Derivative Financial Instruments

6 Months Ended

Jun. 30, 2021

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 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 June 30, 2021								At December 31, 2020
	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)	$	1,000,000	$	29,179	$	25,000	$	14	$	1,000,000	$	39,641	$	25,000	$	103
Not designated as hedging instruments:
Interest rate derivatives (1)	4,526,290		196,438		4,422,119		16,137		4,533,441		292,096		4,356,339		11,874
Mortgage banking derivatives (2)	32,078		263		1,294		2		40,771		855		—		—
Other (3)	108,871		354		309,867		139		108,987		264		360,497		377
Total not designated as hedging instruments	4,667,239		197,055		4,733,280		16,278		4,683,199		293,215		4,716,836		12,251
Gross derivative instruments, before netting	$	5,667,239	226,234		$	4,758,280	16,292		$	5,683,199	332,856		$	4,741,836	12,354
Less: Master netting agreements			4,724				4,724				7,522				7,522
Cash collateral			30,234				2,996				33,043				4,485
Total derivative instruments, after netting			$	191,276			$	8,572			$	292,291			$	347

(1)Balances related to Chicago Mercantile Exchange (CME), excluding accrued interest, are presented as a single unit of account. In accordance with its rule book, CME legally characterizes variation margin payments as settlement of derivatives rather than collateral against derivative positions. Notional amounts of interest rate swaps cleared through CME include $0.2 billion and $0.1 billion for asset derivatives and $3.0 billion and $3.2 billion for liability derivatives at June 30, 2021 and December 31, 2020, respectively. The related fair values approximate zero.

(2)Notional amounts related to residential loans exclude approved floating rate commitments of $1.2 million at June 30, 2021.

(3)Other derivatives include foreign currency forward contracts related to lending arrangements and customer hedging activity, a Visa equity swap transaction, and risk participation agreements. Notional amounts of risk participation agreements include $83.1 million and $80.5 million for asset derivatives and $306.8 million and $338.9 million for liability derivatives at June 30, 2021 and December 31, 2020, respectively, that have insignificant related fair values.

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


	At June 30, 2021
(In thousands)	Gross Amount		Offset Amount		Net Amount on Balance Sheet		Amounts Not Offset		Net Amounts
Asset derivatives	$	34,958	$	34,958	$	—	$	134	$	134
Liability derivatives	7,720		7,720		—		1,915		1,915

	At December 31, 2020
(In thousands)	Gross Amount		Offset Amount		Net Amount on Balance Sheet		Amounts Not Offset		Net Amounts
Asset derivatives	$	40,565	$	40,565	$	—	$	785	$	785
Liability derivatives	12,007		12,007		—		1,247		1,247

Derivative Activity

The following table presents the income statement effect of derivatives designated as cash flow hedges:


	Recognized In	Three months ended June 30,				Six months ended June 30,
(In thousands)	Net Interest Income	2021		2020		2021		2020




Interest rate derivatives	Long-term debt	$	123	$	1,228	$	244	$	2,349
Interest rate derivatives	Interest and fees on loans and leases	(2,645)		(1,837)		(5,227)		(1,097)
Net recognized on cash flow hedges		$	(2,522)	$	(609)	$	(4,983)	$	1,252

The following table presents information related to a fair value hedging adjustment:


Condensed Consolidated Balance Sheet Line Item in Which Hedged Item is Located	Carrying Amount of Previously Hedged Item				Cumulative Amount of Fair Value Hedging Adjustment Included in Carrying Amount
(In thousands)	At June 30, 2021		At December 31, 2020		At June 30, 2021		At December 31, 2020
Long-term debt	$	341,488	$	344,164	$	41,488	$	44,164

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


	Recognized In	Three months ended June 30,				Six months ended June 30,
(In thousands)	Non-interest Income	2021		2020		2021		2020
Interest rate derivatives	Other income	$	(239)	$	(2,523)	$	4,405	$	3,403
Mortgage banking derivatives	Mortgage banking activities	(212)		633		(594)		1,626
Other	Other income	(303)		(1,014)		169		897
Total not designated as hedging instruments		$	(754)	$	(2,904)	$	3,980	$	5,926

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 June 30, 2021, the remaining unamortized balance of time-value premiums was $8.6 million.

Over the next twelve months, an estimated $10.5 million decrease to interest expense will be reclassified from AOCI (AOCL) relating to cash flow hedges, and an estimated $0.3 million increase to interest expense will be reclassified from AOCI (AOCL) relating to hedge terminations. At June 30, 2021, the remaining unamortized loss on terminated cash flow hedges is $0.8 million. The maximum length of time over which forecasted transactions are hedged is 3.1 years.

Additional information about cash flow hedge activity impacting AOCI (AOCL) and the related amounts reclassified to interest expense is provided in Note 11: Accumulated Other Comprehensive Income, Net of Tax. Information about the valuation methods used to measure the fair value of derivatives is provided in Note 15: Fair Value Measurements.

Derivative Exposure

At June 30, 2021, the Company had $72.7 million in initial margin collateral posted at CME. In addition, $32.2 million of cash collateral received is included in cash and due from banks on the accompanying Condensed Consolidated Balance Sheets.

Webster regularly evaluates the credit risk of its derivative customers, taking into account the likelihood of default, net exposures, and remaining contractual life, among other related factors. Credit risk exposure is mitigated as transactions with customers are generally secured by the same collateral of the underlying transactions. Current net credit exposure relating to interest rate derivatives with Webster Bank customers was $191.0 million at June 30, 2021. In addition, the Company monitors potential future exposure, representing its best estimate of exposure to remaining contractual maturity. The potential future exposure relating to interest rate derivatives with Webster Bank customers totaled $36.0 million at June 30, 2021. The Company incorporates a credit valuation adjustment (CVA) and debit valuation adjustment (DVA) to reflect nonperformance risk in the fair value measurement of its derivatives. Various factors impact changes in the CVA and DVA 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.