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 2: Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in inactive markets, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, rate volatility, prepayment speeds, and credit ratings), or inputs that are derived principally from or corroborated by market data, by 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.

An asset or liability's fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques maximize the use of relevant observable inputs and minimize the use of unobservable inputs.

Available-for-Sale Investment Securities. When unadjusted quoted prices are available in an active market, Webster classifies available-for-sale investment securities within Level 1 of the valuation hierarchy. U.S. Treasury notes have a readily determinable fair value and therefore are classified within Level 1 of the fair value hierarchy.

When quoted market prices are not available, Webster employs an independent pricing service that utilizes matrix pricing to calculate fair value. These fair value measurements consider observable data such as dealer quotes, market spreads, cash flows, yield curves, live trading levels, trade execution data, market consensus prepayments speeds, credit information, and the respective terms and conditions for debt instruments. Management maintains procedures to monitor the pricing service's results and has a process in place to challenge their valuations and methodologies that appear unusual or unexpected. Agency collateralized mortgage obligations (Agency CMO), Agency MBS, Agency CMBS, CMBS, CLO, and corporate debt securities available-for-sale are classified within Level 2 of the fair value hierarchy.

Derivative Instruments. The fair values presented for derivative instruments include any accrued interest. Foreign exchange contracts are valued based on unadjusted quoted prices in active markets and accordingly are classified within Level 1 of the fair value hierarchy. Except for mortgage banking derivatives, all other derivative instruments are valued using third-party valuation software, which considers the present value of cash flows discounted using observable forward rate assumptions. The resulting fair value is then validated against valuations performed by independent third parties. These derivative instruments are classified within Level 2 of the fair value hierarchy.

Mortgage Banking Derivatives. Webster uses forward sales of mortgage loans and mortgage-backed securities to manage the risk of loss associated with its mortgage loan commitments and mortgage loans held for sale. Prior to closing and funding certain single-family residential mortgage loans, an interest rate lock commitment is generally extended to the borrower. During this in-between time period, Webster is subject to the risk that market interest rates may change. If rates rise, investors generally will pay less to purchase mortgage loans, which would result in a reduction in the gain on sale of the loans, or possibly a loss. In an effort to mitigate this risk, forward delivery sales commitments are established in which Webster agrees to either deliver whole mortgage loans to various investors or issue mortgage-backed securities. The fair value of mortgage banking derivatives is determined based on current market prices for similar assets in the secondary market. Accordingly, mortgage banking derivatives are classified within Level 2 of the fair value hierarchy.

Originated Loans Held For Sale. Webster has elected to measure originated residential mortgage loans held for sale at fair value under the fair value option per ASC Topic 825, Financial Instruments. Electing to measure originated residential mortgage loans held for sale at fair value reduces certain timing differences and better reflects the price Webster would expect to receive from the sale of these loans. The fair value of originated residential mortgage loans held for sale is based on quoted market prices of similar loans sold in conjunction with securitization transactions. Accordingly, originated residential mortgage loans held for sale are classified within Level 2 of the fair value hierarchy.

The following table compares the fair value to unpaid principal balance of originated residential mortgage loans held for sale:


	At December 31,
	2021						2020
(In thousands)	Fair Value		Unpaid Principal Balance		Difference		Fair Value		Unpaid Principal Balance		Difference
Originated loans held for sale	$	4,694	$	5,034	$	(340)	$	14,000	$	13,511	$	489

Investments Held in Rabbi Trust. Investments held in the Rabbi Trust 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 represent quoted prices in active markets. Webster has elected to measure the investments held in the Rabbi Trust at fair value. Accordingly, investments held in the Rabbi Trust are classified within Level 1 of the fair value hierarchy. At December 31, 2021, the cost basis of the investments held in the Rabbi Trust was $1.6 million.

Alternative Investments. Equity investments have a readily determinable fair value when unadjusted quoted prices are available in an active market for identical assets. Accordingly, these alternative investments are classified within Level 1 of the fair value hierarchy. At December 31, 2021, equity investments with a readily determinable fair value had a carrying amount of $1.9 million and no remaining unfunded commitment. During the year ended December 31, 2021, there was a net change in fair value of $0.5 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. Webster's alternative investments measured at NAV consist of investments in non-public entities that cannot be redeemed since investments are distributed as the underlying equity is liquidated. Alternative investments measured at NAV are not classified within the fair value hierarchy. At December 31, 2021, these alternative investments had a carrying amount of $25.9 million and a remaining unfunded commitment of $14.1 million.


	At December 31, 2021
(In thousands)	Level 1		Level 2		Level 3		Total
Financial Assets:
Available-for-sale investment securities:
U.S. Treasury notes	$	396,966	$	—	$	—	$	396,966
Agency CMO	—		90,384		—		90,384
Agency MBS	—		1,593,403		—		1,593,403
Agency CMBS	—		1,232,541		—		1,232,541
CMBS	—		886,263		—		886,263
CLO	—		21,847		—		21,847
Corporate debt	—		13,450		—		13,450
Total available-for-sale investment securities	396,966		3,837,888		—		4,234,854
Gross derivative instruments, before netting (1)	187		158,930		—		159,117
Originated loans held for sale	—		4,694		—		4,694
Investments held in Rabbi Trust	3,416		—		—		3,416
Alternative investments (2)	1,877		—		—		27,732
Total financial assets	$	402,446	$	4,001,512	$	—	$	4,429,813
Financial Liabilities:
Gross derivative instruments, before netting (1)	$	141	$	21,643	$	—	$	21,784


	At December 31, 2020
(In thousands)	Level 1		Level 2		Level 3		Total
Financial Assets:
Available-for-sale investment securities:
Agency CMO	$	—	$	154,613	$	—	$	154,613
Agency MBS	—		1,457,409		—		1,457,409
Agency CMBS	—		1,117,233		—		1,117,233
CMBS	—		508,018		—		508,018
CLO	—		76,383		—		76,383
Corporate debt	—		13,120		—		13,120
Total available-for-sale investment securities	—		3,326,776		—		3,326,776
Gross derivative instruments, before netting (1)	205		338,853		—		339,058
Originated loans held for sale	—		14,000		—		14,000
Investments held in Rabbi Trust	4,811		—		—		4,811
Alternative investments (2)	—		—		—		11,112
Total financial assets held at fair value	$	5,016	$	3,679,629	$	—	$	3,695,757
Financial Liabilities:
Gross derivative instruments, before netting (1)	$	218	$	12,472	$	—	$	12,690

(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.

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, 2021, the carrying amount of these alternative investments was $25.8 million, of which $5.8 million are considered to be measured at fair value as a result of $4.4 million in write-ups due to observable price changes and a $0.3 million write-down due to impairment during the current period.

Collateral Dependent Loans and Leases. Loans and leases for which repayment is substantially expected to be provided through the operation or sale of collateral are considered collateral dependent, and are valued based on the estimated fair value of the collateral, less estimated costs to sell at the reporting date, using customized discounting criteria. Accordingly, collateral dependent loans and leases are classified within Level 3 of the fair value hierarchy.

Other Real Estate Owned and Repossessed Assets. 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, 2021, the total book value of OREO and repossessed assets was $2.8 million. In addition, the amortized cost of consumer loans secured by residential real estate property that are in the process of foreclosure at December 31, 2021 was $7.5 million.

Webster is required to disclose the estimated fair values of certain financial instruments and mortgage servicing assets. The following is a description of the valuation methodologies used to estimate fair value for those assets and liabilities.

Cash and Cash Equivalents. Given the short time frame to maturity, the carrying amount of cash and cash equivalents, which comprises cash and due from banks and interest-bearing deposits, approximates fair value. Cash and cash equivalents are classified within Level 1 of the fair value hierarchy.

Held-to-Maturity Investment Securities. When quoted market prices are not available, Webster employs an independent pricing service that utilizes matrix pricing to calculate fair value. These fair value measurements consider observable data such as dealer quotes, market spreads, cash flows, yield curves, live trading levels, trade execution data, market consensus prepayments speeds, credit information, and the respective terms and conditions for debt instruments. Management maintains procedures to monitor the pricing service's results and has a process in place to challenge their valuations and methodologies that appear unusual or unexpected. Held-to-maturity investment securities, which include Agency CMO, Agency MBS, Agency CMBS, municipal bonds and notes, are classified within Level 2 of the fair value hierarchy.

Loans and Leases, net. Except for collateral dependent loans and leases, the fair value of loans and leases held for investment is estimated using a discounted cash flow methodology, based on future prepayments and market interest rates inclusive of an illiquidity premium for comparable loans and leases. The associated cash flows are then adjusted for associated credit risks and other potential losses, as appropriate. Loans and leases are classified within Level 3 of the fair value hierarchy.

Mortgage Servicing Assets. Mortgage servicing assets are initially measured at fair value and subsequently measured using the amortization method. Webster assesses mortgage servicing assets for impairment each quarter and establishes or adjusts the valuation allowance to the extent that amortized cost exceeds the estimated fair market value. Fair value is calculated as the present value of estimated future net servicing income and relies on market based assumptions for loan prepayment speeds, servicing costs, discount rates, and other economic factors. Accordingly, the primary risk inherent in valuing mortgage servicing assets is the impact of fluctuating interest rates on the related servicing revenue stream. Mortgage servicing assets are classified within Level 3 of the fair value hierarchy.

Deposit Liabilities. The fair value of deposit liabilities, which comprises demand deposits, interest-bearing checking, savings, health savings, and money market accounts, reflects the amount payable on demand at the reporting date. Deposit liabilities are classified within Level 2 of the fair value hierarchy.

Time Deposits. The fair value of fixed-maturity certificates of deposit is estimated using rates that are currently offered for deposits with similar remaining maturities. Time deposits are classified within Level 2 of the fair value hierarchy.

Securities Sold Under Agreements to Repurchase and Other Borrowings. The fair value of securities sold under agreements to repurchase and other borrowings that mature within 90 days approximates their carrying value. The fair value of securities sold under agreements to repurchase and other borrowings that mature after 90 days is estimated using a discounted cash flow methodology based on current market rates and adjusted for associated credit risks, as appropriate. Securities sold under agreements to repurchase and other borrowings are classified within Level 2 of the fair value hierarchy.

Federal Home Loan Bank Advances and Long-Term Debt. The fair value of FHLB advances and long-term debt is estimated using a discounted cash flow methodology in which discount rates are matched with the time period of the expected cash flows and adjusted for associated credit risks, as appropriate. FHLB advances and long-term debt are classified within Level 2 of the fair value hierarchy.

The following table summarizes the carrying amounts, estimated fair values, and classifications within the fair value hierarchy of selected financial instruments and mortgage servicing assets:


	At December 31,
	2021				2020
(In thousands)	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Assets:
Level 1
Cash and cash equivalents	$	461,570	$	461,570	$	263,104	$	263,104
Level 2
Held-to-maturity investment securities	6,198,125		6,280,936		5,567,889		5,835,364
Level 3
Loans and leases, net	21,970,542		21,702,732		21,281,784		21,413,397
Mortgage servicing assets	9,237		12,527		13,422		14,362
Liabilities:
Level 2
Deposit liabilities	$	28,049,259	$	28,049,259	$	24,847,618	$	24,847,618
Time deposits	1,797,770		1,794,829		2,487,818		2,494,601
Securities sold under agreements to repurchase and other borrowings	674,896		676,581		995,355		1,000,189
FHLB advances	10,997		11,490		133,164		139,035
Long-term debt (1)	562,931		515,912		567,663		538,407