Derivative Financial Instruments

3 Months Ended

Mar. 31, 2022

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, including accrued interest, of derivative positions:


	At March 31, 2022
	Asset Derivatives				Liability Derivatives
(In thousands)	Notional Amounts		Fair Value		Notional Amounts		Fair Value
Designated as hedging instruments:
Interest rate derivatives (1)	$	1,000,000	$	5,651	$	—	$	—
Not designated as hedging instruments:
Interest rate derivatives (1)	6,385,652		101,454		6,054,975		117,041
Mortgage banking derivatives (2)	4,123		32		336		1
Other (3)	109,881		434		451,036		282
Total not designated as hedging instruments	6,499,656		101,920		6,506,347		117,324
Gross derivative instruments, before netting	$	7,499,656	107,571		$	6,506,347	117,324
Less: Master netting agreements			5,977				5,977
Cash collateral			54,206				904
Total derivative instruments, after netting			$	47,388			$	110,443

	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. Notional amounts of interest rate swaps cleared through clearing houses include $2.0 billion and $0.4 billion for asset derivatives and $1.5 billion and $2.6 billion for liability derivatives at March 31, 2022 and December 31, 2021, respectively. The related fair values approximate zero.

(2)Notional amounts related to residential loans exclude approved floating rate commitments of $0.9 million at March 31, 2022.

(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 $68.0 million and $66.0 million for asset derivatives and $438.8 million and $338.2 million for liability derivatives at March 31, 2022 and December 31, 2021, 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 March 31, 2022
(In thousands)	Gross Amount		Offset Amount		Net Amount on Balance Sheet		Amounts Not Offset		Net Amounts
Asset derivatives	$	62,877	$	60,183	$	2,694	$	(3,060)	$	(366)
Liability derivatives	6,881		6,881		—		1,014		1,014

	At December 31, 2021
(In thousands)	Gross Amount		Offset Amount		Net Amount on Balance Sheet		Amounts Not Offset		Net Amounts
Asset derivatives	$	25,636	$	25,636	$	—	$	51	$	51
Liability derivatives	8,483		8,483		—		428		428

Derivative Activity

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


	Recognized In	Three months ended March 31,
(In thousands)	Net Interest Income		2022		2021




Interest rate derivatives	Long-term debt		$	76	$	121
Interest rate derivatives	Interest and fees on loans and leases		(2,559)		(2,582)
Net recognized on cash flow hedges			$	(2,483)	$	(2,461)

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


Condensed 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
(In thousands)	At March 31, 2022		At December 31, 2021		At March 31, 2022		At December 31, 2021
Long-term debt	$	337,473	$	338,811	$	37,473	$	38,811

The following table summarizes the income statement effect of derivatives not designated as hedging instruments:


	Recognized In	Three months ended March 31,
(In thousands)	Non-interest Income		2022		2021
Interest rate derivatives	Other income		$	6,445	$	4,644
Mortgage banking derivatives	Mortgage banking activities		(49)		(382)
Other	Other income		397		472
Total not designated as hedging instruments			$	6,793	$	4,734

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 March 31, 2022, the remaining unamortized balance of time-value premiums was $6.2 million. Over the next twelve months, an estimated $1.2 million decrease to interest expense will be reclassified from (AOCL) AOCI relating to cash flow hedges, and an estimated $0.3 million increase to interest expense will be reclassified from (AOCL) AOCI relating to hedge terminations. At March 31, 2022, the remaining unamortized loss on terminated cash flow hedges is $0.6 million. The maximum length of time over which forecasted transactions are hedged is 2.3 years. Additional information about cash flow hedge activity impacting (AOCL) AOCI and the related amounts reclassified to interest expense is provided in Note 10: Accumulated Other Comprehensive (Loss) 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 March 31, 2022, the Company had $83.9 million in initial margin collateral posted at clearing houses. In addition, $55.2 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 $44.6 million at March 31, 2022. 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 $47.8 million at March 31, 2022. Webster has incorporated a valuation adjustment to reflect nonperformance risk in the fair value measurement of its derivatives, which totaled $3.3 million and $(0.4) million at March 31, 2022 and December 31, 2021, respectively. Various factors impact changes in the valuation adjustment 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.