Derivative Financial Instruments

9 Months Ended

Sep. 30, 2019

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Webster uses derivative financial instruments, primarily interest rate swaps, caps, and floors, under its interest rate risk management strategy, to mitigate certain economic risks and to achieve greater stability in interest income and interest expense. For additional information on Webster's accounting policies for derivatives and risk management objectives or related exposure of using derivatives see Note 1 to the Consolidated Financial Statements and Note 15: Derivative Financial Instruments, respectively, in the Notes to Consolidated Financial Statements contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2018.

Derivative Positions and Offsetting

Derivative positions are recorded at fair value with asset derivatives included in accrued interest receivable and other assets and liability derivatives included in accrued expenses and other liabilities on the consolidated balance sheet.

The following table presents the notional amounts and fair value of derivative positions:



	At September 30, 2019								At December 31, 2018
	Asset Derivatives				Liability Derivatives				Asset Derivatives				Liability Derivatives
(In thousands)	Notional Amounts		Fair Value		Notional Amounts		Fair Value		Notional Amounts		Fair Value		Notional Amounts		Fair Value
Designated as hedging instruments:
Interest rate derivatives ^{(1) (2)}	$	1,525,000	$	19,209	$	—	$	—	$	325,000	$	3,050	$	—	$	—
Not designated as hedging instruments:
Interest rate derivatives ⁽¹⁾	4,401,353		180,852		4,026,716		9,114		4,435,530		42,205		3,643,985		38,029
Mortgage banking derivatives ⁽³⁾	61,367		506		74,000		184		13,599		226		17,000		293
Other ⁽⁴⁾	107,022		776		151,219		762		85,432		797		140,601		688
Total not designated as hedging instruments	4,569,742		182,134		4,251,935		10,060		4,534,561		43,228		3,801,586		39,010
Gross derivative instruments, before netting	$	6,094,742	201,343		$	4,251,935	10,060		$	4,859,561	46,278		$	3,801,586	39,010
Less: Master netting agreements			6,240				6,240				2,495				2,495
Cash collateral			13,299				2,506				4,936				—
Total derivative instruments, after netting			$	181,804			$	1,314			$	38,847			$	36,515


(1)	Balances related to Chicago Mercantile Exchange (CME) are presented as a single unit of account. Notional amounts of interest rate swaps cleared through CME include $0.7 billion and $1.9 billion for asset derivatives and $2.8 billion and $1.1 billion for liability derivatives at September 30, 2019 and December 31, 2018, respectively. The related fair values approximate zero.


(2)	The increase in the notional amount is due to $1.0 billion interest rate floors purchased as part of the Company's balance sheet repositioning strategy.


(3)	Notional amounts related to residential loan commitments include mandatory forward commitments of $74.0 million, while notional amounts do not include approved floating rate commitments of $11.0 million, at September 30, 2019.

(4)

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 $65.0 million and $65.0 million for asset derivatives and $139.5 million and $96.3 million for liability derivatives at September 30, 2019 and December 31, 2018, respectively, that have insignificant related fair values.

All eligible dealer contracts are cleared through CME. In accordance with its rulebook, CME legally characterizes variation margin payments as settlement of derivatives rather than collateral against derivative positions. The Company has elected to record non-cleared derivative positions subject to a legally enforceable master netting agreement on a net basis. In addition, cash collateral received or posted is offset; however, securities collateral is not offset. At September 30, 2019, $13.3 million of cash collateral received is included in cash and due from banks on the consolidated balance sheet and is considered restricted in nature.

The following table presents fair value positions transitioned from gross to net upon application of counterparty netting agreements:



	At September 30, 2019
(In thousands)	Gross Amount		Offset Amount		Net Amount on Balance Sheet		Amounts Not Offset			Net Amounts
Asset derivatives	$	19,683	19,539		$	144	$	(201	)	$	(57	)
Liability derivatives	8,816		8,746		70		(104		)	(34		)

	At December 31, 2018
(In thousands)	Gross Amount		Offset Amount		Net Amount on Balance Sheet		Amounts Not Offset			Net Amounts
Asset derivatives	$	9,928	$	7,431	$	2,497	$	(755	)	$	1,742
Liability derivatives	2,566		2,495		71		—			71

Derivative Activity

The following table presents the change in fair value for derivatives designated as fair value hedges as well as the offsetting change in fair value on the hedged item and the income statement effect of derivatives designated as cash flow hedges:



	Recognized In	Three months ended September 30,					Nine months ended September 30,
(In thousands)	Net Interest Income	2019			2018		2019			2018
Fair value hedges:
Recognized on derivatives	Long-term debt	$	10,624		$	—	$	26,436		$	—
Recognized on hedged items	Long-term debt	(10,624		)	—		(26,436		)	—
Net recognized on fair value hedges		$	—		$	—	$	—		$	—
Cash flow hedges:
Interest rate derivatives	Long-term debt	$	1,095		$	1,667	$	3,028		$	5,158
Interest rate derivatives	Interest and fees on loans and leases	515			—		527			—
Net recognized on cash flow hedges		$	1,610		$	1,667	$	3,555		$	5,158

Additional information related to fair value hedges:



Consolidated Balance Sheet Line Item in Which Hedged Item is Located	Carrying Amount of Hedged Item				Cumulative Amount of Fair Value Hedging Adjustment Included in Carrying Amount
	At September 30,				At September 30,
(In thousands)	2019		2018		2019		2018
Long-term debt	$	326,436	$	—	$	26,436	$	—

The following table presents the effect on the income statement for derivatives not designated as hedging instruments:



	Recognized In	Three months ended September 30,					Nine months ended September 30,
(In thousands)	Non-interest Income	2019		2018			2019		2018
Interest rate derivatives	Other income	$	784	$	1,623		$	5,906	$	7,372
Mortgage banking derivatives	Mortgage banking activities	347		(26		)	96		(95		)
Other	Other income	1,679		(204		)	1,603		1,230
Total not designated as hedging instruments		$	2,810	$	1,393		$	7,605	$	8,507

For purchased options designated as cash flow hedges time value is excluded from the assessment of hedge effectiveness. Premiums related to time value are amortized to net interest income on a straight-line basis. During 2019, premiums of $13.5 million were excluded from the assessment of hedge effectiveness which had a remaining unamortized balance of $12.9 million at September 30, 2019.

Amounts for the change in fair value of derivatives qualifying for cash flow hedge accounting treatment are recorded to AOCL and reclassified to interest income as hedged interest payments are received or to interest expense as hedged interest payments are made. Over the next twelve months, an estimated $4.4 million reduction to interest expense will be reclassified from AOCL. Gains or losses on hedge termination are also recorded to AOCL and subsequently amortized into interest expense over the respective terms of the hedged debt instruments. Over the next twelve months, an estimated $2.7 million increase to interest expense will be reclassified from AOCL. At September 30, 2019, the remaining unamortized loss on terminated cash flow hedges is $5.8 million. The maximum length of time over which forecasted transactions are hedged is 10 years years.

Additional information about cash flow hedge activity impacting AOCL and the related amounts reclassified to interest expense is provided in Note 10: Accumulated Other Comprehensive Loss, Net of Tax. Information about the valuation methods used to measure the fair value of derivatives is provided in Note 14: Fair Value Measurements.

Derivative Exposure

The Company had approximately $160.4 million in net margin posted with financial counterparties or the derivative clearing organization at September 30, 2019, which is primarily comprised of $57.8 million in initial margin collateral posted at CME and $113.5 million in CME variation margin posted.

Webster regularly evaluates the credit risk of its derivative customers, taking into account the likelihood of default, net exposures, and remaining contractual life, among other related factors. Credit risk exposure is mitigated as transactions with customers are generally secured by the same collateral of the underlying transactions being hedged. Current net credit exposure relating to interest rate derivatives with Webster Bank customers was $180.5 million at September 30, 2019. In addition, the Company monitors potential future exposure, representing its best estimate of exposure to remaining contractual maturity. The potential future exposure relating to interest rate derivatives with Webster Bank customers totaled $36.5 million at September 30, 2019.