Derivative Financial Instruments

9 Months Ended

Sep. 30, 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 tables present the notional amounts and fair values, including accrued interest, of derivative positions:


	At September 30, 2022
	Asset Derivatives				Liability Derivatives
(In thousands)	Notional Amounts		Fair Value		Notional Amounts		Fair Value
Designated as hedging instruments:
Interest rate derivatives (1)	$	850,000	$	243	$	2,000,000	$	16,377
Not designated as hedging instruments:
Interest rate derivatives (1)	6,731,008		217,613		6,721,716		409,950
Mortgage banking derivatives (2)	4,445		36		476		3
Other (3)	155,206		1,601		485,375		447
Total not designated as hedging instruments	6,890,659		219,250		7,207,567		410,400
Gross derivative instruments, before netting	$	7,740,659	219,493		$	9,207,567	426,777
Less: Master netting agreements			16,877				16,877
Cash collateral			185,968				—
Total derivative instruments, after netting			$	16,648			$	409,900

	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. At September 30, 2022 and December 31, 2021, notional amounts of interest rate swaps cleared through clearing houses include $2.9 billion and $0.4 billion for asset derivatives, respectively, and zero and $2.6 billion for liability derivatives, respectively. The related fair values approximate zero.

(2)Notional amounts related to residential loans exclude approved floating rate commitments of $2.8 million and $1.0 million at September 30, 2022 and December 31, 2021, respectively.

(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 $103.7 million and $66.0 million for asset derivatives and $464.7 million and $338.2 million for liability derivatives at September 30, 2022 and December 31, 2021, respectively, that have insignificant related fair values.

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


	At September 30, 2022
(In thousands)	Gross Amount Recognized		Derivative Offset Amount		Cash Collateral Received/Pledged		Net Amount Presented		Amounts Not Offset
Asset derivatives	$	219,245	$	16,877	$	185,968	$	16,400	$	16,771
Liability derivatives	16,877		16,877		—		—		852

	At December 31, 2021
(In thousands)	Gross Amount Recognized		Derivative Offset Amount		Cash Collateral Received/Pledged		Net Amount Presented		Amounts Not Offset
Asset derivatives	$	25,636	$	6,364	$	19,272	$	—	$	51
Liability derivatives	8,483		6,364		2,119		—		428

Derivative Activity

The following table summarizes 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	2022		2021		2022		2021




Interest rate derivatives	Long-term debt	$	(76)	$	(90)	$	(229)	$	(334)
Interest rate derivatives	Interest and fees on loans and leases	(483)		2,706		3,320		7,933
Net recognized on cash flow hedges		$	(559)	$	2,616	$	3,091	$	7,599

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 September 30, 2022		At December 31, 2021		At September 30, 2022		At December 31, 2021
Long-term debt	$	334,796	$	338,811	$	34,796	$	38,811

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


	Recognized In	Three months ended September 30,				Nine months ended September 30,
(In thousands)	Non-interest Income	2022		2021		2022		2021
Interest rate derivatives	Other income	$	6,032	$	2,727	$	25,291	$	7,132
Mortgage banking derivatives	Mortgage banking activities	31		38		(47)		(556)
Other	Other income	3,196		611		4,620		780
Total not designated as hedging instruments		$	9,259	$	3,376	$	29,864	$	7,356

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, 2022, the remaining unamortized balance of time-value premiums was $3.5 million. Over the next twelve months, an estimated $2.8 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 September 30, 2022, the remaining unamortized loss on terminated cash flow hedges is $0.4 million. The maximum length of time over which forecasted transactions are hedged is 4.5 years. Additional information about cash flow hedge activity impacting (AOCL) AOCI and the related amounts reclassified to interest expense is provided in Note 9: 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 14: Fair Value Measurements.

Derivative Exposure. At September 30, 2022, the Company had $64.8 million in initial margin collateral posted at clearing houses. In addition, $186.8 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 $0.2 million at
September 30, 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 $85.9 million at September 30, 2022. Webster has incorporated a valuation adjustment to reflect nonperformance risk in the fair value measurement of its derivatives, which totaled $9.5 million and $(0.4) million at September 30, 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.