Current: | | | | | |
Federal | $ | 170,779 | | | $ | 109,621 | | | $ | 73,172 | |
State and local | 52,579 | | | 20,374 | | | 17,417 | |
Total current | 223,358 | | | 129,995 | | | 90,589 | |
Deferred: | | | | | |
Federal | (45,421) | | | (9,844) | | | (23,799) | |
State and local | (24,243) | | | 4,846 | | | (7,437) | |
Total deferred | (69,664) | | | (4,998) | | | (31,236) | |
| | | | | |
Total federal | 125,358 | | | 99,777 | | | 49,373 | |
Total state and local | 28,336 | | | 25,220 | | | 9,980 | |
Income tax expense | $ | 153,694 | | | $ | 124,997 | | | $ | 59,353 | |
Included in the Company's income tax expense for the years ended December 31, 2022, 2021, and 2020, are net tax credits of approximately $14.0 million, $2.6 million, and $1.1 million, respectively. These amounts relate primarily to LIHTC investments and include associated SALT credits and benefits, with the increase in 2022 primarily attributable to Webster's merger with Sterling.
Also included in the Company's income tax expense for the years ended December 31, 2022, and 2021, are benefits from operating loss carryforward of $10.3 million and $0.4 million, respectively. The 2022 amount includes a $9.9 million benefit related to a reduction in the Company's beginning-of-year valuation allowance for its SALT DTAs. The deferred federal benefit in 2021 reflects the effects of elections the Company made on its 2020 federal tax return to defer cost recovery deductions, which did not impact deferred state and local expense to any significant degree.
The following table reflects a reconciliation of reported income tax expense to the amount that would result from applying the federal statutory rate of 21.0%:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years ended December 31, |
| 2022 | | 2021 | | 2020 |
(In thousands) | Amount | Percent | | Amount | Percent | | Amount | Percent |
Income tax expense at federal statutory rate | $ | 167,575 | | 21.0 | % | | $ | 112,111 | | 21.0 | % | | $ | 58,795 | | 21.0 | % |
Reconciliation to reported income tax expense: | | | | | | | | |
SALT expense, net of federal | 32,259 | | 4.1 | | | 19,924 | | 3.7 | | | 7,884 | | 2.8 | |
Tax-exempt interest income, net | (35,371) | | (4.4) | | | (6,814) | | (1.3) | | | (7,181) | | (2.6) | |
Increase in cash surrender value of life insurance | (6,122) | | (0.8) | | | (3,030) | | (0.6) | | | (3,058) | | (1.1) | |
| | | | | | | | |
Non-deductible FDIC Deposit insurance premiums | 5,581 | | 0.7 | | | 2,064 | | 0.4 | | | 2,172 | | 0.8 | |
Low income housing tax credits and other benefits, net | (7,627) | | (1.0) | | | (615) | | (0.1) | | | (289) | | (0.1) | |
Non-deductible compensation expense | 7,948 | | 1.0 | | | 786 | | 0.1 | | | 454 | | 0.2 | |
Non-deductible merger-related expenses, excluding compensation | 2,717 | | 0.3 | | | 3,451 | | 0.7 | | | — | | — | |
SALT DTA valuation allowance adjustment, net | (9,874) | | (1.2) | | | — | | — | | | — | | — | |
Other, net | (3,392) | | (0.4) | | | (2,880) | | (0.5) | | | 576 | | 0.2 | |
Income tax expense and effective tax rate | $ | 153,694 | | 19.3 | % | | $ | 124,997 | | 23.4 | % | | $ | 59,353 | | 21.2 | % |
The following table reflects the significant components of the DTAs, net: | | | | | | | | | | | |
| At December 31, |
(In thousands) | 2022 | | 2021 |
Deferred tax assets: | | | |
ACL on loans and leases | $ | 161,932 | | | $ | 78,905 | |
Net operating loss and credit carry forwards | 72,035 | | | 64,366 | |
Compensation and employee benefit plans | 55,093 | | | 22,840 | |
Lease liabilities under operating leases | 64,899 | | | 38,130 | |
Net unrealized loss on AFS securities | 233,978 | | | — | |
Other | 38,314 | | | 12,790 | |
Gross deferred tax assets | 626,251 | | | 217,031 | |
Valuation allowance | (29,176) | | | (37,374) | |
Total deferred tax assets, net of valuation allowance | $ | 597,075 | | | $ | 179,657 | |
Deferred tax liabilities: | | | |
Net unrealized gain on AFS securities | $ | — | | | $ | 1,885 | |
| | | |
ROU assets under operating leases | 51,822 | | | 31,580 | |
Equipment financing leases | 74,295 | | | 21,193 | |
| | | |
Goodwill and other intangible assets | 56,223 | | | 5,690 | |
Purchase accounting and fair value adjustments | 11,529 | | | — | |
Other | 31,572 | | | 9,904 | |
Gross deferred tax liabilities | 225,441 | | | 70,252 | |
Deferred tax assets, net | $ | 371,634 | | | $ | 109,405 | |
The Company's DTAs, net increased by $262.2 million during 2022, primarily reflecting the $69.7 million deferred tax benefit and a $245.9 million benefit allocated directly to AOCI, partially offset by a $51.9 million deferred tax liability, net, established in purchase accounting related to the merger with Sterling and acquisition of Bend.
The valuation allowance of $29.2 million at December 31, 2022, consists of approximately $28.6 million attributable to SALT net operating loss carryforwards and $0.6 million of federal credit carryforwards, as compared to $37.4 million at
December 31, 2021, attributable to SALT net operating loss carryforwards. The $8.2 million net decrease in the valuation allowance during 2022 reflects the $9.9 million reduction in the beginning-of-year valuation allowance related to a change in management's estimate about the realizability of the Company's SALT DTAs due to an estimated increase in future taxable income associated with the Sterling merger, partially offset by a $1.7 million valuation allowance established in purchase accounting related to the Bend acquisition.
SALT net operating loss carryforwards approximated $1.0 billion at December 31, 2022, including those related to the Sterling merger and Bend acquisition, and are scheduled to expire in varying amounts during tax years 2024 through 2032. Federal net operating loss carryforwards of approximately $21.9 million and credit carryforwards of $0.6 million at December 31, 2022, related to the Bend acquisition are subject to annual limitations on utilization, with the net operating losses able to be carried forward indefinitely and the credits scheduled to expire in varying amounts between 2038 and 2041. The valuation allowance has been established for approximately $484.4 million of those SALT net operating loss carryforwards and the $0.6 million of federal credit carryforwards that are estimated to expire unused.
Management believes it is more likely than not that the results of future operations will generate sufficient taxable income to realize its total DTAs, net of the valuation allowance. Although taxable income in prior years is no longer able to be included as a source of taxable income, due to the general repeal of the carryback of net operating losses under the Tax Cuts and Jobs Act of 2017, significant positive evidence remains in support of management's conclusion regarding the realizability of the Company's DTAs, including projected future reversals of existing taxable temporary differences and book-taxable income levels in recent and projected in future years. There can, however, be no assurance that any specific level of future income will be generated or that the Company’s DTAs will ultimately be realized.
DTLs of $63.2 million and $15.3 million at December 31, 2022, and 2021, respectively, have not been recognized for certain thrift bad-debt reserves, established before 1988, that would become taxable upon the occurrence of certain events: distributions by the Bank in excess of certain earnings and profits; the redemption of the Bank’s stock; or liquidation. The Company does not expect any of those events to occur. At December 31, 2022, and 2021, the cumulative taxable temporary differences applicable to those reserves approximated $233.1 million and $58.0 million, respectively, with the increase in 2022 attributable to the merger with Sterling.
The following table reflects a reconciliation of the beginning and ending balances of UTBs: | | | | | | | | | | | | | | | | | |
| Years ended December 31, |
(In thousands) | 2022 | | 2021 | | 2020 |
Beginning balance | $ | 4,249 | | | $ | 4,252 | | | $ | 4,813 | |
Additions as a result of tax positions taken during the current year | 223 | | | 294 | | | 87 | |
Additions as a result of tax positions taken during prior years | 8,807 | | | 434 | | | 572 | |
Reductions as a result of tax positions taken during prior years | (503) | | | (186) | | | (694) | |
Reductions relating to settlements with taxing authorities | (2,110) | | | (267) | | | (130) | |
Reductions as a result of lapse of statute of limitation periods | (791) | | | (278) | | | (396) | |
Ending balance | $ | 9,875 | | | $ | 4,249 | | | $ | 4,252 | |
The increase in additions as a result of tax positions taken during prior years reflects the merger with Sterling. At
December 31, 2022, 2021, and 2020, there were $9.1 million, $3.5 million, and $3.5 million, respectively, of UTBs that if recognized would affect the effective tax rate.
The Company recognizes interest and penalties related to UTBs, where applicable, in income tax expense. The Company recognized an expense of $0.1 million and $0.3 million during the years ended December 31, 2022, and 2021, respectively, and a benefit of $0.1 million for the year ended December 31, 2020. At December 31, 2022 and 2021, the Company had accrued interest and penalties related to UTBs of $2.0 million and $1.9 million respectively.
The Company has determined it is reasonably possible that its total UTBs could decrease by between $0.7 million and $6.8 million by the end of 2023 as a result of potential lapses in statute-of-limitation periods and/or potential settlements with taxing authorities, primarily concerning various depreciation and state and local apportionment and tax-base determinations.
The Company's federal tax returns for all years subsequent to 2018 remain open to examination, including the carryback of a Sterling 2019 net operating loss under the CARES Act in 2020 to tax years 2014 and 2016, currently under review by the Internal Revenue Service. The Company's tax returns filed in its principal state tax jurisdictions of Connecticut, Massachusetts, New York, and Rhode Island for years subsequent to 2014, or 2018, are either under or remain open to examination.
Note 10: Deposits
The following table summarizes deposits by type: | | | | | | | | | | | |
| At December 31, |
(In thousands) | 2022 | | 2021 |
Non-interest-bearing: | | | |
Demand | $ | 12,974,975 | | | $ | 7,060,488 | |
Interest-bearing: | | | |
Health savings accounts | 7,944,892 | | | 7,397,582 | |
Checking | 9,237,529 | | | 4,182,497 | |
Money market | 11,062,652 | | | 3,718,953 | |
Savings | 8,673,343 | | | 5,689,739 | |
Time deposits | 4,160,949 | | | 1,797,770 | |
Total interest-bearing | 41,079,365 | | | 22,786,541 | |
Total deposits | $ | 54,054,340 | | | $ | 29,847,029 | |
| | | |
Time deposits, money market, and interest-bearing checking obtained through brokers | $ | 1,964,873 | | | $ | 120,392 | |
Aggregate amount of time deposit accounts that exceeded the FDIC limit | 1,894,950 | | | 256,522 | |
Demand deposit overdrafts reclassified as loan balances | 8,721 | | | 1,577 | |
The following table summarizes the scheduled maturities of time deposits: | | | | | |
(In thousands) | At December 31, 2022 |
2023 | $ | 3,754,386 | |
2024 | 181,790 | |
2025 | 129,775 | |
2026 | 55,102 | |
2027 | 39,896 | |
Thereafter | — | |
Total time deposits | $ | 4,160,949 | |
Note 11: Borrowings
The following table summarizes securities sold under agreements to repurchase and other borrowings: | | | | | | | | | | | | | | | | | |
| At December 31, |
| 2022 | | 2021 |
(In thousands) | Total Outstanding | Rate | | Total Outstanding | Rate |
Securities sold under agreements to repurchase (1): | | | | | |
Original maturity of one year or less | $ | 282,005 | | 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) | 282,005 | | 0.11 | | | 674,896 | | 0.47 | |
Federal funds purchased | 869,825 | | 4.44 | | | — | | — | |
Securities sold under agreements to repurchase and other borrowings | $ | 1,151,830 | | 3.38 | % | | $ | 674,896 | | 0.47 | % |
(1)The Company 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 year ended December 31, 2022, the Company 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 the Company, which was recognized as a gain and recorded within Other income on the accompanying Consolidated Statements of Income.
Securities sold under agreements to repurchase are used as a source of borrowed funds and are collateralized by Agency MBS and Corporate debt. The Company's repurchase agreement counterparties are limited to primary dealers in government securities, and commercial and municipal customers through the Corporate Treasury function. The Company 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 December 31, |
| 2022 | | 2021 |
(In thousands) | Total Outstanding | Weighted-Average Contractual Coupon Rate | | Total Outstanding | Weighted-Average Contractual Coupon Rate |
Maturing within 1 year | $ | 5,450,187 | | 4.40 | % | | $ | 90 | | — | % |
After 1 but within 2 years | — | | — | | | 202 | | 2.95 | |
After 2 but within 3 years | — | | — | | | — | | — | |
After 3 but within 4 years | — | | — | | | — | | — | |
After 4 but within 5 years | 252 | | — | | | — | | — | |
After 5 years | 10,113 | | 2.09 | | | 10,705 | | 2.03 | |
FHLB advances | $ | 5,460,552 | | 4.39 | % | | $ | 10,997 | | 2.03 | % |
| | | | | |
Aggregate carrying value of assets pledged as collateral | $ | 13,692,379 | | | | $ | 7,556,034 | | |
Remaining borrowing capacity at FHLB | 4,291,326 | | | | 5,087,294 | | |
The Bank may borrow up to the amount of eligible mortgages and securities that have been pledged as collateral to secure FHLB advances, which includes certain residential and commercial real estate loans, home equity lines of credit, MBS and Agency CLO. The Bank was in compliance with its FHLB collateral requirements at both December 31, 2022, and 2021.
The following table summarizes long-term debt: | | | | | | | | | | | | | | |
| At December 31, |
(In thousands) | 2022 | | 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) | 333,458 | | | 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 | 1,059,778 | | | 566,131 | |
Discount on senior fixed-rate notes | (756) | | | (974) | |
Debt issuance cost on senior fixed-rate notes | (1,824) | | | (2,226) | |
Premium on subordinated fixed-to-floating rate notes | 15,930 | | | — | |
Long-term debt | $ | 1,073,128 | | | $ | 562,931 | |
(1)The Company de-designated its fair value hedging relationship on these senior notes in 2020. A basis adjustment of $33.5 million and $38.8 million at December 31, 2022, and 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 7.69% and 3.17% at December 31, 2022, and 2021, respectively.
The Company 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 the Company 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 and including
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 March 30, June 30, September 30, and December 30 of each year, commencing on March 30, 2025.
The Company also 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 the Company on November 1, 2025, 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 November 1. From and including 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 February 1, May 1, August 1, and November 1 of each year, commencing on February 1, 2026.
The Company recorded the 2029 and 2030 subordinated notes at their estimated fair value of $281.0 million and $235.9 million, respectively, on January 31, 2022. The corresponding purchase premiums are being amortized into interest expense over the remaining lives of the subordinated notes.
Note 12: Stockholders' Equity
The following table summarizes the changes in shares of preferred and common stock issued and common stock held as treasury shares for the year ended December 31, 2022: | | | | | | | | | | | | | | | | | | |
| | Preferred Stock Series F Issued | Preferred Stock Series G Issued | Common Stock Issued (1) | Treasury Stock Held | Common Stock Outstanding |
Balance, beginning of period | | 6,000 | | — | | 93,686,311 | | 3,102,690 | | 90,583,621 | |
Issued in business combination | | — | | 135,000 | | 89,091,734 | | — | | 89,091,734 | |
Contribution to charitable foundation | | — | | — | | — | | (242,270) | | 242,270 | |
Employee stock compensation plan activity | | — | | — | | — | | (458,881) | | 458,881 | |
Stock options exercised | | — | | — | | — | | (30,355) | | 30,355 | |
Common stock repurchase program | | — | | | — | | 6,399,288 | | (6,399,288) | |
Balance, end of period | | 6,000 | | 135,000 | | 182,778,045 | | 8,770,472 | | 174,007,573 | |
(1)In accordance with the merger agreement, 87,965,239 shares were issued as consideration for outstanding Sterling common stock, and 1,126,495 shares were issued to replace Sterling equity awards. Additional information regarding the determination of the purchase price consideration for the Sterling merger can be found within Note 2: Mergers and Acquisitions.
Repurchases of Common Stock
The Company maintains a common stock repurchase program, which was approved by the Board of Directors on
October 24, 2017, that authorizes management to purchase shares of Webster common stock in open market or privately negotiated transactions, through block trades, and pursuant to any adopted predetermined trading plan subject to the availability and trading price of stock, general market conditions, alternative uses for capital, regulatory considerations, and the Company's financial performance. On April 27, 2022, the Board of Directors increased the Company's authority to repurchase shares of Webster common stock under the repurchase program by $600.0 million in shares. During the year ended December 31, 2022, the Company repurchased shares under the program at a weighted-average price of $50.33 per share, totaling $322.1 million.
At December 31, 2022, the Company's remaining purchase authority was $401.3 million.
In addition, the Company will periodically acquire Webster common stock outside of the repurchase program related to employee stock compensation plan activity. During the year ended December 31, 2022, the Company repurchased shares at a weighted-average price of $56.90 per share, totaling $23.6 million for this purpose.
Contribution to Charitable Foundation
On July 8, 2022, the Company made an unrestricted and unconditional contribution of Webster common shares to the Webster Bank Charitable Foundation, a nonprofit charitable organization with a focus on education and community development that serves communities in the Greater New York City, Lower Hudson Valley, Long Island, and New Jersey areas. The fair value of these shares based on their closing price on the contribution date was $10.5 million.
Change in Common Shares Authorized
The number of authorized shares of Webster common stock was increased from 200.0 million shares to 400.0 million shares on January 31, 2022, in connection with the completion of the merger with Sterling and in accordance with the merger agreement.
Series F Preferred Stock
On December 12, 2017, the Company closed on a public offering of 6,000,000 depositary shares, each representing 1/1000th ownership interest in a share of 5.25% Series F Non-Cumulative Preferred Perpetual Stock, par value $0.01 per share, with a liquidation preference equal to $25,000 per share (the Series F Preferred Stock).
Dividends on the Series F Preferred Stock are non-cumulative and are not mandatory. If declared by the Board of Directors, or a duly authorized committee thereof, the Company will pay dividends quarterly in arrears on the fifteenth day of each March, June, September, and December, at a rate equal to 5.25% of the $25,000 per share liquidation amount per annum. If a dividend on the Series F Preferred Stock is not declared in respect of a dividend period, a dividend will not accrue and the Company has no obligation to pay any dividend for that period, regardless as to whether a dividend is declared for a future period on the Series F Preferred Stock or any other series of Webster preferred stock. The terms of the Series F Preferred Stock prohibit the Company from declaring or paying any cash dividends on Webster common stock, and from repurchasing, redeeming, or otherwise acquiring Webster common stock or any other series of Webster preferred stock to which it ranks on parity with, unless dividends have been declared and paid in full on the Series F Preferred Stock for the most recent dividend period.
The Series F Preferred Stock is perpetual and has no maturity date, and is not subject to any mandatory redemption, sinking fund, or other similar provisions. Except with respect to certain non-payment events and certain changes to the terms of the Series F Preferred Stock, holders have no voting rights nor preemptive or conversion rights. The Series F Preferred Stock is not convertible or exchangeable for shares of any other class of Webster stock.
Series G Preferred Stock
On January 31, 2022, in connection with the Sterling merger, the Company 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 (the Series G Preferred Stock). The Series G Preferred Stock ranks on parity with the Series F Preferred Stock and senior to Webster common stock, with respect to the payment of dividends and distributions upon the liquidation, dissolution, or winding-up of the Company.
Dividends on the Series G Preferred Stock are non-cumulative and are not mandatory. If declared by the Board of Directors, or a duly authorized committee thereof, the Company will pay dividends quarterly in arrears on the fifteenth day of each
January, April, July, and October, at a rate equal to 6.50% of the $1,000 per share liquidation amount per annum. If a dividend on the Series F Preferred Stock is not declared in respect of a dividend period, a dividend will not accrue and the Company has no obligation to pay any dividend for that period, regardless as to whether a dividend is declared for a future period on the Series G Preferred Stock or any other series of Webster preferred stock. The terms of the Series G Preferred Stock prohibit the Company from declaring or paying any cash dividends on Webster common stock, and from repurchasing, redeeming or otherwise acquiring Webster common stock or any other series of Webster preferred stock to which it ranks on parity with, unless dividends have been declared and paid in full on the Series G Preferred Stock for the most recent dividend period.
The Series G Preferred Stock is perpetual and has no maturity date, and is not subject to any mandatory redemption, sinking fund, or other similar provisions. Except with respect to certain non-payment events and certain changes to the terms of the Series G Preferred Stock, holders have no voting rights, nor preemptive or conversion rights. The Series G Preferred Stock is not convertible or exchangeable for shares of any other class of Webster stock.
Preferred Stock Redemptions
The Company may redeem either the Series F Preferred Stock or 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. The Company has no plans to redeem either its Series F Preferred Stock or its Series G Preferred stock, in whole or in part, as of the date of this Annual Report on Form 10-K.
Note 13: Accumulated Other Comprehensive (Loss) Income, Net of Tax
The following table summarizes the changes in each component of accumulated other comprehensive (loss) income, net of tax: | | | | | | | | | | | | | | |
(In thousands) | Investment Securities Available- For-Sale | Derivative Instruments | Defined Benefit Pension and Other Postretirement Benefit Plans | Total |
Balance at December 31, 2019 | $ | 17,251 | | $ | (9,184) | | $ | (44,139) | | $ | (36,072) | |
Other comprehensive income (loss) before reclassifications | 50,179 | | 20,667 | | (3,887) | | 66,959 | |
Amounts reclassified from accumulated other comprehensive income (loss) | (6) | | 8,435 | | 2,940 | | 11,369 | |
Other comprehensive income (loss), net of tax | 50,173 | | 29,102 | | (947) | | 78,328 | |
Balance at December 31, 2020 | 67,424 | | 19,918 | | (45,086) | | 42,256 | |
Other comprehensive (loss) income before reclassifications | (62,888) | | (17,109) | | 8,876 | | (71,121) | |
Amounts reclassified from accumulated other comprehensive (loss) income | — | | 3,261 | | 3,024 | | 6,285 | |
Other comprehensive (loss) income, net of tax | (62,888) | | (13,848) | | 11,900 | | (64,836) | |
Balance at December 31, 2021 | 4,536 | | 6,070 | | (33,186) | | (22,580) | |
Other comprehensive (loss) before reclassifications | (640,656) | | (17,810) | | (13,350) | | (671,816) | |
Amounts reclassified from accumulated other comprehensive income (loss) | 4,960 | | 2,866 | | 1,610 | | 9,436 | |
Other comprehensive (loss), net of tax | (635,696) | | (14,944) | | (11,740) | | (662,380) | |
Balance at December 31, 2022 | $ | (631,160) | | $ | (8,874) | | $ | (44,926) | | $ | (684,960) | |
The following table further summarizes the amounts reclassified from accumulated other comprehensive (loss) income: | | | | | | | | | | | | | | | | | | | | |
| Years ended December 31, | |
Accumulated Other Comprehensive Income (Loss) Components | 2022 | | 2021 | | 2020 | Associated Line Item in the Consolidated Statement Of Income |
(In thousands) | | | | | | |
Investment securities available-for-sale: | | | | | | |
Net unrealized holding (losses) gains | $ | (6,751) | | | $ | — | | | $ | 8 | | (Loss) gain on sale of investment securities, net |
| | | | | | |
| | | | | | |
Tax benefit (expense) | 1,791 | | | — | | | (2) | | Income tax expense |
Net of tax | $ | (4,960) | | | $ | — | | | $ | 6 | | |
Derivative instruments: | | | | | | |
Hedge terminations | $ | (306) | | | $ | (306) | | | $ | (7,884) | | Interest expense |
Premium amortization | (3,626) | | | (4,109) | | | (3,536) | | Interest income |
Tax benefit | 1,066 | | | 1,154 | | | 2,985 | | Income tax expense |
Net of tax | $ | (2,866) | | | $ | (3,261) | | | $ | (8,435) | | |
Defined benefit pension and other postretirement benefit plans: | | | | | | |
Actuarial net loss amortization | $ | (2,210) | | | $ | (4,102) | | | $ | (3,976) | | Other non-interest expense |
Tax benefit | 600 | | | 1,078 | | | 1,036 | | Income tax expense |
Net of tax | $ | (1,610) | | | $ | (3,024) | | | $ | (2,940) | | |
The following tables summarize each component of other comprehensive (loss) income and the related tax effects: | | | | | | | | | | | |
| Year ended December 31, 2022 |
(In thousands) | Amount Before Tax | Tax Benefit (Expense) | Amount Net of Tax |
Investment securities available-for-sale: | | | |
Net unrealized holding (losses) arising during the year | $ | (878,366) | | $ | 237,710 | | $ | (640,656) | |
Reclassification adjustment for net realized losses included in net income | 6,751 | | (1,791) | | 4,960 | |
Total investment securities available-for-sale | (871,615) | | 235,919 | | (635,696) | |
Derivative instruments: | | | |
Net unrealized (losses) arising during the year | (24,440) | | 6,630 | | (17,810) | |
Reclassification adjustment for net realized losses included in net income | 3,932 | | (1,066) | | 2,866 | |
Total derivative instruments | (20,508) | | 5,564 | | (14,944) | |
Defined benefit pension and other postretirement benefit plans: | | | |
Net actuarial (loss) arising during the year | (18,319) | | 4,969 | | (13,350) | |
Reclassification adjustment for net actuarial loss amortization included in net income | 2,210 | | (600) | | 1,610 | |
Total defined benefit pension and postretirement benefit plans | (16,109) | | 4,369 | | (11,740) | |
Other comprehensive (loss), net of tax | $ | (908,232) | | $ | 245,852 | | $ | (662,380) | |
| | | |
| Year ended December 31, 2021 |
(In thousands) | Amount Before Tax | Tax Benefit (Expense) | Amount Net of Tax |
Investment securities available-for-sale: | | | |
Net unrealized holding (losses) arising during the year | $ | (85,368) | | $ | 22,480 | | $ | (62,888) | |
| | | |
Total investment securities available-for-sale | (85,368) | | 22,480 | | (62,888) | |
Derivative instruments: | | | |
Net unrealized (losses) arising during the year | (23,216) | | 6,107 | | (17,109) | |
Reclassification adjustment for net realized losses included in net income | 4,415 | | (1,154) | | 3,261 | |
Total derivative instruments | (18,801) | | 4,953 | | (13,848) | |
Defined benefit pension and other postretirement benefit plans: | | | |
Net actuarial gain arising during the year | 12,052 | | (3,176) | | 8,876 | |
Reclassification adjustment for net actuarial loss amortization included in net income | 4,102 | | (1,078) | | 3,024 | |
Total defined benefit pension and postretirement benefit plans | 16,154 | | (4,254) | | 11,900 | |
Other comprehensive (loss), net of tax | $ | (88,015) | | $ | 23,179 | | $ | (64,836) | |
| | | |
| Year ended December 31, 2020 |
(In thousands) | Amount Before Tax | Tax Benefit (Expense) | Amount Net of Tax |
Investment securities available-for-sale: | | | |
Net unrealized holding gains arising during the year | $ | 68,116 | | $ | (17,937) | | $ | 50,179 | |
Reclassification adjustment for net realized gains included in net income | (8) | | 2 | | (6) | |
Total investment securities available-for-sale | 68,108 | | (17,935) | | 50,173 | |
Derivative instruments: | | | |
Net unrealized gains arising during the year | 27,683 | | (7,016) | | 20,667 | |
Reclassification adjustment for net realized losses included in net income | 11,420 | | (2,985) | | 8,435 | |
Total derivative instruments | 39,103 | | (10,001) | | 29,102 | |
Defined benefit pension and other postretirement benefit plans: | | | |
Net actuarial (loss) arising during the year | (5,262) | | 1,375 | | (3,887) | |
Reclassification adjustment for net actuarial loss amortization included in net income | 3,976 | | (1,036) | | 2,940 | |
Total defined benefit pension and postretirement benefit plans | (1,286) | | 339 | | (947) | |
Other comprehensive income, net of tax | $ | 105,925 | | $ | (27,597) | | $ | 78,328 | |
Note 14: Regulatory Capital and Restrictions
Capital Requirements
The Holding Company and the 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/or the regulatory framework for prompt corrective action (such provisions apply to the Bank only), both the Holding Company and the 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 stockholders’ equity less deductions for goodwill and other intangible assets, and certain deferred tax adjustments. Upon adoption of the Basel III Capital Rules, the Company elected to opt-out of the requirement to include certain components of AOCI 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 December 31, 2022, and 2021, both the Company and the Bank were classified as well-capitalized. Management believes that no events or changes have occurred subsequent to year-end that would change this designation.
The following table provides information on the regulatory capital ratios for the Holding Company and the Bank: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| At December 31, 2022 |
| Actual (1) | | Minimum Requirement | | Well Capitalized |
(In thousands) | Amount | Ratio | | Amount | Ratio | | Amount | Ratio |
Webster Financial Corporation | | | | | | | | |
CET1 risk-based capital | $ | 5,822,369 | | 10.71 | % | | $ | 2,446,344 | | 4.5 | % | | $ | 3,533,608 | | 6.5 | % |
Total risk-based capital | 7,203,029 | | 13.25 | | | 4,349,056 | | 8.0 | | | 5,436,320 | | 10.0 | |
Tier 1 risk-based capital | 6,106,348 | | 11.23 | | | 3,261,792 | | 6.0 | | | 4,349,056 | | 8.0 | |
Tier 1 leverage capital | 6,106,348 | | 8.95 | | | 2,730,212 | | 4.0 | | | 3,412,765 | | 5.0 | |
Webster Bank | | | | | | | | |
CET1 risk-based capital | $ | 6,661,504 | | 12.28 | % | | $ | 2,442,058 | | 4.5 | % | | $ | 3,527,417 | | 6.5 | % |
Total risk-based capital | 7,165,935 | | 13.20 | | | 4,341,437 | | 8.0 | | | 5,426,796 | | 10.0 | |
Tier 1 risk-based capital | 6,661,504 | | 12.28 | | | 3,256,078 | | 6.0 | | | 4,341,437 | | 8.0 | |
Tier 1 leverage capital | 6,661,504 | | 9.77 | | | 2,727,476 | | 4.0 | | | 3,409,345 | | 5.0 | |
| | | | | | | | |
| At December 31, 2021 |
| Actual (1) | | Minimum Requirement | | Well Capitalized |
(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, the Company 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 regulatory capital ratios and amounts exclude the impact of the increased ACL on loans and leases, HTM investment securities, and unfunded loan commitments attributed to the adoption of CECL on January 1, 2020, adjusted for an approximation of the after-tax provision for credit losses attributable to CECL relative to the incurred loss methodology during the deferral period. During the three year transition period, regulatory capital ratios will begin to phase out the aggregate amount of the regulatory capital benefit provided in the initial two years. For 2022, 2023, and 2024, the Company is allowed 75%, 50%, and 25% of the regulatory capital benefit as of December 31, 2021, respectively, with full absorption occurring in 2025.
Dividend Restrictions
The Holding Company is dependent upon dividends from the Bank to provide funds for the payment of dividends to stockholders and 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 net income for that year combined with undistributed net income for the preceding two years. The Bank paid the Holding Company $475.0 million and $200.0 million in dividends during the years ended December 31, 2022, and 2021, respectively, for which no express approval from the OCC was required.
Cash Restrictions
The 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 December 31, 2022, and 2021.
Note 15: Variable Interest Entities
The Company has an investment interest in the following entities that each meet the definition of a variable interest entity. Information regarding the Company's consolidation of variable interest entities can be found within Note 1: Summary of Significant Accounting Policies.
Consolidated
Rabbi Trusts. The Company established a Rabbi Trust to meet its obligations due under the Webster Bank Deferred Compensation Plan for Directors and Officers and to mitigate expense volatility. The funding of the Rabbi Trust and the discontinuation of the Webster Bank Deferred Compensation Plan for Directors and Officers occurred during 2012. In connection with the Sterling merger, the Company 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. The Company 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 Consolidated Balance Sheets. Investment earnings are included in Other income on the accompanying Consolidated Statements of Income, and depending on the nature of the underlying assets in the Rabbi Trusts, fair value changes are either recognized in Other income or in Other comprehensive (loss), net of tax, on the accompanying Consolidated Statements of Comprehensive Income. Additional information regarding the the Rabbi Trusts' investments can be found within Note 18: Fair Value Measurements.
Non-Consolidated
Tax Credit Finance Investments. The Company makes non-marketable equity investments in entities that sponsor affordable housing and other community development projects that qualify for the 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 the Company'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. 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 and the Company does not have the obligation to absorb losses and/or the right to receive benefits. The Company applies the proportional amortization method to subsequently measure its investments in qualified affordable housing projects.
The following table summarizes the Company's LIHTC investments and related unfunded commitments:
| | | | | | | | | | | |
| At December 31, |
(In thousands) | 2022 | | 2021 |
Gross investment in LIHTC investments (1) | $ | 797,453 | | | $ | 68,635 | |
Accumulated amortization | (69,424) | | | (25,216) | |
Net investment in LIHTC investments | $ | 728,029 | | | $ | 43,419 | |
| | | |
Unfunded commitments for LIHTC investments (1) | $ | 335,959 | | | $ | 11,106 | |
(1)The Company acquired $517.0 million of LIHTC investments and assumed $267.3 million of unfunded commitments for LIHTC investments in connection with the Sterling merger on January 31, 2022.
The aggregate carrying value of the Company's LIHTC investments is included in Accrued interest receivable and other assets on the accompanying 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 Consolidated Balance Sheets. In addition to the LIHTC investments acquired from Sterling, there were $211.8 million and $10.1 million of net commitments approved to fund LIHTC investments during the years ended December 31, 2022, and 2021.
Webster Statutory Trust. The Company 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 Consolidated Balance Sheets, and the related interest expense is reported as Interest expense on Long-term debt on the accompanying Consolidated Statements of Income. Additional information regarding these junior subordinated debentures can be found within Note 11: Borrowings.
Other Non-Marketable Investments. The Company 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 the Company's other
non-marketable investments was $144.9 million and $61.5 million at December 31, 2022, and 2021, respectively, which is included in Accrued interest receivable and other assets on the accompanying Consolidated Balance Sheets, and its maximum exposure to loss, including unfunded commitments, was $243.9 million and $95.9 million, respectively. Additional information regarding other non-marketable investments can be found within Note 18: Fair Value Measurements.
Note 16: Earnings Per Common Share
The following table summarizes the calculation of basic and diluted earnings per common share: | | | | | | | | | | | | | | | | | |
| Years ended December 31, |
(In thousands, except per share data) | 2022 | | 2021 | | 2020 |
Net income | $ | 644,283 | | | $ | 408,864 | | | $ | 220,621 | |
Less: Preferred stock dividends | 15,919 | | | 7,875 | | | 7,875 | |
Net income available to common stockholders | 628,364 | | | 400,989 | | | 212,746 | |
Less: Earnings allocated to participating securities | 5,672 | | | 2,302 | | | 1,272 | |
Earnings applicable to common stockholders | $ | 622,692 | | | $ | 398,687 | | | $ | 211,474 | |
| | | | | |
Weighted-average common shares outstanding - basic | 167,452 | | | 89,983 | | | 89,967 | |
Add: Effect of dilutive stock options and restricted stock | 95 | | | 223 | | | 184 | |
Weighted-average common shares outstanding - diluted | 167,547 | | | 90,206 | | | 90,151 | |
| | | | | |
Basic earnings per common share | $ | 3.72 | | | $ | 4.43 | | | $ | 2.35 | |
Diluted earnings per common share | 3.72 | | | 4.42 | | | 2.35 | |
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. The Company may grant restricted stock, restricted stock units, non-qualified stock options, incentive stock options, or stock appreciation rights to certain employees and directors under its stock-based compensation programs, which entitle recipients to receive
non-forfeitable dividends during the vesting period on a basis equivalent to the dividends paid to holders of common stock. These unvested awards meet the definition of participating securities.
Potential common shares from performance-based restricted stock that were not included in the computation of dilutive earnings per common share because they were anti-dilutive under the treasury stock method were 176,177, 56,829, and 43,508 for the years ended December 31, 2022, 2021, and 2020, respectively. Additional information regarding stock options and restricted stock awards can be found within Note 20: Share-Based Plans.
Note 17: Derivative Financial Instruments
Derivative Positions and Offsetting
Derivatives Designated in Hedge Relationships. Interest rate swaps allow the Company to change the fixed or variable nature of an interest rate without the exchange of the underlying notional amount. Certain pay fixed/receive variable interest rate swaps are designated as cash flow hedges to effectively convert variable-rate debt into fixed-rate debt. While certain receive fixed/pay variable interest rate swaps may be designated as fair value hedges to effectively convert fixed-rate long-term debt into variable-rate debt, the Company did not have any such instruments designated as fair value hedges at December 31, 2022, and 2021. Certain purchased options are also designated as cash flow hedges. Purchased options allow the Company to limit the potential adverse impact of variable interest rates by establishing a cap rate 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. In addition, the Company enters into derivative contracts to accommodate customer needs. Derivative contracts with customers are offset with dealer counterparty transactions structured with matching terms to ensure minimal impact on earnings.
The following table presents the notional amounts and fair values, including accrued interest, of derivative positions:
| | | | | | | | | | | | | | | | | |
| At December 31, 2022 |
| Asset Derivatives | | Liability Derivatives |
(In thousands) | Notional Amounts | Fair Value | | Notional Amounts | Fair Value |
Designated as hedging instruments: | | | | | |
Interest rate derivatives (1) | $ | 1,350,000 | | $ | 1,515 | | | $ | 1,750,000 | | $ | 9,632 | |
Not designated as hedging instruments: | | | | | |
Interest rate derivatives (1) | 7,024,507 | | 221,225 | | | 7,022,844 | | 403,952 | |
Mortgage banking derivatives (2) | 3,283 | | 32 | | | — | | — | |
Other (3) | 161,934 | | 134 | | | 606,478 | | 915 | |
Total not designated as hedging instruments | 7,189,724 | | 221,391 | | | 7,629,322 | | 404,867 | |
Gross derivative instruments, before netting | $ | 8,539,724 | | 222,906 | | | $ | 9,379,322 | | 414,499 | |
Less: Master netting agreements | | 16,129 | | | | 16,129 | |
Cash collateral | | 184,095 | | | | — | |
Total derivative instruments, after netting | | $ | 22,682 | | | | $ | 398,370 | |
| | | | | |
| 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 December 31, 2022, and 2021, notional amounts of interest rate swaps cleared through clearing houses include $2.7 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 $2.4 million and $1.0 million at December 31, 2022, and 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 $125.6 million and $66.0 million for asset derivatives and $559.2 million and $338.2 million for liability derivatives at December 31, 2022, and 2021, respectively, which have insignificant related fair values.
The following tables present fair value positions transitioned from gross to net upon applying counterparty netting agreements: | | | | | | | | | | | | | | | | | | | | |
| At December 31, 2022 |
(In thousands) | Gross Amount Recognized | Derivative Offset Amount | Cash Collateral Received/Pledged | Net Amount Presented | | Amounts Not Offset |
Asset derivatives | $ | 217,246 | | $ | 16,129 | | $ | 184,095 | | $ | 17,022 | | | $ | 17,392 | |
Liability derivatives | 16,129 | | 16,129 | | — | | — | | | 1,545 | |
| | | | | | |
| 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 | Years ended December 31, |
(In thousands) | Net Interest Income | 2022 | | 2021 | | 2020 |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Cash flow hedges: | | | | | | |
Interest rate derivatives | Interest and fees on loans and leases | $ | 1,935 | | | $ | 10,676 | | | $ | 6,373 | |
Interest rate derivatives | Long-term debt | 306 | | | 411 | | | 8,206 | |
Net recognized on cash flow hedges | | $ | 1,629 | | | $ | 10,265 | | | $ | (1,833) | |
The following table summarizes information related to a fair value hedging adjustment:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Consolidated Balance Sheet Line Item in Which Previously Hedged Item is Located | | Carrying Amount of Previously Hedged Item | | Cumulative Amount of Fair Value Hedging Adjustment Included in Carrying Amount |
| | At December 31, | | At December 31, |
(In thousands) | | 2022 | | 2021 | | 2022 | | 2021 |
Long-term debt (1) | | $ | 333,458 | | | $ | 338,811 | | | $ | 33,458 | | | $ | 38,811 | |
(1)The Company de-designated its fair value hedging relationship on its long-term debt in 2020. The basis adjustment included in the carrying amount is being amortized into interest expense over the remaining life of the long-term debt.
The following table summarizes the income statement effect of derivatives not designated as hedging instruments: | | | | | | | | | | | | | | | | | | | | |
| Recognized In | Years ended December 31, |
(In thousands) | Non-interest Income | 2022 | | 2021 | | 2020 |
Interest rate derivatives | Other income | $ | 25,092 | | | $ | 10,369 | | | $ | 11,068 | |
Mortgage banking derivatives | Mortgage banking activities | (48) | | | (776) | | | 636 | |
Other | Other income | 3,249 | | | 878 | | | (1,696) | |
Total not designated as hedging instruments | $ | 28,293 | | | $ | 10,471 | | | $ | 10,008 | |
Time-value premiums, which are amortized on a straight-line basis, are excluded from the assessment of hedge effectiveness for purchased options designated as cash flow hedges. At December 31, 2022, the remaining unamortized balance of time-value premiums was $2.8 million. Over the next twelve months, an estimated decrease to interest income of $3.5 million will be reclassified from (AOCL) relating to cash flow hedge gain/loss, and an estimated increase to interest expense of $0.3 million will be reclassified from (AOCL) relating to cash flow hedge terminations. At December 31, 2022, the remaining unamortized loss on terminated cash flow hedges is $0.3 million. The maximum length of time over which forecasted transactions are hedged is 4.3 years. Additional information regarding cash flow hedge activity impacting (AOCL) and the related amounts reclassified to net income can be found within Note 13: Accumulated Other Comprehensive (Loss) Income, Net of Tax.
Derivative Exposure. At December 31, 2022, the Company had $59.2 million in initial margin collateral posted at clearing houses. In addition, $185.6 million of cash collateral received is included in Cash and due from banks on the accompanying Consolidated Balance Sheets. The Company 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 the Bank's customers was $5.6 million at December 31, 2022. In addition, the Company monitors potential future exposure, representing its best estimate of exposure to remaining contractual maturity. The potential future exposure related to interest rate derivatives with the Bank's customers totaled $95.3 million at December 31, 2022. The Company has incorporated a valuation adjustment to reflect non-performance risk in the fair value measurement of its derivatives, which totaled $8.4 million and $(0.4) million at December 31, 2022, and 2021, respectively. Various factors impact changes in the valuation adjustment over time, such as changes in the credit spreads of the contracted parties, and changes in market rates and volatilities, which affect the total expected exposure of the derivative instruments.
Note 18: Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The determination of fair value may require the use of estimates when quoted market prices are not available. Fair value estimates made at a specific point in time are based on management’s judgments regarding future expected losses, current economic conditions, the risk characteristics of each financial instrument, and other subjective factors that cannot be determined with precision.
The framework for measuring fair value provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The three levels within the fair value hierarchy are as follows:
•Level 1: Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Company 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 (i.e., 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
AFS Investment Securities. When unadjusted quoted prices are available in an active market, the Company classifies its AFS 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, the Company 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 AFS investment securities 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. The Company 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, the Company 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 the Company 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. The Company 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 the Company 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 December 31, |
| 2022 | | 2021 |
(In thousands) | Fair Value | | Unpaid Principal Balance | | Difference | | Fair Value | | Unpaid Principal Balance | | Difference |
Originated loans held for sale | $ | 1,991 | | | $ | 1,631 | | | $ | 360 | | | $ | 4,694 | | | $ | 5,034 | | | $ | (340) | |
Rabbi Trust Investments. Investments held in each of the Company's Rabbi Trusts consist primarily of mutual funds that invest in equity and fixed income securities. Shares of these mutual funds are valued based on the NAV as reported by the trustee of the funds, which represents quoted prices in active markets. The Company 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 December 31, 2022, and 2021, the total cost basis of the investments held in the Rabbi Trusts was $10.0 million and $1.6 million, respectively.
Alternative Investments. Equity investments have a readily determinable fair value when unadjusted quoted prices are available in an active market for identical assets. Accordingly, these alternative investments are classified within Level 1 of the fair value hierarchy. At December 31, 2022, and 2021, equity investments with a readily determinable fair value had a total carrying amount of $0.4 million and $1.9 million, respectively, with no remaining unfunded commitment. During the year ended December 31, 2022, there were total write-downs in fair value of $1.5 million associated with these alternative investments.
Equity investments that do not have a readily determinable fair value may qualify for the NAV practical expedient if they meet certain requirements. The Company's alternative investments measured at NAV consist of investments in non-public entities that cannot be redeemed since investments are distributed as the underlying equity is liquidated. Alternative investments measured at NAV are not classified within the fair value hierarchy. At December 31, 2022, and 2021, these alternative investments had a total carrying amount of $89.2 million and $25.9 million, respectively, and a remaining unfunded commitment of $82.7 million and $14.1 million, respectively.
The following table summarizes the fair values of assets and liabilities measured at fair value on a recurring basis:
| | | | | | | | | | | | | | |
| At December 31, 2022 |
(In thousands) | Level 1 | Level 2 | Level 3 | Total |
Financial Assets: | | | | |
AFS investment securities: | | | | |
U.S. Treasury notes | $ | 717,040 | | $ | — | | $ | — | | $ | 717,040 | |
Government agency debentures | — | | 258,374 | | — | | 258,374 | |
Municipal bonds and notes | — | | 1,633,202 | | — | | 1,633,202 | |
Agency CMO | — | | 59,965 | | — | | 59,965 | |
Agency MBS | — | | 2,158,024 | | — | | 2,158,024 | |
Agency CMBS | — | | 1,406,486 | | — | | 1,406,486 | |
CMBS | — | | 896,640 | | — | | 896,640 | |
CLO | — | | 2,107 | | — | | 2,107 | |
Corporate debt | — | | 704,412 | | — | | 704,412 | |
Private label MBS | — | | 44,249 | | — | | 44,249 | |
Other | — | | 12,198 | | — | | 12,198 | |
Total AFS investment securities | 717,040 | | 7,175,657 | | — | | 7,892,697 | |
Gross derivative instruments, before netting (1) | 79 | | 222,827 | | — | | 222,906 | |
Originated loans held for sale | — | | 1,991 | | — | | 1,991 | |
Investments held in Rabbi Trusts | 12,103 | | — | | — | | 12,103 | |
Alternative investments (2) | 430 | | — | | — | | 89,678 | |
Total financial assets | $ | 729,652 | | $ | 7,400,475 | | $ | — | | $ | 8,219,375 | |
Financial Liabilities: | | | | |
Gross derivative instruments, before netting (1) | $ | 843 | | $ | 413,656 | | $ | — | | $ | 414,499 | |
| | | | | | | | | | | | | | |
| At December 31, 2021 |
(In thousands) | Level 1 | Level 2 | Level 3 | Total |
Financial Assets: | | | | |
AFS 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 AFS 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 in Note 17: Derivative Financial Instruments.
(2)Certain alternative investments are recorded at NAV. Assets measured at NAV are not classified within the fair value hierarchy.
Assets Measured at Fair Value on a Non-Recurring Basis
The Company measures certain assets at fair value on a non-recurring basis. The following is a description of valuation methodologies used for assets measured at fair value on a non-recurring basis.
Alternative Investments. The measurement alternative has been elected for alternative investments without readily determinable fair values that do not qualify for the NAV practical expedient. The measurement alternative requires investments to be measured at cost minus impairment, if any, plus or minus adjustments resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer. Accordingly, these alternative investments are classified within Level 2 of the fair value hierarchy. At December 31, 2022, and 2021, the total carrying amount of these alternative investments was $42.8 million and $25.8 million, respectively, of which $5.9 million and $5.8 million, respectively, were considered to be measured at fair value. During the year ended December 31, 2022, there were $1.0 million of total net
write-ups due to observable price changes and $0.2 million of total write-downs due to impairment.
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, less estimated costs to sell. 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
December 31, 2022, and 2021, there were no loans transferred to held for sale on the accompanying Consolidated Balance Sheets.
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.
OREO and Repossessed Assets. OREO and repossessed assets are held at the lower of cost or fair value and are considered to be measured at fair value when recorded below cost. The fair value of OREO is calculated using independent appraisals or internal valuation methods, less estimated selling costs, and may consider available pricing guides, auction results, and price opinions. Certain repossessed assets may also require assumptions about factors that are not observable in an active market when determining fair value. Accordingly, OREO and repossessed assets are classified within Level 3 of the fair value hierarchy. At December 31, 2022, and 2021, the total book value of OREO and repossessed assets was $2.3 million and $2.8 million, respectively. In addition, the amortized cost of consumer loans secured by residential real estate property that are in the process of foreclosure at December 31, 2022, was $10.1 million.
Estimated Fair Values of Financial Instruments and Mortgage Servicing Assets
The Company is required to disclose the estimated fair values of certain financial instruments and mortgage servicing rights. 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.
HTM Investment Securities. When quoted market prices are not available, the Company 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. HTM 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 Rights. Mortgage servicing rights are initially measured at fair value and subsequently measured using the amortization method. The Company assesses mortgage servicing rights 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 rights is the impact of fluctuating interest rates on the related servicing revenue stream. Mortgage servicing rights 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.
FHLB 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 rights: | | | | | | | | | | | | | | | | | | | | | | | |
| At December 31, |
| 2022 | | 2021 |
(In thousands) | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
Assets: | | | | | | | |
Level 1 | | | | | | | |
Cash and cash equivalents | $ | 839,943 | | | $ | 839,943 | | | $ | 461,570 | | | $ | 461,570 | |
Level 2 | | | | | | | |
HTM investment securities | 6,564,697 | | | 5,761,453 | | | 6,198,125 | | | 6,280,936 | |
Level 3 | | | | | | | |
Loans and leases, net | 49,169,685 | | | 47,604,463 | | | 21,970,542 | | | 21,702,732 | |
Mortgage servicing rights | 9,515 | | | 27,043 | | | 9,237 | | | 12,527 | |
Liabilities: | | | | | | | |
Level 2 | | | | | | | |
Deposit liabilities | $ | 49,893,391 | | | $ | 49,893,391 | | | $ | 28,049,259 | | | $ | 28,049,259 | |
Time deposits | 4,160,949 | | | 4,091,979 | | | 1,797,770 | | | 1,794,829 | |
Securities sold under agreements to repurchase and other borrowings | 1,151,830 | | | 1,151,797 | | | 674,896 | | | 676,581 | |
FHLB advances | 5,460,552 | | | 5,459,218 | | | 10,997 | | | 11,490 | |
Long-term debt (1) | 1,073,128 | | | 1,001,779 | | | 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 19: Retirement Benefit Plans
Defined Benefit Pension and Postretirement Benefit Plans
The Bank had offered a qualified noncontributory defined benefit Pension Plan and a non-qualified SERP to eligible employees and key executives who met certain age and service requirements, both of which were frozen effective December 31, 2007. Only those employees who were hired prior to January 1, 2007, and who became participants of the plans prior to January 1, 2008, have accrued benefits under the plans. The Bank also provides for OPEB to certain retired employees.
In connection with the merger with Sterling, on January 31, 2022, the Company assumed the benefit obligations of Sterling's non-qualified SERP and OPEB plans, which includes the Astoria Bank Excess Benefit and Supplemental Benefit Plans, Astoria Bank Directors' Retirement Plan, Retirement Plan of the Greater New York Savings Bank for Non-Employee Directors, Supplemental Executive Retirement Plan of Provident Bank, Supplemental Executive Retirement Plan of Provident Bank - Other, Sterling Bancorp Supplemental Postretirement Life Insurance Plan, Astoria Bank Postretirement Welfare Benefit Plans, and a Split Dollar Life Insurance Arrangement. Each of the plan's measurement dates, including the plans assumed from Sterling in the merger, coincides with the Company's December 31 year end.
The following table summarizes the changes in the benefit obligation, fair value of plan assets, and funded status of the defined benefit pension and postretirement benefit plans at December 31:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pension | | SERP | | OPEB |
(In thousands) | 2022 | 2021 | | 2022 | 2021 | | 2022 | 2021 |
Change in benefit obligation: | | | | | | | | |
Beginning balance | $ | 250,263 | | $ | 266,414 | | | $ | 1,873 | | $ | 2,046 | | | $ | 1,904 | | $ | 1,998 | |
Benefit obligation assumed from Sterling | — | | — | | | 4,517 | | — | | | 26,030 | | — | |
Service cost | — | | — | | | — | | — | | | 34 | | — | |
Interest cost | 5,565 | | 4,663 | | | 107 | | 30 | | | 652 | | 19 | |
Actuarial (gain) loss | (57,751) | | (11,131) | | | (581) | | (77) | | | (4,992) | | 32 | |
Benefits and administrative expenses paid | (10,241) | | (9,683) | | | (1,671) | | (126) | | | (806) | | (145) | |
Ending balance | 187,836 | | 250,263 | | | 4,245 | | 1,873 | | | 22,822 | | 1,904 | |
Change in plan assets: | | | | | | | | |
Beginning balance | 271,846 | | 266,268 | | | — | | — | | | — | | — | |
Actual return on plan assets | (60,223) | | 15,261 | | | — | | — | | | — | | — | |
Employer contributions | — | | — | | | 1,671 | | 126 | | | 806 | | 145 | |
Benefits paid | (10,241) | | (9,683) | | | (1,671) | | (126) | | | (806) | | (145) | |
Ending balance | 201,382 | | 271,846 | | | — | | — | | | — | | — | |
Funded status (1) | $ | 13,546 | | $ | 21,583 | | | $ | (4,245) | | $ | (1,873) | | | $ | (22,822) | | $ | (1,904) | |
(1)The overfunded (underfunded) status of each plan is respectively included in Accrued interest receivable and other assets or Accrued expenses and other liabilities on the accompanying Consolidated Balance Sheets, as applicable.
Excluding the impact of the merger with Sterling, the change in the total funded status of the defined benefit pension and postretirement benefit plans is primarily attributed to higher actuarial gains due to the increase in discount rate and, for the pension plan only, a negative return on plan assets due to lower market valuations.
The following table summarizes the weighted-average assumptions used to determine the benefit obligation at December 31: | | | | | | | | | |
| Discount Rate |
| 2022 | 2021 | |
Pension: | | | |
Webster Bank Pension Plan | 4.96 | % | 2.65 | % | |
| | | |
SERP: | | | |
Webster Bank Supplemental Defined Benefit Plan for Executive Officers | 4.88 | % | 2.45 | % | |
Astoria Bank Excess Benefit and Supplemental Benefit Plans | 4.77 | % | n/a | |
Astoria Bank Directors' Retirement Plan | 4.70 | % | n/a | |
Retirement Plan of the Greater New York Savings Bank for Non-Employee Directors | 4.70 | % | n/a | |
Supplemental Executive Retirement Plan of Provident Bank | 5.04 | % | n/a | |
Supplemental Executive Retirement Plan of Provident Bank - Other | 4.90 | % | n/a | |
| | | |
OPEB: | | | |
Webster Bank Postretirement Medical Benefit Plan | 4.72 | % | 1.99 | % | |
Sterling Bancorp Supplemental Postretirement Life Insurance Plan | 4.70 | % | n/a | |
Astoria Bank Postretirement Welfare Benefit Plans | 4.94 | % | n/a | |
Split Dollar Life Insurance Arrangement | 4.63 | % | n/a | |
The following table summarizes the amounts recorded in accumulated other comprehensive (loss) income that have not yet been recognized in net periodic benefit (income) cost at December 31: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pension | | SERP | | OPEB |
(In thousands) | 2022 | 2021 | | 2022 | 2021 | | 2022 | 2021 |
Net actuarial loss (gain) | $ | 56,717 | | $ | 41,792 | | | $ | 50 | | $ | 658 | | | $ | (5,573) | | $ | (620) | |
Deferred tax benefit (expense) | 15,383 | | 8,636 | | | 14 | | 136 | | | (1,512) | | (128) | |
Net amount recorded in (AOCL) AOCI | $ | 41,334 | | $ | 33,156 | | | $ | 36 | | $ | 522 | | | $ | (4,061) | | $ | (492) | |
The following table summarizes the components of net periodic benefit (income) cost for the years ended December 31: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pension | | SERP | | OPEB |
(In thousands) | 2022 | 2021 | 2020 | | 2022 | 2021 | 2020 | | 2022 | 2021 | 2020 |
Service cost | $ | — | | $ | — | | $ | — | | | $ | — | | $ | — | | $ | — | | | $ | 34 | | $ | — | | $ | — | |
Interest cost | 5,565 | | 4,663 | | 6,511 | | | 107 | | 30 | | 46 | | | 652 | | 19 | | 46 | |
Expected return on plan assets | (14,675) | | (14,385) | | (13,522) | | | — | | — | | — | | | — | | — | | — | |
Amortization of actuarial loss (gain) | 2,224 | | 4,102 | | 4,027 | | | 26 | | 38 | | 23 | | | (40) | | (38) | | (74) | |
Net periodic benefit (income) cost (1) | $ | (6,886) | | $ | (5,620) | | $ | (2,984) | | | $ | 133 | | $ | 68 | | $ | 69 | | | $ | 646 | | $ | (19) | | $ | (28) | |
(1)Net periodic benefit (income) cost is included in Other expense on the accompanying Consolidated Statements of Income.
The following table summarizes the weighted-average assumptions used to determine net periodic benefit (income) cost for the years ended December 31: | | | | | | | | | | | |
| Discount Rate |
| 2022 | 2021 | 2020 |
Pension: | | | |
Webster Bank Pension Plan | 2.65 | % | 2.29 | % | 3.07 | % |
| | | |
SERP: | | | |
Webster Bank Supplemental Defined Benefit Plan for Executive Officers | 2.45 | % | 1.91 | % | 2.82 | % |
Astoria Bank Excess Benefit and Supplemental Benefit Plans | 2.58 | % | n/a | n/a |
Astoria Bank Directors' Retirement Plan | 2.23 | % | n/a | n/a |
Retirement Plan of the Greater New York Savings Bank for Non-Employee Directors | 2.37 | % | n/a | n/a |
Supplemental Executive Retirement Plan of Provident Bank | 2.76 | % | n/a | n/a |
Supplemental Executive Retirement Plan of Provident Bank - Other | 2.38 | % | n/a | n/a |
| | | |
OPEB: | | | |
Webster Bank Postretirement Medical Benefit Plan | 1.99 | % | 1.40 | % | 2.50 | % |
Sterling Bancorp Supplemental Postretirement Life Insurance Plan | 2.35 | % | n/a | n/a |
Astoria Bank Postretirement Welfare Benefit Plans | 2.93 | % | n/a | n/a |
Split Dollar Life Insurance Arrangement | 2.20 | % | n/a | n/a |
| | | |
| Expected Long-Term Rate of Return on Plan Assets |
| 2022 | 2021 | 2020 |
Pension: | | | |
Webster Bank Pension Plan | 5.50 | % | 5.50 | % | 5.75 | % |
| | | |
| Assumed Health Care Cost Trend Rate (1) |
| 2022 | 2021 | 2020 |
OPEB: | | | |
Webster Bank Postretirement Medical Benefit Plan | 6.25 | % | 6.50 | % | 6.50 | % |
Astoria Bank Postretirement Welfare Benefit Plans | 6.60 | % | n/a | n/a |
(1)The rates to which the healthcare cost trend rates are assumed to decline (ultimate trend rates) along with the year that the ultimate trend rates will be reached for the Webster Bank Postretirement Medical Benefit Plan and the Astoria Bank Postretirement Welfare Benefit Plans are 4.40% in 2030, and 4.75% in 2033, respectively.
The discount rates used to determine the benefit obligation and net periodic benefit (income) cost for the Company's defined benefit pension and postretirement benefit plans were generally selected by reference to a high-quality bond yield curve, using a full yield curve approach, and matched to the timing and amount of each plan's expected benefit payments.
The following table summarizes amounts recognized in other comprehensive (loss) income, including reclassification adjustments, for the years ended December 31:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pension | | SERP | | OPEB |
(In thousands) | 2022 | 2021 | 2020 | | 2022 | 2021 | 2020 | | 2022 | 2021 | 2020 |
Net actuarial loss (gain) | $ | 17,148 | | $ | (12,008) | | $ | 5,375 | | | $ | (581) | | $ | (77) | | $ | 194 | | | $ | (4,992) | | $ | 33 | | $ | (307) | |
Amounts reclassified from (AOCL) AOCI | (2,224) | | (4,102) | | (4,027) | | -4027000 | (26) | | (38) | | (23) | | | 40 | | 38 | | 74 | |
Total loss (gain) recognized in (OCL) OCI | $ | 14,924 | | $ | (16,110) | | $ | 1,348 | | | $ | (607) | | $ | (115) | | $ | 171 | | | $ | (4,952) | | $ | 71 | | $ | (233) | |
At December 31, 2022, the expected future benefit payments for the Company's defined benefit pension and postretirement benefits plans are as follows: | | | | | | | | | | | |
(In thousands) | Pension | SERP | OPEB |
2023 | $ | 10,224 | | $ | 475 | | $ | 2,850 | |
2024 | 10,804 | | 478 | | 2,669 | |
2025 | 11,236 | | 460 | | 2,522 | |
2026 | 11,644 | | 440 | | 2,330 | |
2027 | 12,046 | | 419 | | 2,153 | |
Thereafter | 63,884 | | 1,724 | | 7,800 | |
Asset Management
The Pension Plan invests primarily in common collective trusts and registered investment companies. However, the Pension Plan's investment policy guidelines also allow for the investment in cash and cash equivalents, fixed income securities, and equity securities. Common collective trusts and registered investment companies are both benchmarked against the Standard & Poor's 500 Index. Incremental benchmarks used to assess the common collective trusts include the S&P 400 Mid Cap Index, Russell 200 Index, MSCI ACWI ex U.S. Index, and the Barclay's Capital U.S. Long Credit Index. The standard deviation should not exceed that of the composite index. The Pension Plan's investment strategy and asset allocations are monitored by the Company's Retirement Plans Committee with the assistance of external investment advisors, and the investment portfolio is rebalanced, as appropriate. The target asset allocation percentages for the year ended December 31, 2022, were 64.5%
fixed-income investments and 35.5% equity investments. The actual asset allocation percentages for the year ended
December 31, 2022, were 63.8% fixed-income investments, 35.4% equity investments, and 0.8% cash and cash equivalents.
The overall investment objective of the Pension Plan is to maintain a diversified portfolio with a targeted expected long-term rate of return on plan assets of approximately 5.50%. The expected long-term rate of return on plans assets is the average rate of return expected to be realized on funds invested or expected to be invested to provide for the benefits included in the benefit obligation. The expected long-term rate of return on plans assets is established at the beginning of the year based upon historical and projected returns for each asset category. Depending on market conditions, the expected long-term rate of return on plan assets may exceed or fall short of the targeted percentage.
Fair Value Measurement
The following is a description of the valuation methodologies used for the Pension Plan's assets measured at fair value:
Common Collective Trusts. Common collective trusts are valued based on the NAV as reported by the trustee of the funds. The funds' underlying investments, which primarily comprise fixed-income debt securities and open-end mutual funds, are valued using quoted market prices in active markets or unobservable inputs for similar assets. Therefore, common collective trusts are classified as Level 2 within the fair value hierarchy. Transactions may occur daily within a trust. If a full redemption of the trust were to be initiated, the investment advisor reserves the right to temporarily delay withdrawals from the trust in order to ensure that the liquidation of securities is carried out in an orderly business manner.
Registered Investment Companies. Registered investment companies are valued at the daily closing price as reported by the funds. Registered investment companies held by the Pension Plan are quoted in an active market and are classified as Level 1 within the fair value hierarchy.
Cash and Cash Equivalents. Cash and cash equivalents are recorded at cost plus accrued interest, which approximates fair value given the short time frame to maturity, and are classified as Level 1 within the fair value hierarchy.
The following table sets forth by level within the fair value hierarchy the Pension Plan's assets at fair value: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| At December 31, |
| 2022 | | 2021 |
(In thousands) | Level 1 | Level 2 | Level 3 | Total | | Level 1 | Level 2 | Level 3 | Total |
Common collective trusts | — | | 172,941 | | — | | 172,941 | | | — | | 230,923 | | — | | 230,923 | |
Registered investment companies | $ | 26,923 | | $ | — | | $ | — | | $ | 26,923 | | | $ | 39,082 | | $ | — | | $ | — | | $ | 39,082 | |
Cash and cash equivalents | 1,518 | | — | | — | | 1,518 | | | 1,841 | | — | | — | | 1,841 | |
Total pension plan assets | $ | 28,441 | | $ | 172,941 | | $ | — | | $ | 201,382 | | | $ | 40,923 | | $ | 230,923 | | $ | — | | $ | 271,846 | |
Multiple-Employer Defined Benefit Pension Plan
The Bank participates in a multi-employer plan that provides pension benefits to former employees of a bank acquired by the Company. Participation in the plan was frozen as of September 1, 2004. The plan maintains a single trust and does not segregate the assets or liabilities of its participating employers. Minimum required employer contributions are determined by an independent actuary and are calculated using a 7-year shortfall amortization factor. There are no collective bargaining agreements or other obligations requiring contributions to the plan, nor has a funding improvement plan been implemented.
The following table summarizes information related to the Bank's participation in the multi-employer plan: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | | | | | | | | Contributions Years Ended December 31, | | Funded Status At December 31, |
Plan Name | | Employer Identification Number | | Plan Number | | Surcharge Imposed | | 2022 | 2021 | 2020 | | 2022 | 2021 |
Pentegra Defined Benefit Plan for Financial Institutions | | 13-5645888 | | 333 | | No | | $448 | $692 | $998 | | At least 80 percent | At least 80 percent |
The Bank's contributions to the multi-employer plan for the years ended December 31, 2022, 2021, and 2020, did not exceed more than 5% of total plan contributions for the plan years ended June 30, 2021, 2020, and 2019. The plan's Form 5500 was not available for the plan year ended June 30, 2022, as of the date the Company's Consolidated Financial Statements were issued. As of July 1, 2022, the date of the most recent actuarial valuation, the plan administrator confirmed that the Bank’s portion of the multi-employer plan was $2.1 million underfunded.
Defined Contribution Postretirement Benefit Plans
The Bank also sponsors defined contribution postretirement benefit plans established under Section 401(k) of the Internal Revenue Code:
Webster Bank Retirement Savings Plan. Employees who have attained age 21 may elect to contribute up to 75% of their eligible compensation on either a pre-tax or post-tax basis. The Bank makes matching contributions equal to 100% of the first 2% and 50% of the next 6% of employees contributions after employees have completed one year of eligible service. If an employee fails to enroll in the plan within 90 days of hire, the employee will be automatically enrolled on a pre-tax basis with a deferral rate set at 3% of eligible compensation. Individuals who became employees of the Company as a result of the merger with Sterling are not eligible to participate in the plan.
Sterling National Bank 401k and Profit Sharing Plan. Eligible legacy Sterling employees as January 31, 2022, who are now employees of the Company may elect to contribute up to 50% of their eligible compensation to the plan. The Bank makes matching contributions equal to 50% of employee contributions up to 4% of eligible compensation, for a maximum match of 2%, and a profit sharing contribution equal to 3% of eligible compensation for all eligible legacy Sterling employees, regardless of whether they had contributed to the plan in the current year. The plan also includes an automatic employee deferral increase provision, whereby deferral contributions for participants who had been automatically enrolled in the plan will increase by 1% every January 1 up to 10%.
Compensation and benefits expense included total employer contributions under the plans of $18.2 million, $13.1 million, and $13.8 million for the years ended December 31, 2022, 2021, and 2020, respectively.
Note 20: Share-Based Plans
The Company maintains a stock compensation plan that provides for the grant of stock options, stock appreciation rights, restricted stock, performance-based stock, and stock units to better align the interests of its employees and directors with those of its stockholders. The number of shares of Webster common stock approved by stockholders that could be issued under the plan is 17.4 million shares. At December 31, 2022, there were 2.6 million shares remaining to be granted. Stock compensation expense is recognized over the required service vesting period for each award based on the grant-date fair value, and is included in Compensation and benefits on the accompanying Consolidated Statements of Income.
The following table summarizes stock-based compensation plan activity for the year ended December 31, 2022: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Non-Vested Restricted Stock Awards Outstanding | | Stock Options Outstanding |
| Time-Based | | | | | Performance-Based | |
| Number of Shares | Weighted-Average Grant Date Fair Value | | | | | Number of Shares | Weighted-Average Grant Date Fair Value | | Number of Shares | Weighted-Average Exercise Price |
Balance, beginning of period | 529,284 | | $ | 48.77 | | | | | | 266,417 | | $ | 50.03 | | | 107,612 | | $ | 23.05 | |
Granted (1) | 711,503 | | 54.95 | | | | | | 307,852 | | 57.66 | | | — | | — | |
Sterling replacement awards (2) | 1,185,499 | | 56.81 | | | | | | — | | — | | | 10,972 | | 29.14 | |
Adjustment (3) | 187,915 | | 56.81 | | | | | | (187,915) | | 47.43 | | | — | | — | |
Vested | (993,512) | | 48.69 | | | | | | (59,400) | | 56.14 | | | — | | — | |
Forfeited | (140,947) | | 51.43 | | | | | | (16,580) | | 55.63 | | | — | | — | |
Exercised | — | | — | | | | | | — | | — | | | (30,355) | | 23.18 | |
Balance, end of period | 1,479,742 | | 50.47 | | | | | | 310,374 | | 57.65 | | | 88,229 | | 23.76 | |
(1)Includes 127,524 shares for performance-based awards that were granted to certain executives on February 1, 2022, in order to incentivize their efforts to promote the integration of Webster and Sterling. One-third of these awards will be eligible to vest each year, in an amount ranging from 50% to 100% of target, based on the achievement of performance metrics in each of the three performance periods, and generally subject to the executive's continued employment.
(2)The Company issued 1,126,495 shares of common stock and reissued 59,004 shares from Treasury stock in order to satisfy its consideration to replace Sterling equity awards under the merger agreement. During the year ended December 31, 2022, the Company recognized an increase of $18.8 million in stock compensation expense related to the replacement equity awards.
(3)Due to the impact of the merger with Sterling on the level of achievement of target performance conditions for the open performance periods applicable to outstanding awards, certain non-vested performance-based restricted stock awards were converted into time-based restricted stock awards on January 31, 2022.
Restricted Stock Awards
Time-based restricted stock awards vest over the applicable service period ranging from one to three years. Under the plan, the number of time-based restricted stock awards that may be granted to an eligible individual per calendar year is limited to 100,000 shares. The fair value of time-based restricted stock awards used to determine compensation expense is measured using the closing price of Webster common stock at the grant date.
Performance-based restricted stock awards generally vest after a three year performance period, with the total share quantity dependent on the Company meeting certain target performance conditions throughout the vesting period, ranging from 0% to 150%. Under the plan, 50% of the share quantity is determined based on total stockholder return as compared to the Company's compensation peer group, while the other 50% is based on the Company's average return on equity. The fair value of performance-based restricted stock awards used to determine compensation expense is calculated using the Monte-Carlo simulation model for total stockholder return awards and the closing price of Webster common stock at the grant date for
average return on equity awards. Compensation expense may be subject to adjustment based on management's assessment of the Company's average return on equity performance relative to the target number of shares condition.
For the years ended December 31, 2022, 2021, and 2020, the Company recognized restricted stock compensation expense totaling $55.1 million, $13.7 million, and $12.2 million, respectively. The corresponding income tax benefit recognized was $12.0 million, $5.4 million, and $2.6 million, respectively. The fair value of restricted stock awards that had vested during the years ended December 31, 2022, 2021, and 2020, was $51.7 million, $12.5 million, and $13.5 million, respectively. At December 31, 2022, there was $36.3 million of unrecognized restricted stock expense related to non-vested restricted stock awards, which is expected to be recognized over a weighted-average period of 1.8 years.
Stock Options
Stock options are granted at an exercise price equal to the market value of Webster common stock on the grant date. Each stock option grants the holder the right to acquire one share of Webster common stock over a contractual life of ten years. The Company has not granted stock options since 2013. At December 31, 2022, there were 10,278 and 77,951 incentive and
non-qualified stock options outstanding, respectively, which have a weighted-average remaining contractual life of 0.4 years, and all of which have vested and are exercisable.
Total pre-tax intrinsic value, or the difference between the Webster common stock closing price on the last trading day of the year and the weighted-average exercise price multiplied by the number of shares, represents the aggregate intrinsic value that would have been received by the option holders had all of their outstanding options been exercised on December 31, 2022. At December 31, 2022, the total pre-tax intrinsic value was $2.1 million. For the years ended December 31, 2022, 2021, and 2020, the total intrinsic value of the options exercised was $1.0 million, $9.0 million, and $0.1 million, respectively. The amount of cash received from the exercise of stock options during the years ended December 31, 2022, 2021, and 2020, was $0.7 million, $7.1 million, and $0.2 million, respectively.
Note 21: Segment Reporting
The Company’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, the Company realigned its investment services operations from Commercial Banking to Consumer Banking (called Retail Banking in 2021) 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. The Company also realigned certain product management and customer contact center operations from both Commercial Banking and Consumer Banking to the Corporate and Reconciling category, which resulted in an insignificant reassignment of assets and liabilities.
There was no goodwill reallocation nor goodwill impairment as a result of these realignments. 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 balance sheet information and results of operations have been recast accordingly to reflect these realignments.
As discussed previously in Note 2: Mergers and Acquisitions, Webster acquired Sterling on January 31, 2022, and the allocation of the purchase price is considered preliminary at December 31, 2022. Accordingly, of the total $1.9 billion in preliminary goodwill recorded, $1.7 billion and $0.2 billion 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
The Company uses an internal profitability reporting system to generate information by reportable segment, which is based on a series of management estimates for funds transfer pricing, and allocations for non-interest expense, provision for credit losses, income taxes, and equity capital. These estimates and allocations, certain of which are subjective in nature, are periodically reviewed and refined. Changes in estimates and allocations that affect the results of any reportable segment do not affect the consolidated financial position or results of operations of the Company 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.
The Company allocates interest income and interest expense to each business through an internal matched maturity FTP process. The goal of the FTP allocation is to encourage loan and deposit growth consistent with the Company’s overall profitability objectives. The FTP process considers the specific interest rate risk and liquidity risk of financial instruments and other assets and liabilities in each line of business. Loans are assigned an FTP rate for funds used and deposits are assigned an FTP rate for funds provided. The allocation considers the origination date and the earlier of the maturity date or the repricing date of a financial instrument to assign an FTP rate for loans and deposits originated each day. The FTP process transfers the corporate interest rate risk exposure to the treasury function included within the Corporate and Reconciling category where such exposures are centrally managed.
The Company 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. The Company also allocates the provision for credit losses to each reportable segment based on management's estimate of the inherent loss content in each of the specific loan and lease portfolios. The ACL on loans and leases is included in total assets within the Corporate and Reconciling category. Business development expenses, such as merger-related and strategic initiatives costs, are also generally included in the Corporate and Reconciling category.
The following table presents balance sheet information, including the appropriate allocations, for the Company's reportable segments and the Corporate and Reconciling category: | | | | | | | | | | | | | | | | | | | | |
| At December 31, 2022 |
(In thousands) | Commercial Banking | HSA Bank | Consumer Banking | | Corporate and Reconciling | Consolidated Total |
Goodwill | $ | 1,904,291 | | $ | 57,779 | | $ | 552,034 | | | $ | — | | $ | 2,514,104 | |
Total assets | 44,380,582 | | 122,729 | | 10,625,334 | | | 16,148,876 | | 71,277,521 | |
| | | | | | |
| 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 operating results, including the appropriate allocations, for the Company’s reportable segments and the Corporate and Reconciling category:
| | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, 2022 |
(In thousands) | Commercial Banking | HSA Bank | Consumer Banking | | Corporate and Reconciling | Consolidated Total |
Net interest income | $ | 1,346,384 | | $ | 218,149 | | $ | 720,789 | | | $ | (251,036) | | $ | 2,034,286 | |
Non-interest income | 171,437 | | 104,586 | | 119,691 | | | 45,069 | | 440,783 | |
Non-interest expense | 398,100 | | 151,329 | | 426,133 | | | 420,911 | | 1,396,473 | |
Pre-tax, pre-provision net revenue | 1,119,721 | | 171,406 | | 414,347 | | | (626,878) | | 1,078,596 | |
Provision (benefit) for credit losses | 276,550 | | — | | (3,754) | | | 7,823 | | 280,619 | |
Income before income taxes | 843,171 | | 171,406 | | 418,101 | | | (634,701) | | 797,977 | |
Income tax expense | 207,188 | | 45,937 | | 108,657 | | | (208,088) | | 153,694 | |
Net income | $ | 635,983 | | $ | 125,469 | | $ | 309,444 | | | $ | (426,613) | | $ | 644,283 | |
| | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, 2021 |
(In thousands) | Commercial Banking | HSA Bank | Consumer Banking | | Corporate and Reconciling | Consolidated Total |
Net interest income | $ | 585,297 | | $ | 168,595 | | $ | 375,318 | | | $ | (228,121) | | $ | 901,089 | |
Non-interest income | 83,538 | | 102,814 | | 95,887 | | | 41,133 | | 323,372 | |
Non-interest expense | 192,977 | | 134,258 | | 297,217 | | | 120,648 | | 745,100 | |
Pre-tax, pre-provision net revenue | 475,858 | | 137,151 | | 173,988 | | | (307,636) | | 479,361 | |
(Benefit) for credit losses | (51,348) | | — | | (3,068) | | | (84) | | (54,500) | |
Income before income taxes | 527,206 | | 137,151 | | 177,056 | | | (307,552) | | 533,861 | |
Income tax expense | 134,965 | | 36,619 | | 42,139 | | | (88,726) | | 124,997 | |
Net income | $ | 392,241 | | $ | 100,532 | | $ | 134,917 | | | $ | (218,826) | | $ | 408,864 | |
| | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, 2020 |
(In thousands) | Commercial Banking | HSA Bank | Consumer Banking | | Corporate and Reconciling | Consolidated Total |
Net interest income | $ | 512,691 | | $ | 162,363 | | $ | 334,157 | | | $ | (117,818) | | $ | 891,393 | |
Non-interest income | 66,867 | | 100,826 | | 97,778 | | | 19,806 | | 285,277 | |
Non-interest expense | 181,218 | | 133,919 | | 334,008 | | | 109,801 | | 758,946 | |
Pre-tax, pre-provision net revenue | 398,340 | | 129,270 | | 97,927 | | | (207,813) | | 417,724 | |
Provision (benefit) for credit losses | 152,571 | | — | | (14,722) | | | (99) | | 137,750 | |
Income before income taxes | 245,769 | | 129,270 | | 112,649 | | | (207,714) | | 279,974 | |
Income tax expense | 61,086 | | 34,501 | | 24,956 | | | (61,190) | | 59,353 | |
Net income | $ | 184,683 | | $ | 94,769 | | $ | 87,693 | | | $ | (146,524) | | $ | 220,621 | |
Note 22: 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 21: Segment Reporting.
| | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, 2022 |
(In thousands) | Commercial Banking | HSA Bank | Consumer Banking | | Corporate and Reconciling | Consolidated Total |
Non-interest Income: | | | | | | |
Deposit service fees | $ | 27,663 | | $ | 97,654 | | $ | 71,353 | | | $ | 1,802 | | $ | 198,472 | |
Loan and lease related fees (1) | 21,498 | | — | | — | | | — | | 21,498 | |
Wealth and investment services | 11,350 | | — | | 28,957 | | | (30) | | 40,277 | |
Other | — | | 6,932 | | 1,493 | | | — | | 8,425 | |
Revenue from contracts with customers | 60,511 | | 104,586 | | 101,803 | | | 1,772 | | 268,672 | |
Other sources of non-interest income | 110,926 | | — | | 17,888 | | | 43,297 | | 172,111 | |
Total non-interest income | $ | 171,437 | | $ | 104,586 | | $ | 119,691 | | | $ | 45,069 | | $ | 440,783 | |
| | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, 2021 |
(In thousands) | Commercial Banking | HSA Bank | Consumer Banking | | Corporate and Reconciling | Consolidated Total |
Non-interest Income: | | | | | | |
Deposit service fees | $ | 16,933 | | $ | 94,844 | | $ | 50,561 | | | $ | 372 | | $ | 162,710 | |
Wealth and investment services | 12,152 | | — | | 27,471 | | | (37) | | 39,586 | |
Other | — | | 7,970 | | 2,140 | | | — | | 10,110 | |
Revenue from contracts with customers | 29,085 | | 102,814 | | 80,172 | | | 335 | | 212,406 | |
Other sources of non-interest income | 54,453 | | — | | 15,715 | | | 40,798 | | 110,966 | |
Total non-interest income | $ | 83,538 | | $ | 102,814 | | $ | 95,887 | | | $ | 41,133 | | $ | 323,372 | |
| | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, 2020 |
(In thousands) | Commercial Banking | HSA Bank | Consumer Banking | | Corporate and Reconciling | Consolidated Total |
Non-interest Income: | | | | | | |
Deposit service fees | $ | 14,740 | | $ | 92,693 | | $ | 48,493 | | | $ | 106 | | $ | 156,032 | |
Wealth and investment services | 10,644 | | — | | 22,307 | | | (35) | | 32,916 | |
Other | — | | 8,133 | | 1,656 | | | — | | 9,789 | |
Revenue from contracts with customers | 25,384 | | 100,826 | | 72,456 | | | 71 | | 198,737 | |
Other sources of non-interest income | 41,483 | | — | | 25,322 | | | 19,735 | | 86,540 | |
Total non-interest income | $ | 66,867 | | $ | 100,826 | | $ | 97,778 | | | $ | 19,806 | | $ | 285,277 | |
| | | | | | |
(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 the Company in 2022 due to the businesses acquired in connection with the Sterling merger.
Contracts with customers did not generate significant contract assets and liabilities at December 31, 2022, and 2021.
Major Revenue Streams
Deposit service fees consist of fees earned from commercial and consumer customer deposit accounts, such as account maintenance and cash management/analysis fees, as well as other transactional service charges (i.e., insufficient funds, wire transfer, stop payment fees, etc.). Performance obligations for account maintenance services and cash management/analysis fees are satisfied on a monthly basis at a fixed transaction price, whereas performance obligations for other deposit service charges that result 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. Certain commercial customer contracts include credit clauses, whereby the Company will grant credit upon the customer meeting pre-determined conditions, which can be used to offset fees. On occasion, the Company may also waive certain fees. 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, the Company 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. The Company 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 the Company. 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 the Company 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 23: Commitments and Contingencies
Credit-Related Financial Instruments
In the normal course of business, the Company offers financial instruments with off-balance sheet risk to meet the financing needs of its customers. These transactions include commitments to extend credit, standby letters of credit, and commercial letters of credit, which involve, to varying degrees, elements of credit risk.
The following table summarizes the outstanding amounts of credit-related financial instruments with off-balance sheet risk: | | | | | | | | | | | |
| At December 31, |
(In thousands) | 2022 | | 2021 |
Commitments to extend credit | $ | 11,237,496 | | | $ | 6,870,095 | |
Standby letters of credit | 380,655 | | | 224,061 | |
Commercial letters of credit | 53,512 | | | 58,175 | |
Total credit-related financial instruments with off-balance sheet risk | $ | 11,671,663 | | | $ | 7,152,331 | |
The Company enters into contractual commitments to extend credit to its customers (i.e., 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 the Company'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, the Company 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 the Company's standby letters of credit expire without being funded. However, if the commitment were funded, the Company has recourse against the customer. The Company'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, the Company's commercial letter of credit agreements are often secured by the underlying goods subject to trade.
The following table summarizes the activity in the ACL on unfunded loan commitments, which provides for the unused portion of commitments to lend that are not unconditionally cancellable by the Company: | | | | | | | | | | | | | | | | | |
| Years ended December 31, |
(In thousands) | 2022 | | 2021 | | 2020 |
Balance, beginning of period | $ | 13,104 | | | $ | 12,755 | | | $ | 2,367 | |
Adoption of CECL | — | | | — | | | 9,139 | |
ACL established in the Sterling merger | 6,749 | | | — | | | — | |
Provision for credit losses | 7,854 | | | 349 | | | 1,249 | |
Balance, end of period | $ | 27,707 | | | $ | 13,104 | | | $ | 12,755 | |
Litigation
The Company 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 the Company 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. The Company will consider settlement of cases when it is in the best interests of the Company and its stakeholders. The Company 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 the Company or its consolidated financial position.
Note 24: Parent Company Financial Information
The following tables summarize condensed financial information for the Parent Company only:
| | | | | | | | | | | |
CONDENSED BALANCE SHEETS | | | |
| December 31, |
(In thousands) | 2022 | | 2021 |
Assets: | | | |
Cash and due from banks | $ | 305,331 | | | $ | 316,193 | |
| | | |
Intercompany debt securities | 150,000 | | | 150,000 | |
Investment in subsidiaries | 8,631,202 | | | 3,526,782 | |
| | | |
Alternative investments | 46,349 | | | 20,163 | |
Other assets | 13,358 | | | 3,953 | |
Total assets | $ | 9,146,240 | | | $ | 4,017,091 | |
Liabilities and stockholders’ equity: | | | |
Senior notes | $ | 480,878 | | | $ | 485,611 | |
Subordinated notes | 514,930 | | | — | |
Junior subordinated debt | 77,320 | | | 77,320 | |
Accrued interest payable | 7,457 | | | 5,861 | |
Due to subsidiaries | 3,858 | | | 488 | |
Other liabilities | 5,611 | | | 9,486 | |
Total liabilities | 1,090,054 | | | 578,766 | |
Stockholders’ equity | 8,056,186 | | | 3,438,325 | |
Total liabilities and stockholders’ equity | $ | 9,146,240 | | | $ | 4,017,091 | |
| | | | | | | | | | | | | | | | | |
CONDENSED STATEMENTS OF INCOME | | | | | |
| Years ended December 31, |
(In thousands) | 2022 | | 2021 | | 2020 |
Income: | | | | | |
Dividend income from bank subsidiary | $ | 475,000 | | | $ | 200,000 | | | $ | 20,000 | |
Interest income on securities and interest-bearing deposits | 5,955 | | | 3,444 | | | 5,530 | |
| | | | | |
Alternative investments income | 6,416 | | | 13,033 | | | 2,467 | |
Other non-interest income | 112 | | | 75 | | | 634 | |
Total income | 487,483 | | | 216,552 | | | 28,631 | |
Expense: | | | | | |
Interest expense on borrowings | 34,284 | | | 16,876 | | | 18,684 | |
Merger-related expenses | 40,314 | | | 16,266 | | | — | |
Other non-interest expense | 22,592 | | | 15,921 | | | 16,426 | |
Total expense | 97,190 | | | 49,063 | | | 35,110 | |
Income (loss) before income taxes and equity in undistributed earnings of subsidiaries | 390,293 | | | 167,489 | | | (6,479) | |
Income tax benefit | 20,799 | | | 3,121 | | | 4,572 | |
Equity in undistributed earnings of subsidiaries | 233,191 | | | 238,254 | | | 222,528 | |
Net income | $ | 644,283 | | | $ | 408,864 | | | $ | 220,621 | |
| | | | | | | | | | | | | | | | | |
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME | | | | | |
| Years ended December 31, |
(In thousands) | 2022 | | 2021 | | 2020 |
Net income | $ | 644,283 | | | $ | 408,864 | | | $ | 220,621 | |
Other comprehensive (loss) income, net of tax: | | | | | |
| | | | | |
Derivative instruments | 226 | | | 226 | | | 2,622 | |
Other comprehensive (loss) income of subsidiaries | (662,606) | | | (65,062) | | | 75,706 | |
Other comprehensive (loss) income, net of tax | (662,380) | | | (64,836) | | | 78,328 | |
Comprehensive (loss) income | $ | (18,097) | | | $ | 344,028 | | | $ | 298,949 | |
| | | | | | | | | | | | | | | | | |
CONDENSED STATEMENTS OF CASH FLOWS | | | | | |
| Years ended December 31, |
(In thousands) | 2022 | | 2021 | | 2020 |
Operating activities: | | | | | |
Net income | $ | 644,283 | | | $ | 408,864 | | | $ | 220,621 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
Equity in undistributed earnings of subsidiaries | (233,191) | | | (238,254) | | | (222,528) | |
| | | | | |
| | | | | |
Common stock contribution to charitable foundation | 10,500 | | | — | | | — | |
Other, net | (2,853) | | | 3,562 | | | 29,697 | |
Net cash provided by operating activities | $ | 418,739 | | | $ | 174,172 | | | $ | 27,790 | |
Investing activities: | | | | | |
Alternative investments (capital call), net of distributions | (16,292) | | | (6,304) | | | (3,751) | |
Net cash received in business combination | 193,238 | | | — | | | — | |
| | | | | |
Net cash provided by (used in) investing activities | 176,946 | | | (6,304) | | | (3,751) | |
Financing activities: | | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Dividends paid to common stockholders | (247,767) | | | (145,223) | | | (144,967) | |
Dividends paid to preferred stockholders | (13,725) | | | (7,875) | | | (7,875) | |
Exercise of stock options | 703 | | | 3,492 | | | 240 | |
| | | | | |
Common stock repurchase program | (322,103) | | | — | | | (76,556) | |
Common shares acquired related to stock compensation plan activity | (23,655) | | | (4,384) | | | (3,506) | |
| | | | | |
Net cash (used in) by financing activities | (606,547) | | | (153,990) | | | (232,664) | |
| | | | | |
Net (decrease) increase in cash and cash equivalents | (10,862) | | | 13,878 | | | (208,625) | |
Cash and cash equivalents at beginning of year | 316,193 | | | 302,315 | | | 510,940 | |
Cash and cash equivalents at end of year | $ | 305,331 | | | $ | 316,193 | | | $ | 302,315 | |
Note 25: Subsequent Events
The Company has evaluated subsequent events from the date of the Consolidated Financial Statements, and accompanying Notes thereto, through the date of issuance, and determined that, except for the acquisition of interLINK discussed within
Note 2: Mergers and Acquisitions, no other significant events were identified requiring recognition or disclosure.