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, 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.

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 fair value 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. Government agency debentures, municipal bonds and notes, Agency CMO, Agency MBS, Agency CMBS, CMBS, CLO, corporate debt, private label MBS, and other 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 loans held for sale at fair value under the fair value option per ASC Topic 825, Financial Instruments. Electing to measure originated 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 loans held for sale is based on quoted market prices of similar loans sold in conjunction with securitization transactions. Accordingly, originated loans held for sale are classified within Level 2 of the fair value hierarchy.

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


	At September 30, 2022						At December 31, 2021
(In thousands)	Fair Value		Unpaid Principal Balance		Difference		Fair Value		Unpaid Principal Balance		Difference
Originated loans held for sale	$	898	$	1,080	$	(182)	$	4,694	$	5,034	$	(340)

Rabbi Trust Investments. Investments held in each of the Rabbi Trusts consist primarily of mutual funds that invest in equity and fixed income securities. Shares of these mutual funds are valued based on the net asset value (NAV) as reported by the trustee of the funds, which represents quoted prices in active markets. Webster has elected to measure the Rabbi Trusts' investments at fair value. Accordingly, the Rabbi Trusts' investments are classified within Level 1 of the fair value hierarchy. At September 30, 2022, the cost basis of the Rabbi Trusts' investments was $10.3 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 September 30, 2022, equity investments with a readily determinable fair value had a carrying amount of $0.5 million and no remaining unfunded commitment. During the three and nine months ended September 30, 2022, there were write-downs in fair value of $0.2 million and $1.4 million, respectively, associated with these alternative investments.

Equity investments that do not have a readily available 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 September 30, 2022, these alternative investments had a carrying amount of $75.2 million and a remaining unfunded commitment of $76.1 million.

The following tables summarize the fair values of assets and liabilities measured at fair value on a recurring basis:


	At September 30, 2022
(In thousands)	Level 1		Level 2		Level 3		Total
Financial Assets:
Available-for-sale investment securities:
U.S. Treasury notes	$	713,263	$	—	$	—	$	713,263
Government agency debentures	—		269,028		—		269,028
Municipal bonds and notes	—		1,697,145		—		1,697,145
Agency CMO	—		63,861		—		63,861
Agency MBS	—		2,197,349		—		2,197,349
Agency CMBS	—		1,455,919		—		1,455,919
CMBS	—		922,928		—		922,928
CLO	—		7,203		—		7,203
Corporate debt	—		702,172		—		702,172
Private label MBS	—		44,310		—		44,310
Other	—		11,866		—		11,866
Total available-for-sale investment securities	713,263		7,371,781		—		8,085,044
Gross derivative instruments, before netting (1)	1,591		217,902		—		219,493
Originated loans held for sale	—		898		—		898
Investments held in Rabbi Trust	12,250		—		—		12,250
Alternative investments (2)	522		—		—		75,728
Total financial assets	$	727,626	$	7,590,581	$	—	$	8,393,413
Financial Liabilities:
Gross derivative instruments, before netting (1)	$	296	$	426,481	$	—	$	426,777


	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

(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 within Note 13: 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 September 30, 2022, the carrying amount of these alternative investments was $31.1 million. There were $0.5 million of net write-ups due to observable price changes and $0.2 million of write-downs due to impairment during both the three and nine months ended September 30, 2022.

Loans Transferred to Held for Sale. Once a decision has been made to sell loans not previously classified as held for sale, these loans are transferred into the held for sale category and carried at the lower of cost or fair value. At the time of transfer into held for sale classification, any amount by which cost exceeds fair value is accounted for as a valuation allowance. This activity generally pertains to commercial loans with observable inputs, and therefore, are classified within Level 2 of the fair value hierarchy. However, should these loans include adjustments for changes in loan characteristics based on unobservable inputs, the loans would then be classified within Level 3 of the fair value hierarchy. At September 30, 2022, there were no loans transferred to held for sale on the Condensed Consolidated Balance Sheet.

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. Other real estate owned (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 September 30, 2022, the total book value of OREO and repossessed assets was $2.1 million. In addition, the amortized cost of consumer loans secured by residential real estate property that were in process of foreclosure at September 30, 2022 was $9.7 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, and CMBS 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 assess 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.


	At September 30, 2022				At December 31, 2021
(In thousands)	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Assets:
Level 1
Cash and cash equivalents	$	613,125	$	613,125	$	461,570	$	461,570
Level 2
Held-to-maturity investment securities	6,505,838		5,650,119		6,198,125		6,280,936
Level 3
Loans and leases, net	47,249,550		45,896,000		21,970,542		21,702,732
Mortgage servicing assets	9,837		27,550		9,237		12,527
Liabilities:
Level 2
Deposit liabilities	$	51,439,293	$	51,439,293	$	28,049,259	$	28,049,259
Time deposits	2,569,594		2,503,396		1,797,770		1,794,829
Securities sold under agreements to repurchase and other borrowings	1,265,414		1,243,251		674,896		676,581
FHLB advances	3,510,717		3,509,221		10,997		11,490
Long-term debt (1)	1,074,844		1,030,390		562,931		515,912