Derivative Financial Instruments

9 Months Ended

Sep. 30, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Positions and Offsetting

Derivatives Designated in Hedge Relationships. Interest rate swaps allow the Company to change the fixed or variable nature of an interest rate without the exchange of the underlying notional amount. Certain pay fixed/receive variable interest rate swaps are designated as cash flow hedges to effectively convert variable-rate debt into fixed-rate debt, while certain receive fixed/pay variable interest rate swaps are designated as fair value hedges to effectively convert fixed-rate long-term debt into variable-rate debt. Certain purchased options are designated as cash flow hedges. Purchased options allow the Company to limit the potential adverse impact of variable interest rates by establishing a cap or a floor rate in exchange for an upfront premium. The purchased options designated as cash flow hedges represent interest rate caps where payment is received from the counterparty if interest rates rise above the cap rate and interest rate floors where payment is received from the counterparty when interest rates fall below the floor rate.

Derivatives Not Designated in Hedge Relationships. The Company also enters into other derivative transactions to manage economic risks but does not designate the instruments in hedge relationships. Further, the Company enters into derivative contracts to accommodate customer needs. Derivative contracts with customers are offset with dealer counterparty transactions structured with matching terms to ensure minimal impact on earnings.

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


	At September 30, 2020								At December 31, 2019
	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)	$	1,150,000	$	44,114	$	25,000	$	145	$	1,225,000	$	11,855	$	300,000	$	3,153
Not designated as hedging instruments:
Interest rate derivatives (1)	4,642,373		341,275		4,505,792		17,212		4,869,139		133,455		4,090,522		9,732
Mortgage banking derivatives (2)	105,605		2,717		—		—		27,873		329		57,000		110
Other (3)	111,089		333		351,288		890		76,544		398		275,279		818
Total not designated as hedging instruments	4,859,067		344,325		4,857,080		18,102		4,973,556		134,182		4,422,801		10,660
Gross derivative instruments, before netting	$	6,009,067	388,439		$	4,882,080	18,247		$	6,198,556	146,037		$	4,722,801	13,813
Less: Master netting agreements			12,390				12,390				4,779				4,779
Cash collateral			32,159				5,085				8,100				1,871
Total derivative instruments, after netting			$	343,890			$	772			$	133,158			$	7,163

(1)Balances related to Chicago Mercantile Exchange (CME) are presented as a single unit of account. In accordance with its rule book, CME legally characterizes variation margin payments as settlement of derivatives rather than collateral against derivative positions. Notional amounts of interest rate swaps cleared through CME include $60.1 million and $1.1 billion for asset derivatives and $3.4 billion and $2.6 billion for liability derivatives at September 30, 2020 and December 31, 2019, respectively. The related fair values approximate zero.

(2)Notional amounts related to residential loans exclude approved floating rate commitments of $10.8 million at September 30, 2020.

(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 (RPAs). Notional amounts of RPAs include $95.4 million and $65.7 million for asset derivatives and $317.8 million and $223.4 million for liability derivatives at September 30, 2020 and December 31, 2019, respectively, that have insignificant related fair values.

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


	At September 30, 2020
(In thousands)	Gross Amount		Offset Amount		Net Amount on Balance Sheet		Amounts Not Offset		Net Amounts
Asset derivatives	$	44,549	$	44,549	$	—	$	196	$	196
Liability derivatives	17,568		17,475		93		1,041		1,134

	At December 31, 2019
(In thousands)	Gross Amount		Offset Amount		Net Amount on Balance Sheet		Amounts Not Offset		Net Amounts
Asset derivatives	$	13,012	$	12,879	$	133	$	299	$	432
Liability derivatives	6,710		6,650		60		329		389

Derivative Activity

The following tables present the income statement effect of derivatives designated as hedges and additional information related to a fair value hedging adjustment:


	Recognized In	Three months ended September 30,				Nine months ended September 30,
(In thousands)	Net Interest Income	2020		2019		2020		2019
Fair value hedges: (1)
Recognized on derivatives	Long-term debt	$	—	$	10,624	$	30,693	$	26,436
Recognized on hedged items	Long-term debt	—		(10,624)		(30,693)		(26,436)
Net recognized on fair value hedges		$	—	$	—	$	—	$	—
Cash flow hedges:
Interest rate derivatives	Long-term debt	$	1,152	$	1,095	$	3,501	$	3,028
Interest rate derivatives	Interest and fees on loans and leases	(2,657)		515		(3,754)		527
Net recognized on cash flow hedges		$	(1,505)	$	1,610	$	(253)	$	3,555


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 (1)
(In thousands)	At September 30, 2020		At December 31, 2019		At September 30, 2020		At December 31, 2019
Long-term debt	$	345,502	$	317,486	$	45,502	$	17,486

(1)The Company has de-designated its fair value hedging relationship on the long-term debt, which resulted in a $48.2 million basis adjustment that is being amortized over the remaining life of the notes through interest expense.

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	2020		2019		2020		2019
Interest rate derivatives	Other income	$	3,824	$	784	$	7,227	$	5,906
Mortgage banking derivatives	Mortgage banking activities	872		347		2,498		96
Other	Other income	(1,229)		1,679		(332)		1,603
Total not designated as hedging instruments		$	3,467	$	2,810	$	9,393	$	7,605

Purchased options designated as cash flow hedges exclude time-value premiums from the assessment of hedge effectiveness. Time-value premiums are amortized on a straight-line basis. At September 30, 2020, the remaining unamortized balance of time-value premiums was $10.0 million.

Over the next twelve months, an estimated $8.1 million decrease to interest expense will be reclassified from AOCI/AOCL relating to cash flow hedges, and an estimated $1.9 million increase to interest expense will be reclassified from AOCI/AOCL relating to hedge terminations. At September 30, 2020, the remaining unamortized loss on terminated cash flow hedges is $3.1 million. The maximum length of time over which forecasted transactions are hedged is 4 years.

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

Derivative Exposure

The Company had approximately $349.5 million in net margin posted with financial counterparties or the derivative clearing organization at September 30, 2020, which is primarily comprised of $82.8 million in initial margin collateral posted at CME and $294.6 million in CME variation margin posted. At September 30, 2020, $33.2 million of cash collateral received is included in cash and due from banks on the consolidated balance sheet and is considered restricted in nature.

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 $346.1 million at September 30, 2020. 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 $40.0 million at September 30, 2020. The Company has incorporated a credit valuation adjustment (CVA) to reflect nonperformance risk in the fair value measurement of its derivatives. The CVA was $4.2 million as of September 30, 2020. Various factors impact changes in the CVA over time, including changes in the credit spreads of the parties to the contracts, as well as changes in market rates and volatilities, which affect the total expected exposure of the derivative instruments.