WEBSTER FINANCIAL CORP - Quarter Report: 2021 September (Form 10-Q)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_______________________________________________________________________________

FORM 10-Q

_________________________________________________________________________________________________________________________________________-___________________________________________________________________________________________________

☒ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2021

☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from ____ to ____

Commission File Number: 001-31486

_______________________________________________________________________________________

WEBSTER FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

______________________________________________________________________________________


Delaware						06-1187536
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)

145 Bank Street, Waterbury, Connecticut 06702

(Address and zip code of principal executive offices)

(203) 578-2202

(Registrant's telephone number, including area code)

______________________________________________________________________________

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbols	Name of each exchange on which registered
Common Stock, par value $0.01 per share	WBS	New York Stock Exchange
Depositary Shares, each representing 1/1000th interest in a share	WBS PrF	New 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. ☒ Yes ☐ 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). ☒ Yes ☐ 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.

Large Accelerated Filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition 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 Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No

The number of shares of common stock, par value $.01 per share, outstanding at October 29, 2021 was 90,588,670.

INDEX


		Page No.

Key to Acronyms and Terms		ii
Forward-Looking Statements		iii

PART I – FINANCIAL INFORMATION

Item 1.	Financial Statements	30

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	69

Item 4.	Controls and Procedures	69

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	70

Item 1A.	Risk Factors	70

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	71

Item 3.	Defaults Upon Senior Securities	71

Item 4.	Mine Safety Disclosures	71

Item 5.	Other Information	71

Item 6.	Exhibits	72

EXHIBIT INDEX		72

SIGNATURES		73

WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES

KEY TO ACRONYMS AND TERMS


ACL			Allowance for credit losses
Agency CMBS			Agency commercial mortgage-backed securities
Agency CMO			Agency collateralized mortgage obligations
Agency MBS			Agency mortgage-backed securities
ALCO			Asset/Liability Committee
AOCI (AOCL)			Accumulated other comprehensive income (loss)
ASC			Accounting Standards Codification
ASU or the Update			Accounting Standards Update
AUA			Assets under administration
AUM			Assets under management
Basel III			Capital rules under a global regulatory framework developed by the Basel Committee on Banking Supervision
BHC Act			Bank Holding Company Act of 1956, as amended
CARES Act			The Coronavirus Aid, Relief, and Economic Security Act
CECL			Current expected credit losses
CET1 capital			Common Equity Tier 1 Capital, defined by Basel III capital rules
CFPB			Consumer Financial Protection Bureau
CLO			Collateralized loan obligations
CMBS			Non-agency commercial mortgage-backed securities
CME			Chicago Mercantile Exchange
COVID-19			Coronavirus
CVA (DVA)			Credit (debit) valuation adjustment
DTA			Deferred tax asset
EAD			Exposure at default
ETS			Emergency Temporary Standard
FASB			Financial Accounting Standards Board
FDIC			Federal Deposit Insurance Corporation
FHLB			Federal Home Loan Bank
FICO			Fair Isaac Corporation
FRB			Federal Reserve Bank
FTP			Funds Transfer Pricing, a matched maturity funding concept
GAAP			U.S. Generally Accepted Accounting Principles
Holding Company			Webster Financial Corporation
HSA			Health savings account
HSA Bank			HSA Bank, a division of Webster Bank, National Association
LGD			Loss given default
NAV			Net asset value
NII			Net interest income
OCC			Office of the Comptroller of the Currency
OCI (OCL)			Other comprehensive income (loss)
OREO			Other real estate owned
OSHA			Occupational Safety and Health Administration
PD			Probability of default
PPD			Principal paydown
PPNR			Pre-tax, pre-provision net revenue
ROU			Right-of-use
PPP			Small Business Administration Paycheck Protection Program
SEC			United States Securities and Exchange Commission
SERP			Supplemental executive defined benefit retirement plan
Sterling			Sterling Bancorp, collectively with its consolidated subsidiaries
TDR			Troubled debt restructuring, defined in ASC 310-40 "Receivables - Troubled Debt Restructurings by Creditors"
TPA			Third-party administrator
VIE			Variable interest entity, defined in ASC 810-10 "Consolidation - Overall"
Webster Bank or the Bank			Webster Bank, National Association, a wholly-owned subsidiary of Webster Financial Corporation
Webster or the Company			Webster Financial Corporation, collectively with its consolidated subsidiaries

WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES

FORWARD-LOOKING STATEMENTS

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 Financial Corporation (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 any risks or uncertainties;

▪our ability to successfully achieve the anticipated cost reductions and operating efficiencies from previously announced strategic initiatives, including branch consolidations, process automation, organization simplification, and spending reductions, and avoid any higher than anticipated costs or delays in the ongoing implementation;

▪our ability to complete the merger with 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, or other unusual and infrequently occurring events, and any governmental or societal responses thereto;

▪changes in laws and regulations, including those concerning banking, taxes, dividends, securities, insurance, and healthcare, with which we and our subsidiaries must comply;

▪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 effects of the replacement of LIBOR as an interest rate benchmark;

▪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 impacts of recently adopted accounting guidance;

▪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.

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 and nine months ended September 30, 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, a full-service regional bank headquartered in Pearl River, New York, that primarily serves the Greater New York metropolitan region, 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. 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 6.50% 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. 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% of the combined company.

The proposed merger was approved by the respective shareholders of both Webster and Sterling on August 17, 2021. Webster Bank and Sterling National Bank, the respective subsidiary banks of Webster and Sterling, also received approval to merge from the Office of the Comptroller of the Currency (OCC) on August 2, 2021 as part of the proposed merger between Webster and Sterling. Completion of the merger remains subject to regulatory approval by the Board of Governors of the Federal Reserve System and the satisfaction of the other customary closing conditions set forth in the merger agreement. Webster is prepared to close the transaction with Sterling shortly after receipt of all required regulatory approvals.

In connection with the proposed merger, the Company incurred $26.9 million of merger-related expenses during the nine months ended September 30, 2021, primarily consisting of professional fees for investment banking, legal, and consulting services, and employee severance and retention costs. At September 30, 2021, Sterling reported $30.6 billion in assets, including $4.2 billion in investment securities and $22.3 billion in loans, $26.0 billion in liabilities, including $24.3 billion in deposits, and $4.6 billion in shareholders' equity.

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 September 30, 2021, the Company has completed all 26 of its previously announced banking center closures, progressed on business process automation and ancillary spend reduction, and continues to realize operational efficiencies from the realignment of certain of the Company's business banking and investment services operations across its reportable segments.

For the nine months ended September 30, 2021, the Company incurred net strategic initiatives costs of $6.6 million, comprised of a net $2.1 million benefit in severance, a net $3.9 million in facilities optimization expense, and $4.8 million in consulting costs. During the three months ended September 30, 2021, the Company released $3.9 million from its previously recorded severance accrual, with a corresponding adjustment to earnings, as a result of changes in retention assumptions.

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 initiatives, as well as the "Segment Reporting" section contained elsewhere in this report for further details specific to the Company's segment changes.

COVID-19 Update

The COVID-19 pandemic continues to cause disruptions to the United States' economy, affecting banking and other financial activities in the areas in which the Company operates. 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.

On September 9, 2021, in an effort to prevent the spread of COVID-19 and the highly contagious Delta variant, President Biden announced executive orders that included a mandate for private-sector businesses with 100 or more employees to require COVID-19 vaccination or weekly testing as soon as the Occupational Safety and Health Administration (OSHA) drafts an Emergency Temporary Standard (ETS). As of the date of issuance of the Company's Quarterly Reporting on Form 10-Q, the OSHA has yet to deliver its ETS with further details of the rule. Webster is monitoring the status of the ETS and will review it upon release to understand and comply with the Company's legal obligations. Current health and safety protocols in place across Webster's offices and banking centers remain in compliance with applicable state and federal guidelines.

Results of Operations

Selected financial highlights are presented in the following table:


	At or for the three months ended September 30,						At or for the nine months ended September 30,
(In thousands, except per share and ratio data)	2021			2020			2021			2020
Earnings:
Net interest income	$	229,691		$	219,256		$	674,307		$	674,464
Provision for credit losses	7,750			22,750			(39,500)			138,750
Total non-interest income	83,775			75,060			233,234			208,514
Total non-interest expense	180,237			183,996			555,247			539,416
Net income	95,713			69,281			297,826			160,577
Earnings applicable to common shareholders	93,171			66,890			290,259			153,758
Share Data:
Weighted-average common shares outstanding - diluted	90,232			89,738			90,186			90,235
Diluted earnings per common share	$	1.03		$	0.75		$	3.22		$	1.70
Dividends and dividend equivalents declared per common share	0.40			0.40			1.20			1.20
Dividends declared per preferred share	328.13			328.13			984.38			984.38
Book value per common share	35.78			34.09			35.78			34.09
Tangible book value per common share (non-GAAP)	29.63			27.86			29.63			27.86
Selected Ratios:
Net interest margin	2.80		%	2.88		%	2.85		%	3.03		%
Return on average assets (annualized basis)	1.10			0.84			1.17			0.67
Return on average common shareholders' equity (annualized basis)	11.61			8.80			12.28			6.78
CET1 risk-based capital	11.77			11.23			11.77			11.23
Tangible common equity ratio (non-GAAP)	7.71			7.75			7.71			7.75
Return on average tangible common shareholders' equity (annualized basis) (non-GAAP)	14.16			10.91			15.05			8.44
Efficiency ratio (non-GAAP)	54.84			59.99			56.62			59.34

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:


	At September 30,
(Dollars and shares in thousands, except per share data)	2021			2020
Tangible book value per common share:
Shareholders' equity	$	3,386,189		$	3,219,690
Less: Preferred stock	145,037			145,037
Goodwill and other intangible assets	557,360			561,902
Tangible common shareholders' equity	$	2,683,792		$	2,512,751
Common shares outstanding	90,588			90,204
Tangible book value per common share	$	29.63		$	27.86

Tangible common equity ratio:
Tangible common shareholders' equity	$	2,683,792		$	2,512,751
Total assets	35,374,258			32,994,443
Less: Goodwill and other intangible assets	557,360			561,902
Tangible assets	$	34,816,898		$	32,432,541
Tangible common equity ratio	7.71		%	7.75		%


	Three months ended September 30,						Nine months ended September 30,
(Dollars in thousands)	2021			2020			2021			2020
Return on average tangible common shareholders' equity:
Net income	$	95,713		$	69,281		$	297,826		$	160,577
Less: Preferred stock dividends	1,968			1,968			5,906			5,906
Add: Intangible assets amortization, tax-effected	888			860			2,682			2,380
Income adjusted for preferred stock dividends and intangible assets amortization	$	94,633		$	68,173		$	294,602		$	157,051
Income adjusted for preferred stock dividends and intangible assets amortization, annualized	$	378,532		$	272,692		$	392,803		$	209,401
Average shareholders' equity	$	3,375,401		$	3,205,330		$	3,314,114		$	3,184,816
Less: Average preferred stock	145,037			145,037			145,037			145,037
Average goodwill and other intangible assets	557,902			560,959			559,027			559,864
Average tangible common shareholders' equity	$	2,672,462		$	2,499,334		$	2,610,050		$	2,479,915
Return on average tangible common shareholders' equity	14.16		%	10.91		%	15.05		%	8.44		%

Efficiency ratio:
Non-interest expense	$	180,237		$	183,996		$	555,247		$	539,416
Less: Foreclosed property activity	(142)			(201)			(188)			(668)
Intangible assets amortization	1,124			1,089			3,395			3,013
Merger-related	9,847			—			26,894			—
Strategic initiatives	(4,011)			4,786			6,568			4,786
Non-interest expense	$	173,419		$	178,322		$	518,578		$	532,285
Net interest income	$	229,691		$	219,256		$	674,307		$	674,464
Add: Tax-equivalent adjustment	2,434			2,635			7,416			7,669
Non-interest income	83,775			75,060			233,234			208,514
Other (1)	327			297			913			6,400
Less: Gain on sale of investment securities, net	—			—			—			8
Income	$	316,227		$	297,248		$	915,870		$	897,039
Efficiency ratio	54.84		%	59.99		%	56.62		%	59.34		%

(1)Other includes low income housing tax credits for all periods and a $5.5 million discrete customer derivative fair value adjustment during nine months ended September 30, 2020.

Financial Performance

Comparison to Prior Year Quarter

Net income increased $26.4 million, or 38.2%, from $69.3 million for the three months ended September 30, 2020 to $95.7 million for the three months ended September 30, 2021, primarily due to a $15.0 million decrease in the provision for credit losses and a $10.4 million increase in net interest income (NII), which is driven by lower rates on interest-bearing liabilities, offset by costs related to the pending merger and strategic optimization initiatives.

Diluted earnings per common share increased $0.28, or 37.3%, from $0.75 for the three months ended September 30, 2020 to $1.03 for the three months ended September 30, 2021.

The efficiency ratio (non-GAAP) decreased 515 basis points from 59.99% for the three months ended September 30, 2020 to 54.84% for the three months ended September 30, 2021, primarily due to increases in NII, higher fair value adjustments on direct investments, higher syndication and prepayment fees, and cost savings from the Company's strategic initiatives.

Comparison to Prior Year to Date

Net income increased $137.2 million, or 85.5%, from $160.6 million for the nine months ended September 30, 2020 to $297.8 million for the nine months ended September 30, 2021, primarily due to a $178.3 million decrease in the provision for credit losses, offset by a net $33.5 million of costs related to the pending merger and strategic optimization initiatives.

Diluted earnings per common share increased $1.52, or 89.4%, from $1.70 for the nine months ended September 30, 2020 to $3.22 for the nine months ended September 30, 2021.

The efficiency ratio (non-GAAP) decreased 272 basis points from 59.34% for the nine months ended September 30, 2020 to 56.62% for the nine months ended September 30, 2021, primarily due to higher interchange and other deposit service fees, increased investment services activity, higher income and fair value adjustments on direct investments, higher syndication fees, and cost savings from the Company's strategic initiatives.

The following tables present daily average balances, interest, yield/rate, and net interest margin on a fully tax-equivalent basis:


	Three months ended September 30,
	2021						2020
(Dollars in thousands)	Average Balance		Interest		Yield/ Rate		Average Balance		Interest		Yield/ Rate

Assets
Interest-earning assets:
Loans and leases	$	21,538,513	$	197,015	3.60	%	$	21,870,740	$	188,865	3.40	%
Investment securities (1)	8,911,291		43,868		2.01		8,762,692		52,154		2.47
FHLB and FRB stock	76,212		290		1.51		91,232		600		2.62
Interest-bearing deposits (2)	2,334,986		896		0.15		102,059		26		0.10
Securities	11,322,489		45,054		1.62		8,955,983		52,780		2.45
Loans held for sale	11,328		57		2.03		31,211		229		2.94
Total interest-earning assets	32,872,330		$	242,126	2.92	%	30,857,934		$	241,874	3.13	%
Non-interest-earning assets	2,021,962						2,057,503
Total assets	$	34,894,292					$	32,915,437

Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Demand deposits	$	7,182,116	$	—	—	%	$	6,228,436	$	—	—	%
Health savings accounts	7,346,239		1,463		0.08		6,953,641		2,073		0.12
Interest-bearing checking, money market and savings	13,363,703		1,794		0.05		11,167,653		3,983		0.14
Time deposits	1,957,286		1,314		0.27		2,589,888		6,542		1.00
Total deposits	29,849,344		4,571		0.06		26,939,618		12,598		0.19

Securities sold under agreements to repurchase and other borrowings	544,311		721		0.52		1,225,616		608		0.19
FHLB advances	120,714		492		1.59		449,085		2,528		2.20
Long-term debt (1)	564,692		4,217		3.22		569,425		4,249		3.25
Total borrowings	1,229,717		5,430		1.82		2,244,126		7,385		1.33
Total interest-bearing liabilities	31,079,061		$	10,001	0.13	%	29,183,744		$	19,983	0.27	%
Non-interest-bearing liabilities	439,830						526,363
Total liabilities	31,518,891						29,710,107

Preferred stock	145,037						145,037
Common shareholders' equity	3,230,364						3,060,293
Total shareholders' equity	3,375,401						3,205,330
Total liabilities and shareholders' equity	$	34,894,292					$	32,915,437
Tax-equivalent net interest income			$	232,125					$	221,891
Less: Tax-equivalent adjustments			(2,434)						(2,635)
Net interest income			$	229,691					$	219,256
Net interest margin					2.80	%					2.88	%

(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 Condensed Consolidated Statements of Cash Flows in Item 1. Financial Statements.


	Nine months ended September 30,
	2021						2020
(Dollars in thousands)	Average Balance		Interest		Yield/ Rate		Average Balance		Interest		Yield/ Rate

Assets
Interest-earning assets:
Loans and leases	$	21,477,967	$	574,984	3.54	%	$	21,270,350	$	603,100	3.75	%
Investment securities (1)	8,878,820		136,727		2.09		8,554,646		167,027		2.67
FHLB and FRB stock	77,040		909		1.58		108,788		2,716		3.33
Interest-bearing deposits (2)	1,434,552		1,419		0.13		89,989		222		0.32
Securities	10,390,412		139,055		1.81		8,753,423		169,965		2.65
Loans held for sale	11,515		201		2.33		25,944		588		3.02
Total interest-earning assets	31,879,894		$	714,240	2.98	%	30,049,717		$	773,653	3.43	%
Non-interest-earning assets	1,968,707						2,017,159
Total assets	$	33,848,601					$	32,066,876

Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Demand deposits	$	6,800,456	$	—	—	%	$	5,525,573	$	—	—	%
Health savings accounts	7,414,332		4,720		0.09		6,854,101		7,973		0.16
Interest-bearing checking, money market and savings	12,579,762		5,117		0.05		10,427,634		22,848		0.29
Time deposits	2,146,218		6,267		0.39		2,841,385		28,425		1.34
Total deposits	28,940,768		16,104		0.07		25,648,693		59,246		0.31

Securities sold under agreements to repurchase and other borrowings	522,638		2,216		0.56		1,366,292		5,318		0.51
FHLB advances	131,606		1,539		1.54		870,063		13,145		1.98
Long-term debt (1)	565,866		12,658		3.22		563,805		13,811		3.52
Total borrowings	1,220,110		16,413		1.85		2,800,160		32,274		1.55
Total interest-bearing liabilities	30,160,878		$	32,517	0.14	%	28,448,853		$	91,520	0.43	%
Non-interest-bearing liabilities	373,609						433,207
Total liabilities	30,534,487						28,882,060

Preferred stock	145,037						145,037
Common shareholders' equity	3,169,077						3,039,779
Total shareholders' equity	3,314,114						3,184,816
Total liabilities and shareholders' equity	$	33,848,601					$	32,066,876
Tax-equivalent net interest income			$	681,723					$	682,133
Less: Tax-equivalent adjustments			(7,416)						(7,669)
Net interest income			$	674,307					$	674,464
Net interest margin					2.85	%					3.03	%

(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 Condensed Consolidated Statements of Cash Flows in Item 1. Financial Statements.

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 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 74.3% of total revenue for the nine months ended September 30, 2021.

Net interest margin is the ratio of tax-equivalent NII to average earning assets for the period.

Webster manages the risk of changes in interest rates on NII 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;

•interest rate contracts; and

•the pricing and structure of loans and deposits.

The federal funds rate target range was 0-0.25% at both September 30, 2021 and December 31, 2020, as compared to 1.50-1.75% at December 31, 2019. The benchmark 10-year U.S. Treasury rate increased to 1.52% at September 30, 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

Comparison to Prior Year Quarter

NII increased $10.4 million, or 4.8%, from $219.3 million for the three months ended September 30, 2020 to $229.7 million for the three months ended September 30, 2021. On a fully tax-equivalent basis, the quarter-over-quarter increase in NII was $10.2 million.

Net interest margin decreased 8 basis points from 2.88% for the three months ended September 30, 2020 to 2.80% for the three months ended September 30, 2021. The decrease was primarily due to excess cash held at the Federal Reserve Bank, as well as lower loan balances and securities yields, partially offset by lower deposit and borrowing costs and higher Small Business Administration Paycheck Protection Program (PPP) loan fee accretion.

Comparison to Prior Year to Date

NII decreased $0.2 million from $674.5 million for the nine months ended September 30, 2020 to $674.3 million for the nine months ended September 30, 2021. On a fully tax-equivalent basis, the year-over-year decrease in NII was $0.4 million.

Net interest margin decreased 18 basis points from 3.03% for the nine months ended September 30, 2020 to 2.85% for the nine months ended September 30, 2021. The decrease was primarily due to excess cash held at the Federal Reserve Bank and lower loan and securities yields, partially offset by interest-earning asset growth, lower deposit and borrowing costs, and higher PPP loan fee accretion.

Changes in Net Interest Income

The following table presents the components of the change in NII attributable to changes in rate and volume, and reflects NII on a fully tax-equivalent basis:


	Three months ended September 30,						Nine months ended September 30,
	2021 vs. 2020 Increase (decrease) due to						2021 vs. 2020 Increase (decrease) due to
(In thousands)	Rate (1)		Volume		Total		Rate (1)		Volume		Total
Interest on interest-earning assets:
Loans and leases	$	12,615	$	(4,466)	$	8,149	$	(32,731)	$	4,615	$	(28,116)
Loans held for sale	(25)		(147)		(172)		(60)		(327)		(387)
Securities (2)	(9,065)		1,341		(7,724)		(39,775)		8,866		(30,909)
Total interest income	$	3,525	$	(3,272)	$	253	$	(72,566)	$	13,154	$	(59,412)
Interest on interest-bearing liabilities:
Deposits	$	(7,226)	$	(800)	$	(8,026)	$	(41,236)	$	(1,905)	$	(43,141)
Borrowings	65		(2,020)		(1,955)		(1,450)		(14,411)		(15,861)
Total interest expense	$	(7,161)	$	(2,820)	$	(9,981)	$	(42,686)	$	(16,316)	$	(59,002)
Net change in net interest income	$	10,686	$	(452)	$	10,234	$	(29,880)	$	29,470	$	(410)

(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.

Average loans and leases for the nine months ended September 30, 2021 increased $0.2 billion as compared to the average balance for the nine months ended September 30, 2020, primarily due to higher commercial loan growth offset by the decrease in PPP loans. The loan and lease portfolio comprised 67.4% of the average interest-earning assets at September 30, 2021 as compared to 70.8% of the average interest-earning assets at September 30, 2020. The loan and lease portfolio yield decreased 21 basis points from 3.75% for the nine months ended September 30, 2020 to 3.54% for the nine months ended September 30, 2021. The decrease in the yield is primarily due to decreased prepayments and the lower rate environment.

Average securities for the nine months ended September 30, 2021 increased $1.6 billion as compared to the average balance for the nine months ended September 30, 2020. The securities portfolio comprised 32.6% of the average interest-earning assets at September 30, 2021 as compared to 29.1% of the average interest-earning assets at September 30, 2020. The securities portfolio yield decreased 84 basis points from 2.65% for the nine months ended September 30, 2020 to 1.81% for the nine months ended September 30, 2021. The decrease in yield is primarily due to higher premium amortization and lower market rates from newly purchased securities.

Average total deposits for the nine months ended September 30, 2021 increased $3.3 billion as compared to the average balance for the nine months ended September 30, 2020. The increase was driven by transactional deposit products resulting from fiscal stimulus. The average cost of deposits decreased 24 basis points from 0.31% for the nine months ended September 30, 2020 to 0.07% for the nine months ended September 30, 2021, primarily due to deposit pricing and product mix. Higher cost time deposits decreased as a percentage of total interest-bearing deposits from 14.1% for the nine months ended September 30, 2020 to 9.7% for the nine months ended September 30, 2021, primarily due to customer migration for more liquid deposit products.

Average total borrowings for the nine months ended September 30, 2021 decreased $1.6 billion as compared to the average balance for the nine months ended September 30, 2020. Specifically, average securities sold under agreements to repurchase and other borrowings decreased $843.7 million and average FHLB advances decreased $738.5 million. The average cost of borrowings increased 30 basis points from 1.55% for the nine months ended September 30, 2020 to 1.85% for the nine months ended September 30, 2021. The increase is primarily a result of a change in the mix of borrowings types.

Provision for Credit Losses

Comparison to Prior Year Quarter

The provision for credit losses decreased $15.0 million, or 65.9%, from $22.8 million for the three months ended September 30, 2020 to $7.8 million for the three months ended September 30, 2021. The decrease is primarily attributed to improvements in the forecasted economic outlook and favorable credit quality trends, which resulted in a release of reserves, partially offset by additional reserves on new loans. Total net charge-offs were $0.9 million and $11.5 million for the three months ended September 30, 2021 and 2020, respectively.

Comparison to Prior Year to Date

The provision for credit losses decreased $178.3 million, reflecting a benefit of $39.5 million for the nine months ended September 30, 2021, as compared to an expense of $138.8 million for the nine months ended September 30, 2020. The decrease is primarily attributed to improvements in the forecasted economic outlook and favorable credit quality trends, which resulted in a release of reserves, partially offset by additional reserves on new loans. Total net charge-offs were $5.1 million and $35.7 million for the nine months ended September 30, 2021 and 2020, respectively.

The ACL on loans and leases coverage ratio decreased 20 basis points from 1.66% at December 31, 2020 to 1.46% at September 30, 2021. Refer to the sections captioned "Loans and Leases" through "Troubled Debt Restructurings" contained elsewhere in this report for further details.

Non-Interest Income


	Three months ended September 30,								Nine months ended September 30,
					Increase (decrease)								Increase (decrease)
(Dollars in thousands)	2021		2020		Amount		Percent		2021		2020		Amount		Percent
Deposit service fees	$	40,258	$	39,278	$	980	2.5	%	$	122,166	$	117,687	$	4,479	3.8	%
Loan and lease related fees	10,881		6,568		4,313		65.7		27,056		20,032		7,024		35.1
Wealth and investment services	9,985		8,255		1,730		21.0		29,475		24,096		5,379		22.3
Mortgage banking activities	1,525		7,087		(5,562)		(78.5)		5,486		14,185		(8,699)		(61.3)
Increase in cash surrender value of life insurance policies	3,666		3,695		(29)		(0.8)		10,802		10,899		(97)		(0.9)
Gain on sale of investment securities, net	—		—		—		n/m		—		8		(8)		(100.0)

Other income	17,460		10,177		7,283		71.6		38,249		21,607		16,642		77.0
Total non-interest income	$	83,775	$	75,060	$	8,715	11.6		$	233,234	$	208,514	$	24,720	11.9

Comparison to Prior Year Quarter

Total non-interest income increased $8.7 million, or 11.6%, from $75.1 million for the three months ended September 30, 2020 to $83.8 million for the three months ended September 30, 2021.

Loan and lease related fees totaled $10.9 million for the three months ended September 30, 2021, as compared to $6.6 million for the three months ended September 30, 2020. The increase is primarily due to higher syndication and prepayment fees.

Wealth and investment services totaled $10.0 million for the three months ended September 30, 2021, as compared to $8.3 million for the three months ended September 30, 2020. The increase was primarily due to increased customer-driven investment services activity and assets under management.

Mortgage banking activities totaled $1.5 million for the three months ended September 30, 2021, as compared to $7.1 million for the three months ended September 30, 2020. The decrease was primarily due to lower volume resulting from the Company's strategic decision to originate residential mortgage loans for investment rather than for sale, along with lower spreads on loans originated for sale.

Other income totaled $17.5 million for the three months ended September 30, 2021, as compared to $10.2 million for the three months ended September 30, 2020. The increase was primarily due to fair value adjustments on direct investments, partially offset by higher third-party administrator (TPA) closure fees at the Company's HSA division in the prior period.

Comparison to Prior Year to Date

Total non-interest income increased $24.7 million, or 11.9%, from $208.5 million for the nine months ended September 30, 2020 to $233.2 million for the nine months ended September 30, 2021.

Deposit service fees totaled $122.2 million for the nine months ended September 30, 2021, as compared to $117.7 million for the nine months ended September 30, 2020. The increase was primarily due to higher interchange and cash management fees.

Loan and lease related fees totaled $27.1 million for the nine months ended September 30, 2021, as compared to $20.0 million for the nine months ended September 30, 2020. The increase was primarily due to higher syndication, prepayment, and line usage fees, and mortgage servicing rights amortization.

Wealth and investment services totaled $29.5 million for the nine months ended September 30, 2021, as compared to $24.1 million for the nine months ended September 30, 2020. The increase was primarily due to increased customer-driven investment services activity and assets under management.

Mortgage banking activities totaled $5.5 million for the nine months ended September 30, 2021, as compared to $14.2 million for the nine months ended September 30, 2020. The decrease was primarily due to lower volume resulting from the Company's strategic decision to originate residential mortgage loans for investment rather than for sale, along with lower spreads on loans originated for sale.

Other income totaled $38.2 million for the nine months ended September 30, 2021, as compared to $21.6 million for the nine months ended September 30, 2020. The increase was primarily due to higher income and fair value adjustments on direct investments, partially offset by higher TPA closure fees at the Company's HSA division in the prior period.

Non-Interest Expense


	Three months ended September 30,								Nine months ended September 30,
					Increase (decrease)								Increase (decrease)
(Dollars in thousands)	2021		2020		Amount		Percent		2021		2020		Amount		Percent
Compensation and benefits	$	105,352	$	104,019	$	1,333	1.3	%	$	310,706	$	305,637	$	5,069	1.7	%
Occupancy	12,430		14,275		(1,845)		(12.9)		42,090		43,005		(915)		(2.1)
Technology and equipment	28,441		27,846		595		2.1		84,081		83,151		930		1.1
Intangible assets amortization	1,124		1,089		35		3.2		3,395		3,013		382		12.7
Marketing	3,721		3,852		(131)		(3.4)		9,452		10,640		(1,188)		(11.2)
Professional and outside services	7,074		9,223		(2,149)		(23.3)		37,875		21,044		16,831		80.0
Deposit insurance	3,855		4,204		(349)		(8.3)		11,560		13,944		(2,384)		(17.1)
Other expense	18,240		19,488		(1,248)		(6.4)		56,088		58,982		(2,894)		(4.9)
Total non-interest expense	$	180,237	$	183,996	$	(3,759)	(2.0)		$	555,247	$	539,416	$	15,831	2.9

Comparison to Prior Year Quarter

Total non-interest expense decreased $3.8 million, or 2.0%, from $184.0 million for the three months ended September 30, 2020 to $180.2 million for the three months ended September 30, 2021.

Compensation and benefits totaled $105.4 million for the three months ended September 30, 2021, as compared to $104.0 million for the three months ended September 30, 2020. The increase was primarily due to merger-related severance, employee retention costs, and higher performance-based compensation, offset by the effects of the Company's strategic initiatives.

Occupancy totaled $12.4 million for the three months ended September 30, 2021, as compared to $14.3 million for the three months ended September 30, 2020. The decrease was primarily due to the decline in rent and related expenses resulting from the effects of the Company's strategic initiatives.

Professional and outside services totaled $7.1 million for the three months ended September 30, 2021, as compared to $9.2 million for the three months ended September 30, 2020. The decrease was primarily due to decreased consulting fees associated with the Company's strategic initiatives, which were higher in the prior period.

Other expense totaled $18.2 million for the three months ended September 30, 2021, as compared to $19.5 million for the three months ended September 30, 2020. The decrease was primarily due to a reduction in the reserve for unfunded lines consistent with the trend in ACL, and lower pension costs and ancillary spending.

Comparison to Prior Year to Date

Total non-interest expense increased $15.8 million, or 2.9%, from $539.4 million for the nine months ended September 30, 2020 to $555.2 million for the nine months ended September 30, 2021.

Compensation and benefits totaled $310.7 million for the nine months ended September 30, 2021, as compared to $305.6 million for the nine months ended September 30, 2020. The increase was primarily due to performance-based compensation, merger-related severance charges, and deferred compensation, offset by the effects of the Company's strategic initiatives.

Marketing totaled $9.5 million for the nine months ended September 30, 2021, as compared to $10.6 million for the nine months ended September 30, 2020. The decrease was primarily due to reductions in ancillary spending, including advertising and promotional fees.

Professional and outside services totaled $37.9 million for the nine months ended September 30, 2021, as compared to $21.0 million for the nine months ended September 30, 2020. The increase was primarily due to merger-related expenses.

Deposit insurance totaled $11.6 million for the nine months ended September 30, 2021, as compared to $13.9 million for the nine months ended September 30, 2020. The decrease was primarily due to improvement in the Company's liquidity position.

Other expense totaled $56.1 million for the nine months ended September 30, 2021, as compared to $59.0 million for the nine months ended September 30, 2020. The decrease was primarily due to lower pension costs and ancillary spending.

Income Taxes

Comparison to Prior Year Quarter

Webster recognized income tax expense of $29.8 million for the three months ended September 30, 2021 and $18.3 million for the three months ended September 30, 2020, reflecting effective tax rates of 23.7% and 20.9%, respectively.

The increase in income tax expense is due to a higher level of pre-tax income for the three months ended September 30, 2021 as compared to the three months ended September 30, 2020. The increase in the effective tax rate for the three months ended September 30, 2021 reflects the effects of higher pre-tax income estimated for 2021 as compared to 2020, and the recognition of $0.5 million of net tax expense specific to the three months ended September 30, 2021, partially offset by the effects of a $2.5 million estimated tax benefit on the $9.8 million of merger-related expenses recognized in the current period.

Comparison to Prior Year to Date

Webster recognized income tax expense of $94.0 million for the nine months ended September 30, 2021 and $44.2 million for the nine months ended September 30, 2020, reflecting effective tax rates of 24.0% and 21.6%, respectively.

The increase in income tax expense is due to a higher level of pre-tax income for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020. The increase in the effective tax rate for the nine months ended September 30, 2021 reflects the effects of higher pre-tax income estimated for 2021 as compared to 2020, and an estimated $16.4 million of the $26.9 million of merger-related expenses recognized in the current period as nondeductible for income tax purposes. Those effects were partially offset by the recognition of $1.7 million of net tax benefits specific to the nine months ended September 30, 2021, which includes $1.8 million of excess tax benefits from stock-based compensation, as compared to $0.2 million of net tax expense specific to the nine months ended September 30, 2020, which included tax deficiencies of $0.6 million from stock-based compensation.

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, how discrete financial information is evaluated, the type of customer served, and how products and services are provided. 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. The previously reported Community Banking segment was also 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 arrangements, 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 130 banking centers and 254 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.

Commercial Banking

Operating Results:


	Three months ended September 30,				Nine months ended September 30,
(In thousands)	2021		2020		2021		2020
Net interest income	$	152,556	$	132,026	$	435,718	$	377,736
Non-interest income	30,076		20,710		80,966		64,975
Non-interest expense	64,917		66,482		191,198		192,964
Pre-tax, pre-provision net revenue	$	117,715	$	86,254	$	325,486	$	249,747

Comparison to Prior Year Quarter

PPNR increased $31.5 million for the three months ended September 30, 2021 as compared to the three months ended September 30, 2020. NII increased $20.5 million, primarily due to growth in loans and deposits, and PPP loan fee acceleration associated with PPP loan forgiveness. Non-interest income increased $9.4 million, primarily due to higher syndication fees, fair value adjustments on direct investments, and trust and investment service fees. Non-interest expense decreased $1.6 million, primarily due to lower support costs.

Comparison to Prior Year to Date

PPNR increased $75.7 million for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020. NII increased $58.0 million, primarily due to growth in loans and deposits, and PPP loan fee acceleration associated with PPP loan forgiveness. Non-interest income increased $16.0 million, primarily due to higher syndication fees, fair value adjustments on direct investments, and trust and investment service fees. Non-interest expense decreased $1.8 million, primarily due to lower support costs.

Selected Balance Sheet and Off-Balance Sheet Information:


(In thousands)	At September 30, 2021		At December 31, 2020
Loans and leases	$	14,654,964	$	14,573,343
Deposits	10,219,462		8,190,997

AUA/AUM (off-balance sheet)	7,041,317		6,585,795

Loans and leases increased $81.6 million at September 30, 2021 as compared to December 31, 2020, primarily due to commercial and commercial real estate portfolio originations, partially offset by increased prepayment activity. Total portfolio originations for both the nine months ended September 30, 2021 and 2020 were $3.9 billion.

Deposits increased $2.0 billion at September 30, 2021 as compared to December 31, 2020, primarily due to excess customer liquidity as a result of government stimulus and reduced spending, and the seasonal inflow of municipal deposits.

Commercial Banking held approximately $5.0 billion and $4.7 billion in assets under administration (AUA) at September 30, 2021 and December 31, 2020, respectively, and $2.0 billion and $1.9 billion in assets under management (AUM) at September 30, 2021 and December 31, 2020, respectively. The increase in AUA was due to both new business and market appreciation during the nine months ended September 30, 2021.

HSA Bank

Operating Results:


	Three months ended September 30,				Nine months ended September 30,
(In thousands)	2021		2020		2021		2020
Net interest income	$	42,074	$	39,861	$	126,376	$	121,868
Non-interest income	24,756		27,235		78,315		76,721
Non-interest expense	32,800		34,789		101,842		105,887
Pre-tax net revenue	$	34,030	$	32,307	$	102,849	$	92,702

Comparison to Prior Year Quarter

Pre-tax net revenue increased $1.7 million for the three months ended September 30, 2021 as compared to the three months ended September 30, 2020. NII increased $2.2 million, primarily due to growth in deposits. Non-interest income decreased $2.5 million, primarily due to decreases in TPA closure fees. Non-interest expense decreased $2.0 million, primarily due to reduced compensation and benefit expenses.

Comparison to Prior Year to Date

Pre-tax net revenue increased $10.1 million for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020. NII increased $4.5 million, primarily due to growth in deposits. Non-interest income increased $1.6 million, primarily due to increases in both interchange and investment fees, partially offset by decreases in TPA closure fees. Non-interest expense decreased $4.0 million, primarily due to reduced compensation and benefits, temporary help, and travel expenses.

Selected Balance Sheet and Off-Balance Sheet Information:


(In thousands)	At September 30, 2021		At December 31, 2020
Deposits	$	7,329,405	$	7,120,017

AUA, through linked brokerage accounts (off-balance sheet)	3,427,389		2,852,877
Total footings	$	10,756,794	$	9,972,894

Deposits increased $209.4 million at September 30, 2021 as compared to December 31, 2020, primarily due to new accounts, as well as organic growth in existing account balances. HSA Bank deposits accounted for 24.4% and 26.0% of total deposits at September 30, 2021 and December 31, 2020, respectively.

AUA, through linked brokerage accounts, increased $574.5 million at September 30, 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 nine months ended September 30, 2021.

Retail Banking

Operating Results:


	Three months ended September 30,				Nine months ended September 30,
(In thousands)	2021		2020		2021		2020
Net interest income	$	98,028	$	83,609	$	279,381	$	246,417
Non-interest income	16,998		21,359		49,832		56,083
Non-interest expense	73,480		80,119		221,950		237,528
Pre-tax, pre-provision net revenue	$	41,546	$	24,849	$	107,263	$	64,972

Comparison to Prior Year Quarter

PPNR increased $16.7 million for the three months ended September 30, 2021 as compared to the three months ended September 30, 2020. NII increased $14.4 million, primarily due to PPP loan fee acceleration associated with PPP loan forgiveness, deposit balance growth, and lower interest paid on deposits, partially offset by lower consumer loan balances. Non-interest income decreased $4.4 million, primarily due to lower mortgage banking fee income, partially offset by higher deposit service fees. Non-interest expense decreased $6.6 million, primarily due to lower employee-related, occupancy, technology and equipment, and marketing expenses.

Comparison to Prior Year to Date

PPNR increased $42.3 million for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020. NII increased $33.0 million, driven by PPP loan fee acceleration associated with PPP loan forgiveness, deposit balance growth, and lower interest paid on deposits, partially offset by lower consumer loan balances. Non-interest income decreased $6.3 million, primarily due to lower mortgage banking fee income, partially offset by higher loan servicing fees, deposit service fees, and credit card and merchant services fee income. Non-interest expense decreased $15.6 million, primarily due to lower employee-related, occupancy, and technology and equipment expenses.

Selected Balance Sheet and Off-Balance Sheet Information:


(In thousands)	At September 30, 2021		At December 31, 2020
Loans	$	6,925,324	$	7,067,818
Deposits	12,474,943		12,023,600

Loans decreased $142.5 million at September 30, 2021 as compared to December 31, 2020, primarily due to net principal paydowns within the home equity lines and the run-off of consumer lending club loans, partially offset by higher residential mortgage balances. Total portfolio originations for the nine months ended September 30, 2021 and 2020 were $2.5 billion and $2.0 billion, respectively. The $425.9 million increase was primarily due to increased residential mortgage and home equity originations given the lower interest rate environment and the Company's strategic decision to originate residential mortgage loans for investment rather than for sale.

Deposits increased $451.3 million at September 30, 2021 as compared to December 31, 2020, primarily due to customer PPP loan funding, other stimulus effects, and lower customer spending, coupled with seasonally higher balances in business and consumer transaction accounts. Further, savings and money market balances also increased as maturing certificates of deposits migrated to more liquid deposit products.

Financial Condition

Total assets were $35.4 billion at September 30, 2021 as compared to $32.6 billion at December 31, 2020. The $2.8 billion increase was primarily driven by increases of $2.4 billion in interest-bearing deposits held at the FRB and $0.5 billion in investment securities, partially offset by a $0.1 billion decrease in loans and leases.

Total liabilities were $32.0 billion at September 30, 2021 as compared to $29.4 billion at December 31, 2020. The $2.6 billion increase was primarily driven by a $2.7 billion increase in deposits, specifically increases of $1.0 billion, $1.5 billion, $0.2 billion in demand deposits, interest-bearing deposits, and HSA deposits, respectively, and a $0.3 billion increase in accrued expenses and other liabilities, partially offset by a $0.3 billion decrease in securities sold under agreements to repurchase and other borrowings.

Total shareholders' equity was $3.4 billion at September 30, 2021 as compared to $3.2 billion at December 31, 2020. The $151.6 million increase primarily reflects $297.8 million of net income recognized, offset by $40.7 million of other comprehensive loss (OCL), and $108.9 million and $5.9 million in dividends paid to common and preferred shareholders, respectively.

Book value per common share was $35.78 at September 30, 2021, as compared to $34.25 at December 31, 2020. On October 26, 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 September 30, 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 current expected credit losses (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 September 30, 2021 exclude the impact of the increased ACL on loans and leases, held-to-maturity debt securities, and unfunded loan commitments attributed to the adoption of CECL. This resulted in a 26, 8, 26, and 17 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 September 30, 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.

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 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 September 30, 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 of $9.4 billion and $8.9 billion at September 30, 2021 and December 31, 2020, respectively, and an average risk weighting for regulatory purposes of 13% at both September 30, 2021 and December 31, 2020.

Available-for-sale investment securities increased $83.7 million, primarily due to purchase activity exceeding paydowns and amortization expense. The tax-equivalent yield in the portfolio was 1.80% for the nine months ended September 30, 2021 as compared to 2.50% for the nine months ended September 30, 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 $17.4 million at September 30, 2021.

Held-to-maturity investment securities increased $418.4 million, primarily due to purchase activity exceeding paydowns and amortization expense. The tax-equivalent yield in the portfolio was 2.25% for the nine months ended September 30, 2021 as compared to 2.77% for the nine months ended September 30, 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 $0.2 million at September 30, 2021. Gross unrealized losses on held-to-maturity investment securities were $27.5 million at September 30, 2021.

The following table summarizes the amortized cost and fair value of investment securities:


	At September 30, 2021								At December 31, 2020
(In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Available-for-sale:

Agency CMO	$	102,257	$	3,549	$	(23)	$	105,783	$	148,711	$	6,000	$	(98)	$	154,613
Agency MBS	1,552,693		50,705		(6,614)		1,596,784		1,389,100		68,598		(289)		1,457,409
Agency CMBS	901,654		6,852		(9,920)		898,586		1,092,430		26,317		(1,514)		1,117,233
CMBS	769,546		869		(329)		770,086		512,759		1,082		(5,823)		508,018
CLO	25,000		—		(33)		24,967		76,693		—		(310)		76,383
Corporate debt	14,576		174		(513)		14,237		14,557		—		(1,437)		13,120
Available-for-sale	$	3,365,726	$	62,149	$	(17,432)	$	3,410,443	$	3,234,250	$	101,997	$	(9,471)	$	3,326,776
Held-to-maturity:
Agency CMO	$	50,146	$	1,075	$	(48)	$	51,173	$	91,622	$	1,785	$	(241)	$	93,166
Agency MBS	2,544,509		101,289		(5,403)		2,640,395		2,419,751		137,863		(84)		2,557,530
Agency CMBS	2,509,487		22,432		(22,094)		2,509,825		2,101,227		60,484		(2,213)		2,159,498
Municipal bonds and notes	707,552		49,961		—		757,513		739,507		60,371		(3)		799,875
CMBS	174,848		5,686		—		180,534		216,081		9,214		—		225,295
Held-to-maturity	$	5,986,542	$	180,443	$	(27,545)	$	6,139,440	$	5,568,188	$	269,717	$	(2,541)	$	5,835,364

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.

Loans and Leases

The following table provides the composition of loans and leases:


	At September 30, 2021			At December 31, 2020
(Dollars in thousands)	Amount		%	Amount		%
Commercial non-mortgage	$	6,552,241	30.4	$	7,085,076	32.8
Asset-based	986,782		4.6	890,598		4.1
Commercial real estate	6,522,679		30.2	6,322,637		29.2
Equipment financing	620,104		2.9	602,224		2.8
Residential	5,167,527		23.9	4,782,016		22.1
Home equity	1,633,873		7.6	1,802,865		8.3
Other consumer	97,129		0.4	155,799		0.7
Total loans and leases	$	21,580,335	100.0	$	21,641,215	100.0

Total commercial non-mortgage and asset-based loans were $7.5 billion at September 30, 2021, reflecting a decrease of $436.7 million from December 31, 2020. The decrease is primarily due to higher principal paydowns.

Commercial real estate loans were $6.5 billion at September 30, 2021, reflecting an increase of $200.0 million from December 31, 2020. The increase is primarily due to originations of $1.1 billion, partially offset by principal paydowns.

Equipment financing was $620.1 million at September 30, 2021, reflecting an increase of $17.9 million from December 31, 2020. The increase is primarily due to originations of $186.2 million, partially offset by principal paydowns.

Residential loans were $5.2 billion at September 30, 2021, reflecting an increase of $385.5 million from December 31, 2020. The increase is primarily due to originations of $1.6 billion associated with the Company's strategic decision to originate residential mortgage loans for investment rather than for sale, partially offset by principal paydowns.

Total home equity and other consumer loans were $1.7 billion at September 30, 2021, reflecting a decrease of $227.7 million from December 31, 2020. The decrease is primarily due to continued net principal paydowns within the home equity lines, and the run-off of consumer lending club loans.

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 also 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.

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 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 September 30, 2021, loan balances associated with these modifications, in their deferral period, totaled approximately $105.9 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 Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and Interagency Statement. Included in the $105.9 million are the $61.2 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 ACL 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 September 30, 2021, loan balances associated with loan modifications designated in connection with these relief provisions in their deferral period totaled approximately $61.2 million. These modifications represent payment deferrals, generally three to six months in length. The $59.1 million decrease from $120.3 million at June 30, 2021 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: Summary of Significant Accounting Policies 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, at the date of discharge, are 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 TDR classification is removed, the loan is returned to the appropriate pool and credit losses are determined through the collective assessment process.

The following tables provide information for loans classified as TDRs:


	Nine months ended September 30,
(In thousands)	2021		2020
Beginning balance	$	235,427	$	237,438
Additions	4,114		54,344
Paydowns, net of draws	(71,833)		(34,345)
Charge-offs	(3,349)		(10,847)
Transfers to OREO	(325)		(1,296)
Ending balance	$	164,034	$	245,294


(In thousands)	At September 30, 2021		At December 31, 2020
Accrual status	$	116,777	$	140,089
Non-accrual status	47,257		95,338
Total TDRs	$	164,034	$	235,427

Specific reserves for TDRs included in the balance of ACL on loans and leases	$	8,980	$	12,728
Additional funds committed to borrowers in TDR status	6,504		12,895

TDR balances decreased $71.4 million at September 30, 2021 as compared to December 31, 2020, primarily due to increased paydown activity. Specific reserves for TDRs decreased 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:


	At September 30, 2021			At December 31, 2020
(Dollars in thousands)	Amount (1)		% (2)	Amount (1)		% (2)
Commercial non-mortgage	$	4,313	0.07	$	1,503	0.02
Asset-based lending	—		—	1,175		0.13
Commercial real estate	821		0.01	3,003		0.05
Equipment financing	1,224		0.20	7,415		1.24
Residential	3,447		0.07	10,623		0.22
Home equity	6,328		0.39	7,246		0.41
Other consumer	830		0.86	1,474		0.95
Total principal balance of loans and leases past due 30-89 days	16,963		0.08	32,439		0.15



Commercial non-mortgage loans and leases past due 90 days and accruing	107		—	445		0.01
Total principal balance of loans and leases past due 30 days or more and accruing income	17,070		0.08	32,884		0.15
Net deferred (fees) costs and net (premiums) discounts	—			98
Total amortized cost of loans and leases past due 30 days or more and accruing income	$	17,070		$	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 $15.9 million at September 30, 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 0.08% at September 30, 2021 as compared to 0.15% at December 31, 2020.

Non-performing Assets

The following table provides information on non-performing assets:


	At September 30, 2021			At December 31, 2020
(Dollars in thousands)	Amount		% (1)	Amount		% (1)
Commercial non-mortgage	$	36,552	0.55	$	64,200	0.90
Asset-based	2,139		0.22	2,622		0.29
Commercial real estate	15,972		0.24	21,222		0.34
Equipment financing	4,222		0.69	7,299		1.22
Residential	19,327		0.38	41,033		0.86
Home equity	23,295		1.44	30,980		1.73
Other consumer	263		0.27	649		0.42
Total principal balance of non-accrual loans and leases	101,770		0.47	168,005		0.78
Net deferred (fees) costs and net (premiums) discounts	(116)			(45)
Total amortized cost of non-accrual loans and leases (2)	$	101,654		$	167,960

Total principal balance of non-accrual loans and leases	$	101,770		$	168,005
Foreclosed and repossessed assets:
Commercial non-mortgage	—			175
Residential and consumer	2,439			2,134
Total foreclosed and repossessed assets	2,439			2,309
Total non-performing assets	$	104,209		$	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.

(2)Includes non-accrual TDRs of $47.3 million and $95.3 million at September 30, 2021 and December 31, 2020, respectively.

Non-performing assets decreased $66.1 million at September 30, 2021 as compared to December 31, 2020. Non-performing assets as a percentage of total assets decreased to 0.29% at September 30, 2021 as compared to 0.52% at December 31, 2020.

The following table provides details of non-performing loan and lease activity:


	Nine months ended September 30,
(In thousands)	2021		2020
Beginning balance	$	168,005	$	150,906
Additions	37,202		107,750
Paydowns, net of draws	(57,131)		(44,958)
Charge-offs	(11,237)		(40,887)
Other	(35,069)		(10,175)
Ending balance	$	101,770	$	162,636

(1)Other generally includes loans transferred to OREO and loans held for sale. The 2021 amount also includes $19.7 million of non-performing consumer loans that were sold during the period.

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:


	At September 30, 2021		At December 31, 2020
Non-performing loans and leases as a percentage of loans and leases	0.47	%	0.78	%
Non-performing assets as a percentage of loans and leases plus other real estate owned (OREO)	0.48		0.79
Non-performing assets as a percentage of total assets	0.29		0.52
ACL on loans and leases as a percentage of non-performing loans and leases	309.44		213.94
ACL on loans and leases as a percentage of loans and leases	1.46		1.66
Net charge-offs as a percentage of average loans and leases (1)	0.03		0.21
Ratio of ACL on loans and leases to net charge-offs (1)	46.55x		7.97x

(1)Calculated for the September 30, 2021 period based on annualized year-to-date net charge-offs.

These ratio calculations include the impact of PPP loans totaling $0.4 billion and $1.3 billion for which there was no ACL recorded at September 30, 2021 and December 31, 2020, respectively.

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 this 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 $274.4 million at September 30, 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

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 EAD 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 approaches, as appropriate.

A fair value shortfall relative to the amortized cost balance is reflected as a valuation allowance 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, an additional allowance 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. 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 September 30, 2021. For additional information on the Company's ACL methodology, refer to Note 1: Summary of Significant Accounting Policies 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 $44.5 million, or 12.4%, from $359.4 million at December 31, 2020 to $314.9 million at September 30, 2021. The decrease is primarily attributed to improvements in the forecasted economic outlook and favorable credit quality trends, which resulted in a release of reserves, partially offset by additional reserves on new loans. 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 1.46% at September 30, 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 309.44% at September 30, 2021, primarily due to the decrease in non-performing loans. The ratio of ACL on loans and leases to net charge-offs increased from 7.97x at December 31, 2020 to 46.55x at September 30, 2021, due to the decrease in net charge-offs within the commercial non-mortgage portfolio.

The following table provides information on the portfolio allocation of the ACL on loans and leases:


	At September 30, 2021			At December 31, 2020
(Dollars in thousands)	Amount		% (1)	Amount		% (1)



Commercial portfolio	$	269,171	1.83	$	312,244	2.10


Consumer portfolio	45,751		0.66	47,187		0.70
Total ACL on loans and leases	$	314,922	1.46	$	359,431	1.66

(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 September 30,				At or for the nine months ended September 30,
(In thousands)	2021		2020		2021		2020
Beginning balance	$	307,945	$	358,522	$	359,431	$	209,096
Adoption of ASU No. 2016-13 (CECL)	—		—		—		57,568
(Benefit) provision	7,898		22,753		(39,435)		138,841
Charge-offs:
Commercial non-mortgage	(1,694)		(12,037)		(3,204)		(32,203)
Asset-based	—		(10)		—		(10)
Commercial real estate	(17)		(1,399)		(5,337)		(1,429)
Equipment financing	(12)		(48)		(97)		(720)
Residential	(88)		(546)		(1,573)		(2,251)
Home equity	(686)		(203)		(1,624)		(1,554)
Other consumer	(1,279)		(1,514)		(4,638)		(5,825)
Total charge-offs	(3,776)		(15,757)		(16,473)		(43,992)
Recoveries:
Commercial non-mortgage	136		1,978		1,169		2,736
Asset-based	—		—		1,426		13
Commercial real estate	5		47		18		52
Equipment financing	1		—		1		71
Residential	672		521		2,612		839
Home equity	1,322		1,080		4,494		2,935
Other consumer	719		667		1,679		1,652
Total recoveries	2,855		4,293		11,399		8,298
Net charge-offs	(921)		(11,464)		(5,074)		(35,694)
Ending balance	$	314,922	$	369,811	$	314,922	$	369,811

The following table provides a summary of net charge-offs (recoveries) to average loans and leases by portfolio:


	Three months ended September 30,						Nine months ended September 30,
	2021			2020			2021			2020
(Dollars in thousands)	Amount		% (1)	Amount		% (1)	Amount		% (1)	Amount		% (1)
Commercial portfolio	$	1,581	0.04	$	11,469	0.31	$	6,024	0.05	$	31,490	0.30
Consumer portfolio	(660)		(0.04)	(5)		—	(950)		(0.02)	4,204		0.08
Net charge-offs (recoveries)	$	921	0.02	$	11,464	0.21	$	5,074	0.03	$	35,694	0.22

(1)Percentage of net charge-offs (recoveries) to average loans and leases was calculated based on annualized period-to-date activity.

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 $15.5 million at September 30, 2021 compared to $17.5 million at 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 August 3, 2021 in an amount equal to an annual yield of 1.52%.

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 $60.4 million and $60.1 million of FRB capital stock at September 30, 2021 and December 31, 2020, respectively. The most recent FRB semi-annual cash dividend was paid on June 30, 2021 in an amount equal to an annual yield of 1.50%.

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 $30.0 billion at September 30, 2021 as compared to $27.3 billion at December 31, 2020. The increase is primarily related to a combination of an increase in transactional accounts due to customer PPP loan funding, 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 September 30, 2021 and December 31, 2020. Webster Bank had additional borrowing capacity of approximately $4.7 billion from the FHLB at both September 30, 2021 and December 31, 2020, and approximately $1.3 billion from the FRB at both September 30, 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 $4.1 billion at September 30, 2021 could have been used for collateral on borrowings such as repurchase agreements, or to increase borrowing capacity by approximately $3.9 billion or $4.0 billion at the FHLB or FRB, respectively. Additionally, Webster Bank may utilize term and overnight federal 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 September 30, 2021 and December 31, 2020.

Total borrowed funds were $1.3 billion at September 30, 2021 as compared to $1.7 billion at December 31, 2020, and represented 3.8% and 5.2% of total assets at September 30, 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.

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 nine months ended September 30, 2021, Webster Bank paid $160.0 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 September 30, 2021, there was $436.3 million of retained earnings 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 September 30, 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 nine months ended September 30, 2021, a total of 77,247 shares of common stock were repurchased at a market value of approximately $4.3 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 71.9% and 79.2% at September 30, 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 September 30, 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 September 30, 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.

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 September 30, 2021 and December 31, 2020 for each subsequent twelve month period as compared to NII, assuming no change in interest rates:

NII

-200bp

-100bp

+100bp

+200bp

September 30, 2021

n/a

5.6%

12.0%

December 31, 2020

n/a

1.7%

4.7%

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 September 30, 2021 and December 31, 2020 for each subsequent twelve month period as compared to PPNR, assuming no change in interest rates:

PPNR

-200bp

-100bp

+100bp

+200bp

September 30, 2021

n/a

8.9%

19.2%

December 31, 2020

n/a

2.4%

7.1%

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 at both September 30, 2021 and December 31, 2020 assumed a federal funds rate of 0.25%. Asset sensitivity for both NII and PPNR increased at September 30, 2021 as compared to December 31, 2020, primarily due to changes in deposit beta assumptions, which were approved by the Company's ALCO and are reflective of management's current deposit pricing strategy and the overall composition of the balance sheet. Loans at floors have increased to approximately $4.3 billion at September 30, 2021, lowering overall asset sensitivity, which 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 at both September 30, 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 September 30, 2021 and December 31, 2020:

Short End of the Yield Curve

Long End of the Yield Curve

NII

-100bp

-50bp

+50bp

+100bp

-100bp

-50bp

+50bp

+100bp

September 30, 2021

n/a

3.9%

8.4%

(3.0)%

(1.4)%

1.3%

2.6%

December 31, 2020

n/a

0.2%

1.5%

n/a

(2.2)%

1.0%

2.5%

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 September 30, 2021 and December 31, 2020:

Short End of the Yield Curve

Long End of the Yield Curve

PPNR

-100bp

-50bp

+50bp

+100bp

-100bp

-50bp

+50bp

+100bp

September 30, 2021

n/a

6.2%

13.6%

(4.8)%

(2.2)%

2.1%

4.1%

December 31, 2020

n/a

(0.3)%

1.7%

n/a

(4.0)%

1.8%

4.4%

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 at September 30, 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 at September 30, 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 at September 30, 2021, management does not run standard scenarios with negative interest rate assumptions to model the down rate scenarios that were modeled at December 31, 2020.

The following table summarizes the estimated economic value of assets, liabilities, and off-balance sheet contracts at September 30, 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:


(Dollars in thousands)	Book Value		Estimated Economic Value		Estimated Economic Value Change

					-100 bp	+100 bp
September 30, 2021
Assets	$	35,374,258	$	35,071,158	n/a	$	(779,658)
Liabilities	31,988,069		30,879,882		n/a	(1,023,917)
Net	$	3,386,189	$	4,191,276	n/a	$	244,259
Net change as % base net economic value					n/a	5.8		%

December 31, 2020
Assets	$	32,590,690	$	32,546,388	n/a	$	(625,173)
Liabilities	29,356,065		29,357,878		n/a	(1,058,460)
Net	$	3,234,625	$	3,188,510	n/a	$	433,287
Net change as % base net economic value					n/a	13.6		%

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 1.9 years at both September 30, 2021 and December 31, 2020. 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. At September 30, 2021, long-term rates have risen by 58 basis points as compared to December 31, 2020. This higher starting point extends 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 September 30, 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.

Application of Critical Accounting Policies and Accounting Estimates

The Company’s significant accounting policies are described in Note 1: Summary of Significant Accounting Policies 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: Summary of Significant Accounting Policies 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 ACL 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.

Recently Issued Accounting Standards Updates (ASUs)

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 consolidated financial statements.

ITEM 1. FINANCIAL STATEMENTS

WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS


	September 30, 2021		December 31, 2020
(In thousands, except share data)	(Unaudited)
Assets:
Cash and due from banks	$	161,369	$	193,501
Interest-bearing deposits	2,442,790		69,603
Investment securities available-for-sale, at fair value	3,410,443		3,326,776


Investment securities held-to-maturity, net of allowance for credit losses of $234 and $299	5,986,308		5,567,889
Federal Home Loan Bank and Federal Reserve Bank stock	75,936		77,594
Loans held for sale (valued under fair value option $10,032 and $14,000)	24,969		14,012
Loans and leases	21,580,335		21,641,215
Allowance for credit losses on loans and leases	(314,922)		(359,431)
Loans and leases, net	21,265,413		21,281,784
Deferred tax assets, net	96,489		81,286
Premises and equipment, net	209,573		226,743
Goodwill	538,373		538,373
Other intangible assets, net	18,987		22,383
Cash surrender value of life insurance policies	572,368		564,195
Accrued interest receivable and other assets	571,240		626,551
Total assets	$	35,374,258	$	32,590,690
Liabilities and shareholders' equity:
Deposits:
Non-interest-bearing	$	7,154,835	$	6,155,592
Interest-bearing	22,871,492		21,179,844
Total deposits	30,026,327		27,335,436
Securities sold under agreements to repurchase and other borrowings	655,871		995,355
Federal Home Loan Bank advances	113,334		133,164
Long-term debt	564,114		567,663
Operating lease liabilities	150,708		158,280
Accrued expenses and other liabilities	477,715		166,167
Total liabilities	31,988,069		29,356,065
Shareholders’ equity:
Preferred stock, $0.01 par value; Authorized - 3,000,000 shares:
Series F issued and outstanding (6,000 shares)	145,037		145,037
Common stock, $0.01 par value; Authorized - 200,000,0000 shares:
Issued (93,686,311 shares)	937		937
Paid-in capital	1,104,885		1,109,532
Retained earnings	2,260,560		2,077,522
Treasury stock, at cost (3,097,840 and 3,487,389 shares)	(126,738)		(140,659)
Accumulated other comprehensive income, net of tax	1,508		42,256
Total shareholders' equity	3,386,189		3,234,625
Total liabilities and shareholders' equity	$	35,374,258	$	32,590,690

See accompanying Notes to Condensed Consolidated Financial Statements.

WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)


	Three months ended September 30,				Nine months ended September 30,
(In thousands, except per share data)	2021		2020		2021		2020
Interest Income:
Interest and fees on loans and leases	$	196,273	$	188,001	$	572,728	$	600,709
Taxable interest and dividends on investments	38,208		45,549		118,125		148,240
Non-taxable interest on investment securities	5,154		5,460		15,770		16,447
Loans held for sale	57		229		201		588
Total interest income	239,692		239,239		706,824		765,984
Interest Expense:
Deposits	4,571		12,598		16,104		59,246
Securities sold under agreements to repurchase and other borrowings	721		608		2,216		5,318
Federal Home Loan Bank advances	492		2,528		1,539		13,145
Long-term debt	4,217		4,249		12,658		13,811
Total interest expense	10,001		19,983		32,517		91,520
Net interest income	229,691		219,256		674,307		674,464
Provision for credit losses	7,750		22,750		(39,500)		138,750
Net interest income after provision for credit losses	221,941		196,506		713,807		535,714
Non-interest Income:
Deposit service fees	40,258		39,278		122,166		117,687
Loan and lease related fees	10,881		6,568		27,056		20,032
Wealth and investment services	9,985		8,255		29,475		24,096
Mortgage banking activities	1,525		7,087		5,486		14,185
Increase in cash surrender value of life insurance policies	3,666		3,695		10,802		10,899
Gain on sale of investment securities, net	—		—		—		8

Other income	17,460		10,177		38,249		21,607
Total non-interest income	83,775		75,060		233,234		208,514
Non-interest Expense:
Compensation and benefits	105,352		104,019		310,706		305,637
Occupancy	12,430		14,275		42,090		43,005
Technology and equipment	28,441		27,846		84,081		83,151
Intangible assets amortization	1,124		1,089		3,395		3,013
Marketing	3,721		3,852		9,452		10,640
Professional and outside services	7,074		9,223		37,875		21,044
Deposit insurance	3,855		4,204		11,560		13,944
Other expense	18,240		19,488		56,088		58,982
Total non-interest expense	180,237		183,996		555,247		539,416
Income before income tax expense	125,479		87,570		391,794		204,812
Income tax expense	29,766		18,289		93,968		44,235
Net income	95,713		69,281		297,826		160,577
Preferred stock dividends and other	(2,542)		(2,391)		(7,567)		(6,819)
Earnings applicable to common shareholders	$	93,171	$	66,890	$	290,259	$	153,758

Earnings per common share:
Basic	$	1.03	$	0.75	$	3.23	$	1.71
Diluted	1.03		0.75		3.22		1.70

See accompanying Notes to Condensed Consolidated Financial Statements.

WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)


	Three months ended September 30,				Nine months ended September 30,
(In thousands)	2021		2020		2021		2020
Net income	$	95,713	$	69,281	$	297,826	$	160,577
Other comprehensive (loss) income, net of tax:
Investment securities available-for-sale	(3,394)		11,766		(35,220)		57,991
Derivative instruments	(1,731)		(1,912)		(7,755)		27,921
Defined benefit pension and other postretirement benefit plans	743		738		2,227		2,197
Other comprehensive (loss) income, net of tax	(4,382)		10,592		(40,748)		88,109
Comprehensive income	$	91,331	$	79,873	$	257,078	$	248,686

See accompanying Notes to Condensed Consolidated Financial Statements.

WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited)


	At or for the three months ended September 30, 2021
(In thousands, except per share data)	Preferred Stock		Common Stock		Paid-In Capital		Retained Earnings		Treasury Stock, at cost		Accumulated Other Comprehensive Income, Net of Tax		Total Shareholders' Equity
Balance at June 30, 2021	$	145,037	$	937	$	1,101,126	$	2,203,160	$	(126,445)	$	5,890	$	3,329,705

Net income	—		—		—		95,713		—		—		95,713
Other comprehensive (loss), net of tax	—		—		—		—		—		(4,382)		(4,382)
Common stock dividends/equivalents $0.40 per share	—		—		—		(36,345)		—		—		(36,345)
Series F preferred stock dividends $328.125 per share	—		—		—		(1,968)		—		—		(1,968)
Stock-based compensation	—		—		3,819		—		(176)		—		3,643
Exercise of stock options	—		—		(60)		—		143		—		83
Common shares acquired from stock compensation plan activity	—		—		—		—		(260)		—		(260)

Balance at September 30, 2021	$	145,037	$	937	$	1,104,885	$	2,260,560	$	(126,738)	$	1,508	$	3,386,189

	At or for the three months ended September 30, 2020
(In thousands, except per share data)	Preferred Stock		Common Stock		Paid-In Capital		Retained Earnings		Treasury Stock, at cost		Accumulated Other Comprehensive Income, Net of Tax		Total Shareholders' Equity
Balance at June 30, 2020	$	145,037	$	937	$	1,103,756	$	2,024,487	$	(140,883)	$	41,445	$	3,174,779

Net income	—		—		—		69,281		—		—		69,281
Other comprehensive income, net of tax	—		—		—		—		—		10,592		10,592
Common stock dividends/equivalents $0.40 per share	—		—		—		(36,180)		—		—		(36,180)
Series F preferred stock dividends $328.125 per share	—		—		—		(1,968)		—		—		(1,968)
Stock-based compensation	—		—		2,717		—		625		—		3,342

Common shares acquired from stock compensation plan activity	—		—		—		—		(156)		—		(156)

Balance at September 30, 2020	$	145,037	$	937	$	1,106,473	$	2,055,620	$	(140,414)	$	52,037	$	3,219,690

	At or for the nine months ended September 30, 2021
(In thousands, except per share data)	Preferred Stock		Common Stock		Paid-In Capital		Retained Earnings		Treasury Stock, at cost		Accumulated Other Comprehensive Income, Net of Tax		Total Shareholders' Equity
Balance at December 31, 2020	$	145,037	$	937	$	1,109,532	$	2,077,522	$	(140,659)	$	42,256	$	3,234,625

Net income	—		—		—		297,826		—		—		297,826
Other comprehensive (loss), net of tax	—		—		—		—		—		(40,748)		(40,748)
Common stock dividends/equivalents $1.20 per share	—		—		—		(108,882)		—		—		(108,882)
Series F preferred stock dividends $984.375 per share	—		—		—		(5,906)		—		—		(5,906)
Stock-based compensation	—		—		508		—		9,568		—		10,076
Exercise of stock options	—		—		(5,155)		—		8,624		—		3,469
Common shares acquired from stock compensation plan activity	—		—		—		—		(4,271)		—		(4,271)

Balance at September 30, 2021	$	145,037	$	937	$	1,104,885	$	2,260,560	$	(126,738)	$	1,508	$	3,386,189

	At or for the nine months ended September 30, 2020
(In thousands, except per share data)	Preferred Stock		Common Stock		Paid-In Capital		Retained Earnings		Treasury Stock, at cost		Accumulated Other Comprehensive (Loss) Income, Net of Tax		Total Shareholders' Equity
Balance at December 31, 2019	$	145,037	$	937	$	1,113,250	$	2,061,352	$	(76,734)	$	(36,072)	$	3,207,770
Cumulative effect of changes in accounting principles	—		—		—		(51,213)		—		—		(51,213)
Net income	—		—		—		160,577		—		—		160,577
Other comprehensive income, net of tax	—		—		—		—		—		88,109		88,109
Common stock dividends/equivalents $1.20 per share	—		—		—		(109,190)		—		—		(109,190)
Series F preferred stock dividends $984.375 per share	—		—		—		(5,906)		—		—		(5,906)
Stock-based compensation	—		—		(6,672)		—		16,028		—		9,356
Exercise of stock options	—		—		(105)		—		223		—		118
Common shares acquired from stock compensation plan activity	—		—		—		—		(3,375)		—		(3,375)
Common stock repurchase program	—		—		—		—		(76,556)		—		(76,556)
Balance at September 30, 2020	$	145,037	$	937	$	1,106,473	$	2,055,620	$	(140,414)	$	52,037	$	3,219,690

See accompanying Notes to Condensed Consolidated Financial Statements.

WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)


	Nine months ended September 30,
(In thousands)	2021		2020
Operating Activities:
Net income	$	297,826	$	160,577
Adjustments to reconcile net income to net cash provided by operating activities:
(Benefit) provision for credit losses	(39,500)		138,750
Deferred tax benefit	(692)		(29,976)
Depreciation and amortization	27,071		27,448
Amortization of premiums/discounts, net	102,648		47,178
Stock-based compensation	10,076		9,356
Gain on sale, net of write-down, of foreclosed and repossessed assets	(367)		(1,073)
Loss on disposal of premises and equipment	688		184

Gain on sale of investment securities, net	—		(8)
Increase in cash surrender value of life insurance policies	(10,802)		(10,899)
Gain from life insurance policies	(1,350)		(352)
Mortgage banking activities	(5,486)		(14,185)
Proceeds from sale of loans held for sale	199,991		342,747
Originations of loans held for sale	(192,948)		(324,319)
Net decrease in right-of-use lease assets	4,074		8,634
Net decrease (increase) in derivative contract assets net of liabilities	140,991		(172,647)
Gain on sale of banking centers	(786)		—
Net (increase) decrease in accrued interest receivable and other assets	(77,859)		23,353
Net increase (decrease) in accrued expenses and other liabilities	10,594		(43,272)
Net cash provided by operating activities	464,169		161,496
Investing Activities:
Purchases of available-for-sale investment securities	(857,820)		(586,228)
Proceeds from available-for-sale investment securities maturities/principal repayments	729,877		422,572
Proceeds from sales of available-for-sale investment securities	—		8,963
Purchases of held-to-maturity investment securities	(1,203,951)		(1,005,535)
Proceeds from held-to-maturity investment securities maturities/principal repayments	1,007,842		655,521
Net proceeds from Federal Home Loan Bank/Federal Reserve Bank stock	1,658		59,435
Alternative investments capital calls, net of distributions	(8,897)		(7,423)
Net increase in loans	(66,526)		(1,869,715)
Proceeds from loans not originated for sale	61,274		6,414

Proceeds from life insurance policies	5,074		1,625
Proceeds from sale of foreclosed and repossessed assets	1,285		8,047
Proceeds from sale of banking centers	2,912		641
Additions to premises and equipment	(11,229)		(14,016)

Net cash used in investing activities	(338,501)		(2,319,699)

See accompanying Notes to Condensed Consolidated Financial Statements.


WEBSTER FINANCIAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited), continued

	Nine months ended September 30,
(In thousands)	2021		2020
Financing Activities:
Net increase in deposits	2,689,995		3,590,551
Proceeds from Federal Home Loan Bank advances	180,470		3,775,000
Repayments of Federal Home Loan Bank advances	(200,300)		(5,290,233)
Net (decrease) increase in securities sold under agreements to repurchase and other borrowings	(339,484)		261,391



Dividends paid to common shareholders	(108,586)		(108,882)
Dividends paid to preferred shareholders	(5,906)		(5,906)
Exercise of stock options	3,469		118

Common stock repurchase program	—		(76,556)
Common shares purchased related to stock compensation plan activity	(4,271)		(3,375)

Net cash provided by financing activities	2,215,387		2,142,108
Net increase (decrease) in cash and cash equivalents	2,341,055		(16,095)
Cash and cash equivalents at beginning of period	263,104		257,895
Cash and cash equivalents at end of period	$	2,604,159	$	241,800

Supplemental disclosure of cash flow information:
Interest paid	$	42,567	$	103,550
Income taxes paid	107,812		77,376
Noncash investing and financing activities:
Transfer of loans and leases to foreclosed properties and repossessed assets	$	1,048	$	5,178
Transfer of loans from loans and leases to loans-held-for-sale	74,923		5,805
Unsettled purchases of investment securities	284,713		—
Deposits assumed	—		4,657

See accompanying Notes to Condensed Consolidated Financial Statements.

Note 1: Summary 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.

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. Operating results for the three and nine months ended September 30, 2021 are not necessarily indicative of results that may be attained during the full year ending December 31, 2021, or any future period. 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 did not have a significant impact on the Company's consolidated financial statements.

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.

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.

ASU No. 2021-01, Reference Rate Reform (Topic 848) - Scope.

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.

Relevant 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 September 30, 2021.

Note 2: Variable 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 September 30, 2021 and December 31, 2020, the aggregate carrying value of the Company's tax credit-finance investments was $44.6 million and $37.2 million, respectively, which represents the Company's maximum exposure to loss. At September 30, 2021 and December 31, 2020, unfunded commitments have been recognized, totaling $12.6 million and $10.2 million, respectively, and are included in accrued expenses and other liabilities on the accompanying Condensed Consolidated Balance Sheets. During the nine months ended September 30, 2021, the Company approved additional commitments of $10.6 million to fund tax credit-finance investments. There were no commitments approved during the nine months ended September 30, 2020.

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 September 30, 2021 and December 31, 2020, the aggregate carrying value of the Company's other non-marketable investments in VIEs was $53.0 million and $34.3 million, respectively, and the maximum exposure to loss of the Company's other non-marketable investments in VIEs, including unfunded commitments, was $83.3 million and $72.7 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: Summary of Significant Accounting Policies to the Consolidated Financial Statements included in its Form 10-K for the year ended December 31, 2020.

Note 3: Business 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. 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 6.50% 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 proposed merger was approved by the respective shareholders of both Webster and Sterling on August 17, 2021. Webster Bank and Sterling National Bank, the respective subsidiary banks of Webster and Sterling, also received approval to merge from the OCC on August 2, 2021 as part of the proposed merger between Webster and Sterling. Completion of the merger remains subject to regulatory approval by the Board of Governors of the Federal Reserve System and the satisfaction of the other customary closing conditions set forth in the merger agreement.

In connection with the proposed transaction, the Company incurred $9.8 million and $26.9 million of merger-related expenses during the three and nine months ended September 30, 2021, respectively, primarily consisting of professional fees for investment banking, legal, and consulting services, and employee severance and retention costs. Merger-related expenses are recorded as either professional and outside services, compensation and benefits, or other non-interest expense on the accompanying Condensed Consolidated Statements of Income, and are presented in the Corporate and Reconciling category for segment reporting purposes.

Strategic Initiatives

The following table presents the changes in accrued expenses associated with the Company's strategic initiatives for the three and nine months ended September 30, 2021:


	Three months ended September 30, 2021
(In thousands)	Severance		ROU Asset		Other		Total
Beginning balance	$	13,964	$	—	$	2,230	$	16,194
Charged to earnings	1		91		53		145
Adjustments (1)	(3,903)		—		(253)		(4,156)
Charged against assets	—		(91)		(246)		(337)
Net cash (payments) receipts	(3,923)		—		193		(3,730)
Ending balance	$	6,139	$	—	$	1,977	$	8,116

	Nine months ended September 30, 2021
(In thousands)	Severance		ROU Asset		Other		Total
Beginning balance	$	17,675	$	—	$	2,120	$	19,795
Charged to earnings	2,106		361		8,987		11,454
Adjustments (1)	(3,903)		—		(984)		(4,887)
Charged against assets	—		(361)		(3,776)		(4,137)
Net cash (payments) receipts	(9,739)		—		(4,370)		(14,109)
Ending balance	$	6,139	$	—	$	1,977	$	8,116

(1)Adjustments reflect changes in retention assumptions, gains on sale of banking centers, and other facilities-related adjustments.

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.

Note 4: Investment Securities

Held-to-Maturity Securities

A summary of the amortized cost, fair value, and ACL on investment securities held-to-maturity is presented below:


	At September 30, 2021
(In thousands)	Amortized Cost (1)		Unrealized Gains		Unrealized Losses		Fair Value		Allowance		Net Carrying Value
Agency CMO	$	50,146	$	1,075	$	(48)	$	51,173	$	—	$	50,146
Agency MBS	2,544,509		101,289		(5,403)		2,640,395		—		2,544,509
Agency CMBS	2,509,487		22,432		(22,094)		2,509,825		—		2,509,487
Municipal bonds and notes	707,552		49,961		—		757,513		234		707,318
CMBS	174,848		5,686		—		180,534		—		174,848
Held-to-maturity securities	$	5,986,542	$	180,443	$	(27,545)	$	6,139,440	$	234	$	5,986,308


	At December 31, 2020
(In thousands)	Amortized Cost (1)		Unrealized Gains		Unrealized Losses		Fair Value		Allowance		Net Carrying Value
Agency CMO	$	91,622	$	1,785	$	(241)	$	93,166	$	—	$	91,622
Agency MBS	2,419,751		137,863		(84)		2,557,530		—		2,419,751
Agency CMBS	2,101,227		60,484		(2,213)		2,159,498		—		2,101,227
Municipal bonds and notes	739,507		60,371		(3)		799,875		299		739,208
CMBS	216,081		9,214		—		225,295		—		216,081
Held-to-maturity securities	$	5,568,188	$	269,717	$	(2,541)	$	5,835,364	$	299	$	5,567,889

(1)Amortized cost excludes accrued interest receivable of $16.7 million and $22.1 million at September 30, 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 is recorded as of September 30, 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 ACL 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 ACL on investment securities held-to-maturity:


	Three months ended September 30,				Nine months ended September 30,
(In thousands)	2021		2020		2021		2020
Balance beginning of period	$	382	$	309	$	299	$	—
Adoption of ASU No. 2016-13 (CECL)	—		—		—		397
Provision (benefit) for credit losses	(148)		(3)		(65)		(91)
Balance end of period	$	234	$	306	$	234	$	306

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. At September 30, 2021, there were no held-to-maturity investment securities rated below investment grade. The securities illustrated below that are not rated are collateralized with U.S. Government 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 at September 30, 2021:


	Investment Grade
(In thousands)	Aaa		Aa1		Aa2		Aa3		A1		A2		A3		Baa2		Not Rated
Agency CMOs	$	—	$	50,146	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Agency MBS	—		2,544,509		—		—		—		—		—		—		—
Agency CMBS	—		2,509,487		—		—		—		—		—		—		—
Municipal bonds and notes	207,813		119,988		227,479		104,454		36,045		8,464		—		190		3,119
CMBS	174,848		—		—		—		—		—		—		—		—
Total held-to-maturity	$	382,661	$	5,224,130	$	227,479	$	104,454	$	36,045	$	8,464	$	—	$	190	$	3,119

At September 30, 2021, there were no 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:


	At September 30, 2021
(In thousands)	Amortized Cost		Fair Value
Due in one year or less	$	380	$	382
Due after one year through five years	5,933		6,222
Due after five years through ten years	294,506		307,837
Due after ten years	5,685,723		5,824,999
Total held-to-maturity debt securities	$	5,986,542	$	6,139,440

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.

Available-for-Sale Securities

A summary of the amortized cost and fair value of available-for-sale securities is presented below:


	At September 30, 2021
(In thousands)	Amortized Cost(1)		Unrealized Gains		Unrealized Losses		Fair Value(2)

Agency CMO	$	102,257	$	3,549	$	(23)	$	105,783
Agency MBS	1,552,693		50,705		(6,614)		1,596,784
Agency CMBS	901,654		6,852		(9,920)		898,586
CMBS	769,546		869		(329)		770,086
CLO	25,000		—		(33)		24,967
Corporate debt	14,576		174		(513)		14,237
Available-for-sale securities	$	3,365,726	$	62,149	$	(17,432)	$	3,410,443

	At December 31, 2020
(In thousands)	Amortized Cost(1)		Unrealized Gains		Unrealized Losses		Fair Value(2)

Agency CMO	$	148,711	$	6,000	$	(98)	$	154,613
Agency MBS	1,389,100		68,598		(289)		1,457,409
Agency CMBS	1,092,430		26,317		(1,514)		1,117,233
CMBS	512,759		1,082		(5,823)		508,018
CLO	76,693		—		(310)		76,383
Corporate debt	14,557		—		(1,437)		13,120
Available-for-sale securities	$	3,234,250	$	101,997	$	(9,471)	$	3,326,776

(1)Amortized cost excludes accrued interest receivable of $6.6 million and $7.5 million at September 30, 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 ACL recorded on investment securities available-for-sale, as the securities are high credit quality and 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 ACL 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:


	At September 30, 2021
	Less Than Twelve Months				Twelve Months or Longer				Total
(Dollars in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		# of Holdings	Fair Value		Unrealized Losses

Agency CMO	$	6,734	$	(19)	$	1,066	$	(4)	4	$	7,800	$	(23)
Agency MBS	495,080		(6,397)		19,902		(217)		55	514,982		(6,614)
Agency CMBS	180,305		(2,583)		285,865		(7,337)		14	466,170		(9,920)
CMBS	220,036		(238)		92,807		(91)		27	312,843		(329)
CLO	—		—		24,967		(33)		1	24,967		(33)
Corporate debt	—		—		9,788		(513)		2	9,788		(513)
Available-for-sale in unrealized loss position	$	902,155	$	(9,237)	$	434,395	$	(8,195)	103	$	1,336,550	$	(17,432)


	At December 31, 2020
	Less Than Twelve Months				Twelve Months or Longer				Total
(Dollars in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		# of Holdings	Fair Value		Unrealized Losses

Agency CMO	$	13,137	$	(49)	$	5,944	$	(49)	5	$	19,081	$	(98)
Agency MBS	33,742		(219)		4,561		(70)		30	38,303		(289)
Agency CMBS	376,330		(1,514)		—		—		8	376,330		(1,514)
CMBS	409,591		(5,486)		23,167		(337)		38	432,758		(5,823)
CLO	57,728		(265)		18,655		(45)		4	76,383		(310)
Corporate debt	4,100		(166)		9,020		(1,271)		3	13,120		(1,437)
Available-for-sale in unrealized loss position	$	894,628	$	(7,699)	$	61,347	$	(1,772)	88	$	955,975	$	(9,471)

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 based on impairment analysis. The Company does not intend and is not required to sell prior to their anticipated recovery because the securities are investment grade, and the decline in fair value is primarily attributable to higher market rates. Fair value is expected to recover as the securities approach maturity. At September 30, 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:


	At September 30, 2021
(In thousands)	Amortized Cost		Fair Value
Due in one year or less	$	—	$	—
Due after one year through five years	2,266		2,338
Due after five through ten years	152,856		153,009
Due after ten years	3,210,604		3,255,096
Total available-for-sale debt securities	$	3,365,726	$	3,410,443

Sales of Available-for Sale Investment Securities

There were no sales of available-for-sale securities during the three and nine months ended September 30, 2021, nor during the three months ended September 30, 2020. For the nine months ended September 30, 2020, proceeds from sales of available-for-sale securities were $9.0 million, which resulted in realized gains of $8.0 thousand.

Other Information

At September 30, 2021, the Company had a carrying value of $1.5 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 $3.0 billion and $1.9 billion at September 30, 2021, respectively, and $2.6 billion and $1.3 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.

Note 5: Loans and Leases

The following table summarizes loans and leases:


(In thousands)	At September 30, 2021		At December 31, 2020
Commercial non-mortgage	$	6,552,241	$	7,085,076
Asset-based	986,782		890,598
Commercial real estate	6,522,679		6,322,637
Equipment financing	620,104		602,224
Commercial portfolio	14,681,806		14,900,535
Residential	5,167,527		4,782,016
Home equity	1,633,873		1,802,865
Other consumer	97,129		155,799
Consumer portfolio	6,898,529		6,740,680
Loans and leases (1) (2) (3)	$	21,580,335	$	21,641,215

(1)Loan balances include net deferred costs/(fees) and net discounts/(premiums) of $5.4 million and $(10.5) million at September 30, 2021 and December 31, 2020, respectively.

(2)At September 30, 2021, the Company had pledged $7.5 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 $55.2 million and $57.8 million at September 30, 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 $213.7 million and $236.1 million at September 30, 2021 and December 31, 2020, respectively. Total undiscounted cash flows, primarily due within the next five years, amounted to $231.5 million at September 30, 2021. This lessor activity resulted in interest income of $1.8 million and $1.8 million for the three months ended September 30, 2021 and 2020, respectively, and $5.6 million and $5.2 million for the nine months ended September 30, 2021 and 2020, respectively.

Loans and Leases Aging

The following table summarizes the aging of loans and leases:


	At September 30, 2021
(In thousands)	30-59 Days Past Due and Accruing		60-89 Days Past Due and Accruing		90 or More Days Past Due and Accruing		Non-accrual		Total Past Due and Non-accrual		Current		Total Loans and Leases
Commercial non-mortgage	$	2,051	$	2,264	$	105	$	36,448	$	40,868	$	6,511,373	$	6,552,241
Asset-based	—		—		—		2,111		2,111		984,671		986,782
Commercial real estate	128		696		—		15,963		16,787		6,505,892		6,522,679
Equipment financing	1,215		9		—		4,222		5,446		614,658		620,104
Commercial portfolio	3,394		2,969		105		58,744		65,212		14,616,594		14,681,806
Residential	2,892		538		—		19,325		22,755		5,144,772		5,167,527
Home equity	4,905		1,437		—		23,322		29,664		1,604,209		1,633,873
Other consumer	564		266		—		263		1,093		96,036		97,129
Consumer portfolio	8,361		2,241		—		42,910		53,512		6,845,017		6,898,529
Total	$	11,755	$	5,210	$	105	$	101,654	$	118,724	$	21,461,611	$	21,580,335


	At December 31, 2020
(In thousands)	30-59 Days Past Due and Accruing		60-89 Days Past Due and Accruing		90 or More Days Past Due and Accruing		Non-accrual		Total Past Due and Non-accrual		Current		Total Loans and Leases
Commercial non-mortgage	$	612	$	903	$	445	$	64,073	$	66,033	$	7,019,043	$	7,085,076
Asset-based	1,174		—		—		2,594		3,768		886,830		890,598
Commercial real estate	2,400		619		—		21,231		24,250		6,298,387		6,322,637
Equipment financing	5,107		2,308		—		7,299		14,714		587,510		602,224
Commercial portfolio	9,293		3,830		445		95,197		108,765		14,791,770		14,900,535
Residential	4,334		6,330		—		41,081		51,745		4,730,271		4,782,016
Home equity	5,500		1,771		—		31,030		38,301		1,764,564		1,802,865
Other consumer	878		601		—		652		2,131		153,668		155,799
Consumer portfolio	10,712		8,702		—		72,763		92,177		6,648,503		6,740,680
Total	$	20,005	$	12,532	$	445	$	167,960	$	200,942	$	21,440,273	$	21,641,215

The following table provides additional detail related to loans and leases on non-accrual status:


	At September 30, 2021				At December 31, 2020
(In thousands)	Non-accrual		Non-accrual With No Allowance		Non-accrual		Non-accrual With No Allowance
Commercial non-mortgage	$	36,448	$	8,081	$	64,073	$	16,985
Asset-based	2,111		2,111		2,594		—
Commercial real estate	15,963		4,951		21,231		15,529
Equipment financing	4,222		—		7,299		2,983
Commercial portfolio	58,744		15,143		95,197		35,497
Residential	19,325		11,420		41,081		29,843
Home equity	23,322		18,798		31,030		24,091
Other consumer	263		—		652		2
Consumer portfolio	42,910		30,218		72,763		53,936
Total	$	101,654	$	45,361	$	167,960	$	89,433

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 $2.4 million and $3.4 million for the three months ended September 30, 2021 and 2020, respectively, and $7.2 million and $9.0 million for the nine months ended September 30, 2021 and 2020, respectively.

Refer to Note 1: Summary of Significant Accounting Policies 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

The following table summarizes the activity in, as well as the loan and lease balances that were evaluated for, ACL on loans and leases:



	At or for the three months ended September 30,
	2021						2020
(In thousands)	Commercial Portfolio		Consumer Portfolio		Total		Commercial Portfolio		Consumer Portfolio		Total
ACL on loans and leases:
Balance, beginning of period	$	263,071	$	44,874	$	307,945	$	291,520	$	67,002	$	358,522

(Benefit) provision	7,681		217		7,898		31,618		(8,865)		22,753
Charge-offs	(1,723)		(2,053)		(3,776)		(13,494)		(2,263)		(15,757)
Recoveries	142		2,713		2,855		2,025		2,268		4,293
Balance, end of period	$	269,171	$	45,751	$	314,922	$	311,669	$	58,142	$	369,811


	At or for the nine months ended September 30,
	2021						2020
(In thousands)	Commercial Portfolio		Consumer Portfolio		Total		Commercial Portfolio		Consumer Portfolio		Total
ACL on loans and leases:
Balance, beginning of period	$	312,244	$	47,187	$	359,431	$	161,669	$	47,427	$	209,096
Adoption of ASU No. 2016-13 (CECL)	—		—		—		34,024		23,544		57,568
(Benefit) provision	(37,049)		(2,386)		(39,435)		147,466		(8,625)		138,841
Charge-offs	(8,638)		(7,835)		(16,473)		(34,362)		(9,630)		(43,992)
Recoveries	2,614		8,785		11,399		2,872		5,426		8,298
Balance, end of period	$	269,171	$	45,751	$	314,922	$	311,669	$	58,142	$	369,811
Individually evaluated for impairment	7,791		4,308		12,099		18,303		4,376		22,679
Collectively evaluated for impairment	$	261,380	$	41,443	$	302,823	$	293,366	$	53,766	$	347,132

Loan and lease balances:
Individually evaluated for impairment	$	116,280	$	104,677	$	220,957	$	158,324	$	149,583	$	307,907
Collectively evaluated for impairment	14,565,526		6,793,852		21,359,378		14,761,792		6,782,324		21,544,116
Loans and leases	$	14,681,806	$	6,898,529	$	21,580,335	$	14,920,116	$	6,931,907	$	21,852,023

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.

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 at September 30, 2021 and December 31, 2020:


	At September 30, 2021
(In thousands)	2021		2020		2019		2018		2017		Prior		Revolving Loans Amortized Cost Basis		Total
Commercial non-mortgage
Pass	$	1,680,524	$	1,261,582	$	862,131	$	673,196	$	291,995	$	317,590	$	1,068,077	$	6,155,095
Special mention	13,242		45,084		38,253		32,989		9,994		16,578		15,835		171,975
Substandard	3,791		47,048		31,030		85,798		8,646		19,647		29,210		225,170
Doubtful	—		1		—		—		—		—		—		1
Commercial non-mortgage	1,697,557		1,353,715		931,414		791,983		310,635		353,815		1,113,122		6,552,241
Asset-based
Pass	7,612		20,768		13,115		13,998		6,272		26,747		835,405		923,917
Special mention	—		—		—		700		—		—		60,054		60,754
Substandard	—		—		2,111		—		—		—		—		2,111
Asset-based	7,612		20,768		15,226		14,698		6,272		26,747		895,459		986,782
Commercial real estate
Pass	847,147		891,343		1,450,959		1,074,542		377,030		1,484,768		34,906		6,160,695
Special mention	350		2,232		—		79,138		54,177		105,173		—		241,070
Substandard	—		887		792		21,565		43,194		54,475		—		120,913
Doubtful	—		—		—		—		—		1		—		1
Commercial real estate	847,497		894,462		1,451,751		1,175,245		474,401		1,644,417		34,906		6,522,679
Equipment financing
Pass	174,137		203,641		101,319		49,725		16,835		39,771		—		585,428
Special mention	—		120		8,101		3,620		87		1,055		—		12,983
Substandard	—		8,989		4,093		3,566		1,512		3,533		—		21,693
Equipment financing	174,137		212,750		113,513		56,911		18,434		44,359		—		620,104
Commercial portfolio	$	2,726,803	$	2,481,695	$	2,511,904	$	2,038,837	$	809,742	$	2,069,338	$	2,043,487	$	14,681,806


	At December 31, 2020
(In thousands)	2020		2019		2018		2017		2016		Prior		Revolving Loans Amortized Cost Basis		Total
Commercial non-mortgage
Pass	$	2,771,373	$	1,052,080	$	907,110	$	481,321	$	231,280	$	218,001	$	936,592	$	6,597,757
Special mention	32,535		33,969		62,034		435		8,357		13,757		38,496		189,583
Substandard	54,716		51,798		66,324		36,159		15,535		23,957		49,084		297,573
Doubtful	—		—		—		163		—		—		—		163
Commercial non-mortgage	2,858,624		1,137,847		1,035,468		518,078		255,172		255,715		1,024,172		7,085,076
Asset-based
Pass	26,344		15,960		23,123		11,333		10,963		16,484		741,336		845,543
Special mention	—		—		775		—		—		—		41,687		42,462
Substandard	—		2,504		—		—		—		—		89		2,593
Asset-based	26,344		18,464		23,898		11,333		10,963		16,484		783,112		890,598
Commercial real estate
Pass	965,582		1,461,201		1,242,322		527,931		554,630		1,165,331		28,113		5,945,110
Special mention	27		10,385		70,704		37,539		35,617		69,832		—		224,104
Substandard	817		1,132		21,923		73,621		2,962		52,968		—		153,423
Commercial real estate	966,426		1,472,718		1,334,949		639,091		593,209		1,288,131		28,113		6,322,637
Equipment financing
Pass	249,370		135,263		68,092		26,433		43,469		22,879		—		545,506
Special mention	7,934		11,043		6,981		1,220		1,577		788		—		29,543
Substandard	7,483		6,169		5,749		2,460		4,743		571		—		27,175
Equipment financing	264,787		152,475		80,822		30,113		49,789		24,238		—		602,224
Commercial portfolio	$	4,116,181	$	2,781,504	$	2,475,137	$	1,198,615	$	909,133	$	1,584,568	$	1,835,397	$	14,900,535

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 at September 30, 2021 and December 31, 2020:


	At September 30, 2021
(In thousands)	2021		2020		2019		2018		2017		Prior		Revolving Loans Amortized Cost Basis		Total
Residential
800+	$	360,987	$	450,223	$	178,412	$	41,697	$	128,474	$	792,003	$	—	$	1,951,796
740-799	857,968		471,194		180,238		38,171		91,741		507,048		—		2,146,360
670-739	300,754		141,427		81,670		25,831		41,147		248,879		—		839,708
580-669	24,569		14,716		9,338		4,394		7,531		76,066		—		136,614
579 and below	10,308		1,451		43,787		868		1,892		34,743		—		93,049
Residential	1,554,586		1,079,011		493,445		110,961		270,785		1,658,739		—		5,167,527
Home equity
800+	27,832		28,501		10,373		17,474		11,631		60,951		491,283		648,045
740-799	29,181		27,269		9,710		14,530		8,428		39,651		414,321		543,090
670-739	12,260		10,657		7,106		8,338		7,369		35,743		234,066		315,539
580-669	364		1,530		1,750		1,529		1,885		15,669		73,350		96,077
579 and below	255		454		874		1,026		304		6,001		22,208		31,122
Home equity	69,892		68,411		29,813		42,897		29,617		158,015		1,235,228		1,633,873
Other consumer
800+	377		1,544		3,254		1,141		323		120		10,386		17,145
740-799	2,314		6,694		10,540		4,047		590		379		4,857		29,421
670-739	542		9,433		16,762		5,021		909		234		8,106		41,007
580-669	245		1,232		3,215		972		347		207		1,313		7,531
579 and below	106		176		283		195		63		54		1,148		2,025
Other consumer	3,584		19,079		34,054		11,376		2,232		994		25,810		97,129
Consumer portfolio	1,628,062		1,166,501		557,312		165,234		302,634		1,817,748		1,261,038		6,898,529

Commercial portfolio	2,726,803		2,481,695		2,511,904		2,038,837		809,742		2,069,338		2,043,487		14,681,806
Loans and leases	$	4,354,865	$	3,648,196	$	3,069,216	$	2,204,071	$	1,112,376	$	3,887,086	$	3,304,525	$	21,580,335


	At December 31, 2020
(In thousands)	2020		2019		2018		2017		2016		Prior		Revolving Loans Amortized Cost Basis		Total
Residential
800+	$	360,336	$	283,755	$	61,048	$	178,849	$	268,044	$	805,537	$	—	$	1,957,569
740-799	654,973		288,173		58,249		133,416		176,286		492,720		—		1,803,817
670-739	199,329		118,620		39,125		75,375		76,666		248,268		—		757,383
580-669	17,151		19,389		8,884		11,843		12,225		96,333		—		165,825
579 and below	—		36,498		673		3,278		3,179		53,794		—		97,422
Residential	1,231,789		746,435		167,979		402,761		536,400		1,696,652		—		4,782,016
Home equity
800+	30,604		16,567		25,205		14,439		17,192		59,956		542,600		706,563
740-799	34,797		13,565		19,715		11,073		12,839		43,802		434,271		570,062
670-739	13,753		8,855		10,761		10,206		7,318		44,025		275,691		370,609
580-669	1,708		2,172		2,660		2,234		2,316		16,680		86,126		113,896
579 and below	129		919		880		1,070		1,073		7,163		30,501		41,735
Home equity	80,991		42,078		59,221		39,022		40,738		171,626		1,369,189		1,802,865
Other consumer
800+	2,827		5,725		2,610		658		115		190		7,171		19,296
740-799	12,317		21,036		8,925		1,493		457		263		5,119		49,610
670-739	14,761		31,952		11,843		2,284		665		228		8,403		70,136
580-669	2,344		5,419		2,360		793		194		124		1,570		12,804
579 and below	608		982		500		183		37		215		1,428		3,953
Other consumer	32,857		65,114		26,238		5,411		1,468		1,020		23,691		155,799
Consumer portfolio	1,345,637		853,627		253,438		447,194		578,606		1,869,298		1,392,880		6,740,680

Commercial portfolio	4,116,181		2,781,504		2,475,137		1,198,615		909,133		1,584,568		1,835,397		14,900,535
Loans and leases	$	5,461,818	$	3,635,131	$	2,728,575	$	1,645,809	$	1,487,739	$	3,453,866	$	3,228,277	$	21,641,215

Individually Assessed Loans and Leases

The following table summarizes individually assessed loans and leases:


	At September 30, 2021
(In thousands)	Unpaid Principal Balance		Amortized Cost		Amortized Cost No Allowance		Amortized Cost With Allowance		Related Allowance
Commercial non-mortgage	$	107,251	$	84,054	$	34,246	$	49,808	$	5,470
Asset-based	2,253		2,111		2,111		—		—
Commercial real estate	29,357		25,893		11,203		14,690		1,449
Equipment financing	4,732		4,222		—		4,222		872
Residential	68,514		65,018		35,337		29,681		2,503
Home equity	43,764		39,396		28,078		11,318		1,689
Other consumer	282		263		—		263		116
Total	$	256,153	$	220,957	$	110,975	$	109,982	$	12,099


	At December 31, 2020
(In thousands)	Unpaid Principal Balance		Amortized Cost		Amortized Cost No Allowance		Amortized Cost With Allowance		Related Allowance
Commercial non-mortgage	$	172,069	$	119,884	$	55,742	$	64,142	$	9,665
Asset-based	2,989		2,594		—		2,594		50
Commercial real estate	37,177		33,879		25,931		7,948		1,610
Equipment financing	7,770		7,298		2,983		4,315		362
Residential	108,077		98,164		58,915		39,249		3,357
Home equity	109,156		46,950		34,335		12,615		988
Other consumer	2,381		653		2		651		105
Total	$	439,619	$	309,422	$	177,908	$	131,514	$	16,137

The following table summarizes average amortized cost and interest income recognized for individually assessed loans and leases:


	Three months ended September 30,												Nine months ended September 30,
	2021						2020						2021						2020
(In thousands)	Average Amortized Cost		Accrued Interest Income		Cash Basis Interest Income		Average Amortized Cost		Accrued Interest Income		Cash Basis Interest Income		Average Amortized Cost		Accrued Interest Income		Cash Basis Interest Income		Average Amortized Cost		Accrued Interest Income		Cash Basis Interest Income

Commercial non-mortgage	$	90,662	$	729	$	—	$	127,676	$	954	$	—	$	101,969	$	2,270	$	—	$	114,027	$	2,882	$	—
Asset-based	2,243		—		—		1,949		—		—		2,353		—		—		1,950		—		—
Commercial real estate	23,512		132		—		24,555		192		—		29,886		440		—		22,440		507		—
Equipment financing	6,192		—		—		7,488		—		—		5,760		—		—		6,308		—		—
Residential	66,920		590		46		103,608		741		289		81,591		1,806		487		95,270		2,352		1,149
Home equity	40,341		218		63		49,309		302		297		43,173		727		579		41,826		1,002		1,540
Other consumer	338		—		—		948		13		—		458		—		—		340		30		—
Total	$	230,208	$	1,669	$	109	$	315,533	$	2,202	$	586	$	265,190	$	5,243	$	1,066	$	282,161	$	6,773	$	2,689

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 $104.4 million at September 30, 2021 and $150.3 million at December 31, 2020.

The following table summarizes whether, or not, individually assessed loans and leases are collateral dependent:


	At September 30, 2021						At December 31, 2020
(In thousands)	Collateral Dependent		Not Considered Collateral Dependent		Total		Collateral Dependent		Not Considered Collateral Dependent		Total
Commercial non-mortgage	$	8,062	$	75,992	$	84,054	$	11,074	$	108,810	$	119,884
Asset-based	2,111		—		2,111		2,504		90		2,594
Commercial real estate	21,229		4,664		25,893		28,482		5,397		33,879
Equipment financing	—		4,222		4,222		—		7,298		7,298
Residential	16,029		48,989		65,018		33,980		64,184		98,164
Home equity	21,014		18,382		39,396		26,796		20,154		46,950
Other consumer	—		263		263		—		653		653
Total amortized cost	$	68,445	$	152,512	$	220,957	$	102,836	$	206,586	$	309,422

Troubled Debt Restructurings

The following table summarizes information for TDRs:


(In thousands)	At September 30, 2021		At December 31, 2020
Accrual status	$	116,777	$	140,089
Non-accrual status	47,257		95,338
Total TDRs	$	164,034	$	235,427

Specific reserves for TDRs included in the balance of ACL on loans and leases	$	8,980	$	12,728
Additional funds committed to borrowers in TDR status	6,504		12,895

The portion of TDRs deemed to be uncollectible, $1.1 million and $7.8 million for the three months ended September 30, 2021 and 2020, respectively, and $3.3 million and $10.8 million for the nine months ended September 30, 2021 and 2020, respectively, were charged off.

The following table provides information on the type of concession for loans modified as TDRs:


	Three months ended September 30,						Nine months ended September 30,
	2021			2020			2021			2020
	Number of Loans	Post- Modification Recorded Investment (1)		Number of Loans	Post- Modification Recorded Investment (1)		Number of Loans	Post- Modification Recorded Investment (1)		Number of Loans	Post- Modification Recorded Investment (1)
(Dollars in thousands)
Commercial portfolio
Extended Maturity	1	$	48	—	$	—	9	$	788	7	$	579

Maturity/Rate Combined	2	94		2	333		8	304		8	885
Other (2)	—	—		4	312		3	114		27	40,434
Consumer portfolio
Extended Maturity	—	—		2	165		2	127		6	673
Maturity/Rate Combined	—	—		5	440		8	1,426		11	1,151
Other (2)	3	153		17	708		19	1,354		111	9,895
Total TDRs	6	$	295	30	$	1,958	49	$	4,113	170	$	53,617

(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 no significant amounts of loans modified as TDRs within the previous 12 months and for which there was a payment default for the three and nine months ended September 30, 2021 and 2020.

TDRs in commercial non-mortgage, commercial real estate, and equipment financing segregated by risk rating exposure is as follows:


(In thousands)	At September 30, 2021		At December 31, 2020
Pass	$	7,327	$	12,462
Special Mention	8,670		—
Substandard	58,797		105,070
Doubtful	—		163
Total	$	74,794	$	117,695

Note 6: Transfers of Financial Assets

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.

The following table provides a summary of activity in the reserve for loan repurchases:


	Three months ended September 30,				Nine months ended September 30,
(In thousands)	2021		2020		2021		2020
Beginning balance	$	782	$	655	$	747	$	508
Provision charged to expense	16		50		59		99
(Charge-offs/settlements) recoveries, net	—		—		(8)		98
Ending balance	$	798	$	705	$	798	$	705

The following table provides information for mortgage banking activities:


	Three months ended September 30,				Nine months ended September 30,
(In thousands)	2021		2020		2021		2020
Residential mortgage loans held for sale:
Proceeds from sale	$	52,256	$	172,579	$	199,991	$	342,747
Loans sold with servicing rights retained	50,643		164,054		192,421		325,832

Net gain on sale	1,063		6,244		4,523		11,587
Ancillary fees	313		1,018		1,231		2,243
Fair value option adjustment	149		(175)		(268)		355

Additionally, certain commercial and consumer loans not originated for sale were sold for cash proceeds of $61.3 million for the nine months ended September 30, 2021, resulting in a gain of $1.3 million, and $6.4 million for the nine months ended September 30, 2020, resulting in a gain of $295 thousand.

The Company services residential mortgage loans for other entities totaling $2.1 billion at September 30, 2021 and $2.3 billion at December 31, 2020.

The following table presents the changes in carrying value for mortgage servicing assets:


	Three months ended September 30,				Nine months ended September 30,
(In thousands)	2021		2020		2021		2020
Beginning balance	$	11,501	$	14,926	$	13,422	$	17,484
Additions	483		1,301		1,685		3,269
Amortization	(1,363)		(1,616)		(4,295)		(4,992)
Adjustment to valuation allowance	(454)		(203)		(645)		(1,353)
Ending balance	$	10,167	$	14,408	$	10,167	$	14,408

Loan servicing fees, net of mortgage servicing rights amortization, were $0.4 million and $0.3 million for the three months ended September 30, 2021 and 2020, respectively, and $1.2 million and $1.1 million for the nine months ended September 30, 2021 and 2020, respectively, and are included within loan and lease 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.

Note 7: Leasing

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 5 to 20 years with various renewal options. The Company does not have any material sub-lease agreements.

The following table summarizes lessee information related to the Company’s operating ROU lease assets and lease liabilities:


	At September 30, 2021
(In thousands)	Operating Leases		Condensed Consolidated Balance Sheet Line Item Location
ROU lease assets	$	123,407	Premises and equipment, net
Lease liabilities	150,708		Operating lease liabilities

The components of operating lease cost and other related information are as follows:


	At or for the three months ended September 30,				At or for the nine months ended September 30,
(In thousands)	2021		2020		2021		2020
Lease Cost:
Operating lease costs	$	6,487	$	7,381	$	19,598	$	22,212
Variable lease costs	1,063		1,297		3,714		4,217
Sublease income	(141)		(141)		(412)		(428)
Total operating lease cost	$	7,409	$	8,537	$	22,900	$	26,001
Other Information:
Cash paid for amounts included in the measurement of lease liabilities	$	7,498	$	7,823	$	23,003	$	23,359
ROU lease assets obtained in exchange for new operating lease liabilities	2,586		856		12,144		9,552

The undiscounted scheduled maturities reconciled to total operating lease liabilities are as follows:


(In thousands)	At September 30, 2021
Remainder of 2021	$	5,141
2022	28,292
2023	26,443
2024	23,666
2025	21,687
Thereafter	66,806
Total operating lease liability payments	172,035
Less: Present value adjustment	21,327
Lease liabilities	$	150,708

Weighted-average remaining lease term, in years	7.67
Weighted-average discount rate	3.07%

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.

Note 8: Goodwill and Other Intangible Assets

There has been no change during the three and nine months ended September 30, 2021 in the carrying amount for goodwill. For goodwill by reportable segment, refer to Note 17: Segment Reporting.

Other intangible assets by reportable segment consisted of the following:


	At September 30, 2021						At December 31, 2020
(In thousands)	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
HSA Bank - Core deposits	$	26,625	$	17,801	$	8,824	$	26,625	$	15,618	$	11,007
HSA Bank - Customer relationships	21,000		10,837		10,163		21,000		9,624		11,376
Total other intangible assets	$	47,625	$	28,638	$	18,987	$	47,625	$	25,242	$	22,383

At September 30, 2021, the remaining estimated aggregate future amortization expense for other intangible assets is as follows:


(In thousands)
Remainder of 2021	$	1,117
2022	4,411
2023	4,315
2024	2,084
2025	2,084
Thereafter	4,976

Note 9: Deposits

A summary of deposits by type is as follows:


(In thousands)	At September 30, 2021		At December 31, 2020
Non-interest-bearing:
Demand	$	7,154,835	$	6,155,592
Interest-bearing:
Health savings accounts	7,329,405		7,120,017
Checking	4,181,825		3,652,763
Money market	3,958,700		2,940,215
Savings	5,517,189		4,979,031
Time deposits	1,884,373		2,487,818
Total interest-bearing	$	22,871,492	$	21,179,844
Total deposits	$	30,026,327	$	27,335,436

Time deposits and interest-bearing checking obtained through brokers (included in above balances)	$	109,312	$	720,440
Time deposits that exceed the FDIC limit (included in above balance)	308,498		504,543
Deposit overdrafts reclassified as loan balances	1,111		2,007

The scheduled maturities of time deposits are as follows:


(In thousands)	At September 30, 2021
Remainder of 2021	$	646,277
2022	1,022,752
2023	103,532
2024	44,240
2025	50,664
Thereafter	16,908
Total time deposits	$	1,884,373

Note 10: Borrowings

Total borrowings of $1.3 billion at September 30, 2021 and $1.7 billion at December 31, 2020 are described in detail below.

The following table summarizes securities sold under agreements to repurchase and other borrowings:


	At September 30, 2021				At December 31, 2020
(Dollars in thousands)	Total Outstanding		Rate		Total Outstanding		Rate
Securities sold under agreements to repurchase (1):
Original maturity of one year or less	$	455,871	0.11	%	$	269,330	0.13	%
Original maturity of greater than one year, non-callable	200,000		1.22		200,000		0.84
Total securities sold under agreements to repurchase	655,871		0.45		469,330		0.43
Fed funds purchased	—		—		526,025		0.08

Securities sold under agreements to repurchase and other borrowings	$	655,871	0.45		$	995,355	0.25

(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 MBS. Repurchase agreement counterparties are limited to primary dealers in government securities and commercial/municipal customers through the Corporate Treasury function.

The following table provides information for FHLB advances:


	At September 30, 2021				At December 31, 2020
(Dollars in thousands)	Total Outstanding		Weighted- Average Contractual Coupon Rate		Total Outstanding		Weighted- Average Contractual Coupon Rate
Maturing within 1 year	$	11	—	%	$	25,000	0.38	%
After 1 but within 2 years	157		1.75		110		—
After 2 but within 3 years	50,132		1.59		215		2.95
After 3 but within 4 years	50,000		1.42		50,000		1.59
After 4 but within 5 years	—		—		50,000		1.42
After 5 years	13,034		2.57		7,839		2.66
FHLB advances	$	113,334	1.63		$	133,164	1.36

Aggregate carrying value of assets pledged as collateral	$	7,150,473			$	7,387,054
Remaining borrowing capacity	4,704,060				4,689,642

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.

The following table summarizes long-term debt:


(Dollars in thousands)		At September 30, 2021		At December 31, 2020
4.375%	Senior fixed-rate notes due February 15, 2024	$	150,000	$	150,000
4.100%	Senior fixed-rate notes due March 25, 2029 (1)	340,149		344,164
Junior subordinated debt Webster Statutory Trust I floating-rate notes due September 17, 2033 (2)		77,320		77,320
Total notes and subordinated debt		567,469		571,484
Discount on senior fixed-rate notes		(1,029)		(1,193)
Debt issuance cost on senior fixed-rate notes		(2,326)		(2,628)
Long-term debt		$	564,114	$	567,663

(1)The Company de-designated its fair value hedging relationship on these notes. A basis adjustment of $40.1 million and $44.2 million at September 30, 2021 and December 31, 2020, respectively, is included in the carrying value and 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 2.95%, was 3.07% at September 30, 2021 and 3.18% at December 31, 2020.

Note 11: Accumulated Other Comprehensive Income, Net of Tax

The following table summarizes the changes in each component of accumulated other comprehensive income (loss), net of tax (AOCI/AOCL):


	Three months ended September 30, 2021								Nine months ended September 30, 2021
(In thousands)	Securities Available For Sale		Derivative Instruments		Defined Benefit Pension and Other Postretirement Benefit Plans		Total		Securities Available For Sale		Derivative Instruments		Defined Benefit Pension and Other Postretirement Benefit Plans		Total
Beginning balance	$	35,598	$	13,894	$	(43,602)	$	5,890	$	67,424	$	19,918	$	(45,086)	$	42,256
Other comprehensive (loss) before reclassifications	(3,394)		(2,560)		—		(5,954)		(35,220)		(10,205)		—		(45,425)
Amounts reclassified from accumulated other comprehensive income (loss)	—		829		743		1,572		—		2,450		2,227		4,677
Net current-period other comprehensive (loss) income, net of tax	(3,394)		(1,731)		743		(4,382)		(35,220)		(7,755)		2,227		(40,748)
Ending balance	$	32,204	$	12,163	$	(42,859)	$	1,508	$	32,204	$	12,163	$	(42,859)	$	1,508


	Three months ended September 30, 2020								Nine months ended September 30, 2020
(In thousands)	Securities Available For Sale		Derivative Instruments		Defined Benefit Pension and Other Postretirement Benefit Plans		Total		Securities Available For Sale		Derivative Instruments		Defined Benefit Pension and Other Postretirement Benefit Plans		Total
Beginning balance	$	63,476	$	20,649	$	(42,680)	$	41,445	$	17,251	$	(9,184)	$	(44,139)	$	(36,072)
Other comprehensive income (loss) before reclassifications	11,766		(3,310)		—		8,456		57,997		23,655		—		81,652
Amounts reclassified from accumulated other comprehensive income (loss)	—		1,398		738		2,136		(6)		4,266		2,197		6,457
Net current-period other comprehensive income (loss), net of tax	11,766		(1,912)		738		10,592		57,991		27,921		2,197		88,109
Ending balance	$	75,242	$	18,737	$	(41,942)	$	52,037	$	75,242	$	18,737	$	(41,942)	$	52,037

The following table further details the amounts reclassified from AOCI (AOCL):


(In thousands)	Three months ended September 30,				Nine months ended September 30,				Associated Line Item on the Condensed Consolidated Statements of Income
AOCI (AOCL) Component	2021		2020		2021		2020
Securities available-for-sale:
Unrealized gains on investment securities	$	—	$	—	$	—	$	8	Gain on sale of investment securities, net


Tax expense	—		—		—		(2)		Income tax expense
Net of tax	$	—	$	—	$	—	$	6
Derivative instruments:
Hedge terminations	$	(1,046)	$	(967)	$	(3,088)	$	(3,228)	Interest expense
Premium amortization	(76)		(926)		(229)		(2,548)		Interest income
Tax benefit	293		495		867		1,510		Income tax expense
Net of tax	$	(829)	$	(1,398)	$	(2,450)	$	(4,266)
Defined benefit pension and other postretirement benefit plans:
Amortization of net loss	$	(1,008)	$	(1,002)	$	(3,023)	$	(2,982)	Other non-interest expense
Tax benefit	265		264		796		785		Income tax expense
Net of tax	$	(743)	$	(738)	$	(2,227)	$	(2,197)

Note 12: Regulatory 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 ACL, that together equal total capital.

The following table provides information on the capital ratios for Webster Financial Corporation and Webster Bank:


	At September 30, 2021
	Actual (1)				Minimum Requirement				Well Capitalized
(Dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
Webster Financial Corporation
CET1 risk-based capital	$	2,729,789	11.77	%	$	1,044,068	4.5	%	$	1,508,098	6.5	%
Total risk-based capital	3,200,180		13.79		1,856,121		8.0		2,320,151		10.0
Tier 1 risk-based capital	2,874,826		12.39		1,392,091		6.0		1,856,121		8.0
Tier 1 leverage capital	2,874,826		8.37		1,373,218		4.0		1,716,523		5.0
Webster Bank
CET1 risk-based capital	$	2,961,510	12.77	%	$	1,043,279	4.5	%	$	1,506,959	6.5	%
Total risk-based capital	3,209,544		13.84		1,854,719		8.0		2,318,399		10.0
Tier 1 risk-based capital	2,961,510		12.77		1,391,039		6.0		1,854,719		8.0
Tier 1 leverage capital	2,961,510		8.63		1,372,558		4.0		1,715,698		5.0


	At December 31, 2020
	Actual				Minimum Requirement				Well Capitalized
(Dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
Webster Financial Corporation
CET1 risk-based capital	$	2,543,131	11.35	%	$	1,008,512	4.5	%	$	1,456,739	6.5	%
Total risk-based capital	3,045,652		13.59		1,792,910		8.0		2,241,137		10.0
Tier 1 risk-based capital	2,688,168		11.99		1,344,682		6.0		1,792,910		8.0
Tier 1 leverage capital	2,688,168		8.32		1,291,980		4.0		1,614,975		5.0
Webster Bank
CET1 risk-based capital	$	2,791,474	12.46	%	$	1,008,027	4.5	%	$	1,456,039	6.5	%
Total risk-based capital	3,071,505		13.71		1,792,048		8.0		2,240,060		10.0
Tier 1 risk-based capital	2,791,474		12.46		1,344,036		6.0		1,792,048		8.0
Tier 1 leverage capital	2,791,474		8.65		1,291,415		4.0		1,614,268		5.0

(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 ACL 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 $160.0 million in dividends to Webster Financial Corporation during the nine months ended September 30, 2021, whereas no dividends were paid during the nine months ended September 30, 2020.

Cash Restrictions. Webster Bank is required by Federal Reserve System regulations to hold cash reserve balances on hand or with an FRB. 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.

Note 13: Earnings Per Common Share

A reconciliation of the calculation of basic and diluted earnings per common share is as follows:


	Three months ended September 30,				Nine months ended September 30,
(In thousands, except per share data)	2021		2020		2021		2020
Earnings for basic and diluted earnings per common share:
Net income	$	95,713	$	69,281	$	297,826	$	160,577
Less: Preferred stock dividends	1,968		1,968		5,906		5,906
Net income available to common shareholders	93,745		67,313		291,920		154,671
Less: Earnings applicable to participating securities (1)	574		423		1,661		913
Earnings applicable to common shareholders	$	93,171	$	66,890	$	290,259	$	153,758

Shares:
Weighted-average common shares outstanding - basic	90,038		89,630		89,960		90,076
Effect of dilutive securities	194		108		226		159
Weighted-average common shares outstanding - diluted	90,232		89,738		90,186		90,235

Earnings per common share (1):
Basic	$	1.03	$	0.75	$	3.23	$	1.71
Diluted	1.03		0.75		3.22		1.70

(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 no anti-dilutive stock options nor non-participating, performance-based restricted shares excluded from the effect of dilutive securities for the three months ended September 30, 2021, whereas there were 96 thousand anti-dilutive non-participating, performance-based restricted shares excluded for the three months ended September 30, 2020. For the nine months ended September 30, 2021 and 2020, respectively, there were 47 thousand and 125 thousand anti-dilutive non-participating, performance-based restricted shares excluded from the effect of dilutive securities.

Note 14: Derivative 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.

The following table presents the notional amounts and fair values, including accrued interest, of derivative positions:


	At September 30, 2021								At December 31, 2020
	Asset Derivatives				Liability Derivatives				Asset Derivatives				Liability Derivatives
(In thousands)	Notional Amounts		Fair Value		Notional Amounts		Fair Value		Notional Amounts		Fair Value		Notional Amounts		Fair Value
Designated as hedging instruments:
Interest rate derivatives (1)	$	1,000,000	$	26,923	$	—	$	—	$	1,000,000	$	40,854	$	25,000	$	110
Not designated as hedging instruments:
Interest rate derivatives (1)	4,434,047		178,749		4,360,615		17,566		4,421,627		297,085		4,468,153		12,203
Mortgage banking derivatives (2)	30,663		300		—		—		40,771		855		—		—
Other (3)	108,875		359		362,668		109		108,987		264		360,497		377
Total not designated as hedging instruments	4,573,585		179,408		4,723,283		17,675		4,571,385		298,204		4,828,650		12,580
Gross derivative instruments, before netting	$	5,573,585	206,331		$	4,723,283	17,675		$	5,571,385	339,058		$	4,853,650	12,690
Less: Master netting agreements			4,772				4,772				7,748				7,748
Cash collateral			28,679				2,731				33,972				4,550
Total derivative instruments, after netting			$	172,880			$	10,172			$	297,338			$	392

(1)Balances related to Chicago Mercantile Exchange (CME) 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 $0.3 billion and $0.1 billion for asset derivatives and $3.0 billion and $3.2 billion for liability derivatives at September 30, 2021 and December 31, 2020, respectively. The related fair values approximate zero.

(2)Notional amounts related to residential loans exclude approved floating rate commitments of $0.7 million at September 30, 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 $82.8 million and $80.5 million for asset derivatives and $355.1 million and $338.9 million for liability derivatives at September 30, 2021 and December 31, 2020, respectively, that have insignificant related fair values.

The following table presents fair value positions transitioned from gross to net upon applying contractual counterparty netting agreements:


	At September 30, 2021
(In thousands)	Gross Amount		Offset Amount		Net Amount on Balance Sheet		Amounts Not Offset		Net Amounts
Asset derivatives	$	33,451	$	33,451	$	—	$	100	$	100
Liability derivatives	7,503		7,503		—		701		701

	At December 31, 2020
(In thousands)	Gross Amount		Offset Amount		Net Amount on Balance Sheet		Amounts Not Offset		Net Amounts
Asset derivatives	$	41,774	$	41,720	$	54	$	666	$	720
Liability derivatives	12,352		12,298		54		265		319

Derivative Activity

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


	Recognized In	Three months ended September 30,				Nine months ended September 30,
(In thousands)	Net Interest Income	2021		2020		2021		2020




Interest rate derivatives	Long-term debt	$	90	$	1,152	$	334	$	3,501
Interest rate derivatives	Interest and fees on loans and leases	(2,706)		(2,657)		(7,933)		(3,754)
Net recognized on cash flow hedges		$	(2,616)	$	(1,505)	$	(7,599)	$	(253)

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


Condensed Consolidated Balance Sheet Line Item in Which Hedged Item is Located	Carrying Amount of Previously Hedged Item				Cumulative Amount of Fair Value Hedging Adjustment Included in Carrying Amount
(In thousands)	At September 30, 2021		At December 31, 2020		At September 30, 2021		At December 31, 2020
Long-term debt	$	340,149	$	344,164	$	40,149	$	44,164

The following table presents the effect on the income statement for derivatives not designated as hedging instruments:


	Recognized In	Three months ended September 30,				Nine months ended September 30,
(In thousands)	Non-interest Income	2021		2020		2021		2020
Interest rate derivatives	Other income	$	2,727	$	3,824	$	7,132	$	7,227
Mortgage banking derivatives	Mortgage banking activities	38		872		(556)		2,498
Other	Other income	611		(1,229)		780		(332)
Total not designated as hedging instruments		$	3,376	$	3,467	$	7,356	$	9,393

Purchased options designated as cash flow hedges exclude time-value premiums from the assessment of hedge effectiveness. Time-value premiums are amortized on a straight-line basis. At September 30, 2021, the remaining unamortized balance of time-value premiums was $7.8 million.

Over the next twelve months, an estimated $10.5 million decrease to interest expense will be reclassified from AOCI (AOCL) relating to cash flow hedges, and an estimated $0.3 million increase to interest expense will be reclassified from AOCI (AOCL) relating to hedge terminations. At September 30, 2021, the remaining unamortized loss on terminated cash flow hedges is $0.7 million. The maximum length of time over which forecasted transactions are hedged is 2.8 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 September 30, 2021, the Company had $63.0 million in initial margin collateral posted at CME. In addition, $29.4 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 $172.6 million at September 30, 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 $35.5 million at September 30, 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.

Note 15: Fair 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. The fair values presented for derivative instruments include any accrued interest. Foreign exchange contracts are valued based on unadjusted quoted prices in active markets and 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.

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:


	At September 30, 2021						At December 31, 2020
(In thousands)	Fair Value		Unpaid Principal Balance		Difference		Fair Value		Unpaid Principal Balance		Difference
Originated loans held for sale	$	10,032	$	9,926	$	106	$	14,000	$	13,511	$	489

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 (NAV), 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 $1.6 million at September 30, 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. At September 30, 2021, these alternative investments had a carrying amount of $1.3 million and no remaining unfunded commitment. During the nine months ended September 30, 2021, there was a $49 thousand write-down due to an observable price change.

Equity investments that do not have a readily available fair value may qualify for 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 September 30, 2021, these alternative investments had a remaining unfunded commitment of $15.4 million.

A summary of the financial assets and liabilities measured at fair value on a recurring basis is as follows:


	At September 30, 2021
(In thousands)	Level 1		Level 2		Level 3		Total
Financial assets held at fair value:

Agency CMO	$	—	$	105,783	$	—	$	105,783
Agency MBS	—		1,596,784		—		1,596,784
Agency CMBS	—		898,586		—		898,586
CMBS	—		770,086		—		770,086
CLO	—		24,967		—		24,967
Corporate debt	—		14,237		—		14,237
Total available-for-sale investment securities	—		3,410,443		—		3,410,443
Gross derivative instruments, before netting (1)	330		206,001		—		206,331
Originated loans held for sale	—		10,032		—		10,032
Investments held in Rabbi Trust	3,597		—		—		3,597
Alternative investments (2)	1,323		—		—		22,546
Total financial assets held at fair value	$	5,250	$	3,626,476	$	—	$	3,652,949
Financial liabilities held at fair value:
Gross derivative instruments, before netting (1)	$	38	$	17,637	$	—	$	17,675


	At December 31, 2020
(In thousands)	Level 1		Level 2		Level 3		Total
Financial assets held at fair value:

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

(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)Certain alternative investments are recorded at NAV. Assets measured at NAV are not classified within the fair value hierarchy.

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 September 30, 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 $23.2 million at September 30, 2021, which is inclusive of $3.9 million and $0.2 million measured at fair value where there were $3.3 million in write-ups due to observable price changes and a $0.3 million write-down due to impairment, respectively. No other adjustments were identified during the nine months ended September 30, 2021.

Transferred Loans Held For Sale. Certain loans are transferred to loans held for sale once a decision has been made to sell such loans. These loans are accounted for at the lower of cost or fair value and are considered to be recognized at fair value when they are recorded at below cost. This activity primarily consists of commercial loans with observable inputs and is classified within Level 2.

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 $2.4 million at September 30, 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 $11.2 million at September 30, 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.

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. Mortgage servicing assets are classified within Level 3 of the fair value hierarchy.

The carrying amounts, estimated fair values, and classifications within the fair value hierarchy of selected financial instruments and servicing assets are summarized as follows:


	At September 30, 2021				At December 31, 2020
(In thousands)	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Assets:
Level 2
Held-to-maturity investment securities, net	$	5,986,308	$	6,139,440	$	5,567,889	$	5,835,364
Level 3
Loans and leases, net	21,265,413		21,393,481		21,281,784		21,413,397
Mortgage servicing assets	10,167		13,032		13,422		14,362
Liabilities:
Level 2
Deposit liabilities	$	28,141,954	$	28,141,954	$	24,847,618	$	24,847,618
Time deposits	1,884,373		1,885,341		2,487,818		2,494,601
Securities sold under agreements to repurchase and other borrowings	655,871		660,146		995,355		1,000,189
FHLB advances	113,334		117,237		133,164		139,035
Long-term debt (1)	564,114		522,251		567,663		538,407

(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.

Note 16: Retirement Benefit Plans

Defined Benefit Pension and Other Postretirement Benefits

The following table summarizes the components of net periodic benefit (income) cost:


	Three months ended September 30,
	2021						2020
(In thousands)	Pension Plan		SERP		Other		Pension Plan		SERP		Other Benefits
Interest cost on benefit obligations	$	1,166	$	7	$	4	$	1,531	$	12	$	9
Expected return on plan assets	(3,595)		—		—		(3,380)		—		—
Recognized net loss (gain)	1,019		8		(20)		1,036		5		(38)
Net periodic benefit (income) cost	$	(1,410)	$	15	$	(16)	$	(813)	$	17	$	(29)



	Nine months ended September 30,
	2021						2020
(In thousands)	Pension Plan		SERP		Other Benefits		Pension Plan		SERP		Other Benefits
Interest cost on benefit obligations	$	3,498	$	20	$	12	$	4,881	$	35	$	34
Expected return on plan assets	(10,786)		—		—		(10,140)		—		—
Recognized net loss (gain)	3,058		25		(60)		3,021		17		(55)
Net periodic benefit (income) cost	$	(4,230)	$	45	$	(48)	$	(2,238)	$	52	$	(21)

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 and nine months ended September 30, 2021 was 5.50%, as determined at the beginning of the fiscal year.

Note 17: Segment Reporting

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. The previously reported Community Banking segment was also renamed as Retail Banking. Under this realignment, $131.0 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 PPNR, 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. ACL on loans and leases is included in total assets within the Corporate and Reconciling category.

The following table presents balance sheet information, including all appropriate allocations, for Webster's reportable segments and the Corporate and Reconciling category:


	At September 30, 2021
(In thousands)	Commercial Banking		HSA Bank		Retail Banking		Corporate and Reconciling		Consolidated Total
Goodwill	$	131,000	$	21,813	$	385,560	$	—	$	538,373
Total assets	14,862,455		74,236		7,538,017		12,899,550		35,374,258

	At December 31, 2020
(In thousands)	Commercial Banking		HSA Bank		Retail Banking		Corporate and Reconciling		Consolidated Total
Goodwill	$	131,000	$	21,813	$	385,560	$	—	$	538,373
Total assets	14,732,792		80,352		7,726,287		10,051,259		32,590,690

The following tables present the operating results, including all appropriate allocations, for Webster’s reportable segments and the Corporate and Reconciling category:



	Three months ended September 30, 2021
(In thousands)	Commercial Banking		HSA Bank		Retail Banking		Corporate and Reconciling		Consolidated Total
Net interest income	$	152,556	$	42,074	$	98,028	$	(62,967)	$	229,691
Non-interest income	30,076		24,756		16,998		11,945		83,775
Non-interest expense	64,917		32,800		73,480		9,040		180,237
Pre-tax, pre-provision net revenue	117,715		34,030		41,546		(60,062)		133,229
Provision for credit losses	5,099		—		2,799		(148)		7,750
Income before income tax expense	112,616		34,030		38,747		(59,914)		125,479
Income tax expense	28,492		9,086		8,524		(16,336)		29,766
Net income	$	84,124	$	24,944	$	30,223	$	(43,578)	$	95,713



	Three months ended September 30, 2020
(In thousands)	Commercial Banking		HSA Bank		Retail Banking		Corporate and Reconciling		Consolidated Total
Net interest income	$	132,026	$	39,861	$	83,609	$	(36,240)	$	219,256
Non-interest income	20,710		27,235		21,359		5,756		75,060
Non-interest expense	66,482		34,789		80,119		2,606		183,996
Pre-tax, pre-provision net revenue	86,254		32,307		24,849		(33,090)		110,320
Provision for credit losses	31,753		—		(9,000)		(3)		22,750
Income before income tax expense	54,501		32,307		33,849		(33,087)		87,570
Income tax expense	13,299		8,626		7,379		(11,015)		18,289
Net income	$	41,202	$	23,681	$	26,470	$	(22,072)	$	69,281



	Nine months ended September 30, 2021
(In thousands)	Commercial Banking		HSA Bank		Retail Banking		Corporate and Reconciling		Consolidated Total
Net interest income	$	435,718	$	126,376	$	279,381	$	(167,168)	$	674,307
Non-interest income	80,966		78,315		49,832		24,121		233,234
Non-interest expense	191,198		101,842		221,950		40,257		$	555,247
Pre-tax, pre-provision net revenue	325,486		$	102,849	107,263		(183,304)		352,294
Provision for credit losses	(37,602)		—		(1,833)		(65)		(39,500)
Income before income tax expense	363,088		102,849		109,096		(183,239)		391,794
Income tax expense	91,861		27,461		24,001		(49,355)		93,968
Net income	$	271,227	$	75,388	$	85,095	$	(133,884)	$	297,826



	Nine months ended September 30, 2020
(In thousands)	Commercial Banking		HSA Bank		Retail Banking		Corporate and Reconciling		Consolidated Total
Net interest income	$	377,736	$	121,868	$	246,417	$	(71,557)	$	674,464
Non-interest income	64,975		76,721		56,083		10,735		208,514
Non-interest expense	192,964		105,887		237,528		3,037		539,416
Pre-tax, pre-provision net revenue	249,747		92,702		64,972		(63,859)		343,562
Provision for credit losses	144,340		—		(5,499)		(91)		138,750
Income before income tax expense	105,407		92,702		70,471		(63,768)		204,812
Income tax expense	25,720		24,751		15,362		(21,598)		44,235
Net income	$	79,687	$	67,951	$	55,109	$	(42,170)	$	160,577

Note 18: Revenue from Contracts with Customers

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:


	Three months ended September 30, 2021
(In thousands)	Commercial Banking		HSA Bank		Retail Banking		Corporate and Reconciling		Consolidated Total
Non-interest Income:
Deposit service fees	$	4,207	$	22,886	$	13,078	$	87	$	40,258
Wealth and investment services	9,993		—		—		(8)		9,985
Other	361		1,870		265		—		2,496
Revenue from contracts with customers	14,561		24,756		13,343		79		52,739
Other sources of non-interest income	15,515		—		3,655		11,866		31,036
Total non-interest income	$	30,076	$	24,756	$	16,998	$	11,945	$	83,775


	Three months ended September 30, 2020
(In thousands)	Commercial Banking		HSA Bank		Retail Banking		Corporate and Reconciling		Consolidated Total
Non-interest Income:
Deposit service fees	$	3,615	$	23,667	$	11,972	$	24	$	39,278
Wealth and investment services	8,234		—		—		21		8,255
Other	277		3,568		249		—		4,094
Revenue from contracts with customers	12,126		27,235		12,221		45		51,627
Other sources of non-interest income	8,584		—		9,138		5,711		23,433
Total non-interest income	$	20,710	$	27,235	$	21,359	$	5,756	$	75,060



	Nine months ended September 30, 2021
(In thousands)	Commercial Banking		HSA Bank		Retail Banking		Corporate and Reconciling		Consolidated Total
Non-interest Income:
Deposit service fees	$	12,412	$	72,382	$	37,115	$	257	$	122,166
Wealth and investment services	29,501		—		—		(26)		29,475
Other	939		5,933		814		—		7,686
Revenue from contracts with customers	42,852		78,315		37,929		231		159,327
Other sources of non-interest income	38,114		—		11,903		23,890		73,907
Total non-interest income	$	80,966	$	78,315	$	49,832	$	24,121	$	233,234



	Nine months ended September 30, 2020
(In thousands)	Commercial Banking		HSA Bank		Retail Banking		Corporate and Reconciling		Consolidated Total
Non-interest Income:
Deposit service fees	$	10,969	$	70,250	$	36,460	$	8	$	117,687
Wealth and investment services	24,120		—		—		(24)		24,096
Other	896		6,471		687		—		8,054
Revenue from contracts with customers	35,985		76,721		37,147		(16)		149,837
Other sources of non-interest income	28,990		—		18,936		10,751		58,677
Total non-interest income	$	64,975	$	76,721	$	56,083	$	10,735	$	208,514

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.

Note 19: Commitments 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.

The following table summarizes the outstanding amounts of credit-related financial instruments with off-balance sheet risk:


(In thousands)	At September 30, 2021		At December 31, 2020
Commitments to extend credit	$	6,953,871	$	6,517,840
Standby letters of credit	220,895		207,201
Commercial letters of credit	49,783		30,522
Total credit-related financial instruments with off-balance sheet risk	$	7,224,549	$	6,755,563

These commitments subject the Company to potential exposure in excess of amounts recorded in the financial statements, and therefore, management maintains an ACL 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 ACL on unfunded loan commitments:


	Three months ended September 30,				Nine months ended September 30,
(In thousands)	2021		2020		2021		2020
Beginning balance	$	11,974	$	10,739	$	12,755	$	2,367
Adoption of ASU No. 2016-13 (CECL)	—		—		—		9,139
(Benefit) provision	196		1,146		(585)		379
Ending balance	$	12,170	$	11,885	$	12,170	$	11,885

Litigation

The Company is subject to certain legal proceedings and claims in the ordinary course of business. Legal contingencies are evaluated based on information currently available, including advice of counsel and assessment of available insurance coverage. The Company 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. Once established, each accrual is adjusted to reflect any subsequent developments.

Legal proceedings are subject to inherent uncertainties, and unfavorable rulings may occur that could cause Webster to either adjust its litigation accrual or incur actual losses that exceed the current estimate, which ultimately could have a material adverse effect, either individually or in the aggregate, on its business, financial condition, or operating results. Webster will consider settlement of cases when it is in the best interests of the Company and its shareholders. However, the Company intends

to defend itself in all claims asserted against it, and management currently believes that the outcome of these proceedings will not be material, either individually or in the aggregate, to Webster or its consolidated financial position.

Note 20: Subsequent Events

The Company has evaluated subsequent events from the date of the Condensed Consolidated Financial Statements and accompanying Notes thereto, September 30, 2021, through the date of issuance, and determined that no significant events were identified requiring recognition or disclosure.

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, and in 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 September 30, 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 September 30, 2021, that materially affected, or would be reasonably likely to materially affect, the Company's internal control over financial reporting.

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. While the requisite shareholder approvals have been obtained, other 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 could 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 consequently, its results could suffer.

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

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 have incurred, and will continue to 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 September 30, 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)
July	1,301	$	47.90	—	$	123,443,785
August	312	50.84		—	123,443,785
September	3,731	48.76		—	123,443,785
Total	5,344	48.67		—	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 $200.0 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

ITEM 6. EXHIBITS

A list of exhibits to this Form 10-Q is set forth below.

Exhibit Number

Exhibit Description

Exhibit Included

Incorporated by Reference

Form

Exhibit

Filing Date

Agreement and Plan of Merger, dated as of April 18, 2021, by and between Sterling Bancorp and Webster Financial Corporation

8-K

2.1

4/23/2021

Certificate of Incorporation and Bylaws.

3.1

Fourth Amended and Restated Certificate of Incorporation

10-Q

3.1

8/9/2016

3.2

Certificate of Designations establishing the rights of the Company's 8.50% Series A Non-Cumulative Perpetual Convertible Preferred Stock

8-K

3.1

6/11/2008

3.3

Certificate of Designations establishing the rights of the Company's Fixed Rate Cumulative Perpetual Preferred Stock, Series B

8-K

3.1

11/24/2008

3.4

Certificate of Designations establishing the rights of the Company's Perpetual Participating Preferred Stock, Series C

8-K

3.1

7/31/2009

3.5

Certificate of Designations establishing the rights of the Company's Non-Voting Perpetual Participating Preferred Stock, Series D

8-K

3.2

7/31/2009

3.6

Certificate of Designations establishing the rights of the Company's 6.40% Series E Non-Cumulative Perpetual Preferred Stock

8-A12B

3.3

12/4/2012

3.7

Certificate of Designations establishing the rights of the Company's 5.25% Series F Non-Cumulative Perpetual Preferred Stock

8-A12B

3.3

12/12/2017

3.8

Bylaws, as amended effective March 15, 2020

8-K

3.1

3/17/2020

31.1

Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, signed by the Chief Executive Officer.

31.2

Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, signed by the Chief Financial Officer.

32.1

Written statement pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by the Chief Executive Officer.

X (1)

32.2

Written statement pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by the Chief Financial Officer.

X (1)

101

The following financial information from the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 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.

104

Cover Page Interactive Data File (formatted as iXBRL and contained in Exhibit 101)

(1)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.

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.

WEBSTER FINANCIAL CORPORATION

Registrant

Date: November 3, 2021

By:

/s/ John R. Ciulla

John R. Ciulla

Chairman, President and Chief Executive Officer

(Principal Executive Officer)

Date: November 3, 2021

By:

/s/ Glenn I. MacInnes

Glenn I. MacInnes

Executive Vice President and Chief Financial Officer

(Principal Financial Officer)

Date: November 3, 2021

By:

/s/ Albert J. Wang

Albert J. Wang

Executive Vice President and Chief Accounting Officer

(Principal Accounting Officer)