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Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbols
Name of Exchange on which registered
iCommon
Stock, par value $0.01 per share
iWBS
iNew York Stock Exchange
iDepositary
Shares, each representing 1/1000th interest in a share
iWBS PrF
iNew York Stock Exchange
of 5.25% Series F Non-Cumulative Perpetual Preferred Stock
Indicate
by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ iYes ☐ No
Indicate by check mark whether the
registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ iYes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
iLarge
Accelerated Filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging
growth company
i☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transaction
period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). i☐ Yes ☒ No
The number of shares of common stock, par value $.01 per share, outstanding as of April 30, 2021 was i90,420,187.
This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by words such as "believes,""anticipates,""expects,""intends,""targeted,""continue,""remain,""will,""should,""may,""plans,""estimates," and similar references to future periods. However, these words are not the exclusive means of identifying such statements. Examples of forward-looking statements include, but are not limited to:
▪projections of revenues, expenses,
income or loss, earnings or loss per share, allowance for credit losses (ACL), expense savings, and other financial items;
▪statements of plans, objectives, and expectations of Webster or its management or Board of Directors;
▪statements of future economic performance; and
▪statements of assumptions underlying such statements.
Forward-looking statements are based on Webster’s current expectations and assumptions regarding its business, the economy, and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks, and changes in circumstances that are difficult to predict. Webster’s actual results may differ materially from those contemplated
by the forward-looking statements, which are neither statements of historical fact nor guarantees or assurances of future performance. Factors that could cause our actual results to differ from those discussed in any forward-looking statements include, but are not limited to:
▪our ability to successfully execute our business plan and strategic initiatives, and manage our risks;
▪our ability to successfully achieve the anticipated cost reductions and efficiencies from recently announced strategic initiatives, including branch consolidations, process automation, organization simplification, and spending reductions, and avoid any higher than anticipated costs or delays in implementing the strategic plan;
▪our ability to complete the acquisition of Sterling
Bancorp (Sterling) and realize the anticipated benefits of the merger;
▪local, regional, national, and international economic conditions, and the impact they may have on us and our customers;
▪volatility and disruption in national and international financial markets;
▪the potential adverse effects of the ongoing novel coronavirus (COVID-19) pandemic and any governmental or societal responses thereto, including the deployment and efficacy of COVID-19 vaccines, or other unusual and infrequently occurring events;
▪changes in laws and regulations (including those concerning banking, taxes, dividends, securities, insurance, and healthcare) with which we and our subsidiaries
must comply, including recent and potential legislative and regulatory changes in response to the COVID-19 pandemic, such as the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and the rules and regulations that may be promulgated thereunder;
▪adverse conditions in the securities markets that lead to impairment in the value of our investment securities and goodwill;
▪inflation, changes in interest rates, and monetary fluctuations;
▪the timely development and acceptance of new products and services, and the perceived value of those products and services by customers;
▪changes in deposit flows, consumer spending, borrowings, and savings habits;
▪our
ability to implement new technologies and maintain secure and reliable technology systems;
▪the effects of any cyber threats, attacks or events, or fraudulent activity;
▪performance by our counterparties and vendors;
▪our ability to increase market share and control expenses;
▪changes in the competitive environment among banks, financial holding companies, and other financial services providers;
▪changes in the level of non-performing assets and charge-offs;
▪changes in estimates of future reserve requirements based upon the periodic
review thereof under relevant regulatory and accounting requirements;
▪the effect of changes in accounting policies and practices applicable to us, including changes in our allowance for loan and lease losses and other impacts of recently adopted accounting guidance regarding the recognition of credit losses;
▪legal and regulatory developments, including the resolution of legal proceedings or regulatory or other governmental inquiries, and the results of regulatory examinations or reviews; and
▪our ability to appropriately address social, environmental, and sustainability concerns that may arise from our business activities.
Any forward-looking statement in this Quarterly Report on Form 10-Q speaks only as
of the date on which it is made. Factors or events that could cause the Company’s actual results to differ may emerge from time to time, and it is not possible for the Company to predict all of them. The Company undertakes no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments, or otherwise, except as may be required by law.
Webster Financial Corporation, collectively with its consolidated subsidiaries
iii
PART
I – FINANCIAL INFORMATION
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company’s Consolidated Financial Statements, and accompanying Notes thereto, for the year ended December 31, 2020, included in Webster Financial Corporation's Annual Report on Form 10-K filed with the United States Securities and Exchange Commission (SEC) on February 26, 2021, and in conjunction with the Condensed Consolidated Financial Statements, and accompanying Notes thereto, included in Item 1 of
this report. Operating results for the three months ended March 31, 2021 are not necessarily indicative of results that may be attained during the full year ending December 31, 2021, or any future period.
Executive Summary
Nature of Operations
Webster Financial Corporation (the Holding Company) is a bank holding company and financial holding company under the Bank Holding Company Act of 1956, as amended (BHC Act), incorporated under the laws of Delaware in 1986, and headquartered in Waterbury, Connecticut. Webster Bank, National Association (Webster Bank) is the principal consolidated subsidiary
of Webster Financial Corporation. Webster Bank, including its HSA Bank division, deliver a wide range of banking, investment, and financial services to individuals, families, and businesses. Webster Bank serves consumer and business customers with mortgage lending, financial planning, trust, and investment services through a distribution network consisting of banking centers, ATMs, a customer care center, and a full range of web and mobile-based banking services throughout southern New England and Westchester County, New York. It also offers equipment financing, commercial real estate lending, asset-based lending, and treasury and payment solutions primarily in the eastern U.S. HSA Bank is a leading provider of health savings accounts (HSAs), while also delivering health reimbursement arrangements, and flexible spending and commuter benefit account administration services to employers and individuals in all 50 states.
Pending
Merger with Sterling Bancorp
On April 19, 2021, Webster and Sterling announced that their boards of directors approved by unanimous vote a definitive agreement under which the two companies will combine in an all-stock transaction for total consideration of approximately $5.1 billion. Sterling, a full-service regional bank headquartered in Pearl River, New York, primarily serves the Greater New York metropolitan region and reported $29.9 billion in assets, $20.9 billion in loans, and $23.8 billion in deposits at March 31, 2021. Under the terms of the agreement, Sterling will merge into Webster, and Sterling's shareholders will receive a fixed exchange ratio of 0.463 of a Webster common share for each share of Sterling common stock owned. In addition, at the effective time of the merger, each outstanding share of Sterling's Series
A non-cumulative perpetual preferred stock will be converted into the right to receive a newly created series of Webster preferred stock having substantially the same terms. The merger is expected to close in the fourth quarter of 2021, subject to satisfaction of customary closing conditions, including receipt of required regulatory approvals and approval by the shareholders of each company. Following the closing of the transaction, Webster shareholders will own approximately 50.4% of the combined company, and Sterling shareholders will own approximately 49.6%, on a fully diluted basis.
Strategic Initiatives
During the fourth quarter of 2020, the Company launched a strategic plan to drive incremental revenue and cost savings measures across the organization through the consolidation of banking centers
and corporate facilities, process automation, ancillary spend reduction, and other organizational actions. As of March 31, 2021, several key project milestones have been completed, including the closure of 7 banking centers, with the remainder planned for the second quarter of 2021, and the realignment of certain of the Company's business banking and investment services operations across its reportable segments.
Strategic initiative costs incurred during the three months ended March 31, 2021 included an incremental $2.0 million in severance due to voluntary terminations, $2.6 million in facilities optimization, and $4.8 million in other project costs. Additional costs will be incurred as the
Company continues to manage the strategic plan and further realize operational benefits. The Company anticipates it will reach full cost savings realization by the end of the fourth quarter of 2021.
Refer to Note 3: Business Developments and Note 17: Segment Reporting in the Notes to the Condensed Consolidated Financial Statements for additional information related to the financial statement impact of the strategic plan, as well as the "Segment Reporting" section contained elsewhere in this report for further details specific to the Company's segment changes.
1
COVID-19
Update
The COVID-19 pandemic has caused significant disruptions to the United States economy, affecting banking and other financial activities in the areas in which the Company operates. Consistent with Webster's philosophy of supporting its customers, communities, and employees in times of need, the Company is committed to providing assistance to those impacted by COVID-19. Webster continues to manage a remote work environment, and has increased the capacity limit in its buildings from 25% to 50% during the second quarter of 2021 in order to accommodate those who are comfortable returning to the office on a regular basis. Social distancing and safety protocols are in place and will remain in compliance with federal and state guidelines. Information regarding
the effects and potential effects of the ongoing COVID-19 pandemic on Webster's business, operating results, and financial condition is further discussed throughout Item 2.
Results of Operations
Selected financial highlights are presented in the following table:
At or for the three months ended March 31,
(In thousands, except
per share and ratio data)
2021
2020
Earnings:
Net interest income
$
223,764
$
230,801
Provision for credit losses
(25,750)
76,000
Non-interest
income
76,757
73,378
Non-interest expense
187,982
178,836
Net income
108,078
38,199
Earnings applicable to common shareholders
105,530
36,021
Share
Data:
Weighted-average common shares outstanding - diluted
90,108
91,206
Diluted earnings per common share
$
1.17
$
0.39
Dividends and dividend equivalents declared per common share
0.40
0.40
Dividends
declared per Series F preferred share
328.13
328.13
Book value per common share
34.60
32.66
Tangible book value per common share (non-GAAP)
28.41
26.46
Selected Ratios:
Net
interest margin
2.92
%
3.23
%
Return on average assets (annualized basis)
1.31
0.50
Return on average common shareholders' equity (annualized basis)
13.65
4.75
CET1
risk-based capital
11.89
10.95
Tangible common equity ratio (non-GAAP)
7.85
7.67
Return on average tangible common shareholders' equity (annualized basis) (non-GAAP)
16.79
5.95
Efficiency
ratio (non-GAAP)
58.46
58.03
The non-GAAP financial measures identified in the preceding table provide both management and investors with information useful in understanding the Company's financial position, operating results, strength of its capital position, and overall business performance. These measures are used by management for internal planning and forecasting purposes, as well as by securities analysts, investors, and other interested parties to assess peer company operating performance. Management believes that this presentation, together with the accompanying reconciliations, provides a complete understanding
of the factors and trends affecting the Company's business and allows investors to view its performance in a similar manner.
The tangible common equity ratio represents shareholders’ equity less preferred stock, goodwill, and intangible assets divided by total assets less goodwill and intangible assets, and is used by management to evaluate the strength of the Company's capital position. The return on average tangible common shareholders' equity is calculated using the Company’s net income available to common shareholders, adjusted for the tax-effected amortization of intangible assets, as a percentage of average shareholders’ equity less average preferred stock, average goodwill,
and intangible assets. This measure is used by management to assess Webster's performance along with its peer financial institutions. The efficiency ratio, which represents the costs expended to generate a dollar of revenue, is calculated excluding certain non-operational items in order to measure how the Company is managing its recurring operating expenses.
These non-GAAP financial measures should not be considered a substitute for GAAP (U.S. Generally Accepted Accounting Principles) basis measures and results. Because non-GAAP financial measures are not standardized, it may not be possible to compare these financial measures with other companies' Non-GAAP financial measures having the same or similar names.
The following tables reconcile non-GAAP financial measures with financial measures defined
by GAAP:
2
At March 31,
(Dollars and shares in thousands, except per share data)
2021
2020
Tangible book value per common share (non-GAAP):
Shareholders'
equity (GAAP)
$
3,272,928
$
3,090,242
Less: Preferred stock (GAAP)
145,037
145,037
Goodwill and other intangible assets (GAAP)
559,617
559,328
Tangible common shareholders' equity (non-GAAP)
$
2,568,274
$
2,385,877
Common
shares outstanding
90,410
90,172
Tangible book value per common share (non-GAAP)
$
28.41
$
26.46
Tangible common equity ratio (non-GAAP):
Tangible
common shareholders' equity (non-GAAP)
$
2,568,274
$
2,385,877
Total assets (GAAP)
$
33,259,037
$
31,654,874
Less: Goodwill and other intangible assets (GAAP)
559,617
559,328
Tangible
assets (non-GAAP)
$
32,699,420
$
31,095,546
Tangible common equity ratio (non-GAAP)
7.85
%
7.67
%
Three
months ended March 31,
(Dollars in thousands)
2021
2020
Return on average tangible common shareholders' equity (non-GAAP):
Income adjusted for preferred stock dividends and intangible assets amortization (non-GAAP)
$
107,009
$
36,990
Income adjusted for preferred stock dividends and intangible assets amortization (annualized basis) (non-GAAP)
$
428,036
$
147,960
Average
shareholders' equity (non-GAAP)
$
3,254,203
$
3,193,525
Less: Average preferred stock (non-GAAP)
145,037
145,037
Average goodwill and other intangible assets (non-GAAP)
560,173
559,786
Average tangible
common shareholders' equity (non-GAAP)
$
2,548,993
$
2,488,702
Return on average tangible common shareholders' equity (non-GAAP)
16.79
%
5.95
%
Efficiency ratio (non-GAAP):
Non-interest
expense (GAAP)
$
187,982
$
178,836
Less: Foreclosed property activity (GAAP)
91
(250)
Intangible assets amortization (GAAP)
1,139
962
Other expense (non-GAAP) (1)
9,441
—
Non-interest
expense (non-GAAP)
$
177,311
$
178,124
Net interest income (GAAP)
$
223,764
$
230,801
Add: Tax-equivalent adjustment (non-GAAP)
2,495
2,473
Non-interest
income (GAAP)
76,757
73,378
Other income (non-GAAP) (2)
277
299
Less: Gain on sale of investment securities, net (GAAP)
—
8
Income
(non-GAAP)
$
303,293
$
306,943
Efficiency ratio (non-GAAP)
58.46
%
58.03
%
(1)Other expense (non-GAAP) includes strategic initiatives charges.
(2)Other income (non-GAAP) includes low income housing tax credits.
Financial
Performance
Net income increased $69.9 million, or 182.9%, from $38.2 million for the three months ended March 31, 2020 to $108.1 million for the three months ended March 31, 2021, primarily due to a $101.8 million decrease in the provision for credit losses, which was driven by improvements to the forecasted economic outlook and favorable credit trends, as compared to that at the start of the COVID-19 pandemic.
Diluted earnings per share increased $0.78, or 200.0%, from $0.39 for the three months ended March 31, 2020 to $1.17 for the three months ended March 31, 2021.
The efficiency ratio (non-GAAP), which measures the costs expended to generate
a dollar of revenue, increased 43 basis points from 58.03% for the three months ended March 31, 2020 to 58.46% for the three months ended March 31, 2021.
3
The following table presents daily average balances, interest, yield/rate, and net interest margin on a fully tax-equivalent basis:
Interest-bearing checking, money market, and savings
11,995,473
1,720
0.06
9,716,974
12,403
0.51
Time
deposits
2,371,026
3,112
0.53
3,067,557
12,144
1.59
Total deposits
28,254,532
6,439
0.09
24,062,795
27,843
0.47
Securities
sold under agreements to repurchase and other borrowings
522,728
635
0.49
1,296,925
3,730
1.14
FHLB advances
135,787
513
1.51
1,325,899
6,869
2.05
Long-term
debt (1)
567,058
4,223
3.23
551,250
5,227
4.00
Total borrowings
1,225,573
5,371
1.82
3,174,074
15,826
2.00
Total
interest-bearing liabilities
29,480,105
$
11,810
0.16
%
27,236,869
$
43,669
0.64
%
Non-interest-bearing liabilities
391,752
362,116
Total
liabilities
29,871,857
27,598,985
Preferred stock
145,037
145,037
Common
shareholders' equity
3,109,166
3,048,488
Total shareholders' equity
3,254,203
3,193,525
Total liabilities and shareholders' equity
$
33,126,060
$
30,792,510
Tax-equivalent
net interest income
$
226,259
$
233,274
Less: Tax-equivalent adjustments
(2,495)
(2,473)
Net interest income
$
223,764
$
230,801
Net
interest margin
2.92
%
3.23
%
(1)For purposes of our yield/rate computation, unrealized gain (loss) balances on available-for-sale securities and senior fixed-rate notes hedges are excluded.
(2)Interest-bearing deposits is a component of cash and cash equivalents on the accompanying Condensed Consolidated Statements of Cash Flows.
4
Net
interest income (NII) and net interest margin are impacted by the level of interest rates, mix of assets earning and liabilities bearing those interest rates, and the volume of interest-earning assets and interest-bearing liabilities. These factors are influenced by changes in economic conditions that impact interest rate policy, competitive conditions that impact loan and deposit pricing strategies, as well as the extent of interest lost to non-performing assets.
NII is the difference between interest income on earning assets, such as loans and investment securities, and interest expense on liabilities, such as deposits and borrowings, which are used to fund those assets. NII is the Company's largest source of revenue, representing 74.5% of total revenue for the three months ended March 31, 2021.
Net
interest margin is the ratio of tax-equivalent net interest income to average earning assets for the period.
Webster manages the risk of changes in interest rates on net interest income and net interest margin through its Asset/Liability Committee (ALCO) and through related interest rate risk monitoring and management policies. ALCO meets at least monthly to make decisions on the investment securities and funding portfolios based on the economic outlook, its interest rate expectations, the portfolio risk position, and other factors.
Four main tools are used for managing interest rate risk:
•the size, duration, and credit risk of the investment portfolio;
•the size and duration of the wholesale funding portfolio;
The federal funds rate target range was 0-0.25% at both March 31, 2021 and December 31, 2020, and 1.50-1.75% at December 31, 2019. The benchmark 10-year U.S. Treasury rate increased to 1.74% at March 31, 2021 from 0.93% at December 31, 2020, as compared to 1.92% at December 31, 2019. Refer to the "Asset/Liability Management and Market Risk" section for further discussion of Webster's interest rate
risk position.
Net Interest Income
Net interest income decreased $7.0 million, or 3.05%, from $230.8 million for the three months ended March 31, 2020 to $223.8 million for the three months ended March 31, 2021. The quarter-over-quarter decrease in net interest income was also $7.0 million on a full tax-equivalent basis.
Net interest margin decreased 31 basis points from 3.23% for the three months ended March 31, 2020 to 2.92% for the three months ended March 31, 2021. The decrease was due to lower loan and securities yields, partially offset by both deposit and borrowings costs and Small Business Administration Paycheck Protection Program (PPP)
loan activity.
Changes in Net Interest Income
The following table presents the components of the change in net interest income attributable to changes in rate and volume, and reflects net interest income on a fully tax-equivalent basis:
Change in interest on interest-bearing liabilities:
Deposits
$
(21,709)
$
305
$
(21,404)
Borrowings
(1,887)
(8,568)
(10,455)
Total
interest expense
$
(23,596)
$
(8,263)
$
(31,859)
Net change in net interest income
$
(35,313)
$
28,298
$
(7,015)
(1)The change attributable to mix, a combined impact of rate and volume, is included
with the change due to rate.
(2)Securities include: investment securities, Federal Home Loan Bank (FHLB) and Federal Reserve Bank (FRB) stock, and interest-bearing deposits.
5
Average loans and leases for the three months ended March 31, 2021 increased $1.2 billion as compared to the average balance for the three months ended March 31, 2020, primarily due to PPP loans. The loan and lease portfolio comprised 69.0% of the average interest-earning assets at March 31, 2021 as compared to 70.4% of the average interest-earning assets at March 31,
2020. The loan and lease portfolio yield decreased 67 basis points from 4.24% for the three months ended March 31, 2020 to 3.57% for the three months ended March 31, 2021. The decrease in yield is primarily due to lower market rates.
Average securities for the three months ended March 31, 2021 increased $1.1 billion as compared to the average balance for the three months ended March 31, 2020. The securities portfolio comprised 31.0% of the average interest-earning assets at March 31, 2021 as compared to 29.5% of the average interest-earning assets at March 31, 2020. The securities portfolio yield decreased 89 basis points from
2.86% for the three months ended March 31, 2020 to 1.97% for the three months ended March 31, 2021. The decrease in yield is primarily due to higher premium amortization and lower yield from newly purchased securities.
Average total deposits for the three months ended March 31, 2021 increased $4.2 billion as compared to the average balance for the three months ended March 31, 2020. The increase was driven by transactional deposit products resulting from stimulus payments and reduced customer spending. The average cost of deposits decreased 38 basis points from 0.47% for the three months ended March 31, 2020 to 0.09% for the three months ended March
31, 2021. The average cost of deposits decreased due to deposit product mix and reductions in the federal funds rate. Higher cost time deposits decreased as a percentage of total interest-bearing deposits from 15.7% for the three months ended March 31, 2020 to 10.9% for the three months ended March 31, 2021, primarily due to customer preference for more liquid deposit products.
Average total borrowings for the three months ended March 31, 2021 decreased $1.9 billion as compared to the average balance for the three months ended March 31, 2020. Specifically, average securities sold under agreements to repurchase and other borrowings decreased $774.2 million and average FHLB advances decreased $1.2 billion. The average cost of
borrowings decreased 18 basis points from 2.00% for the three months ended March 31, 2020 to 1.82% for the three months ended March 31, 2021. The decrease is primarily a result of lower market rates and paying down higher rate FHLB advances enabled by the increase in deposits.
Provision for Credit Losses
The provision for credit losses decreased $101.8 million, reflecting a benefit of $25.8 million for the three months ended March 31, 2021 as compared to an expense of $76.0 million for the three months ended March 31, 2020. The decrease in the provision is attributed to improvements in the forecasted economic outlook and favorable credit trends, as compared to that at the start of the
COVID-19 pandemic. Total net charge-offs were $5.3 million and $7.8 million for the three months ended March 31, 2021 and 2020, respectively.
The allowance for credit losses on loan and leases coverage ratio decreased 12 basis points from 1.66% at December 31, 2020 to 1.54% at March 31, 2021. Refer to the sections captioned "Loans and Leases" through "Troubled Debt Restructurings," contained elsewhere in the report for further details.
6
Non-Interest
Income
Three months ended March 31,
Increase (decrease)
(Dollars in thousands)
2021
2020
Amount
Percent
Deposit
service fees
$
40,469
$
42,570
$
(2,101)
(4.9)
%
Loan and lease related fees
8,313
6,496
1,817
28.0
Wealth
and investment services
9,403
8,739
664
7.6
Mortgage banking activities
2,642
2,893
(251)
(8.7)
Increase in cash surrender value of life insurance policies
3,533
3,580
(47)
(1.3)
Gain
on sale of investment securities, net
—
8
(8)
(100.0)
Other income
12,397
9,092
3,305
36.4
Total
non-interest income
$
76,757
$
73,378
$
3,379
4.6
Comparison to Prior Year Quarter
Total non-interest income was $76.8 million for the three months ended March 31, 2021, an increase of $3.4 million from the three months ended March 31, 2020.
Deposit service fees totaled $40.5 million for the three months
ended March 31, 2021, as compared to $42.6 million for the three months ended March 31, 2020. The decrease was primarily due to lower overdraft and service related fees.
Loan and lease related fees totaled $8.3 million for the three months ended March 31, 2021, as compared to $6.5 million for the three months ended March 31, 2020. The increase was primarily due to higher syndication fees.
Other income totaled $12.4 million for the three months ended March 31, 2021, as compared to $9.1 million for the three months ended March 31, 2020. The increase was primarily due to fair value adjustments
on derivatives.
Non-Interest Expense
Three months ended March 31,
Increase (decrease)
(Dollars in thousands)
2021
2020
Amount
Percent
Compensation
and benefits
$
107,600
$
101,887
$
5,713
5.6
%
Occupancy
15,650
14,485
1,165
8.0
Technology
and equipment
28,516
27,837
679
2.4
Intangible assets amortization
1,139
962
177
18.4
Marketing
2,504
3,502
(998)
(28.5)
Professional
and outside services
9,776
5,663
4,113
72.6
Deposit insurance
3,956
4,725
(769)
(16.3)
Other expense
18,841
19,775
(934)
(4.7)
Total
non-interest expense
$
187,982
$
178,836
$
9,146
5.1
Comparison to Prior Year Quarter
Total non-interest expense was $188.0 million for the three months ended March 31, 2021, an increase of $9.1 million from the three months ended March 31, 2020. The increase was primarily attributable to the $9.4 million in strategic initiatives charges incurred
during the three months ended March 31, 2021.
7
Income Taxes
Webster recognized income tax expense of $30.2 million for the three months ended March 31, 2021 and $11.1 million for the three months ended March 31, 2020, reflecting effective tax rates of 21.8% and 22.6%, respectively.
The increase in tax expense is due to a higher level of pre-tax income for the three months ended March
31, 2021 as compared to the same period in 2020. The decrease in the effective tax rate for the three months ended March 31, 2021 as compared to the same period in 2020 reflects the recognition of $1.6 million of net tax benefits specific to the three months ended March 31, 2021, which includes $1.5 million of excess tax benefits from stock-based compensation, as compared to $42 thousand of net tax expense specific to the three months ended March 31, 2020, which included tax deficiencies of $0.5 million from stock-based compensation. The decrease is partially offset by the effects of a higher level of pre-tax income estimated for 2021 as compared to 2020.
For additional information on Webster's income taxes, including its deferred tax assets (DTAs), refer to Note 10: Income
Taxes in the Notes to Consolidated Financial Statements contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2020.
Segment Reporting
Webster's operations are organized into three reportable segments that represent its primary businesses: Commercial Banking, HSA Bank, and Retail Banking. These segments reflect how executive management responsibilities are assigned, the type of customer served, how products and services are provided, and how discrete financial information is evaluated. Segments are evaluated using pre-tax, pre-provision net revenue (PPNR). Certain Treasury activities, along with the amounts
required to reconcile profitability metrics to those reported in accordance with GAAP, are included in the Corporate and Reconciling category. For additional information regarding the Company’s reportable segments and its segment reporting methodology refer to Note 17: Segment Reporting in the Notes to the Condensed Consolidated Financial Statements contained elsewhere in this report.
Effective January 1, 2021, management realigned certain of the Company's business banking and investment services operations to better serve its customers and deliver operational efficiencies. Also, the previously reported Community Banking segment was renamed as Retail Banking. Under this realignment, $1.9 billion of loans, $2.2
billion of deposits, and $3.9 billion of assets under administration (off-balance sheet) were reassigned from Retail Banking to Commercial Banking. Additionally, $131.0 million of goodwill was reallocated, on a relative fair value basis, from Retail Banking to Commercial Banking. Prior period amounts have been recasted to reflect the realignment.
The following is a description of Webster’s three reportable segments and their primary services:
Commercial Banking serves businesses that have more than $2 million of revenue through its business banking, middle market, asset-based lending, equipment finance, commercial real estate lending, sponsor finance, and treasury services business units. Additionally, its Wealth group provides wealth management solutions to business owners, operators, and consumers within the
Company's targeted markets and retail footprint.
HSA Bank offers a comprehensive consumer-directed healthcare solution that includes HSAs, health reimbursement accounts, flexible spending accounts, and commuter benefits. HSAs are used in conjunction with high deductible health plans in order to facilitate tax advantages for account holders with respect to health care spending and savings, in accordance with applicable laws. HSAs are distributed nationwide directly to employers and individual consumers, as well as through national and regional insurance carriers, benefit consultants, and financial advisors.
HSA Bank deposits provide long duration low-cost funding that is used to minimize the Company’s use of wholesale funding in support of its loan growth. In addition,
non-interest revenue is generated predominantly through service fees and interchange income.
Retail Banking serves consumer and small business banking customers by offering consumer deposit and fee-based services, residential mortgages, home equity lines, secured and unsecured loans, and credit card products through its consumer lending and small business banking business units.
Retail Banking operates a distribution network consisting of 148 banking centers and 280 ATMs, a customer care center, and a full range of web and mobile-based banking services, primarily throughout southern New England and into Westchester County, New York.
8
Commercial
Banking
Operating Results:
Three months ended March 31,
(In thousands)
2021
2020
Net interest income
$
142,038
$
117,587
Non-interest
income
25,177
22,416
Non-interest expense
64,836
65,221
Pre-tax, pre-provision net revenue
$
102,379
$
74,782
Comparison to Prior Year Quarter
PPNR
increased $27.6 million for the three months ended March 31, 2021 as compared to the same period in 2020. Net interest income increased $24.5 million, primarily driven by PPP loan fee accretion due to forgiveness and growth in loans and deposits. Non-interest income increased $2.8 million, driven by higher loan related fees and trust and investment service fees. Non-interest expense decreased $0.4 million.
Selected Balance Sheet and Off-Balance Sheet Information:
Assets
under administration/management (off-balance sheet)
6,694,058
6,585,795
Loans and leases decreased $160.4 million at March 31, 2021 as compared to December 31, 2020. Loan originations in the three months ended March 31, 2021 and 2020 were $1.0 billion and $0.8 billion, respectively. The loan decrease was primarily related to increased prepayment activity, which was partially
offset by new originations. Included in the March 31, 2021 balance was $314.2 million of second round PPP loan originations, which were mostly held as deposits.
Deposits increased $225.5 million at March 31, 2021 as compared to December 31, 2020. The increase was primarily driven by PPP loan fundings and client liquidity needs as a result of COVID-19.
Commercial Banking held approximately $4.8 billion and $4.7 billion in assets under administration at March 31, 2021 and December 31, 2020, respectively, and $1.9 billion in assets under management, at both March 31, 2021 and December 31,
2020. The increase in assets under administration was due to both new business and market appreciation, partially offset by seasonal outflows for income tax payments.
9
HSA Bank
Operating Results:
Three months ended March 31,
(In
thousands)
2021
2020
Net interest income
$
42,109
$
42,673
Non-interest income
27,005
26,383
Non-interest expense
36,250
37,078
Pre-tax
net revenue
$
32,864
$
31,978
Comparison to Prior Year Quarter
Pre-tax net revenue increased $0.9 million for the three months ended March 31, 2021 as compared to the same period in 2020. Net interest income decreased $0.6 million, due to a decline in deposit spreads partially offset by growth in deposits. Non-interest income increased $0.6 million, primarily due to increases in investment and notional account fees. Non-interest expense decreased $0.8 million, primarily due to reduced travel expenses.
Selected Balance Sheet and Off-Balance
Sheet Information:
Assets
under administration, through linked brokerage accounts (off-balance sheet)
3,118,479
2,852,877
Total footings
$
10,573,660
$
9,972,894
Deposits increased $335.2 million at March 31, 2021 as compared to December 31, 2020, due to new accounts, as well as organic growth in existing account balances.
Assets under administration, through linked brokerage accounts, increased $265.6 million at March 31, 2021 as compared to December 31, 2020, primarily due to an increase in the number of account holders, as well as market appreciation during the quarter.
10
Retail Banking
Operating
Results:
Three months ended March 31,
(In thousands)
2021
2020
Net interest income
$
88,813
$
81,199
Non-interest
income
16,071
18,443
Non-interest expense
76,124
80,290
Pre-tax, pre-provision net revenue
$
28,760
$
19,352
Comparison to Prior Year Quarter
PPNR increased
$9.4 million for the three months ended March 31, 2021 as compared to the same period in 2020. Net interest income increased $7.6 million, driven by PPP loan fee accretion and deposit growth, partially offset by lower consumer loan balances. Non-interest income decreased $2.4 million, resulting from lower deposit-related service charges and fee income from mortgage banking activities, partially offset by higher loan servicing fee income. Non-interest expense decreased $4.2 million, driven by lower employee-related, occupancy, and marketing expenses.
Loans
decreased $179.4 million at March 31, 2021 as compared to December 31, 2020. The decrease is due to lower residential mortgage, home equity, and other consumer loan balances, partially offset by higher small business loan balances.
Loan originations during the three months ended March 31, 2021 and 2020 were $849.6 million and $409.3 million, respectively. The $440.3 million increase resulted from $218.8 million of second round PPP loan originations coupled with increased residential mortgage and home equity originations in the low interest rate environment.
Deposits increased $587.4 million at March 31, 2021 as compared to December 31,
2020, primarily due to two government stimulus payments to consumers and PPP loan fundings, coupled with seasonally higher balances in business and consumer transaction accounts. This also drove balance increases in savings and money market products, partially offset by a decline in certificate of deposit balances.
11
Financial Condition
Total assets were $33.3 billion at March 31, 2021 as compared to $32.6 billion at December 31, 2020. The $0.7 billion increase was primarily
driven a $1.1 billion increase in interest-bearing deposits, partially offset by decreases of $339.8 million in loans, $12.9 million in investment securities, and $117.0 million in accrued interest receivable and other assets.
Total liabilities were $30.0 billion at March 31, 2021 as compared to $29.4 billion at December 31, 2020. The $0.6 billion increase was primarily driven by a $1.1 billion increase in deposits, specifically increases of $0.5 billion, $0.3 billion, $0.3 billion in demand deposits, interest-bearing deposits, and HSA deposits, respectively, partially offset by a $0.5 billion decrease in securities sold under agreements to repurchase and other borrowings.
Total shareholders' equity was $3.3 billion at March 31, 2021
as compared to $3.2 billion at December 31, 2020. The $38.3 million increase reflects $108.1 million of net income recognized during the quarter plus $34.0 million of other comprehensive loss (OCL), less $36.2 million and $2.0 million in dividends paid to common and preferred shareholders, respectively.
Book value per common share was $34.60 at March 31, 2021, as compared to $34.25 at December 31, 2020. On April 21, 2021, the Board of Directors declared a quarterly cash dividend to shareholders of $0.40 per common share. The Company will continue to monitor its ability to pay dividends at this level. Due to the
Company's announcement of its pending merger agreement with Sterling, Webster is restricted from paying quarterly cash dividends in excess of the current level until the transaction is closed.
As of March 31, 2021, both the Company and the Bank were considered well-capitalized, meeting all capital requirements under the Basel III Capital Rules. In accordance with regulatory capital rules, the Company elected the option to delay the impact of the adoption of CECL on its regulatory capital over a two-year deferral and subsequent three-year transition period ending December 31, 2024. Therefore, capital ratios and amounts as of March 31,
2021 exclude the impact of the increased allowance for credit losses on loans and leases, held-to-maturity debt securities, and unfunded loan commitments attributed to the adoption of current expected credit losses (CECL). This resulted in a 28, 20, 28, and 19 basis point benefit to the Company's CET1 risk based capital, total risk based capital, tier 1 risk based capital, and tier 1 leverage capital, respectively, at March 31, 2021. The Company's capital ratios remain in excess of well capitalized even without the benefit of the CECL impact delay.
Refer to the selected financial highlights under the "Results of Operations" section and Note 12: Regulatory Matters in the accompanying Notes to Condensed
Consolidated Financial Statements contained elsewhere in this report for information on regulatory capital levels and ratios.
12
Investment Securities
Webster Bank's investment securities are managed within regulatory guidelines and corporate policy, which include limitations on aspects such as concentrations in and types of investments, as well as minimum risk ratings per type of security. The Office of the Comptroller of the Currency (OCC) may establish additional individual limits on a certain type of investment if the concentration in such investment presents a safety and soundness concern. In addition to Webster
Bank, the Holding Company may also directly hold investment securities. At March 31, 2021, the Company had no holdings in obligations of individual states, counties, or municipalities which exceeded 10% of consolidated shareholders’ equity.
Through its Corporate Treasury function, Webster maintains investment securities that are primarily used to provide a source of liquidity for operating needs, to generate interest income, and as a means to manage interest-rate risk. Investment securities are classified into two major categories: available-for-sale, which currently consists of agency collateralized mortgage obligations (Agency CMO); agency mortgage-backed securities (Agency MBS); agency commercial mortgage-backed securities (Agency CMBS); non-agency commercial mortgage-backed securities (CMBS);
collateralized loan obligations (CLO); and corporate debt, and held-to-maturity, which currently consists of Agency CMO; Agency MBS; Agency CMBS; municipal bonds and notes; and CMBS. Investment securities had a carrying value and an average risk weighting for regulatory purposes of $8.9 billion and 13%, respectively, at both March 31, 2021 and December 31, 2020.
Available-for-sale investment securities decreased $12.8 million, primarily due to paydowns, particularly for Agency CMBS and Agency MBS, exceeding purchase activity. The tax-equivalent yield in the portfolio was 1.83% for the three months ended March 31, 2021 as compared to 2.77% for the three months ended March 31, 2020. Available-for-sale investment securities are evaluated
for credit losses on a quarterly basis. Unrealized losses on these securities are attributable to factors other than credit loss, and therefore no ACL has been recorded. Further, the Company does not have the intent to sell these investment securities, and it is more likely than not that it will not be required to sell these securities before the recovery of their cost basis. Gross unrealized losses on available-for-sale investment securities were $20.2 million at March 31, 2021.
Held-to-maturity investment securities decreased $0.1 million, primarily due to paydowns in excess of purchase activity. The tax-equivalent yield in the portfolio was 2.29% for the three months ended March 31, 2021 as compared to 2.90% for the three months ended March
31, 2020. Held-to-maturity investment securities are evaluated for credit losses on a quarterly basis under CECL. The ACL on investment securities held-to-maturity was $0.3 million at March 31, 2021. Gross unrealized losses on held-to-maturity investment securities were $27.8 million at March 31, 2021.
The following table summarizes the amortized cost and fair value of investment securities:
Webster
Bank has the ability to use its investment portfolio, as well as interest-rate derivative financial instruments, within internal policy guidelines to hedge and manage interest-rate risk as part of its asset/liability strategy. Refer to Note 14: Derivative Financial Instruments in the accompanying Notes to Condensed Consolidated Financial Statements contained elsewhere in this report for additional information concerning derivative financial instruments.
13
Loans and Leases
The following table provides the composition of loans and leases:
Total
commercial non-mortgage and asset-based loans were $7.8 billion at March 31, 2021, reflecting a decrease of $149.6 million from December 31, 2020. The net decrease is primarily the result of higher principal paydowns.
Commercial real estate loans were $6.3 billion at March 31, 2021, reflecting an increase of $15.4 million from December 31, 2020. The increase is a result of originations of $185.8 million, partially offset by loan payments.
Equipment financing was $611.4 million at March 31, 2021, reflecting an increase of $9.2 million from December 31, 2020. The increase is a result of originations
of $65.4 million, partially offset by loan payments.
Residential loans were $4.7 billion at March 31, 2021, reflecting a decrease of $113.1 million from December 31, 2020. The net decrease is a result of higher prepayments partially offset by originations of $420.6 million.
Total home equity and other consumer loans were $1.9 billion at March 31, 2021, reflecting a decrease of $101.8 million from December 31, 2020. The decrease is primarily due to continued net principal paydowns within the home equity lines.
Credit Policies and Procedures
Webster Bank has credit policies and procedures in place designed
to support lending activity within an acceptable level of risk. Management reviews and approves these policies and procedures on a regular basis. To assist management with its review, reports related to loan production, loan quality, concentrations of credit, loan delinquencies, non-performing loans, and potential problem loans are generated using the Company's loan reporting systems. Webster has implemented incremental monitoring procedures in connection with COVID-19.
Commercial and industrial loans are underwritten after evaluating and understanding the borrower’s ability to operate and service its debt. Assessment of management is a critical element of the underwriting process and overall credit decision. Once it is determined that the borrower’s management possesses sound ethics and a solid business acumen, current and projected cash flows
are examined to determine the ability of the borrower to repay its agreed upon obligations. Commercial and industrial loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. However, the cash flows of borrowers may not be as expected, and the collateral securing these loans may fluctuate in value. Most commercial and industrial loans are secured by the assets being financed and may incorporate personal guarantees of the principal amounts.
Commercial real estate loans are subject to underwriting standards and processes similar to commercial and industrial loans. These real estate loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Repayment of these loans is largely dependent on the successful operation of the property securing the loan, the market in which the property is located, and the tenants
of the property securing the loan. The properties securing the Company’s commercial real estate portfolio are diverse in terms of type and geographic location, which reduces the Company's exposure to adverse economic events that may affect a particular market. Management monitors and evaluates commercial real estate loans based on collateral, geography, and risk grade criteria. Commercial real estate loans may be adversely affected by conditions in the real estate markets or in the general economy. Management periodically utilizes third-party experts to provide insight and guidance about economic conditions and trends affecting its commercial real estate loan portfolio.
Consumer loans are subject to policies and procedures developed to manage the risk characteristics
of the portfolio. Policies and procedures, coupled with relatively small individual loan amounts and predominately collateralized structures spread across many different borrowers, minimize risk. Trend and outlook reports are reviewed by management on a regular basis with policies and procedures modified, or developed, as needed. Underwriting factors for mortgage and home equity loans include the borrower’s Fair Isaac Corporation (FICO) score, the loan amount relative to property value, and the borrower’s debt to income level, and are also influenced by regulatory requirements. Additionally, Webster Bank originates both qualified mortgage and non-qualified mortgage loans as defined by applicable Consumer Financial Protection Bureau (CFPB) rules.
14
Loan Modifications
Webster
works with customers to modify loan agreements when borrowers are experiencing financial difficulties. Webster will modify a loan in order to minimize the risk of loss and achieve the best possible outcome for both the borrower and the Company. Loan modifications can take various forms and include payment deferrals, rate reductions, covenant waivers, term extensions, or other action. Depending on the nature of modification, it may, or may not, be accounted for as a troubled debt restructuring (TDR).
COVID-19 Payment Modification Activities
The Company has accommodated over 2,500 customers impacted by COVID-19 through payment-related deferrals. As of March 31, 2021,
loan balances associated with these modifications, in their deferral period, totaled approximately $253.5 million. This balance includes all loans associated with a customer relationship where at least one loan has been modified or is in process of modification. A significant portion of the loan balances associated with these modifications would not be considered a TDR based on the nature of the modification. Certain other modifications that would otherwise be considered a TDR are subject to TDR accounting relief through the CARES Act and Interagency Statement. Included in the $253.5 million are the $137.0 million of loan balances associated with the CARES Act and Interagency Statement, as discussed below. The Company continues to actively monitor customer relationships associated with these modified loans. The impact of these modifications is reflected in our allowance for credit losses
on loans and leases.
The CARES Act and Interagency Statement
In response to the COVID-19 pandemic, financial institutions were provided relief from certain TDR accounting and disclosure requirements for qualifying loan modifications. Specifically, Section 4013 of the CARES Act, extended by the Consolidated Appropriations Act, 2021, provided temporary relief from certain GAAP requirements for modifications related to COVID-19. In addition, a group of banking regulatory agencies issued a revised Interagency Statement that offers practical expedients for evaluating whether COVID-19 loan modifications are TDRs.
As of March 31, 2021, loan balances associated with loan modifications designated in connection with these relief provisions in their deferral period totaled approximately $137.0 million.
These modifications represent payment deferrals, generally three to six months in length. The $64.4 million decrease from $201.4 million at December 31, 2020 is primarily the result of borrowers exiting their payment deferral period. The Company will continue to evaluate the effectiveness of the loan modification program as the deferral periods end. For additional information on the accounting for loan modifications under Section 4013 of the CARES Act and the Interagency Statement, refer to Note 1 to the Consolidated Financial Statements included in Webster's 2020 Form 10-K.
Troubled Debt Restructurings
A modified loan is considered a TDR when two conditions are met: (i) the borrower is experiencing financial difficulties, and (ii) the modification
constitutes a concession. Modified terms are dependent upon the financial position and needs of the individual borrower. The Company considers all aspects of the restructuring in determining whether a concession has been granted, including the debtor's ability to access market rate funds. In general, a concession exists when the modified terms of the loan are more attractive to the borrower than standard market terms. Common modifications include material changes in covenants, pricing, and forbearance. Loans for which the borrower has been discharged under Chapter 7 bankruptcy are considered collateral dependent TDRs and thus, are impaired at the date of discharge and charged down to the fair value of collateral less costs to sell.
The Company’s policy is
to place consumer loan TDRs on non-accrual status for a minimum period of six months, except for those that were performing prior to TDR status. Commercial TDRs are evaluated on a case-by-case basis for determination of accrual status. Loans qualify for return to accrual status once they have demonstrated performance with the restructured terms of the loan agreement for a minimum of six months. Generally, a TDR is classified and reported as a TDR for the remaining life of the loan. TDR classification may be removed if the loan was restructured under market conditions and the borrower demonstrates compliance with the modified terms for a minimum period of six months. In the limited circumstance that a loan is removed from TDR classification, it is the Company’s policy to continue to base its measure of credit loss on the contractual terms specified by the loan agreement.
15
The
following tables provide information for loans classified as TDRs:
Specific reserves for TDRs included in the balance of ACL on loans and leases
$
14,293
$
12,728
Additional funds committed to borrowers in TDR status
14,606
12,895
TDR
balances decreased $13.3 million at March 31, 2021 as compared to December 31, 2020. Specific reserves for TDRs increased from year end reflective of management’s current assessment of reserve requirements. Qualifying loan modifications in connection with Section 4013 of the CARES Act or Interagency Statement are excluded from TDR identification.
Past Due Loans and Leases
The following table provides information on loans and leases that are accruing income and are past due 30 days or more:
Commercial
non-mortgage loans and leases past due 90 days and accruing
50
—
445
0.01
Total
20,421
0.10
32,884
0.15
Net deferred fees (costs) and net premiums (discounts)
61
98
Total
loans and leases past due 30 days or more and accruing income
$
20,482
$
32,982
(1)Past due loans and leases exclude non-accrual loans and leases.
(2)Represents the principal balance of loans and leases that are accruing income and are past due 30 days as a percentage of the outstanding principal balance within the comparable loan and lease category.
Loans and leases that are accruing income and are past due 30 days or more decreased $12.5 million at March 31,
2021 as compared to December 31, 2020. The ratio of loans and leases that are accruing income and are past due 30 days or more as a percentage of total loans and leases decreased to 0.10% at March 31, 2021 as compared to 0.15% at December 31, 2020.
16
Non-performing Assets
The following table provides information on non-performing assets:
Net
deferred fees (costs) and net premiums (discounts)
(60)
(45)
Amortized cost of non-accrual loans and leases (2)
$
150,361
$
167,960
Total
non-accrual loans and leases
$
150,421
$
168,005
Foreclosed and repossessed assets:
Commercial non-mortgage
102
175
Residential
and consumer
2,285
2,134
Total foreclosed and repossessed assets
2,387
2,309
Total non-performing assets
$
152,808
$
170,314
(1)Represents
the principal balance of non-accrual loans and leases as a percentage of the outstanding principal balance within the comparable loan and lease category.
The following table
provides details of non-performing loan and lease activity:
Three months ended March 31,
(In thousands)
2021
2020
Beginning balance
$
168,005
$
150,906
Additions
16,368
33,314
Paydowns,
net of draws
(26,893)
(10,210)
Charge-offs
(6,908)
(8,950)
Other
(151)
(2,767)
Ending balance
$
150,421
$
162,293
17
Asset
Quality
The Company manages its asset quality leveraging established risk tolerance levels through its underwriting standards, servicing, and portfolio management of loans and leases. Loans and leases, particularly where a heightened risk of loss has been identified, are regularly monitored to mitigate further deterioration that could potentially impact key measures of asset quality in future periods. Management considers past due loans and leases, non-performing assets, and credit loss levels to be key measures of asset quality.
The following table provides key asset quality ratios:
Non-performing loans and leases as a percentage of loans and leases
0.71
%
0.78
%
Non-performing assets as a percentage of loans and leases plus other real estate owned (OREO)
0.72
0.79
Non-performing
assets as a percentage of total assets
0.46
0.52
ACL on loans and leases as a percentage of non-performing loans and leases
218.29
213.94
ACL on loans and leases as a percentage of loans and leases
1.54
1.66
Net charge-offs as a percentage of average loans
and leases (1)
0.10
0.21
Ratio of ACL on loans and leases to net charge-offs (1)
15.43x
7.97x
(1)Calculated for the March 31, 2021 period based on annualized year-to-date net charge-offs.
These ratio calculations include the impact of PPP loans totaling $1.3 billion for which there was no allowance for credit losses recorded at both March 31,
2021 and December 31, 2020.
Potential Problem Loans and Leases
Potential problem loans and leases are defined by management as certain loans and leases that, for:
•the commercial portfolio, are performing loans and leases classified as Substandard and have a well-defined weakness that could jeopardize the full repayment of the debt; and
•the consumer portfolio, are performing loans that are accruing income and are 60-89 days past due.
Potential problem loans and leases exclude loans and leases that are accruing income and are past due 90 days or more, non-accrual loans and leases, and TDRs. Certain loans with modifications related to COVID-19 are not
reflected as potential problem loans and have not reported as TDRs due to relief provisions of the CARES Act and Interagency Statement, as discussed elsewhere in section. As uncertainties related to the pandemic still exist, there is a risk that some of these modified loans may become potential problem loans at a later date.
Management monitors potential problem loans and leases due to a higher degree of risk associated with those loans and leases. The current expectation of lifetime losses is included in the ACL on loans and leases, however management cannot predict whether these potential problem loans and leases ultimately will become non-performing or result in a loss. The Company had potential problem loans and leases of $334.4 million at March 31, 2021 as compared to $335.1 million at
December 31, 2020.
Allowance for Credit Losses on Loans and Leases
Methodology
The Company's policy for ACL on loans and leases is considered a critical accounting policy. The ACL on loans and leases is a contra-asset account that offsets the amortized cost basis of loans and leases for the credit losses expected to occur over the life of the asset. Executive management reviews and advises on the adequacy of the reserve, which is maintained at a level management deems sufficient to cover expected losses within each of the loan and lease portfolios.
The ACL on loans and leases is determined using the CECL model, which requires recognition of expected lifetime credit
losses at the purchase or origination of an asset. Expected losses are determined through a pooled, collective assessment of loans and leases with similar risk characteristics. If the risk characteristics of a loan or lease change and no longer match that of the collective assessment pool, it is removed and individually assessed for credit impairment. Management applies significant judgments and assumptions that influence the loss estimate and ACL on loan and lease balances.
Collectively Assessed Loans and Leases. Collectively assessed loans and leases are segmented based on the commercial and consumer portfolios and expected losses are determined using a Probability of Default/Loss Given Default/Exposure at Default (PD/LGD/EAD) framework. Expected credit losses are calculated as the product of the probability of a loan defaulting, expected loss given the occurrence of a default, and the current exposure
of a loan at default. Summing the product across loans over their lives yields the lifetime expected credit losses for a given portfolio. The Company’s PD and LGD calculations are predictive models that measure the current risk profile of the loan pools using forecasts of future macroeconomic conditions, historical loss information, and credit risk ratings. The Company’s models incorporate a single economic forecast scenario and macroeconomic assumptions over a reasonable and supportable forecast period. Macroeconomic variables are selected based on
18
the correlation of the variables to credit losses for
each class of financing receivable. Data from the baseline forecast scenario is used as the input to the model loss calculation. After the reasonable and supportable forecast period, the Company reverts to historical loss rates for the remaining life of the loans and leases on a straight-line basis over a one-year reversion period. The calculation of exposure at default follows an iterative process to determine the expected remaining principal balance of a loan based on historical paydown rates for loans of similar segment within the same portfolio. The calculation of portfolio exposure in future quarters incorporates expected losses and principal paydown (PPD). PPD is the combination of contractual repayment and prepayment. A portion of the collective ACL is comprised of qualitative adjustments for risk characteristics, which are not reflected or captured in the quantitative models
but are likely to impact the measurement of estimated credit losses.
Individually Assessed Loans and Leases.When loans and leases no longer match the risk characteristics of the collective assessment pool, they are removed from the collectively assessed population and individually assessed for credit losses. Generally, all non-accrual loans, TDRs, potential TDRs, loans with a charge-off, and collateral dependent loans when the borrower is experiencing financial difficulty, are individually assessed. Individual assessment calculations are either based on the fair value of the collateral less estimated costs to sell, the present value of the expected cash flows from operation of the collateral, discounted cash flows, or other individual assessment approach, as appropriate.
A fair value shortfall relative to the
amortized cost balance is reflected as an impairment reserve within the ACL on loans and leases. Subsequent to an appraisal or other fair value estimate, should reliable information come to management's attention that the value has declined further, additional impairment may be recorded to reflect the particular situation, thereby increasing the ACL on loans and leases. Any individually assessed loan for which no specific valuation allowance was necessary is the result of either sufficient cash flow or sufficient collateral coverage relative to the amortized cost. If the credit quality subsequently improves, the allowance is reversed up to a maximum of the previously recorded credit loss.
The ACL on loans and leases represents the total of estimated losses calculated through collective and individual assessments. To assist management with its review, reports related to loan production, loan quality, concentrations of credit,
loan delinquencies, non-performing loans, and potential problem loans are generated using the Company's loan reporting systems. While actual future conditions and losses realized may vary significantly from present judgments and assumptions, management believes the ACL on loans and leases is adequate as of March 31, 2021. For additional information on the Company's ACL methodology, refer to Note 1 to the Consolidated Financial Statements included in Webster's 2020 Form 10-K.
Allowance for Credit Losses on Loans and Leases Balances and Ratios
The ACL on loans and leases decreased $31.0 million, or 8.6%, from $359.4 million at December 31,
2020 to $328.4 million at March 31, 2021. The decrease in the allowance is attributed to improvements in the forecasted economic outlook and favorable credit trends, as compared to that at the start of the COVID-19 pandemic. The ACL on loans and leases as a percentage of total loans and leases, also known as the reserve coverage ratio, decreased from 1.66% at December 31, 2020 to 1.54% at March 31, 2021. The ACL on loans and leases as a percentage of non-performing loans and leases increased from 213.94% at December 31, 2020 to 218.29% at March 31, 2021.
19
The
following table provides information on the portfolio allocation of the ACL on loans and leases:
(1)Percentage represents
the allocated ACL on loans and leases to total loans and leases within the comparable category. The allocation of a portion of the allowance to one category of loans and leases does not preclude its availability to absorb losses in other categories.
The following table provides details of the activity in the ACL on loans and leases:
At or for the three months ended March 31,
(In
thousands)
2021
2020
Beginning balance
$
359,431
$
209,096
Adoption of ASU No. 2016-13 (CECL)
—
57,568
(Benefit)
provision
(25,759)
76,085
Charge-offs:
Commercial non-mortgage
(1,079)
(5,439)
Commercial
real estate
(5,157)
(30)
Equipment financing
(85)
(105)
Residential
(380)
(1,511)
Home
equity
(694)
(861)
Other consumer
(1,900)
(2,215)
Total charge-offs
(9,295)
(10,161)
Recoveries:
Commercial
non-mortgage
209
509
Asset-based
1,424
3
Commercial real estate
3
3
Equipment
financing
—
49
Residential
1,158
235
Home equity
724
1,038
Other
consumer
456
506
Total recoveries
3,974
2,343
Net charge-offs
(5,321)
(7,818)
Ending
balance
$
328,351
$
334,931
The following table provides a summary of net charge-offs to average loans and leases by portfolio:
(1)Percentage of net charge-offs to average loans and leases was calculated based on annualized period-to-date activity.
20
Sources
of Funds and Liquidity
Sources of Funds. The primary source of Webster Bank’s cash flows for use in lending and meeting its general operational needs is deposits. Operating activities, such as loan and mortgage-backed securities repayments, and other investment securities sale proceeds and maturities, also provide cash flows. While scheduled loan and investment securities repayments are a relatively stable source of funds, loan and investment securities prepayments and deposit inflows are influenced by prevailing interest rates, and local economic conditions and are inherently uncertain. Additional sources of funds are provided by FHLB advances or other borrowings.
Federal Home Loan Bank and Federal Reserve Bank Stock. Webster Bank is a member of the FHLB System, which consists of eleven district Federal Home Loan
Banks, each subject to the supervision and regulation of the Federal Housing Finance Agency. An activity-based capital stock investment in the FHLB of Boston is required in order for Webster Bank to access advances and other extensions of credit for sources of funds and liquidity purposes. The FHLB capital stock investment is restricted in that there is no market for it, and it can only be redeemed by the FHLB. Webster Bank held FHLB Boston capital stock of $17.5 million at both March 31, 2021 and December 31, 2020 for its FHLB membership and for outstanding advances and other extensions of credit. The most recent FHLB quarterly cash dividend was paid on March 2, 2021 in an amount equal to an annual yield of 1.59%.
Additionally, Webster Bank is required to hold FRB of Boston stock
equal to 6% of its capital and surplus of which 50% is paid. The remaining 50% is subject to call when deemed necessary by the Federal Reserve System. The FRB capital stock investment is restricted in that there is no market for it, and it can only be redeemed by the FRB. Webster Bank held $60.2 million and $60.1 million of FRB capital stock at March 31, 2021 and December 31, 2020, respectively. The most recent FRB semi-annual cash dividend was paid on December 31, 2020 in an amount equal to an annual yield of 0.95%.
Deposits. Webster Bank offers a wide variety of deposit products for checking and savings (including: ATM and debit card use, direct deposit, ACH payments, mobile banking services, internet-based banking, bank by mail, as well as overdraft
protection via line of credit or transfer from another deposit account) designed to meet the transactional, savings, and investment needs for both consumer and business customers throughout its primary market area. HSA Bank, a division of Webster Bank, specifically provides deposit products for HSAs, health reimbursement accounts, flexible spending accounts, and commuter benefits. Webster Bank manages the flow of funds in its deposit accounts and provides a variety of accounts and rates consistent with Federal Deposit Insurance Corporation (FDIC) regulations. Webster Bank’s Retail Pricing Committee and its Commercial and Institutional Loan and Liability Pricing Committee meet regularly to determine pricing and marketing initiatives.
Total deposits were $28.5 billion at March 31, 2021 as compared to $27.3 billion at December 31,
2020. The increase is primarily related to an increase in transactional accounts of $1.1 billion due to customer PPP loan funding pending utilization, other stimulus effects, and lower customer spending. Refer to Note 9: Deposits in the Notes to Condensed Consolidated Financial Statements contained elsewhere in this report for additional information.
Borrowings. FHLB advances are utilized as a source of funding for liquidity and interest rate risk management purposes. FHLB advances totaled $0.1 billion at both March 31, 2021 and December 31, 2020. Webster Bank had additional borrowing capacity of approximately $4.5 billion and $4.7 billion from the FHLB at March 31, 2021 and December 31, 2020, respectively,
and $1.3 billion from the FRB at both March 31, 2021 and December 31, 2020.
Securities sold under agreements to repurchase, whereby securities are delivered to counterparties under an agreement to repurchase such securities at a fixed price in the future, are also utilized as a source of funding. Unpledged investment securities of $4.7 billion at March 31, 2021 could have been used for collateral on borrowings such as repurchase agreements, or to increase borrowing capacity by approximately $4.3 billion or $4.5 billion at the FHLB or FRB, respectively. Additionally, Webster Bank may utilize term and overnight Fed funds to meet short-term liquidity needs.
Long-term debt, which consists of senior fixed-rate notes maturing in 2024 and
2029, and junior subordinated notes maturing in 2033, totaled $0.6 billion at both March 31, 2021 and December 31, 2020.
Total borrowed funds were $1.2 billion at March 31, 2021 as compared to $1.7 billion at December 31, 2020, and represented 3.6% and 5.2% of total assets at March 31, 2021 and December 31, 2020, respectively. The decrease is due to deposit growth exceeding loan and securities growth. For additional information, refer to Note 10: Borrowings in the Notes to Condensed Consolidated Financial Statements contained elsewhere in this report.
21
Liquidity.
Webster meets its cash flow requirements at an efficient cost under various operating environments through proactive liquidity management at both the Holding Company and Webster Bank. Liquidity comes from a variety of cash flow sources, such as operating activities, including principal and interest payments on loans and securities, or financing activities, including unpledged investment securities that can be sold or utilized to secure funding, and new deposits. Webster is committed to maintaining a strong, increasing base of core deposits, consisting of demand, checking, savings, health savings, and money market accounts, to support growth in its loan and lease portfolio. Liquidity is reviewed and managed in order to maintain stable, cost effective funding to promote overall balance sheet strength.
Holding Company Liquidity. The primary source of liquidity at the Holding Company
is dividends from Webster Bank. During the three months ended March 31, 2021, Webster Bank paid $60.0 million in dividends to the Holding Company. To a lesser extent, investment income, net proceeds from investment sales, borrowings, and public offerings may provide additional liquidity. The main uses of liquidity are the payment of principal and interest to holders of senior notes and junior subordinated debt, the payment of dividends to preferred and common shareholders, repurchases of its common stock, and purchases of investment securities. There are certain restrictions on the payment of dividends by Webster Bank to the Holding Company, which are described in the section captioned "Supervision and Regulation" in Item 1 of Webster’s 2020 Form 10-K. At March 31, 2021, there was $324.8 million of retained earnings are available for the payment of dividends by
Webster Bank to the Holding Company.
The Company has a common stock repurchase program authorized by the Board of Directors with $123.4 million of remaining repurchase authority at March 31, 2021. Due to the Company's announcement of its pending merger agreement with Sterling, Webster may not purchase any shares under this program until the transaction is closed. Additionally, the Company periodically acquires common shares outside of the repurchase program related to stock compensation plan activity. During the three months ended March 31, 2021, a total of 70,048 shares of
common stock were repurchased at a market value of approximately $3.9 million.
Webster Bank Liquidity. Webster Bank's primary source of funding is core deposits, which are used to support loan portfolio growth. Including time deposits, Webster Bank had a loan to total deposit ratio of 74.8% and 79.2% at March 31, 2021 and December 31, 2020, respectively.
Webster Bank is required by OCC regulations to maintain liquidity sufficient to ensure safe and sound operations. Whether liquidity is adequate, as assessed by the OCC, depends on factors such as the overall asset/liability structure, market conditions, competition, and the nature of the institution’s deposit and loan customers. Webster Bank exceeded all regulatory liquidity requirements as of March 31,
2021. The Company has a detailed liquidity contingency plan designed to respond to liquidity concerns in a prompt and comprehensive manner. The plan is designed to provide early detection of potential problems and details specific actions required to address liquidity stress scenarios.
As an OCC regulated commercial institution, Webster Bank is also required to satisfy certain minimum leverage and risk-based capital requirements, as well as minimum tangible capital requirements. As of March 31, 2021, Webster Bank was in compliance with all applicable capital requirements and exceeded the FDIC requirements for a well-capitalized institution. Refer to Note 12: Regulatory Matters in the Notes to Condensed Consolidated Financial Statements contained elsewhere in this report for a further discussion
of regulatory requirements applicable to the Holding Company and Webster Bank.
The liquidity position of the Company is continuously monitored and adjustments are made to balance between sources and uses of funds, as deemed appropriate. Management is not aware of any events that are reasonably likely to have a material adverse effect on the Company’s liquidity, capital resources, or operations. In addition, management is not aware of any regulatory recommendations regarding liquidity, which if implemented, would have a material adverse effect on the Company.
Off-Balance Sheet Arrangements
Webster
engages in a variety of financial transactions that, in accordance with GAAP, are not recorded in the financial statements or are recorded in amounts that differ from the notional amounts. Such transactions are utilized in the normal course of business for general corporate purposes or for customer financing needs. Corporate purpose transactions are structured to manage credit, interest rate, and liquidity risks, or to optimize capital. Customer transactions are structured to manage their funding requirements or facilitate certain trade arrangements. These transactions give rise to elements of credit, interest rate, and liquidity risk. For additional information, refer to Note 2: Variable Interest Entities and Note 19: Commitments and Contingencies in the Notes to Condensed Consolidated Financial Statements contained elsewhere in this report.
22
Asset/Liability
Management and Market Risk
An effective asset/liability management process must balance the risks and rewards from both short-term and long-term interest rate risks in determining management's strategy and action. To facilitate and manage this process, interest rate sensitivity is monitored on an ongoing basis by the Company's ALCO. The impact has not been calculated for scenarios that would require negative interest rates.
The following table summarizes the estimated impact that gradual parallel changes in interest rates of 100 and 200 basis points might have on NII over a twelve month period, starting at March 31, 2021 and December 31, 2020 for each subsequent twelve month period as compared to NII,
assuming no change in interest rates:
The following table summarizes the estimated impact that gradual parallel changes in interest rates of 100 and 200 basis points might have on PPNR over a twelve month period, starting at March 31, 2021 and December 31, 2020 for each subsequent twelve month period as compared to PPNR, assuming no change in interest rates:
Interest rates are assumed to change up or down in a parallel fashion, and the NII and PPNR results in each scenario are compared to a flat rate based scenario. The flat rate scenario holds the end of period yield curve constant over a twelve month forecasted horizon. Such scenario as of both March 31,
2021 and December 31, 2020 assumed a Fed Funds rate of 0.25%. Asset sensitivity for both NII and PPNR was relatively the same as of March 31, 2021 and December 31, 2020. Loans at floors have increased to approximately $3.6 billion as of March 31, 2021, lowering overall asset sensitivity, but is being offset by increased cash levels at the FRB due to elevated deposits. When interest rates start to rise, not all of these loans will immediately lift off of their floors. Due to the lower rate environment as of both March 31, 2021 and December 31, 2020, management does not run standard scenarios with negative interest rate assumptions to model the down rate scenarios that were
previously modeled when market rates were higher.
Webster can also hold futures, options, and forward foreign currency contracts to minimize the price volatility of certain assets and liabilities. Changes in the market value of these positions are recognized in earnings.
The following table summarizes the estimated impact that yield curve twists or immediate non-parallel changes in interest rates might have on NII for the subsequent twelve month period starting at March 31, 2021 and December 31, 2020:
The following table summarizes the estimated impact that immediate non-parallel changes in interest rates might have on PPNR for the subsequent twelve month period starting at March 31, 2021 and December 31, 2020:
These non-parallel scenarios are modeled with the short end of the yield curve moving up or down 50 and 100 basis points, while the long end of the yield curve remains unchanged, and vice versa. The short end of the yield curve is defined as terms of less than eighteen months, whereas the long end of the yield curve is defined as terms of greater than eighteen months. The results above reflect the annualized
impact of immediate rate changes.
Sensitivity to the short end of the yield curve for both NII and PPNR increased as of March 31, 2021 as compared to December 31, 2020 due to excess cash at the FRB. As rates rise, this cash can be deployed into higher yielding assets. NII and PPNR were less sensitive to changes in the long end of the yield curve as of March 31, 2021 as compared to December 31, 2020, due to slower forecast prepayment speeds resulting from increases in the long end of the yield curve, which shortens asset duration for MBS and residential mortgages. Due to the lower rate environment as of March 31, 2021, management does not run standard scenarios with negative interest
rate assumptions to model the down rate scenarios that were modeled as of December 31, 2020.
23
The following table summarizes the estimated economic value of assets, liabilities, and off-balance sheet contracts at March 31, 2021 and December 31, 2020, and the projected change to economic values if interest rates were to instantaneously increase or decrease by 100 basis points:
Changes in economic value can best be described using duration, which is a measure of the price sensitivity of financial instruments for small changes in interest rates. For fixed-rate instruments, it can also be thought of as the weighted-average expected time to receive future cash flows, whereas for floating-rate instruments, it can be thought of as the weighted-average expected time until the next rate reset. The longer the duration, the greater the price sensitivity for given changes in interest rates. Floating-rate instruments may have durations as short as one day, and therefore, may have very little price sensitivity due to changes in interest rates.
Increases in interest rates typically reduce the value of fixed-rate assets as future discounted cash flows are worth less at higher discount rates. A liability's value decreases for the same reason in a rising rate environment. A reduction in the value of a liability is a benefit to the Company.
Duration gap is the difference between the duration of assets and the duration of liabilities. A duration gap near zero implies that the balance sheet is matched, and thus would exhibit no change in estimated economic value for a small change in interest rates. Webster's duration gap was negative 1.7 years and negative 1.9 years at March 31, 2021 and December 31, 2020, respectively. A negative duration gap implies that liabilities are longer than assets,
and therefore, have more price sensitivity than assets and will reset their interest rates at a slower pace. Consequently, Webster's net estimated economic value would generally be expected to increase when interest rates rise as the benefit of the decreased value of liabilities would more than offset the decreased value of assets. The opposite would generally be expected to occur when interest rates fall. Earnings would also generally be expected to increase when interest rates rise and, in turn, decrease when interest rates fall over the longer term absent the effects of new business booked in the future. As of March 31, 2021, long-term rates have risen by 86 basis points as compared to December 31, 2020. This higher starting point lengthens asset duration by decreasing residential loan and MBS prepayment speeds.
These estimates
assume that management does not take any additional action to mitigate any positive or negative effects from changing interest rates. Both the earnings and economic values estimates are subject to factors that could cause actual results to differ. Management believes that Webster's interest rate risk position at March 31, 2021 represents a reasonable level of risk given the current interest rate outlook. Management is prepared to take additional action in the event that interest rates do change rapidly.
For a detailed description of the Company's asset/liability management process, refer to the section captioned "Asset/Liability Management and Market Risk" in Item 7. Management's Discussion And Analysis Of Financial Condition And Results Of Operations, included in its Form 10-K for the
year ended December 31, 2020.
Impact of Inflation and Changing Prices
The Condensed Consolidated Financial Statements and related data presented herein have been prepared in accordance with GAAP, which requires the measurement of financial position and operating results principally in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation.
Unlike most industrial companies, substantially all of the assets and liabilities of a banking institution are monetary in nature. As a result, interest rates have a more significant impact on Webster's performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the price of goods and services.
24
Application
of Critical Accounting Policies and Accounting Estimates
The Company’s significant accounting policies are described in Note 1 to the Consolidated Financial Statements included in its 2020 Annual Report on Form 10-K. Modifications to significant accounting policies, if made during the year, are described in Note 1 to the Condensed Consolidated Financial Statements included in Item 1 of this report. The preparation of the Condensed Consolidated Financial Statements in accordance with GAAP and practices generally applicable to the financial services industry requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses, and to disclose contingent assets and liabilities. Actual results could differ from those estimates.
Management
has identified that the Company's most critical accounting policy is the allowance for credit losses on loans and leases not only because of its importance to the Company’s financial condition and operating results, but also the fact that it requires management’s subjective and complex judgment surrounding the need to make estimates about the effects of matters that are inherently uncertain.
Accounting policies and estimates, including the nature of the estimates and types of assumptions used, are described throughout Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Webster's 2020 Form 10-K, and Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, of
this report.
Refer to Note 1: Summary of Significant Accounting Policies in the accompanying Notes to Condensed Consolidated Financial Statements contained elsewhere in this report for a summary of recently issued ASUs and the expected impact on the Company's financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three
months ended March 31,
(In thousands)
2021
2020
Operating Activities:
Net income
$
i108,078
$
i38,199
Adjustments
to reconcile net income to net cash provided by (used for) operating activities:
Provision for credit losses
(i25,750)
i76,000
Deferred
tax expense (benefit)
i13,192
(i6,518)
Depreciation
and amortization
i10,351
i9,063
Amortization
of premiums/discounts, net
i35,583
i10,345
Stock-based
compensation
i2,965
i2,609
Loss
(gain) on sale, net of write-down, on foreclosed and repossessed assets
i29
(i363)
Loss
on sale/write-down on premises and equipment
i197
i100
Gain
on the sale of investment securities, net
i—
(i8)
Increase
in cash surrender value of life insurance policies
(i3,533)
(i3,580)
Gain
from life insurance policies
(i410)
(i6)
Mortgage
banking activities
(i2,642)
(i2,893)
Proceeds
from sale of loans held for sale
i79,308
i75,594
Originations
of loans held for sale
(i81,361)
(i59,562)
Net
change in right-of-use lease assets
i58
(i2,660)
Net
decrease (increase) in derivative contract assets net of liabilities
i128,550
(i189,718)
Net
decrease in accrued interest receivable and other assets
i4,083
i5,447
Net
decrease in accrued expenses and other liabilities
(i39,873)
(i13,637)
Net
cash provided by (used for) operating activities
i228,825
(i61,588)
Investing
Activities:
Purchases of available-for-sale investment securities
(i291,386)
(i122,353)
Proceeds
from available-for-sale investment securities maturities/principal repayments
i255,362
i124,848
Proceeds
from sales of available-for-sale investment securities
i—
iiiii8,963////
Purchases
of held-to-maturity investment securities
(i356,624)
(i371,935)
Proceeds
from held-to-maturity investment securities maturities/principal repayments
i343,825
i172,032
Net
(increase) decrease in Federal Home Loan Bank/Federal Reserve Bank stock
(i80)
i7,719
Alternative
investments capital call, net
(i3,526)
(i2,192)
Net
decrease (increase) in loans
i302,554
(i863,351)
Proceeds
from loans not originated for sale
i16,787
i390
Proceeds
from life insurance policies
i1,100
i750
Proceeds
from the sale of foreclosed and repossessed assets
i44
i2,636
Proceeds
from the sale of premises and equipment
i250
i—
Additions
to premises and equipment
(i3,680)
(i3,548)
Net
cash provided by (used for) investing activities
i264,626
(i1,046,041)
See
accompanying Notes to Condensed Consolidated Financial Statements.
30
WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited), continued
Three
months ended March 31,
(In thousands)
2021
2020
Financing Activities:
Net increase in deposits
i1,145,364
i1,188,728
Proceeds
from Federal Home Loan Bank advances
i80,470
i2,950,000
Repayments
of Federal Home Loan Bank advances
(i75,080)
(i3,125,077)
Net
(decrease) increase in securities sold under agreements to repurchase and other borrowings
(i496,977)
i222,318
Dividends
paid to common shareholders
(i36,108)
(i36,728)
Dividends
paid to preferred shareholders
(i1,969)
(i1,969)
Exercise
of stock options
i3,314
i118
Common
stock repurchase program
i—
(i76,556)
Common
shares purchased related to stock compensation plan activity
(i3,908)
(i3,160)
Net
cash provided by financing activities
i615,106
i1,117,674
Net
increase in cash and cash equivalents
i1,108,557
i10,045
Cash
and cash equivalents at beginning of period
i263,104
i257,895
Cash
and cash equivalents at end of period
$
i1,371,661
$
i267,940
Supplemental
disclosure of cash flow information:
Interest paid
$
i16,638
$
i50,327
Income
taxes paid
i3,355
i4,928
Noncash
investing and financing activities:
Transfer of loans and leases to foreclosed properties and repossessed assets
$
i151
$
i2,627
Transfer
of loans from loans and leases to loans-held-for-sale
i16,587
i214
See
accompanying Notes to Condensed Consolidated Financial Statements.
31
Note 1: iSummary of Significant Accounting Policies
Nature of Operations
Webster
Financial Corporation is a bank holding company and financial holding company under the BHC Act, incorporated under the laws of Delaware in 1986, and headquartered in Waterbury, Connecticut. Webster Bank is the principal consolidated subsidiary of Webster Financial Corporation. Webster Bank, including its HSA Bank division, deliver a wide range of banking, investment, and financial services to individuals, families, and businesses.
Webster Bank serves consumer and business customers with mortgage lending, financial planning, trust, and investment services through a distribution network consisting of banking centers, ATMs, a customer care center, and a full range of web and mobile-based banking services throughout southern New England and Westchester County, New York. It also offers equipment financing, commercial real estate lending, asset-based lending, and treasury and payment solutions primarily in the eastern U.S. HSA
Bank is a leading provider of HSAs, while also delivering health reimbursement arrangements, and flexible spending and commuter benefit account administration services to employers and individuals in all 50 states.
i
Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements of the Company have been prepared in accordance with GAAP for interim financial information and with the instructions for Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all the information and notes required by GAAP for complete financial statements and should be read in conjunction with the Company's Consolidated Financial Statements, and related Notes thereto, for the year ended December 31, 2020, included in our Form 10-K filed with the SEC. In the opinion of management, all necessary adjustments are reflected to present fairly the financial position and results of operations as of the dates and for the periods shown. There have been no changes to the Company's significant accounting policies from those described within that Form 10-K, except as described within the Recently Adopted Accounting Standards Updates section of this note.
Certain
prior period amounts have been reclassified to conform to the current year's presentation. These reclassifications had an immaterial effect on the Company's consolidated financial statements. Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period.
i
Use of Estimates
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
i
Recently Adopted Accounting Standards Updates
ASU No. 2019-12, Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes.
The Accounting Standards Update (the Update) provides simplification to the accounting
for income taxes related to a variety of topics and makes minor codification improvements. Changes include a requirement that the effects of an enacted change in tax law be reflected in the computation of the annual effective tax rate in the first interim period that includes the enactment date of the new legislation and clarification on presentation of non-income based taxes.
The Company adopted the Update on January 1, 2021 on a prospective basis. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements.
The
Update clarifies that certain optional expedients and exceptions provided for in ASU No. 2020-04 for applying GAAP to contract modifications and hedging relationships apply to derivatives that are affected by the discounting transition. The amendments are elective and apply to all entities that have derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform. The Update was effective upon issuance for application on either a retrospective basis as of any date from the beginning of an interim period that includes or is subsequent to March 22, 2020, or on a prospective basis beginning on January 7,
2021.
The Company adopted the Update on a prospective basis. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements.
Accounting Standards Issued But Not Yet Adopted
The Company has adopted all applicable Accounting Standards Updates issued by the Financial Accounting Standards Board (FASB) as of March 31, 2021.
32
Note
2: iVariable Interest Entities
The Company has an investment interest in the following entities that meet the definition of a variable interest entity (VIE).
Consolidated
Rabbi Trust. The Company established a Rabbi Trust to meet the obligations
due under its Deferred Compensation Plan for Directors and Officers and to mitigate the expense volatility of the aforementioned plan. The funding of the Rabbi Trust and the discontinuation of the Deferred Compensation Plan for Directors and Officers occurred during 2012.
Investments held in the Rabbi Trust primarily consist of mutual funds that invest in equity and fixed income securities. The Company is considered the primary beneficiary of the Rabbi Trust as it has the power to direct the activities of the Rabbi Trust that most significantly affect the VIE's economic performance and it has the obligation to absorb losses of the VIE that could potentially be significant to the VIE.
The Company consolidates the invested
assets of the trust along with the total deferred compensation obligations and includes them in accrued interest receivable and other assets, and accrued expenses and other liabilities, respectively, on the accompanying Condensed Consolidated Balance Sheets. Earnings in the Rabbi Trust, including appreciation or depreciation, are reflected as other non-interest income, and changes in the corresponding liability are reflected as compensation and benefits, on the accompanying Condensed Consolidated Statement of Income. Refer to Note 15: Fair Value Measurements for additional information.
Non-Consolidated
Tax Credit - Finance Investments.The Company makes non-marketable equity investments in entities that finance affordable housing and other community development projects and
provide a return primarily through the realization of tax benefits. In most instances, the investments require the funding of capital commitments in the future. While the Company's investment in an entity may exceed 50% of its outstanding equity interests, the entity is not consolidated as the Company is not the primary beneficiary. The Company determined it is not the primary beneficiary due to its inability to direct the activities that most significantly impact the economic performance of the VIEs and the Company does not have the obligation to absorb expected losses or the right to receive residual returns. The
Company applies the proportional amortization method to account for its investments in qualified affordable housing projects.
At March 31, 2021 and December 31, 2020, the aggregate carrying value of the Company's tax credit-finance investments was $i36.0 million and $i37.2
million, respectively, which represents the Company's maximum exposure to loss. At March 31, 2021 and December 31, 2020, unfunded commitments have been recognized, totaling $i9.0 million and $i10.2
million, respectively, and are included in accrued expenses and other liabilities on the accompanying Condensed Consolidated Balance Sheets.
Webster Statutory Trust. The Company owns all the outstanding common stock of Webster Statutory Trust, a financial vehicle that has issued, and in the future may issue, trust preferred securities. The trust is a VIE in which the Company is not the primary beneficiary. The trust's only assets are junior subordinated debentures issued by the Company, which were acquired by the trust using the proceeds from the issuance of the trust preferred securities and common stock. The junior subordinated debentures are included
in long-term debt on the accompanying Condensed Consolidated Balance Sheets, and the related interest expense is reported as interest expense on long-term debt on the accompanying Condensed Consolidated Statements of Income. Refer to Note 10: Borrowings for additional information.
Other Non-Marketable Investments. The Company invests in various alternative investments in which it holds a variable interest. These investments are non-public entities which cannot be redeemed since the Company’s investment is distributed as the underlying equity is liquidated. For these investments, the Company has determined it is not the primary beneficiary due to its
inability to direct the activities that most significantly impact the economic performance of the VIEs.
At March 31, 2021 and December 31, 2020, the aggregate carrying value of the Company's other non-marketable investments in VIEs was $i40.2 million and $i34.3
million, respectively, and the maximum exposure to loss of the Company's other non-marketable investments in VIEs, including unfunded commitments, was $i75.3 million and $i72.7
million, respectively. Refer to Note 15: Fair Value Measurements for additional information.
The Company's equity interests in Other Non-Marketable Investments, as well as Tax Credit-Finance Investments and Webster Statutory Trust, are included in accrued interest receivable and other assets on the accompanying Condensed Consolidated Balance Sheets. For a description of the Company's accounting policy regarding the consolidation of VIEs, refer to Note 1 to the Consolidated Financial Statements included in its Form 10-K for the year ended December 31, 2020.
33
Note
3: iBusiness Developments
Pending Merger
On April 19, 2021, Webster and Sterling announced that their boards of directors approved by unanimous vote a definitive agreement under which the two companies will combine in an all-stock transaction for total consideration of approximately $i5.1 billion.
Under the terms of the agreement, Sterling will merge into Webster, and Sterling's shareholders will receive a fixed exchange ratio of i0.463 of a Webster common share for each share of Sterling common stock owned. In addition, at the effective time of the merger, each outstanding share of Sterling's Series A non-cumulative perpetual preferred stock will be converted into the right to receive a newly created series of Webster preferred stock having substantially the same terms. The merger is expected to close in the fourth
quarter of 2021, subject to satisfaction of customary closing conditions, including receipt of required regulatory approvals and approval by the shareholders of each company.
Strategic Initiatives
During the fourth quarter of 2020, the Company launched a strategic plan to drive incremental revenue and cost savings measures across the organization through the consolidation of banking centers and corporate facilities, process automation, ancillary spend reduction, and other organizational actions.
i
The
following table presents the changes in reserves associated with the Company's strategic initiatives for the three months ended March 31, 2021:
(In thousands)
Severance
ROU
Asset
Other
Total
Beginning balance
$
i17,675
$
i—
$
i2,120
$
i19,795
Charged
to earnings
i2,060
i179
i7,202
i9,441
Charged
against assets
i—
(i179)
(i1,634)
(i1,813)
Cash
payments
(i1,365)
i—
(i3,143)
(i4,508)
Ending
balance
$
i18,370
$
i—
$
i4,545
$
i22,915
/
The
reserves associated with strategic initiatives are included in accrued expenses and other liabilities on the accompanying Condensed Consolidated Balance Sheets. Severance costs are recorded as compensation and benefits, Right-of-Use (ROU) lease asset charges are recorded as occupancy expense, and Other is recorded as either occupancy, technology and equipment, professional and outside services, or other non-interest expense on the accompanying Condensed Consolidated Statements of Income. Strategic initiative costs are presented in the Corporate and Reconciling category for segment reporting purposes.
34
Note 4: iInvestment
Securities
Held-to-Maturity Securities
i
A summary of the amortized cost, fair value, and allowance for credit losses on investment securities held-to-maturity is presented below:
(1)Amortized
cost excludes accrued interest receivable of $i17.3 million and $i22.1 million at March 31, 2021 and December 31, 2020,
respectively, which is included in accrued interest receivable and other assets on the accompanying Condensed Consolidated Balance Sheets.
/
Agency securities represent obligations issued by a U.S. government-sponsored enterprise or other federally-related entity and are either explicitly or implicitly guaranteed, and therefore, assumed to be zero loss. Securities with unrealized losses and no allowance are considered to be of high credit quality, and therefore, zero credit loss as of March 31, 2021. The current unrealized loss position of certain agency securities and non-agency CMBS with no credit loss allowance can be attributed to the changing interest rate environment. An allowance for credit losses on investment securities held-to-maturity
is recorded for certain Municipal bonds and notes to account for expected lifetime credit losses.
The following table summarizes the activity in the allowance for credit losses on investment securities held-to-maturity:
Three months ended March 31,
(In
thousands)
2021
2020
Balance beginning of period
$
i299
$
i—
Adoption
of ASU No. 2016-13 (CECL)
i—
i397
Provision
(benefit) for credit losses
i9
(i85)
Balance
end of period
$
i308
$
i312
Credit
Quality Information
The Company monitors the credit quality of held-to-maturity debt securities through credit ratings provided by Standard & Poor's Rating Services (S&P), Moody's Investor Services (Moody's), Fitch Ratings, Inc., Kroll Bond Rating Agency, or DBRS Inc. Credit ratings express opinions about the credit quality of a security. Investment grade securities are rated BBB- or higher by S&P, or Baa3 or higher by Moody's, and are generally considered by the rating agencies and market participants to be of low credit risk. Conversely, securities rated below investment grade, labeled as speculative grade by the rating agencies, are considered to have distinctively higher credit risk than investment grade securities. Securities shown below that are not rated are collateralized with U.S. Treasury obligations, and credit quality
indicators are updated at each quarter end.
The following table summarizes credit ratings for the amortized cost of held-to-maturity debt securities according to their lowest public credit rating as of March 31, 2021:
35
Investment
Grade
(In thousands)
Aaa
Aa1
Aa2
Aa3
A1
A2
A3
Baa2
Not Rated
Agency CMOs
$
i—
$
i74,319
$
i—
$
i—
$
i—
$
i—
$
i—
$
i—
$
i—
Agency
MBS
i—
i2,365,315
i—
i—
i—
i—
i—
i—
i—
Agency
CMBS
i—
i2,182,794
i—
i—
i—
i—
i—
i—
i—
Municipal
bonds and notes
i208,995
i125,355
i240,215
i114,328
i33,225
i8,471
i2,066
i190
i3,123
CMBS
i209,697
i—
i—
i—
i—
i—
i—
i—
i—
Total
held-to-maturity
$
i418,692
$
i4,747,783
$
i240,215
$
i114,328
$
i33,225
$
i8,471
$
i2,066
$
i190
$
i3,123
As
of March 31, 2021, there were ino held-to-maturity investment securities in non-accrual status.
Contractual Maturities
The amortized cost and fair value of held-to-maturity debt securities presented by contractual maturity are set forth below:
For
the maturity schedule above, investment securities that are not due at a single maturity date have been categorized based on the maturity date of the underlying collateral. Actual principal cash flows may differ from this maturity date presentation as borrowers have the right to repay obligations with or without prepayment penalties.
36
Available-for-Sale Securities
i
A
summary of the amortized cost and fair value of available-for-sale securities is presented below:
(1)Amortized
cost excludes accrued interest receivable of $i7.1 million and $i7.5 million at March 31, 2021 and December 31, 2020, respectively,
which is included in accrued interest receivable and other assets on the accompanying Condensed Consolidated Balance Sheets.
(2)Fair value represents net carrying value as there is no allowance for credit losses recorded on investment securities available-for-sale, as the securities are high credit quality, investment grade.
/
Fair Value and Unrealized Losses
The following table provides information on fair value and unrealized losses for the individual available-for-sale securities with an unrealized loss, for which an allowance for credit losses on investment securities available-for-sale has not been recorded, aggregated by classification and length of time that
the individual investment securities have been in a continuous unrealized loss position:
Unrealized
losses on available-for-sale debt securities presented in the previous table have not been recognized in the accompanying Condensed Consolidated Statements of Income because the securities are high credit quality, investment grade securities that the Company does not intend to sell and will not be required to sell prior to their anticipated recovery, and the decline in fair value is primarily attributable to higher market rates in selected asset classes. Fair value is expected to recover as the securities approach maturity. As of March 31, 2021, there were no available-for-sale investment securities in non-accrual status.
Contractual Maturities
The amortized cost and fair value of available-for-sale debt securities presented by contractual maturity
are set forth below:
For
the maturity schedule above, investment securities that are not due at a single maturity date have been categorized based on the maturity date of the underlying collateral. Actual principal cash flows may differ from this maturity date presentation as borrowers have the right to repay obligations with or without prepayment penalties.
Sales of Available-for Sale Investment Securities
There
were ino sales of available-for-sale securities during the three months ended March 31, 2021. For the three months ended March 31, 2020, proceeds from sales of available-for-sale securities were $i9.0
million, which resulted in realized gains of $i8 thousand.
Other Information
At March 31, 2021, the Company had a carrying value of $i1.4
billion in callable debt securities in its CMBS, CLO, and municipal bond portfolios. The Company considers this prepayment risk in the evaluation of its interest rate risk profile.
Held-to-maturity and available-for-sale investment securities with carrying values of $i2.7 billion and $i1.3
billion at March 31, 2021, respectively, and $i2.6 billion and $i1.3
billion at December 31, 2020, respectively, were pledged to secure public funds, trust deposits, repurchase agreements, and for other purposes, as required or permitted by law.
(1)Loan
balances include net deferred (fees)/costs and net (premiums)/discounts of $(i20.1) million and $(i10.5)
million at March 31, 2021 and December 31, 2020, respectively.
(2)At March 31, 2021, the Company had pledged $i7.6 billion of eligible loans as collateral
to support borrowing capacity at the FHLB of Boston and the FRB of Boston.
(3)Loan balances exclude accrued interest receivable of $i58.5 million and $i57.8
million at March 31, 2021 and December 31, 2020, respectively, which is included in accrued interest receivable and other assets on the accompanying Condensed Consolidated Balance Sheets.
/
Equipment financing includes net investment in leases of $i223.9
million. Total undiscounted cash flows, primarily due within the next five years, amounting to $i243.3 million, at March 31, 2021. This lessor activity resulted in interest income of $i1.9
million and $i1.5 million for the three months ended March 31, 2021 and 2020, respectively.
Loans and Leases Aging
i
The
following table summarizes the aging of loans and leases:
Interest
on non-accrual residential and home equity loans, which would have been recorded as additional interest income had the loans been current in accordance with the original terms, totaled $i4.0 million and $i3.3 million
for the three months ended March 31, 2021 and 2020, respectively.
Refer to Note 1 to the Consolidated Financial Statements included in the Company's Form 10-K for the year ended December 31, 2020, for details of non-accrual policies.
Allowance for Credit Losses on Loans and Leases
i
The
following table summarizes the activity in, as well as the loan and lease balances that were evaluated for, ACL on loans and leases:
Credit
Quality Indicators. To measure credit risk for the commercial portfolio, the Company employs a dual grade credit risk grading system for estimating the PD and LGD. The credit risk grade system assigns a rating to each borrower and to the facility, which together form a Composite Credit Risk Profile. The credit risk grade system categorizes borrowers by common financial characteristics that measure the credit strength of borrowers and facilities by common structural characteristics. The Composite Credit Risk Profile has ten grades, with each grade corresponding to a progressively greater risk of loss. Grades (1) to (6) are considered pass ratings, and grades (7) to (10) are considered criticized, as defined by the regulatory agencies. Risk ratings assigned in order to differentiate risk within the portfolio are reviewed on an ongoing basis and revised to reflect
changes in a borrowers’ current financial position and outlook, risk profile, and the related collateral and structural position. Loan officers review updated financial information on at least an annual basis for all pass rated loans to assess the accuracy of the risk grade. Criticized loans undergo more frequent reviews and enhanced monitoring. A (7) - "Special Mention" rating has the potential weakness that, if left uncorrected, may result in deterioration of the repayment prospects for the credit. An (8) - "Substandard" rating has a well-defined weakness that jeopardizes the full repayment of the debt. A (9) - "Doubtful" rating has all of the same weaknesses as a substandard credit with the added characteristic that the weakness makes collection or liquidation in full improbably, given current facts, conditions, and values. Credits when classified as (10) - "Loss", in accordance with regulatory guidelines, are considered uncollectible and
charged off.
i
The following tables summarize commercial, commercial real estate, and equipment financing loans and leases segregated by origination year and risk rating exposure under the Composite Credit Risk Profile grades as of March 31, 2021 and December 31, 2020:
To
measure credit risk for the consumer portfolio, the most relevant credit characteristic is the FICO score, which is a widely used credit scoring system that ranges from 300 to 850. A lower FICO score is indicative of higher credit risk. FICO scores are updated at least quarterly.
The following tables summarize residential and consumer loans segregated by origination year and risk rating exposure under FICO score groupings as of March 31, 2021 and December 31, 2020:
Collateral
Dependent Loans and Leases. A loan is considered collateral dependent when the borrower is experiencing financial difficulty and repayment is substantially expected through the operation or sale of collateral. A collateral dependent loan is individually assessed based on the fair value of the collateral, less costs to sell, as of the reporting date. Commercial non-mortgage, asset based, and equipment financing loans are collateralized by equipment, inventory, receivables, or other non-real estate assets. Commercial real estate, residential, and home equity loans are collateralized by real estate. Collateral value on collateral dependent loans and leases was $iii147.7//
million at March 31, 2021 and $i150.3 million at December 31, 2020.
The following table summarizes whether, or not, individually assessed loans and leases are collateral dependent:
Specific
reserves for TDRs included in the balance of ACL on loans and leases
$
i14,293
$
i12,728
Additional
funds committed to borrowers in TDR status
i14,606
i12,895
/
45
The
portion of TDRs deemed to be uncollectible, $i1.9 million and $i1.2 million
for the three months ended March 31, 2021 and 2020, respectively, were charged off.
The following table provides information on the type of concession for loans modified as TDRs:
(1)Post-modification
balances approximate pre-modification balances. The aggregate amount of charge-offs as a result of the restructurings was not significant.
(2)Other includes covenant modifications, forbearance, loans discharged under Chapter 7 bankruptcy, or other concessions.
There were iino/
significant amounts of loans modified as TDRs within the previous 12 months and for which there was a payment default for the three months ended March 31, 2021 and 2020.
TDRs in commercial non-mortgage, commercial real estate, and equipment financing segregated by risk rating exposure is as follows:
The Company sells financial assets in the normal course of business, primarily residential mortgage loans sold to government-sponsored enterprises through established programs and securitizations. Residential mortgage origination fees, adjustments for changes in fair value, and gains or losses on loans sold are included as mortgage banking activities on the accompanying Condensed Consolidated
Statements of Income.
The Company may be required to repurchase a loan in the event of certain breaches of the representations and warranties, or in the event of default of the borrower within 90 days of sale, as provided for in the sale agreements. A reserve for loan repurchases provides for estimated losses pertaining to the potential repurchase of loans associated with the Company’s mortgage banking activities. The reserve reflects loan repurchase requests received by the Company for which management evaluates the identity of the counterparty, the vintage of the loans sold, the amount of open repurchase requests, specific loss estimates for each open request, the current
level of loan losses in similar vintages held in the residential loan portfolio, and estimated recoveries on the underlying collateral. The reserve also reflects management’s expectation of losses from loan repurchase requests for which the Company has not yet been notified. The provision recorded at the time of the loan sale is netted from the gain or loss recorded in mortgage banking activities, while any incremental provision, post loan sale, is recorded in other non-interest expense in the accompanying Condensed Consolidated Statements of Income.
i
The
following table provides a summary of activity in the reserve for loan repurchases:
Three months ended March 31,
(In thousands)
2021
2020
Beginning
balance
$
i747
$
i508
Provision
charged to expense
i23
i22
(Charge-offs/settlements)
recoveries, net
i—
i103
Ending
balance
$
i770
$
i633
/i
The
following table provides information for mortgage banking activities:
Three months ended March 31,
(In thousands)
2021
2020
Residential
mortgage loans held for sale:
Proceeds from sale
$
i79,308
$
i75,594
Loans
sold with servicing rights retained
i75,691
i72,091
Net
gain on sale
i2,109
i2,519
Ancillary
fees
i541
i401
Fair
value option adjustment
(i8)
(i27)
/
Additionally,
loans not originated for sale were sold approximately at carrying value for cash proceeds of $i16.8 million, resulting in a gain of approximately $i191
thousand, for certain commercial loans for the three months ended March 31, 2021, and $i0.4 million for certain commercial loans for the three months ended March 31, 2020.
The
following table presents the changes in carrying value for mortgage servicing assets:
Three months ended March 31,
(In thousands)
2021
2020
Beginning
balance
$
i13,422
$
i17,484
Additions
i586
i1,189
Amortization
(i1,490)
(i1,707)
Adjustment
to valuation allowance
(i191)
(i575)
Ending
balance
$
i12,327
$
i16,391
/
Loan
servicing fees, net of mortgage servicing rights amortization, were $i0.4 million and $i0.5 million for
the three months ended March 31, 2021 and 2020, respectively, and are included as a component of loan related fees on the accompanying Condensed Consolidated Statements of Income.
Refer to Note 15: Fair Value Measurements for additional information on loans held for sale and mortgage servicing assets.
47
Note 7: iLeasing
The
Company enters into operating leases, as lessee, primarily for office space, banking centers, and certain other operational assets. The Company's operating leases generally have lease terms for periods of i5 to i20
years with various renewal options. The Company does not have any material sub-lease agreements.
i
The following table summarizes lessee information related to the Company’s operating ROU lease assets and lease liabilities:
Refer to Note 5: Loans and Leases for information relating to leases included within the equipment financing portfolio in which the Company is the lessor.
48
Note 8: iGoodwill and Other Intangible Assets
There has been no change during the three months ended March 31, 2021 in the carrying amount
for goodwill. For goodwill by reportable segment, refer to Note 17: Segment Reporting.
i
Other intangible assets by reportable segment consisted of the following:
Securities sold under agreements to repurchase (1):
Original
maturity of one year or less
$
i298,378
i0.11
%
$
i269,330
i0.13
%
Original
maturity of greater than one year, non-callable
i200,000
i1.53
i200,000
i0.84
Total
securities sold under agreements to repurchase
i498,378
i0.68
i469,330
i0.43
Fed
funds purchased
i—
i—
i526,025
i0.08
Securities
sold under agreements to repurchase and other borrowings
$
i498,378
i0.68
$
i995,355
i0.25
/
(1)The
Company has right of offset with respect to all repurchase agreement assets and liabilities. Total securities sold under agreements to repurchase are presented as gross transactions, as only liabilities are outstanding for the periods presented.
Repurchase agreements are used as a source of borrowed funds and are collateralized by agency mortgage-backed securities. Repurchase agreement counterparties are limited to primary dealers in government securities and commercial/municipal customers through the Corporate Treasury function.
i
The
following table provides information for FHLB advances:
Aggregate
carrying value of assets pledged as collateral
$
i7,239,063
$
i7,387,054
Remaining
borrowing capacity
i4,451,005
i4,689,642
/
Webster
Bank is in compliance with FHLB collateral requirements for the periods presented. Eligible collateral, primarily certain residential and commercial real estate loans, has been pledged to secure FHLB advances.
Junior
subordinated debt Webster Statutory Trust I floating-rate notes due September 17, 2033(2)
i77,320
i77,320
Total
notes and subordinated debt
i570,146
i571,484
Discount
on senior fixed-rate notes
(i1,138)
(i1,193)
Debt
issuance cost on senior fixed-rate notes
(i2,528)
(i2,628)
Long-term
debt
$
i566,480
$
i567,663
(1)The
Company de-designated its fair value hedging relationship on these notes. A basis adjustment is included in the carrying value, which is being amortized over the remaining life of the notes.
(2)The interest rate on Webster Statutory Trust I floating-rate notes, which varies quarterly based on 3-month LIBOR plus i2.95%, was i3.13%
at March 31, 2021 and i3.18% at December 31, 2020.
/
50
Note
11: iAccumulated Other Comprehensive Income, Net of Tax
i
The following table summarizes the changes in each component of accumulated other comprehensive income (loss), net
of tax:
Defined Benefit Pension and Other Postretirement Benefit Plans
Total
Beginning balance
$
i17,251
$
(i9,184)
$
(i44,139)
$
(i36,072)
Other
comprehensive (loss) income before reclassifications
(i15,683)
i24,779
i—
i9,096
Amounts
reclassified from accumulated other comprehensive income (loss)
(i6)
i1,453
i729
i2,176
Net
current-period other comprehensive (loss) income, net of tax
(i15,689)
i26,232
i729
i11,272
Ending
balance
$
i1,562
$
i17,048
$
(i43,410)
$
(i24,800)
/
i
The
following table further details the amounts reclassified from accumulated other comprehensive income (loss):
(In thousands)
Three months ended March 31,
Associated Line Item on the Condensed Consolidated
Statements of Income
AOCI (AOCL) Component
2021
2020
Securities available-for-sale:
Unrealized gains on investment securities
$
i—
$
i8
Gain
on sale of investment securities, net
Tax expense
i—
(i2)
Income
tax expense
Net of tax
$
i—
$
i6
Derivative
instruments:
Hedge terminations
$
(i1,005)
$
(i1,173)
Interest
expense
Premium amortization
(i76)
(i794)
Interest
income
Tax benefit
i283
i514
Income
tax expense
Net of tax
$
(i798)
$
(i1,453)
Defined
benefit pension and other postretirement benefit plans:
Amortization of net loss
$
(i1,008)
$
(i990)
Other
non-interest expense
Tax benefit
i265
i261
Income
tax expense
Net of tax
$
(i743)
$
(i729)
/
51
Note
12: iRegulatory Matters
Capital Requirements
Webster Financial Corporation is subject to regulatory capital requirements administered by the Federal Reserve System, while Webster Bank is subject to regulatory capital requirements administered by the OCC. Regulatory authorities can initiate certain mandatory actions if either Webster Financial Corporation or Webster Bank fail to meet minimum capital requirements, which could have
a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, both Webster Financial Corporation and Webster Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. These quantitative measures require minimum amounts and ratios to ensure capital adequacy.
Total risk-based capital is comprised of three categories as defined by Basel III capital rules: CET1 capital, Tier 1 capital, and Tier 2 capital. CET1 capital includes common shareholders' equity, less deductions for goodwill, other intangibles, and certain deferred tax adjustments. For purposes of CET1 capital, common shareholders' equity excludes AOCI (AOCL) components
as permitted by the opt-out election taken by Webster upon adoption of Basel III. Tier 1 capital is comprised of CET1 capital plus perpetual preferred stock, while Tier 2 capital includes qualifying subordinated debt and qualifying allowance for credit losses, that together equal total capital.
i
The following table provides information on the capital ratios for Webster Financial Corporation and Webster Bank:
(1)In
accordance with regulatory capital rules, the Company elected an option to delay the estimated impact of the adoption of CECL on its regulatory capital over a two-year deferral period and subsequent three-year transition period ending December 31, 2024. As a result, capital ratios and amounts exclude the impact of the increased allowance for credit losses on loans, held-to-maturity debt securities, and unfunded loan commitments attributed to the adoption of CECL, adjusted for an approximation of the after-tax provision for credit losses attributable to CECL relative to the incurred loss methodology during the deferral period.
Dividend Restrictions. Webster Financial Corporation is dependent upon dividends from Webster Bank to provide funds for its cash requirements, including
payments of dividends to shareholders. Dividends paid by the Bank are subject to various federal and state regulatory limitations. Express approval by the OCC is required if the effect of dividends declared would cause the regulatory capital of the Bank to fall below specified minimum levels, or would exceed the net income for that year combined with the undistributed net income for the preceding two years. Webster Bank paid $i60.0 million in dividends to Webster Financial Corporation during the three months ended March
31, 2021, whereas ino dividends were paid during the three months ended March 31, 2020.
Cash Restrictions. Webster Bank is required by Federal Reserve System regulations to hold cash reserve balances on hand or with a Federal Reserve Bank. To address liquidity concerns due to COVID-19, the Federal Reserve reset the requirement to zero. The reserve requirement ratio remains subject to adjustment as conditions warrant.
52
Note
13: iEarnings Per Common Share
A rieconciliation of the calculation of basic and diluted earnings per common share
is as follows:
Three months ended March 31,
(In thousands, except per share data)
2021
2020
Earnings
for basic and diluted earnings per common share:
Net income
$
i108,078
$
i38,199
Less:
Preferred stock dividends
i1,969
i1,969
Net
income available to common shareholders
ii106,109/
ii36,230/
Less:
Earnings applicable to participating securities (1)
ii579/
ii209/
Earnings
applicable to common shareholders
$
ii105,530/
$
ii36,021/
Shares:
Weighted-average
common shares outstanding - basic
i89,809
i90,936
Effect
of dilutive securities
i299
i270
Weighted-average
common shares outstanding - diluted
i90,108
i91,206
Earnings
per common share (1):
Basic
$
i1.18
$
i0.40
Diluted
i1.17
i0.39
(1)Earnings
per common share amounts under the two-class method for unvested time-based restricted stock with non-forfeitable dividends and dividend rights are computed the same as the presentation above.
Dilutive Securities
Webster maintains stock compensation plans under which restricted stock, restricted stock units, non-qualified stock options, incentive stock options, or stock appreciation rights may be granted to employees and directors. The effect of dilutive securities for the periods presented is attributed to outstanding stock options and non-participating, performance-based restricted stock.
There were ino
anti-dilutive stock options nor non-participating, performance-based restricted shares excluded from the effect of dilutive securities for the three months ended March 31, 2021, whereas there were i35 thousand anti-dilutive non-participating, performance-based restricted shares excluded for the for the three months ended March 31, 2020.
53
Note
14: iDerivative Financial Instruments
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.
i
The
following table presents the notional amounts and fair values of derivative positions:
(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 $i0.3 billion and $i0.1
billion for asset derivatives and $i3.0 billion and $i3.2 billion for liability derivatives at March 31, 2021
and December 31, 2020, respectively. The related fair values approximate izero.
(2)Notional amounts related to residential loans exclude approved floating rate commitments of $i1.1
million at March 31, 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 $i82.7 million and $i80.5
million for asset derivatives and $i368.4 million and $i338.9 million for liability derivatives at March 31,
2021 and December 31, 2020, respectively, that have insignificant related fair values.
/i
The following table presents fair value positions transitioned from gross to net upon applying
contractual counterparty netting agreements:
The
following table presents the effect on the income statement for derivatives not designated as hedging instruments:
Recognized In
Three months ended March 31,
(In thousands)
Non-interest Income
2021
2020
Interest
rate derivatives
Other income
$
i4,644
$
i5,926
Mortgage
banking derivatives
Mortgage banking activities
(i382)
(i993)
Other
Other
income
i472
i1,911
Total
not designated as hedging instruments
$
i4,734
$
i6,844
/
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, 2021, the remaining unamortized balance of time-value premiums was $i9.4 million.
Over the next twelve months, an estimated $i10.3
million decrease to interest expense will be reclassified from AOCI (AOCL) relating to cash flow hedges, and an estimated $i0.3 million increase to interest expense will be reclassified from AOCI (AOCL) relating to hedge terminations. At March 31, 2021, the remaining unamortized loss on terminated cash flow hedges is $i0.9
million. The maximum length of time over which forecasted transactions are hedged is i3.3 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 March 31,
2021, the Company had $i75.9 million in initial margin collateral posted at CME. In addition, $i40.7
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 $i182.3
million at March 31, 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 $i39.6 million at March 31, 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.
55
Note 15: iFair
Value Measurements
Fair value is 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. Fair value is best determined using quoted market prices. However, in many instances, quoted market prices are not available. In such instances, fair values are determined using appropriate valuation techniques. Various assumptions and observable inputs must be relied upon in applying these techniques. Accordingly, categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. As such, the fair value estimates may not be realized in an immediate transfer of the respective asset or liability.
Fair value estimates are made at a specific point in time based on relevant market information and information about the
financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the entire holdings or any part of a particular financial instrument. Fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These factors are subjective in nature and involve uncertainties and matters of significant judgment, and therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Fair Value Hierarchy
The three levels within the fair value hierarchy are as follows:
•Level 1: Valuation is based upon unadjusted quoted prices in active markets for identical assets or liabilities that the reporting
entity has the ability to access at the measurement date.
•Level 2: Fair value is calculated using significant inputs other than quoted market prices that are directly or indirectly observable for the asset or liability. The valuation may rely on 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, credit ratings,) or inputs that are derived principally or corroborated by market data, correlation, or other means.
•Level 3: Inputs for determining the fair value of the respective assets or liabilities are not observable. Level 3 valuations are reliant upon pricing models and techniques that require significant
management judgment or estimation.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Available-for-Sale Investment Securities. When quoted prices are available in an active market, the Company classifies available-for-sale investment securities within Level 1 of the fair value hierarchy. U.S. Treasury Bills are classified within Level 1 of the fair value hierarchy.
When quoted market prices are not available, the Company employs an independent pricing service that utilizes matrix pricing to calculate fair value. Such 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 respective terms and conditions for debt instruments. Management maintains procedures to monitor the pricing service's results and has an established process to challenge their valuations, or methodologies, that appear unusual or unexpected. Available-for-Sale investment securities which include Agency CMO, Agency MBS, Agency CMBS, CMBS, CLO, and corporate debt, are classified within Level 2 of the fair value hierarchy.
Derivative Instruments. Foreign exchange contracts are valued based on unadjusted quoted prices in active markets and classified within Level 1 of the fair value hierarchy.
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 validated against valuations performed by independent third parties and are classified within Level 2 of the fair value hierarchy.
Mortgage Banking Derivatives. Forward sales of mortgage loans and mortgage-backed securities are utilized by the Company in its efforts to manage 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 the period from commitment date to closing date, the
Company is subject to the risk that market rates of interest may change. If market rates rise, investors generally will pay less to purchase such loans resulting in a reduction in the gain on sale of the loans or, possibly, a loss. In an effort to mitigate such risk, forward delivery sales commitments are established, under which the Company agrees to 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 and, therefore, classified within Level 2 of the fair value hierarchy.
56
Originated Loans Held For Sale.
Residential mortgage loans typically are classified as held for sale upon origination based on management's intent to sell such loans. The Company generally records residential mortgage loans held for sale under the fair value option of Accounting Standards Codification (ASC) Topic 825 "Financial Instruments." Electing to measure originated loans held for sale at fair value reduces certain timing differences and better matches changes in the value of these assets with changes in the value of the derivatives used as an economic hedge on these assets. The fair value of residential mortgage loans held for sale is based on quoted market prices of similar loans sold in conjunction with securitization transactions. Accordingly, such loans are classified within Level 2 of the fair value hierarchy.
The following table compares the fair value
to unpaid principal balance of assets accounted for under the fair value option:
Investments
Held in Rabbi Trust.Investments held in the Rabbi Trust primarily include open-ended mutual funds that invest in equity and fixed income securities. Shares of mutual funds are valued based on net asset value, which represents quoted market prices for the underlying shares held in the mutual funds. Therefore, investments held in the Rabbi Trust are classified within Level 1 of the fair value hierarchy. The Company has elected to measure the investments held in the Rabbi Trust at fair value. The cost basis of the investments held in the Rabbi Trust is $i1.6
million at March 31, 2021.
Alternative Investments. Equity investments have a readily determinable fair value when quoted prices are available in an active market. Accordingly, such alternative investments are classified within Level 1 of the fair value hierarchy.
Equity investments that do not have a readily available fair value may qualify for net asset value (NAV) practical expedient measurement, based on specific requirements. The Company's alternative investments accounted for at NAV consist of investments in non-public entities that generally cannot be redeemed since the Company’s investments are distributed as the underlying equity is
liquidated. Alternative investments recorded at NAV are not classified within the fair value hierarchy. At March 31, 2021, these alternative investments had a remaining unfunded commitment of $i18.7 million.
57
i
A
summary of the financial assets and liabilities measured at fair value on a recurring basis is as follows:
(1)For
information relating to the impact of netting derivative assets and derivative liabilities, as well as the impact from offsetting cash collateral paid to the same derivative counterparties, refer to Note 14: Derivative Financial Instruments.
(2)Alternative investments are recorded at NAV. Assets measured at NAV are not classified within the fair value hierarchy.
/
58
Assets Measured at Fair Value on a Non-Recurring Basis
Certain assets are
measured at fair value on a non-recurring basis; that is, the assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances, for example, when there is evidence of impairment. At March 31, 2021, no significant assets classified within Level 3 were identified and measured under this basis. The following is a description of valuation methodologies used for assets measured on a non-recurring basis.
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 accounted for at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or
a similar investment of the same issuer. These alternative investments are investments in non-public entities that generally cannot be redeemed since the investment is distributed as the underlying equity is liquidated. Accordingly, these alternative investments are classified within Level 2 of the fair value hierarchy. The carrying amount of these alternative investments was $i17.9 million at March 31, 2021. No reductions for impairments or adjustments due to observable price changes were identified during the three
months ended March 31, 2021.
Collateral Dependent Loans and Leases. Loans and leases for which the payment is expected to be provided solely by the value of the underlying collateral are considered collateral dependent and are valued based on the estimated fair value of such collateral, less estimated cost to sell, using customized discounting criteria. Accordingly, such collateral dependent loans and leases are classified within Level 3 of the fair value hierarchy.
Other Real Estate Owned (OREO) and Repossessed Assets. The total book value of OREO and repossessed assets was $i2.4
million at March 31, 2021. OREO and repossessed assets are accounted for at the lower of cost or fair value and are considered to be recognized at fair value when recorded below cost. The fair value of OREO is based on independent appraisals or internal valuation methods, less estimated selling costs. The valuation may consider available pricing guides, auction results, and price opinions. Certain assets require assumptions about factors that are not observable in an active market in the determination of fair value; as such, OREO and repossessed assets are classified within Level 3 of the fair value hierarchy.
In addition, the amortized cost of consumer loans secured by residential real estate property that are in process of foreclosure amounted to $i19.3
million at March 31, 2021.
Fair Value of Financial Instruments and Servicing Assets
The Company is required to disclose the estimated fair value of financial instruments for which it is practicable to estimate fair value, as well as for servicing assets. The following is a description of the valuation methodologies used for those assets and liabilities.
Cash, Due from Banks, and Interest-bearing Deposits.The carrying amount of cash, due from banks, and interest-bearing deposits is used to approximate fair value given the short time frame to maturity, and as such, these assets do not present unanticipated credit concerns. Cash, due from
banks, and interest-bearing deposits are classified within Level 1 of the fair value hierarchy.
Held-to-Maturity Investment Securities. When quoted market prices are not available, the Company employs an independent pricing service that utilizes matrix pricing to calculate fair value. Such 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 respective terms and conditions for debt instruments. Management maintains procedures to monitor the pricing service's results, and has an established process to challenge their valuations or methodologies that appear unusual or unexpected. Held-to-Maturity investment securities, which include Agency
CMO, Agency MBS, Agency CMBS, CMBS, and municipal bonds and notes, are classified within Level 2 of the fair value hierarchy.
Loans and Leases, net. The estimated fair value of loans and leases held for investment is calculated using a discounted cash flow method based on future prepayments and market interest rates inclusive of an illiquidity premium for comparable loans and leases. The associated cash flows are adjusted for credit and other potential losses. Fair value for collateral dependent loans and leases is estimated using the net present value of the expected cash flows. Loans and leases are classified within Level 3 of the fair value hierarchy.
59
Deposit Liabilities.
The fair value of demand deposits, savings accounts, and certain money market deposits is 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 a fixed-maturity certificate of deposit is estimated using the rates currently offered for deposits of 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 is equal to the carrying value. Fair value for all other balances are estimated using a discounted cash flow analysis based on current
market rates 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 technique. Discount rates are matched with the time period of the expected cash flows and are adjusted, as appropriate, to reflect credit risk. FHLB advances and long-term debt are classified within Level 2 of the fair value hierarchy.
Mortgage Servicing Assets. Mortgage servicing assets are initially recorded at fair value and subsequently measured under the amortization method. 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. As such, 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 reviewed quarterly and held at the lower of the carrying amount or fair value. Fair value adjustments, if any, are included as a component of loan related fees in the accompanying Condensed Consolidated Statements of Income. The Company recorded a $i191 thousand
and a $i575 thousand charge to the valuation allowance for the three months ended March 31, 2021 and 2020, respectively. Mortgage servicing assets are classified within Level 3 of the fair value hierarchy.
i
The
carrying amounts, estimated fair values, and classifications within the fair value hierarchy of selected financial instruments and servicing assets are summarized as follows:
Securities
sold under agreements to repurchase and other borrowings
i498,378
i505,387
i995,355
i1,000,189
FHLB
advances
i138,554
i142,467
i133,164
i139,035
Long-term
debt (1)
i566,480
i522,850
i567,663
i538,407
(1)Adjustments
to the carrying amount of long-term debt for basis adjustment and unamortized discount and debt issuance cost on senior fixed-rate notes are not included in the determination of fair value. Refer to Note 10: Borrowings for additional information.
/
60
Note 16: iRetirement
Benefit Plans
Defined Benefit Pension and Other Postretirement Benefits
i
The following table summarizes the components of net periodic benefit (income) cost:
The
components of net periodic benefit (income) cost are included within other non-interest expense on the accompanying Condensed Consolidated Statements of Income. The weighted-average expected long-term rate of return on plan assets for the three months ended March 31, 2021 was i5.50%, as determined at the beginning of the fiscal year.
Note
17: iSegment Reporting
Webster's operations are organized into ithree reportable segments that represent its primary businesses:
Commercial Banking, HSA Bank, and Retail Banking. These segments reflect how executive management responsibilities are assigned, the type of customer served, how products and services are provided, and how discrete financial information is evaluated. Certain Treasury activities, along with the amounts required to reconcile profitability metrics to those reported in accordance with GAAP, are included in the Corporate and Reconciling category.
Effective January 1, 2021, management realigned certain of the Company's business banking and investment services operations to better serve its customers and deliver operational efficiencies. Also, the previously reported Community Banking segment was renamed as Retail Banking. Under this realignment, $ii131.0/
million of goodwill was reallocated, on a relative fair value basis, from Retail Banking to Commercial Banking. There was no goodwill impairment as a result of the reorganization. Prior period amounts have been recasted to reflect the realignment.
Description of Segment Reporting Methodology
Webster uses an internal profitability reporting system to generate information by reportable segment, which is based on a series of management estimates for funds transfer pricing, and allocations for non-interest expense, provision for credit losses, income taxes, and equity capital. These estimates and allocations, certain of which are subjective in nature, are periodically reviewed and refined. Changes in estimates and allocations that affect the results of any reportable segment do not affect the consolidated financial position or results of operations of Webster as a whole. The full profitability
measurement reports, which are prepared for each reportable segment, reflect non-GAAP reporting methodologies. The differences between full profitability and GAAP results are reconciled in the Corporate and Reconciling category.
Webster allocates interest income and interest expense to each business, through an internal matched maturity Funds Transfer Pricing (FTP) process. The goal of the FTP allocation is to encourage loan and deposit growth consistent with the Company’s overall profitability objectives. The FTP process considers the specific interest rate risk and liquidity risk of financial instruments and other assets and liabilities in each line of business. Loans are assigned an FTP rate for funds used and deposits are assigned an FTP rate for funds provided. The allocation considers the origination date and the earlier of the maturity
date or the repricing date of a financial instrument to assign an FTP rate for loans and deposits originated each day. The FTP process transfers the corporate interest rate risk exposure to the treasury function included within the Corporate and Reconciling category where such exposures are centrally managed.
Webster allocates a majority of non-interest expense to each reportable segment using a full-absorption costing process. Costs, including corporate overhead, are analyzed, pooled by process, and assigned to the appropriate reportable segment. Business development costs are generally included in the Corporate and Reconciling category.
The results of funds transfer pricing and allocations for non-interest expense, as well as non-interest income produces pre-tax, pre-provision net revenue, under which basis the segments are reviewed by executive management.
Webster
also allocates the provision for credit losses to each reportable segment based on management's estimate of the inherent loss content in each of the specific loan and lease portfolios. Allowance for credit losses on loans and leases is included in total assets within the Corporate and Reconciling category.
61
i
The following table presents balance sheet information, including all appropriate allocations,
for Webster's reportable segments and the Corporate and Reconciling category:
The
following tables present the operating results, including all appropriate allocations, for Webster’s reportable segments and the Corporate and Reconciling category:
The following table presents revenues within
the scope of ASC Topic 606, Revenue from Contracts with Customers, along with the net amount of other sources of non-interest income that are within the scope of other GAAP topics, by reportable segment:
The
major sources of revenue from contracts with customers are described below:
Deposit service fees predominately consist of fees earned from deposit accounts and interchange fees. Fees earned from deposit accounts relate to event-driven services and periodic account maintenance activities. Webster's obligations for event-driven services are satisfied at the time the service is delivered, while the obligations for maintenance services are satisfied monthly. Interchange fees are assessed as the performance obligation is satisfied, which is the point in time that the card transaction is authorized.
Wealth and investment services consists of fees earned from investment and securities-related services, trust, and other related services. Obligations for
wealth and investment services are generally satisfied over time through a time-based measurement of progress, but certain obligations may be satisfied at points in time for activities that are transactional in nature.
These disaggregated amounts are reconciled to non-interest income as presented within Note 17: Segment Reporting. Contracts with customers did not generate significant contract assets and liabilities.
63
Note 19: iCommitments
and Contingencies
Credit-Related Financial Instruments
The Company offers credit-related financial instruments in the normal course of business to meet certain financing needs of its customers, that involve off-balance sheet risk. These transactions may include an unused commitment to extend credit, standby letter of credit, or a commercial letter of credit. Such transactions involve, to varying degrees, elements of credit risk.
Commitments to Extend Credit.The Company makes commitments under various terms to lend funds to customers at a future point in time. These commitments include revolving credit arrangements, term
loan commitments, and short-term borrowing agreements. Most of these loans have fixed expiration dates or other termination clauses where a fee may be required. Since commitments routinely expire without being funded, or after required availability of collateral occurs, the total commitment amount does not necessarily represent future liquidity requirements.
Standby Letters of Credit.A standby letter of credit commits the Company to make payments on behalf of customers if certain specified future events occur. The Company has recourse against the customer for any amount required to be paid to a third party under a standby letter of credit, which is often part of a larger credit agreement
under which security is provided. Historically, a large percentage of standby letters of credit expire without being funded. The contractual amount of a standby letter of credit represents the maximum amount of potential future payments the Company could be required to make, and is the Company's maximum credit risk.
Commercial Letters of Credit.A commercial letter of credit is issued to facilitate either domestic or foreign trade arrangements for customers. As a general rule, drafts are committed to be drawn when the goods underlying the transaction are in transit. Similar to a standby letter of credit, a commercial letter of credit is often secured by an underlying security agreement including
the assets or inventory to which they relate.
i
The following table summarizes the outstanding amounts of credit-related financial instruments with off-balance sheet risk:
Total
credit-related financial instruments with off-balance sheet risk
$
i6,745,332
$
i6,755,563
/
These
commitments subject the Company to potential exposure in excess of amounts recorded in the financial statements, and therefore, management maintains an allowance for credit losses on unfunded loan commitments to provide for expected losses in connection with funding the unused portion of legal commitments to lend when those commitments are not unconditionally cancellable by Webster. Loss calculation factors are consistent with the ACL methodology for funded loans using PD and LGD applied to the underlying borrower risk and facility grades, a draw down factor applied to utilization rates, and relevant forecast information. This allowance is reported as a component of accrued expenses and other liabilities on the accompanying Condensed Consolidated Balance Sheets.
The following table provides a summary of activity in the allowance for credit
losses on unfunded loan commitments:
Three months ended March 31,
(In thousands)
2021
2020
Beginning
balance
$
i12,755
$
i2,367
Adoption
of ASU No. 2016-13 (CECL)
i—
i9,139
Provision
(benefit)
i45
(i1,422)
Ending
balance
$
i12,800
$
i10,084
Note
20: iSubsequent Events
The Company has evaluated subsequent events from the date of the Condensed Consolidated Financial Statements and accompanying Notes thereto, March 31, 2021, through the date of issuance, and determined that, except for the pending merger discussed in Note 3: Business Developments, no other significant events were identified requiring recognition or disclosure.
64
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The required information is set forth above in Item 1. Financial Statements, refer to Note 14: Derivative Financial Instruments, andin Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, refer to the section captioned "Asset/Liability Management and Market Risk", which are incorporated herein for reference.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company has performed an evaluation, under the
supervision and with the participation of the Company's management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company's disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. Based on that evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures for recording, processing, summarizing, and reporting the information the Company is
required to disclose in the reports it files under the Securities Exchange Act of 1934, within the time periods specified in the SEC's rules and forms, were effective as of March 31, 2021.
Changes in Internal Control over Financial Reporting
There were no changes made to the Company's internal control over financial reporting during the quarter ended March 31, 2021, that materially affected, or would be reasonably likely to materially affect, the Company's internal control over financial reporting.
65
PART
II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, Webster Financial Corporation, or its subsidiaries, are subject to certain legal proceedings and claims in the ordinary course of business. The Company intends to defend itself in all claims asserted against it, and management currently believes that the ultimate outcome of these proceedings will not be material, either individually or in the aggregate, to Webster or its consolidated financial position. Webster establishes an accrual for specific legal matters when it determines that the likelihood of an unfavorable outcome
is probable and the loss is reasonably estimable. Legal proceedings are subject to inherent uncertainties, and unfavorable rulings may occur that could cause Webster to adjust its litigation accrual or could have a material adverse effect, either individually or in the aggregate, on its business, financial condition, or operating results.
ITEM 1A. RISK FACTORS
As a result of Webster entering into a merger agreement with Sterling, certain risk factors have been identified:
Webster may not be able to complete the merger with Sterling, as the completion is contingent upon the satisfaction of a number of conditions, some of which are beyond both Webster's and Sterling's control.
Adoption
of the merger agreement is subject to customary closing conditions, including the receipt of regulatory approvals and the requisite approvals of both Webster's shareholders and Sterling's shareholders. Conditions to the closing of the merger may not be fulfilled in a timely manner or at all, and accordingly, the merger may not be completed. In addition, the parties can mutually decide to terminate the merger agreement at any time, or Webster or Sterling may unilaterally elect to terminate the merger agreement. If the merger agreement is terminated under certain circumstances, Webster may be required to pay a $185.0 million termination fee to Sterling.
Webster and Sterling may also be subject to lawsuits challenging the merger, and adverse rulings in these lawsuits may delay or prevent the merger from being completed or require Webster or Sterling to incur significant costs to defend or settle these lawsuits. Any delay in completing
the merger could cause Webster not to realize, or be delayed in realizing, some or all of the benefits that the Company expects to achieve if the merger is successfully completed within the anticipated time frame.
While the merger is pending, Webster will be subject to business uncertainties and contractual restrictions that could adversely affect its business and operations.
Uncertainty about the effect of the merger on employees, customers, and other persons with whom Webster or Sterling have a business relationship may have an adverse effect on Webster's business, operations and stock price. Existing customers of Webster and Sterling could decide to no longer do business with Webster, Sterling, or the combined company, reducing the anticipated benefits of the merger. Webster and Sterling are also
subject to certain restrictions on the conduct of their respective businesses while the merger is pending. As a result, certain other projects may be delayed or abandoned and business decisions could be deferred. Employee retention at Sterling and Webster may be challenging before completion of the merger, as certain employees may experience uncertainty about their future roles with the combined company. These retention challenges would require Webster to incur additional expenses in order to retain key employees. If key employees depart because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with Webster, Sterling or the combined company, the benefits of the merger could be materially diminished.
Webster may fail to realize the anticipated benefits of the merger, or those benefits may take longer to realize than expected. Further, following the completion of the merger, Webster
may also encounter significant difficulties in integrating with Sterling and its results could suffer if the Company does not effectively manage its operations.
Webster and Sterling have operated and, until the completion of the merger, will continue to operate, independently. The success of the merger, including anticipated benefits and cost savings, will depend, in part, on Webster’s ability to successfully integrate Sterling’s operations in a manner that results in various benefits and that does not materially disrupt existing customer relationships or result in decreased revenues due to loss of customers. The process of integrating operations could result in a loss of key personnel or cause an interruption of, or loss of momentum in, the activities of one or more of the combined company's businesses. Inconsistencies in standards, internal
controls, procedures, and policies could adversely affect the combined company. The diversion of management's attention and any delays or difficulties encountered in connection with the merger and the integration of Sterling’s operations could have an adverse effect on the business, financial condition, and operating results of the combined company. If Webster experiences difficulties in the integration process, including those listed above, Webster may fail to realize the anticipated benefits of the merger in a timely manner or at all.
Upon the merger's completion, the size of Webster’s business will increase significantly. Webster’s future success depends, in part, upon the ability to manage this expanded business, which will pose substantial challenges for management, including challenges related to the management and monitoring of new operations and associated increased costs and complexity. There
66
is
no guarantee that Webster will be successful or that Webster will realize the expected operating efficiencies, cost savings, and other benefits currently anticipated from the merger’s completion.
Webster is expected to incur substantial expenses related to the merger and integration with Sterling.
Both Webster and Sterling will incur substantial transaction costs and other expenses in connection with the merger, as there are various processes, policies, procedures, operations, technologies, and systems that must be integrated. Many of the expenses that will be incurred are inherently difficult to estimate accurately and could exceed the anticipated savings that Webster expects to achieve. While Webster has planned for an estimated level of expenses to be incurred, there are many factors beyond the Company’s
control that could affect the total amount or the timing of charges to earnings.
The other risk factors that could affect the Company's financial condition or operating results remain unchanged from those previously disclosed in Webster's Annual Report on Form 10-K for the year ended December 31, 2020.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
The following table provides information with respect to any purchase of equity securities of Webster Financial Corporation's common stock
made by or on behalf of Webster or any "affiliated purchaser," as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934, during the three months ended March 31, 2021:
Period
Total
Number of
Shares
Purchased (1)
Average Price Paid Per
Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
Maximum
Dollar Amount Available for Repurchase
Under the Plans
or Programs (2)
January
1,161
$
48.54
—
$
123,443,785
February
54,672
55.63
—
123,443,785
March
14,215
57.03
—
123,443,785
Total
70,048
55.79
—
123,443,785
(1)The
total number of shares purchased were acquired outside of the Company's common stock repurchase program at market prices and were related to stock compensation plan activity.
(2)Webster maintains a common stock repurchase program which authorizes management to purchase shares of its common stock in either open market or privately negotiated transactions, subject to market conditions and other factors. On October 29, 2019, the Company announced that its Board of Directors approved a modification to this program, originally approved on October 24, 2017, increasing the maximum dollar amount available for repurchase to $200 million. This
program will remain in effect until fully utilized or until modified, superseded, or terminated. However, due to the Company's announcement of its pending merger agreement with Sterling on April 19, 2021, Webster may not purchase any shares under this program until the transaction is closed.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable
ITEM 5.
OTHER INFORMATION
Not applicable
67
ITEM 6. EXHIBITS
A list of exhibits to this Form 10-Q is set forth below.
The following financial information from the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2021 formatted in Inline Extensible Business Reporting Language (iXBRL) includes: (i) Cover Page, (ii) Condensed Consolidated Balance
Sheets, (iii) Condensed Consolidated Statements Of Income, (iv) Condensed Consolidated Statements Of Comprehensive Income, (v) Condensed Consolidated Statements Of Shareholders' Equity, (vi) Condensed Consolidated Statements Of Cash Flows, and (vii) Notes to Condensed Consolidated Financial Statements, tagged in summary and in detail.
X
104
Cover Page Interactive Data File (formatted as iXBRL and contained in Exhibit 101)
X
(1)
Denotes management contract or compensatory plan or arrangement in which directors or executive officers are eligible to participate.
(2) Exhibit is furnished herewith and shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.
68
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.