WEBSTER FINANCIAL CORP (WBS) FY 2021 MD&A

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Introduction

This discussion and analysis provides information that management believes is necessary to understand the Company's financial condition, changes in financial condition, results of operations, and cash flows for the fiscal year ended December 31, 2021 as compared to 2020. The following information should be read in conjunction with Webster Financial Corporation's Consolidated Financial Statements and the accompanying Notes to the Consolidated Financial Statements contained in Part II - Item 8. Financial Statements and Supplementary Data of this Form 10-K, as well as other information set forth throughout this report. For discussion and analysis over the Company's 2020 results as compared to 2019, and other 2019 information, refer to Part II - Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020 filed with the SEC on February 26, 2021.

Recent Developments

Mergers and Acquisitions

Effective January 31, 2022, Webster completed its previously announced merger with Sterling pursuant to an Agreement and Plan of Merger dated as of April 18, 2021. The total aggregate consideration payable in the merger was approximately 90 million shares of Webster common stock. Pursuant to the merger agreement, Sterling merged with and into Webster, with Webster continuing as the surviving corporation. Following the merger, on February 1, 2022, Sterling National Bank, a wholly-owned subsidiary of Sterling, merged with and into Webster Bank, with Webster Bank continuing as the surviving bank. Sterling was a full-service regional bank headquartered in Pearl River, New York, that primarily served the Greater New York metropolitan area. The merger expanded Webster's geographic footprint and combined two complementary organizations to create one of the largest commercial banks in the Northeastern U.S.

At the effective time of the merger, each share of Sterling common stock outstanding, other than certain shares held by Webster and Sterling, was converted into the right to receive a fixed 0.4630 share of Webster common stock. In addition, at the effective time of the merger, each outstanding share of Sterling 6.50% Series A Non-Cumulative Perpetual Preferred Stock was converted into the right to receive one share of newly created Webster 6.50% Series G Non-Cumulative Perpetual Preferred Stock, having substantially the same terms. At the close of the merger, Webster shareholders owned 50.4% of the combined company, and Sterling shareholders owned 49.6% of the combined company.

During the year ended December 31, 2021, Webster incurred merger-related expenses totaling $37.5 million, which consisted primarily of professional fees for investment banking, legal, and consulting, and employee severance and retention costs. The combined company has approximately $65 billion in assets, $44 billion in loans, and $53 billion in deposits based on balances at December 31, 2021 and operates 202 financial centers across the Northeast region.

In addition, on February 18, 2022, Webster acquired 100% of the equity interests of Bend Financial, Inc. (Bend), a cloud-based platform solution provider for HSAs, in exchange for cash. The acquisition accelerates Webster’s efforts underway to deliver enhanced user experiences at HSA Bank.

Additional information regarding Webster's mergers and acquisitions can be found within Note 3: Business Developments in the Notes to Consolidated Financial Statements contained in Part II - Item 8. Financial Statements and Supplementary Data.

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. At December 31, 2021, key project milestones have been completed, including the completion of all planned banking center closures, the delivery of a new digital onboarding platform for retail consumers, an investment in foundational technology modernization, and the realignment of certain business banking and investment service operations across the Company's reportable segments. These initiatives collectively contributed to the realization of operational efficiencies and ancillary spend reductions in 2021. As a result of Webster's merger with Sterling, various strategic initiatives were paused in 2021 but are expected to still be delivered throughout the merger integration period. In the second quarter of 2022, the Company plans to launch a new HSA Bank digital experience for employers, with consumers to follow thereafter.

During the year ended December 31, 2021, Webster incurred net strategic initiatives costs of $7.2 million, comprised of a net $4.8 million in professional and outside services, $3.5 million in occupancy, and $0.5 million in technology and equipment, partially offset by a net $1.6 million benefit in compensation and benefits. During the third quarter of 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 employee retention assumptions.

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Additional information regarding the financial statement impact of these strategic initiatives, as well as further details specific to the Company's segment changes, can be found in Part II within Note 3: Business Developments and Note 21: Segment Reporting, respectively, in the Notes to Consolidated Financial Statements contained in Item 8. Financial Statements and Supplementary Data, and the section captioned "Segment Reporting" contained elsewhere in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

COVID-19 Update

During 2021, the United States' economy began to recover from the COVID-19 pandemic, as the increased availability and distribution of COVID-19 vaccines allowed for the easing of restrictive measures that had previously been imposed by state and local governments. Despite these improvements, certain adverse effects of the COVID-19 pandemic may continue to impact the macroeconomic environment for some time, including labor shortages, disruptions to global supply chains, and rising inflationary pressures. These effects are anticipated to continue throughout 2022 but remain uncertain and difficult to predict, including any impact to Webster's business, liquidity, financial condition, and results of operations.

In 2020, the Federal Reserve reduced interest rates to near zero in response to the effects of the COVID-19 pandemic. However, in response to inflationary pressures, the FRB has announced that it will begin to taper its purchase of mortgage and other bonds. Webster expects interest rates to gradually and slowly rise over the course of the next year, but the timing and impact of the reversal in interest rate trends is unknown at this time.

Results of Operations

The following table summarizes selected financial highlights and key performance indicators:

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Non-GAAP Financial Measures

The non-GAAP financial measures identified in the preceding table provide both management and investors with information useful in understanding Webster's financial position, operating results, the 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 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.

Tangible book value per common share represents shareholders’ equity less preferred stock and goodwill and other intangible assets divided by common shares outstanding at the end of the period. The tangible common equity ratio represents shareholders’ equity less preferred stock, goodwill, and other intangible assets, divided by total assets less goodwill and other intangible assets. Both of these measures are 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 average other intangible assets. This measure is used by management to assess Webster's performance against 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 basis financial measures. Because non-GAAP financial measures are not standardized, it may not be possible to compare these with other companies that present financial measures having the same or similar names.

The following tables reconcile non-GAAP financial measures to the most comparable financial measures defined by GAAP:

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(1)Other expense includes debt prepayments costs in 2021 and business and facility optimization charges in 2019.

(2)Other income includes low income housing tax credits for all periods presented and a $5.5 million discrete customer derivative fair value adjustment in 2020.

Net Interest Income

Net interest income is Webster's primary source of revenue, representing 73.6%, 75.8%, and 77.0% of total revenues for the years ended December 31, 2021, 2020, and 2019, respectively, and is the difference between interest income on interest-earning assets, such as loans and investment securities, and interest expense on interest-bearing liabilities, such as deposits and borrowings, which are used to fund interest-earnings assets and other activities. Net interest margin is calculated as the ratio of tax-equivalent net interest income to average interest-earning assets. Tax-equivalent adjustments are determined assuming a statutory federal income tax rate of 21%.

Net interest income and net interest margin are influenced by the volume and mix of interest-earning assets and interest-bearing liabilities, changes in interest rate levels, re-pricing frequencies, contractual maturities, prepayment behavior, and the use of interest rate derivative financial instruments. These factors are affected by changes in economic conditions which, in turn, impacts monetary policies, competition for loans and deposits, as well as the extent of interest lost on non-performing assets.

Net interest income increased $9.7 million, or 1.1%, from $891.4 million for the year ended December 31, 2020 to $901.1 million for the year ended December 31, 2021. The increase is primarily attributed to funding optimization and balance sheet growth in the continued low interest rate environment. On a fully tax-equivalent basis, net interest income increased $9.3 million from 2020 to 2021.

Net interest margin decreased 16 basis points from 3.00% for the year ended December 31, 2020 to 2.84% for the year ended December 31, 2021. The decrease is primarily attributed to lower loan and securities yields, partially offset by lower deposit and borrowings costs and higher Small Business Administration Paycheck Protection Program (PPP) loan fee accretion.

Average interest-earning assets increased $2.0 billion, or 6.7%, from $30.3 billion for the year ended December 31, 2020 to $32.3 billion for the year ended December 31, 2021, primarily due to increases of $0.2 billion, $0.6 billion, and $1.3 billion in average loans and leases, taxable and non-taxable investment securities, and interest-bearing deposits held at the FRB, respectively. The average yield on interest-earning assets decreased 40 basis points from 3.37% during 2020 to 2.97% during 2021, primarily due to lower market rates, partially offset by the aforementioned increases in average earning balances.

Average interest-bearing liabilities increased $1.8 billion, or 6.4%, from $28.6 billion for the year ended December 31, 2020 to $30.4 billion for the year ended December 31, 2021, primarily due to an increase of $3.2 billion in average deposits, partially offset by decreases of $0.7 billion and $0.6 billion in federal funds purchased and FHLB advances, respectively. The average rate on interest-bearing liabilities decreased 25 basis points from 0.39% during 2020 to 0.14% during 2021, primarily due to borrowings mix and lower market rates.

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The following table summarizes daily average balances, interest, and average yield/rate by major category, and net interest margin on a fully tax-equivalent basis:

(1)Non-accrual loans have been included in the computation of average balances.

(2)For the purposes of our yield/rate and margin computations, unsettled trades on securities available-for-sale and unrealized gain (loss) balances on securities available-for-sale and senior fixed-rate notes hedges are excluded.

(3)Interest-bearing deposits are a component of cash and cash equivalents on the Consolidated Statements of Cash Flows included in Part II - Item 8. Financial Statements and Supplementary Data.

(4)In 2020, the Federal Reserve extended credit to Webster under the Paycheck Protection Program Liquidity Facility as the Bank was eligible to receive funds as a participating lender of PPP loans. The Bank had settled its obligation as of the third quarter of 2020.

(5)Tax-equivalent net interest margin equals net interest margin for all periods presented.

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The following table summarizes the change in net interest income attributable to changes in rate and volume, and reflects net interest income on a fully tax-equivalent basis:

(1)The change attributable to mix, a combined impact of rate and volume, is included with the change due to rate.

Average loans and leases increased $0.2 billion, or 0.9%, from $21.4 billion for the year ended December 31, 2020 to $21.6 billion for the year ended December 31, 2021, primarily due to higher commercial loan growth offset by the decrease in PPP loans. At December 31, 2021 and 2020, the loan and lease portfolio comprised 66.9% and 70.7% of total average interest-earning assets. The average yield on loans and leases decreased 16 basis points from 3.71% during 2020 to 3.55% during 2021, primarily due to decreased prepayments and lower market rates.

Average taxable and non-taxable investment securities increased $0.6 billion, or 6.7%, from $8.6 billion for the year ended December 31, 2020 to $9.2 billion for the year ended December 31, 2021, primarily due to purchases exceeding paydowns and maturities in both the AFS and HTM portfolios, as a result of the Company's strategic decision to deploy its excess funds into higher yielding assets which, in turn, increased its investment portfolios. At both December 31, 2021 and 2020, the investment securities portfolio comprised 28.6% of total average interest-earning assets. The average yield on investment securities decreased 53 basis points from 2.56% during 2020 to 2.03% during 2021, primarily due to higher premium amortization and lower interest rates on newly purchased securities.

Average interest-bearing deposits held at the FRB increased $1.3 billion, or 1,382.7%, from $0.1 billion for the year ended December 31, 2020 to $1.4 billion for the year ended December 31, 2021, primarily due to excess customer liquidity as a result of government stimulus and reduced spending. At December 31, 2021 and 2020, interest-bearing deposits comprised 4.3% and 0.3% of total average interest-earning assets. The average yield on interest-bearing deposits decreased 12 basis points from 0.26% during 2020 to 0.14% during 2021, primarily due to lower market rates.

Average deposits increased $3.2 billion, or 12.3%, from $26.0 billion for the year ended December 31, 2020 to $29.2 billion for the year ended December 31, 2021, reflecting increases of $1.2 billion and $2.0 billion in non-interest-bearing deposits and interest-bearing deposits, respectively. The overall increase in deposits was driven by transactional deposit products resulting from government stimulus and reduced customer spending. At December 31, 2021 and 2020, deposits comprised 96.0% and 91.0% of total average interest-bearing liabilities, respectively. The average rate on deposits decreased 19 basis points from 0.26% during 2020 to 0.07% during 2021, primarily due to deposit pricing and product mix. Higher cost time deposits as a percentage of total interest-bearing deposits decreased from 13.6% for the year ended December 31, 2020 to 9.4% for the year ended December 31, 2021, primarily due to customers' migration to more liquid deposit products.

Average securities sold under agreements to repurchase increased $59.8 million, or 12.8%, from $467.4 million for the year ended December 31, 2020 to $527.2 million for the year ended December 31, 2021, primarily due to the timing of additional short-term borrowings and contractual maturities. At December 31, 2021 and 2020, securities sold under agreements to repurchase comprised 1.7% and 1.6% of total average interest-bearing liabilities. The average rate on securities sold under agreements to repurchase increased 9 basis points from 0.48% during 2020 to 0.57% during 2021, primarily due to an increase in cost on long-term borrowings, partially offset by lower market rates.

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Average federal funds purchased decreased $705.0 million, or 97.8%, from $721.0 million for the year ended December 31, 2020 to $16.0 million for the year ended December 31, 2021, due to contractual maturities in the first quarter of 2021 and the strategic decision to not purchase federal funds during the remainder of the period. At December 31, 2021 and 2020, federal funds purchased comprised 0.1% and 2.5% of total average interest-bearing liabilities. The average rate on federal funds purchased decreased 38 basis points from 0.46% during 2020 to 0.08% during 2021, which was also due to the aforementioned contractual maturities and current period borrowings mix.

Average FHLB advances decreased $621.9 million, or 85.2%, from $730.1 million for the year ended December 31, 2020 to $108.2 million for the year ended December 31, 2021, due to prepayments of higher costing FHLB advances in the current period enabled by excess liquidity. At December 31, 2021 and 2020, FHLB advances comprised 0.4% and 2.6% of total average interest-bearing liabilities. The average rate on FHLB advances decreased 99 basis points from 2.57% during 2020 to 1.58% during 2021, which was also due to the aforementioned prepayments of higher costing FHLB advances.

Provision for Credit Losses

The provision for credit losses decreased $192.3 million, or 139.6%, from an expense of $137.8 million for the year ended December 31, 2020 to a benefit of $54.5 million for the year ended December 31, 2021. The decrease is primarily attributed to improvements in the forecasted economic outlook and favorable credit trends, which were negatively affected by the emergence of the COVID-19 pandemic in 2020 and resulted in a release of reserves in 2021, partially offset by reserves on newly originated loans and leases. During the years ended December 31, 2021 and 2020, total net charge-offs were $3.8 million and $45.1 million, respectively. The $41.3 million decrease from 2020 to 2021 is primarily attributed to a reduced volume of charge-offs in the commercial non-mortgage portfolio.

Additional information regarding the Company's provision for credit losses and ACL can be found under the the sections captioned "Loans and Leases" through "Allowance for Credit Losses" contained elsewhere in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Non-Interest Income

Total non-interest income increased $38.1 million, or 13.4%, from $285.3 million for the year ended December 31, 2020 to $323.4 million for the year ended December 31, 2021, primarily due to increases in deposit service fees, loan and lease related fees, wealth and investment services, and other income, partially offset by a decrease in mortgage banking activities.

Deposit service fees increased $6.7 million, or 4.3%, from $156.0 million during 2020 to $162.7 million during 2021, primarily due to higher interchange, cash management, and wire transfer fees, partially offset by lower checking account service fees.

Loan and lease related fees increased $7.5 million, or 25.9%, from $29.1 million during 2020 to $36.6 million during 2021, primarily due to higher syndication and line usage fees, and mortgage service rights amortization.

Wealth and investment services increased $6.7 million, or 20.3%, from $32.9 million during 2020 to $39.6 million during 2021, primarily due to an increase in customer-driven investment services activity.

Mortgage banking activities decreased $12.1 million, or 66.0%, from $18.3 million during 2020 to $6.2 million during 2021, primarily due to lower volume, as the Company made the strategic decision to originate residential mortgage loans for investment rather than for sale during 2021.

Other income increased $29.4 million, or 85.7%, from $34.3 million during 2020 to $63.7 million during 2021, primarily due to realized gains and fair value adjustments on direct investments and gains on sale of commercial loans not originated for sale.

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Non-Interest Expense

Total non-interest expense decreased $13.8 million , or 1.8%, from $758.9 million for the year ended December 31, 2020 to $745.1 million for the year ended December 31, 2021, primarily due to decreases in compensation and benefits, occupancy, marketing, and deposit insurance, partially offset by an increase in professional and outside services.

Compensation and benefits decreased $8.4 million, or 2.0%, from $428.4 million during 2020 to $420.0 million during 2021, primarily due to the effects of the Company's strategic initiatives, partially offset by merger-related retention and severance charges and increases in performance and variable-based compensation.

Occupancy decreased $15.7 million, or 22.1%, from $71.0 million during 2020 to $55.3 million during 2021, primarily due to higher prior period right-of-use (ROU) asset impairment charges and a decline in rent expense resulting from the effects of the Company's strategic initiatives.

Marketing decreased $2.1 million, or 14.7%, from $14.1 million during 2020 to $12.0 million during 2021, primarily due to reductions in ancillary spending, including advertising and promotional fees.

Professional and outside services increased $14.8 million, or 45.7%, from $32.4 million during 2020 to $47.2 million during 2021, primarily due to current period merger-related expenses, partially offset by higher prior period strategic initiative charges.

Deposit insurance decreased $2.5 million, or 13.8%, from $18.3 million during 2020 to $15.8 million during 2021, primarily due to excess cash held at the FRB throughout the majority of 2021, which was strategically redeployed in the fourth quarter.

Income Taxes

Webster recognized income tax expense of $125.0 million for the year ended December 31, 2021 and $59.4 million for the year ended December 31, 2020, reflecting effective tax rates of 23.4% and 21.2%, respectively.

The $65.6 million increase in income tax expense is due to a higher level of pre-tax income in 2021 as compared to 2020. The 2.2% point increase in the effective tax rate from 2020 to 2021 primarily reflects the effects of higher pre-tax income in 2021, and $16.4 million of the total $37.5 million in merger-related expenses recognized during the current period that were estimated to be nondeductible for income tax purposes. Those effects were partially offset by the recognition of $3.3 million in net discrete tax benefits specific to the year ended December 31, 2021, which included $1.9 million of excess tax benefits from stock-based compensation, as compared to $0.1 million in net discrete tax benefits specific to the year ended December 31, 2020, which included tax deficiencies of $0.6 million from stock-based compensation.

At both December 31, 2021 and 2020, Webster recorded a valuation allowance on its DTAs of $37.4 million. Webster's valuation allowance is related to the portion of its state and local tax (SALT) net operating loss carryforwards that, in management's judgment, is not more likely than not to be realized. At December 31, 2021 and 2020, Webster's gross DTAs included $64.4 million and $66.8 million, respectively, applicable to SALT net operating loss and credit carryforwards that are available to offset future taxable income through 2032.

The ultimate realization of those DTAs is dependent on the generation of future taxable income during the periods in which the net operating loss and credit carryforwards are available. In making its assessment, management considers the Company's forecasted future results of operations, estimates the content and apportionment of its income by legal entity over the near term for SALT purposes, and also applies longer-term growth rate assumptions. Based on its estimates, management believes it is more likely than not that the Company will realize its DTAs, net of the valuation allowance, at December 31, 2021. However, it is possible that some or all of Webster's net operating loss carryforwards could expire unused or that more net operating loss carryforwards could be utilized than estimated, either as a result of changes in future forecasted levels of taxable income for SALT purposes due to the merger with Sterling, or if future economic or market conditions or interest rates were to vary significantly from the Company's forecasts and, in turn, impact its future results of operations.

Additional information regarding the Company's income taxes, including DTAs, can be found within Note 10: Income Taxes in the Notes to Consolidated Financial Statements contained in Part II - Item 8. Financial Statements and Supplementary Data.

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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. Additional information regarding the Company's reportable segments and its segment reporting methodology at December 31, 2021 can be found within Note 21: Segment Reporting in the Notes to Consolidated Financial Statements contained in Part II - Item 8. Financial Statements and Supplementary Data.

Effective January 1, 2021, management realigned certain of Webster's Business Banking and investment services operations to better serve its customers and deliver operational efficiencies. Under this realignment, the previously reported Community Banking segment was renamed Retail Banking, and $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.

Beginning in the first quarter of 2022, Webster's reportable segment structure will also reflect the operations of businesses acquired in connection with the Company's merger with Sterling. The following is a description of Webster’s three reportable segments and their primary services at December 31, 2021:

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, Sponsor and Specialty Finance, and Treasury and Payment Solutions 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 251 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.

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Commercial Banking

Operating Results:

Commercial Banking's PPNR increased $97.7 million, or 28.4%, for the year ended December 31, 2021 as compared to the year ended December 31, 2020, due to increases in both net interest income and non-interest income, and a decrease in non-interest expense. The $72.5 million increase in net interest income is primarily attributed to loan and deposit growth and PPP loan fee acceleration associated with PPP loan forgiveness. The $21.8 million increase in non-interest income is primarily attributed to higher trust and investment service fees, fair value adjustments on direct investments, gains on sale of commercial loans not originated for sale, syndication fees, and unused line fees. The $3.5 million decrease in non-interest expense is primarily attributed to lower support costs.

Selected Balance Sheet and Off-Balance Sheet Information:

Loans and leases increased $636.2 million, or 4.4%, at December 31, 2021 as compared to December 31, 2020, primarily due to commercial non-mortgage and commercial real estate portfolio originations, partially offset by increased prepayment activity and a decrease in PPP loans. Total portfolio originations for the years ended December 31, 2021 and 2020 were $5.7 billion and $5.1 billion, respectively. The increase was primarily attributed to increased commercial real estate and commercial non-mortgage originations, partially offset by lower PPP loan fundings.

Deposits increased $1.5 billion, or 17.7%, at December 31, 2021 as compared to December 31, 2020, primarily due to excess customer liquidity as a result of government stimulus and reduced spending.

Commercial Banking held $5.1 billion and $4.7 billion in assets under administration and $2.1 billion and $1.9 billion in assets under management at December 31, 2021 and 2020, respectively. The combined $616.5 million, or 9.4%, increase from 2020 to 2021 was primarily due to new business and market appreciation.

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HSA Bank

Operating Results:

HSA Bank's pre-tax net revenue increased $12.9 million, or 10.5%, for the year ended December 31, 2021 as compared to the year ended December 31, 2020, due to increases in both net interest income and non-interest income, and a decrease in non-interest expense. The $6.2 million increase in net interest income is primarily attributed to deposit growth. The $2.0 million increase in non-interest income is primarily attributed to increased interchange and investment revenues, partially offset by a decrease in third-party administrator account closures fees. The $4.6 million decrease in non-interest expense is primarily attributed to lower compensation and benefits, postage and statement costs, travel and entertainment, occupancy, and supply costs.

Selected Balance Sheet and Off-Balance Sheet Information:

Deposits increased $278.0 million, or 3.9%, at December 31, 2021 as compared to December 31, 2020, primarily due to an increase in the number of account holders and organic deposit growth. HSA deposits accounted for approximately 24.8% and 26.0% of Webster's total consolidated deposits at December 31, 2021 and December 31, 2020, respectively.

Assets under administration, through linked brokerage accounts, increased $865.7 million, or 30.3%, at December 31, 2021 as compared to December 31, 2020, primarily due to the increased number of account holders, specifically those with investment accounts, and market appreciation during the year ended December 31, 2021.

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Retail Banking

Operating Results:

Retail Banking's PPNR increased $55.3 million, or 62.3%, for the year ended December 31, 2021 as compared to the year ended December 31, 2020, due to an increase in net interest income and a decrease in non-interest expense, offset by a decrease in non-interest income. The $41.3 million increase in net interest income is primarily attributed to deposit growth, lower interest rates on deposits, and PPP loan fee acceleration associated with PPP loan forgiveness, partially offset by lower interest rates on loans. The $7.0 million decrease in non-interest income is primarily attributed to lower mortgage banking fee income, partially offset by higher deposit service fees, loan servicing fees, and credit card and merchant services fee income. The $21.0 million decrease in non-interest expense is primarily attributed to lower employee-related, occupancy, technology and equipment, and marketing expenses.

Selected Balance Sheet Information:

Loans decreased $5.6 million, or 0.1%, at December 31, 2021 as compared to December 31, 2020, primarily due to net principal paydowns within the home equity credit line and loan portfolios, accelerated PPP loan forgiveness paydowns, and the continued run-off of consumer lending club loans, partially offset by higher residential mortgage loan balances. Total portfolio originations for the years ended December 31, 2021 and 2020 were $3.2 billion and $2.7 billion, respectively. The increase was primarily attributed to increased residential mortgage and home equity originations, partially offset by lower PPP loan fundings.

Deposits increased $778.2 million, or 6.5%, at December 31, 2021 as compared to December 31, 2020, primarily due to customer PPP loan funding, other stimulus effects, and lower customer spending, resulting in higher balances in small business and consumer transaction accounts. In addition, Retail Banking experienced increases in savings and money market balances as account holders with maturing certificates of deposits migrated to more liquid deposit products.

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Financial Condition

Total assets increased $2.3 billion, or 7.1%, from $32.6 billion at December 31, 2020 to $34.9 billion at December 31, 2021. The change in total assets was primarily attributed to the following:

•Total cash and cash equivalents, which is comprised of cash due from banks and interest-bearing deposits, increased $198.5 million. The $254.6 million increase in interest-bearing deposits corresponds to the increase in total deposits driven by excess customer liquidity (discussed further below), which was partially offset by a $56.1 million decrease in cash due from the FRB and other banks;

•Total investment securities, net increased $1.5 billion, reflecting increases of $908.1 million and $630.2 million in the available-for-sale and held-to-maturity portfolios, respectively. The total increase is primarily due to purchases exceeding paydowns and maturities, particularly across the agency mortgage-backed securities (Agency MBS), agency commercial mortgage-backed securities (Agency CMBS), and non-agency commercial mortgage-backed securities (CMBS) categories. During 2021, the Company made the strategic decision to deploy its excess funds into higher yielding assets which, in turn, increased its investment portfolios and included the purchase of $397.0 million in U.S. Treasury notes;

•Loans and leases increased $630.5 million, reflecting increases of $279.4 million and $351.1 million in the commercial and consumer portfolios, respectively. The total increase is primarily due to originations, particularly across the asset-based lending, commercial real estate, equipment financing, and residential loan categories, which was partially offset by higher principal paydowns in commercial non-mortgage as a result of PPP loan forgiveness;

•The ACL on loans and leases decreased $58.2 million, primarily due to improvements in the forecasted economic outlook and favorable credit trends, which were negatively affected by the emergence of the COVID-19 pandemic in 2020 and resulted in a release of reserves in 2021, partially offset by reserves on newly originated loans and leases.

•DTAs, net increased $28.1 million, primarily due to the tax effect on current period other comprehensive loss, which resulted in a $23.2 million deferred tax benefit;

•Premises and equipment, net, which is comprised of ROU leased assets and property and equipment, decreased $22.2 million. The $7.6 million decrease in ROU leased assets is primarily due to operating lease expense, partially offset by the impact of lease modifications and renewals. The $14.6 million decrease in property and equipment is primarily due to depreciation charges, partially offset by additions, which were largely attributed to data processing and software; and

•Accrued interest receivable and other assets decreased $95.1 million due to decreases of $163.9 million, $14.8 million, $8.3 million, and $2.2 million in treasury derivative assets, accounts receivable, accrued interest receivable, and assets held for sale, respectively, which were partially offset by increases of $63.1 million, $28.1 million, and $2.7 million in other assets, alternative investments, and prepaid expenses, respectively.

Total liabilities increased $2.1 billion, or 7.2%, from $29.4 billion at December 31, 2020 to $31.5 billion at December 31, 2021. The change in total liabilities was primarily attributed to the following:

•Total deposits increased $2.5 billion, primarily due to excess customer liquidity as a result of government stimulus and reduced customer spending, reflecting increases of $0.9 billion and $1.6 billion in non-interest bearing deposits and interest-bearing deposits, respectively. The Company experienced increases across all of its deposit categories except for time deposits, as customers with maturing higher cost time deposits opted to migrate to more liquid deposit products;

•Securities sold under agreements to repurchase and other borrowings decreased $320.5 million, primarily due to the paydown of $526.0 million in federal funds during the first quarter of 2021, partially offset by an increase in lower rate, short-term repurchase agreements;

•FHLB advances decreased $122.2 million, primarily due to a $102.2 million prepayment during the fourth quarter of 2021;

•Operating lease liabilities decreased $13.5 million, which is generally consistent with the change in ROU leased assets (discussed further above); and

•Accrued expenses and other liabilities increased $70.5 million due to increases of $43.0 million, $13.3 million, $9.3 million, and $5.8 million in other liabilities, accrued income taxes, treasury derivative liabilities, and accounts payable, which were partially offset by a $1.0 million decrease in accrued interest payable.

Total shareholders' equity increased $203.7 million, or 6.3%, from $3.2 billion at December 31, 2020 to $3.4 billion at December 31, 2021. The change in shareholders' equity was attributed to the following activity during 2021:

•Net income recognized of $408.9 million;

•Dividends paid to common and preferred shareholders of $145.2 million and $7.9 million, respectively;

•Other comprehensive loss, net of tax, of $64.8 million, primarily due to market value decreases in the Company's available-for-sale securities portfolio and cash flow hedges;

•Employee stock-based compensation plan activity of $13.7 million, inclusive of restricted stock amortization and forfeitures;

•Stock options exercised of $3.5 million; and

•Repurchases of treasury stock, at cost, for taxes of $4.4 million associated with employee stock-based compensation plans.

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Investment Securities

Through its Corporate Treasury function, Webster maintains and invests in debt securities that are primarily used to provide a source of liquidity for operating needs, to generate interest income, and as a means to manage the Company's interest-rate risk. Webster's debt securities are classified into two major categories: available-for-sale and held-to-maturity.

ALCO manages the Company's debt securities in accordance with regulatory guidelines and corporate policies, which include limitations on aspects such as concentrations in and types of investments, as well as minimum risk ratings per type of security. In addition, the OCC may further establish individual limits on certain types of investments if the concentration in such investment presents a safety and soundness concern. At December 31, 2021 and 2020, Webster had investment securities with a total net carrying value of $10.4 billion and $8.9 billion, respectively, with an average risk weighting for regulatory purposes of 12.5% and 12.9%, respectively. Although the Bank held the entirety of Webster's investment portfolio at both December 31, 2021 and 2020, the Holding Company may also directly hold investments.

The following table summarizes the balances and percentage composition of Webster's investment securities:

(1)The balances at December 31, 2021 and 2020, exclude the allowance for credit losses recorded on held-to-maturity debt securities of $0.2 million and $0.3 million, respectively.

Available-for-sale debt securities increased $908.1 million, or 27.3%, from $3.3 billion at December 31, 2020 to $4.2 billion at December 31, 2021, primarily due to purchases exceeding paydowns and maturities, particularly across the Agency MBS, Agency CMBS, and CMBS categories. During 2021, the Company made the strategic decision to deploy its excess funds into higher yielding assets which, in turn, increased its investment portfolios and included the purchase of $397.0 million in U.S. Treasury notes. The tax-equivalent yield in the available-for-sale portfolio was 1.73% for the year ended December 31, 2021 as compared to 2.35% for the year ended December 31, 2020. The 62 basis point decrease is attributed to higher premium amortization and lower rates on securities purchased in the current period. Available-for-sale debt securities are evaluated for credit losses on a quarterly basis. For the years ended December 31, 2021 and 2020, gross unrealized losses on available-for-sale debt securities were $34.3 million and $9.5 million, respectively. Because these unrealized losses were attributable to factors other than credit deterioration, no ACL was recorded during either period. Further, Webster currently does not intend to sell these securities, and it is more likely than not that it will not be required to sell these securities prior to the anticipated recovery of their cost basis.

Held-to-maturity debt securities increased $630.2 million, or 11.3%, from $5.6 billion at December 31, 2020 to $6.2 billion at December 31, 2021, primarily due to purchases exceeding paydowns and maturities, particularly across the Agency MBS and Agency CMBS categories. During 2021, the Company made the strategic decision to deploy its excess funds into higher yielding assets which, in turn, increased its investment portfolios. The tax-equivalent yield in the held-to-maturity portfolio was 2.21% for the year ended December 31, 2021 as compared to 2.67% for the year ended December 31, 2020. The 46 basis point decrease is attributed to higher premium amortization and lower rates on securities purchased in the current period. Held-to-maturity debt securities are evaluated for credit losses on a quarterly basis under CECL. For the years ended December 31, 2021 and 2020, gross unrealized losses on held-to-maturity debt securities were $55.7 million and $2.5 million, respectively. The ACL on held-to-maturity debt securities was $0.2 million and $0.3 million at December 31, 2021 and 2020, respectively.

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The following table summarizes the amortized cost of investment securities by contractual maturity, along with the respective weighted-average yields:

(1)Weighted-average yields were calculated using amortized cost on a fully-tax equivalent basis, assuming a 21% tax rate.

Additional information regarding the Company's available-for-sale and held-to-maturity investment securities' portfolios can be found within Note 4: Investment Securities in the Notes to Consolidated Financial Statements contained in Part II - Item 8. Financial Statements and Supplementary Data.

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Loans and Leases

The following table summarizes the amortized cost and percentage composition of Webster's loans and leases:

(1)The amortized cost balances at December 31, 2021 and 2020, exclude the allowance for credit losses recorded on loans and leases of $301.2 million and $359.4 million, respectively.

The following table summarizes loans and leases by contractual maturity, along with the indication of whether interest rates are fixed or variable:

(1)Amounts due exclude total accrued interest receivable of $50.7 million.

Credit Policies and Procedures

Webster Bank has credit policies and procedures in place designed to support its lending activities within an acceptable level of risk, which are reviewed and approved by management and the Board of Directors on a regular basis. To assist with this process, management inspects reports generated by the Company's loan reporting systems related to loan production, loan quality, concentrations of credit, loan delinquencies, non-performing loans, and potential problem loans. In response to the ongoing COVID-19 pandemic, management has implemented incremental policies and procedures to monitor credit risk.

Commercial non-mortgage, asset-based, and equipment finance loans are underwritten after evaluating and understanding the borrower’s ability to operate and service its debt. Assessment of the borrower's management is a critical element of the underwriting process and 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 obligations, as contracted. Commercial non-mortgage, asset-based, and equipment finance 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 non-mortgage, asset-based, and equipment finance loans are secured by the assets being financed and may incorporate personal guarantees of the principal balance.

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Commercial real estate loans are subject to underwriting standards and processes similar to those for commercial non-mortgage, asset-based, and equipment finance loans. These loans are primarily viewed as cash flow loans, and secondarily as loans secured by real estate. Repayment of commercial real estate 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. All transactions are appraised to validate market value. 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 specific risk characteristics of the portfolio. These policies and procedures, coupled with relatively small individual loan amounts and predominately collateralized loan structures, are spread across many different borrowers, minimizing the level of credit risk. Trend and outlook reports are reviewed by management on a regular basis, and policies and procedures are modified or developed, as needed. Underwriting factors for residential 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. Webster Bank originates both qualified mortgage and non-qualified mortgage loans, as defined by applicable CFPB rules.

Loan Modifications

Webster works with customers to modify loan agreements when borrowers are experiencing financial difficulty. Webster will modify a loan 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, including payment deferral, rate reduction, covenant waiver, term extension, or other actions. Depending on the nature of the modification, it may be accounted for as a troubled debt restructuring (TDR).

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 each individual borrower. Webster considers all aspects of the restructuring in determining whether a concession has been granted, including the debtor's ability to access market rate funds. Generally, a concession exists when the modified terms of the loan are more attractive to the borrower than standard market terms. Common TDR modifications include changes in covenants, pricing, and forbearance. Loans in 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.

COVID-19 Payment Modifications

Webster has accommodated over 2,500 customers impacted by the COVID-19 pandemic through payment-related deferrals. At December 31, 2021, total outstanding loan balances related to these modifications, in their deferral period, were $78.1 million. This amount includes all loans associated with a customer relationship where at least one loan has been modified or is in the process of modification. A significant portion of the COVID-19 payment modifications have not been considered a TDR based on their nature. Webster continues to actively monitor customer relationships associated with these modified loans. The impact of these modifications is appropriately reflected in the 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 through the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). Specifically, Section 4013 of the CARES Act, which was extended by the Consolidated Appropriations Act, 2021, provided temporary relief from certain GAAP requirements for loan modifications related to COVID-19. In addition, a group of banking regulatory agencies issued a revised Interagency Statement that offered practical expedients for evaluating whether COVID-19 loan modifications were TDRs.

At December 31, 2021, total outstanding loan balances associated with loan modifications designated in connection with these TDR relief provisions, in their deferral period, were $83.1 million. These modifications generally represented payment deferrals ranging from three to six months in length. The $118.3 million decrease from $201.4 million at December 31, 2020 is the result of borrowers exiting their payment deferral period. Webster continues to evaluate the effectiveness of this loan modification program as deferral periods end.

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Allowance for Credit Losses on Loans and Leases

The ACL on loans and leases decreased $58.2 million, or 16.2%, from $359.4 million at December 31, 2020 to $301.2 million at December 31, 2021, primarily due to improvements in the forecasted economic outlook and favorable credit trends, which were negatively affected by the emergence of the COVID-19 pandemic in 2020 and resulted in a release of reserves in 2021, partially offset by reserves on newly originated loans and leases.

The following table summarizes the percentage allocation of the ACL across the loans and leases categories:

(1)The ACL allocated to a single loan and lease category does not preclude its availability to absorb losses in other categories.

Methodology

Webster's ACL on loans and leases is considered to be 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 that are expected to occur over the life of the asset. Executive management reviews and advises on the adequacy of the allowance, which is maintained at a level that management deems to be sufficient to cover expected credit losses within the loan and lease portfolios.

The ACL on loans and leases is determined using the CECL model, whereby an expected lifetime credit loss is recognized at the origination or purchase of an asset, including those acquired through a business combination, which is then reassessed at each reporting date over the contractual life of the asset. The calculation of expected credit losses includes consideration of past events, current conditions, and reasonable and supportable economic forecasts that affect the collectability of the reported amounts. Generally, expected credit losses are determined through a pooled, collective assessment of loans and leases with similar risk characteristics. However, if the risk characteristics of a loan or lease change such that it no longer matches that of the collectively assessed pool, it is removed from the population and individually assessed for credit losses. The total ACL on loans and leases recorded by management represents the aggregated estimated credit loss determined through both the collective and individual assessments.

Collectively Assessed Loans and Leases. Collectively assessed loans and leases are segmented based on product type, credit quality, risk ratings, and/or collateral types within its commercial and consumer portfolios, and expected losses are determined using a Probability of Default (PD), Loss Given Default (LGD), and Exposure at Default (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 expected exposure of a loan at default. Summing the product across loans over their lives yields the lifetime expected credit losses for a given portfolio. Management'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. Webster's models incorporate a single economic forecast scenario and macroeconomic assumptions over a two year reasonable and supportable forecast period.

Webster incorporates forecasts of macroeconomic variables in the determination of expected credit losses. Macroeconomic variables are selected for each class of financing receivable based on relevant factors, such as asset type, the correlation of the variables to credit losses, among others. Data from a baseline forecast scenario of these variables is used as an input to the modeled loss calculation. Qualitative adjustments may be applied in relation to economic forecasts when relevant facts and circumstances are expected to impact credit losses, particularly in times of significant volatility in economic activity.

After the reasonable and supportable forecast period, the credit loss model gradually 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 a similar segment within the same portfolio. The calculation of portfolio exposure in future quarters incorporates expected losses and principal paydowns (the combination of contractual repayments and voluntary prepayments). A portion of the collective ACL is comprised of qualitative adjustments for risk characteristics that are not reflected or captured in the quantitative models, but are likely to impact the measurement of estimated credit losses.

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Individually Assessed Loans and Leases. If the risk characteristics of a loan or lease change such that it no longer matches the risk characteristics of the collectively assessed pool, it is removed from the population and individually assessed for credit losses. Generally, all non-accrual loans, TDRs, potential TDRs, loans with a charge-off, and collateral dependent loans where the borrower is experiencing financial difficulty, are individually assessed. The measurement method used to calculate the expected credit loss on an individually assessed loan or lease is dependent on the type and whether the loan or lease is considered to be collateral dependent. Methods for collateral dependent loans are either based on the fair value of the collateral less estimated cost to sell (when the basis of repayment is the sale of collateral), or the present value of the expected cash flows from the operation of the collateral. For non-collateral dependent loans, either a discounted cash flow method or other loss factor method is used. Any individually assessed loan or lease for which no specific valuation allowance is deemed necessary is either the result of sufficient cash flows or sufficient collateral coverage relative to the amortized cost of the asset.

Additional information regarding Webster's ACL methodology can be found within Note 1: Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements contained in Part II - Item 8. Financial Statements and Supplementary Data.

Asset Quality Ratios

Webster manages asset quality using risk tolerance levels established through the Company's underwriting standards, servicing, and management of its loan and lease portfolio. Loans and leases for which a heightened risk of loss has been identified are regularly monitored to mitigate further deterioration and preserve asset quality in future periods. Non-performing assets, credit losses, and net charge-offs are considered by management to be key measures of asset quality.

The following table summarizes key asset quality ratios and their underlying components:

(1)The Company adopted CECL on January 1, 2020. The ACL on loans and leases in 2019 was calculated in accordance with the applicable GAAP for that period.

Total loans and leases increased $630.5 million from December 31, 2020 to December 31, 2021, primarily due to originations, which were partially offset by higher principal paydowns as a result of PPP loan forgiveness. The growth in loans and leases contributed to decreases across related asset quality ratios. Further contributing to the changes across asset quality ratios were the declines experienced in non-performing loans and leases, net charge-offs, and the ACL on loans and leases from December 31, 2020 to December 31, 2021, which were primarily due to favorable credit trends and improvements in the forecasted economic outlook, and resulted in a reduced volume of non-performing loans and leases and net charge-offs, along with a release of reserves in 2021.

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The following table summarizes net charge-offs (recoveries) as a percentage of average loans and leases for each category:

The 0.19% decrease in net charge-offs as a percentage of average loans and leases is primarily due to a reduced volume of net charge-offs in the commercial non-mortgage portfolio during the year ended December 31, 2021, which contributed to $34.7 million of the total $41.3 million decrease in net charge-offs from 2020 to 2021.

Allowance for Credit Losses on Unfunded Loan Commitments

An ACL is also recorded to provide for the unused portion of commitments to lend that are not unconditionally cancellable by Webster. Under the CECL methodology, the calculation of the allowance generally includes the probability of funding to occur and a corresponding estimate of expected lifetime credit losses on amounts assumed to be funded. Loss calculation factors are consistent with those for funded loans using the PD and LGD applied to the underlying borrower's risk and facility grades, a draw down factor applied to utilization rates, relevant forecast information, and management's qualitative factors. The level of ACL is monitored quarterly against key metrics from the funded portfolio. The ACL on unfunded loan commitments increased $0.3 million, or 2.7%, from $12.8 million at December 31, 2020 to $13.1 million at December 31, 2021.

Additional information regarding the activity in the ACL on unfunded loan commitments can be found within Note 23: Commitments and Contingencies in the Notes to Consolidated Financial Statements contained in Part II - Item 8. Financial Statements and Supplementary Data.

Liquidity and Capital Resources

Webster manages its cash flow requirements through proactive liquidity measures at both the Holding Company and Webster Bank in order to maintain stable, cost-effective funding and to promote overall balance sheet strength. The liquidity position of the Company is continuously monitored and adjustments are made to balance sources and uses of funds, as needed. At December 31, 2021, management is not aware of any events that are reasonably likely to have a material adverse effect on the Company’s liquidity position, capital resources, or operating activities. Further, management is not aware of any regulatory recommendations regarding liquidity, that if implemented, would have a material adverse effect on the Company.

Cash inflows are provided through a variety of sources, including as operating activities such as principal and interest payments on loans and investments, financing activities, such as unpledged securities that can be sold or utilized to secure funding, and new deposits. Webster is committed to maintaining a strong base of core deposits, which consists of demand, interest-bearing checking, savings, health savings, and money market accounts, in order to support growth in its loan and lease portfolio.

Holding Company Liquidity. The primary source of liquidity at the Holding Company is dividends from Webster Bank. To a lesser extent, investment income, net proceeds from investment sales, borrowings, and public offerings may provide additional liquidity. The Holding Company generally uses its funds for principal and interest payments on senior notes and junior subordinated debt, dividend payments to preferred and common shareholders, repurchases of its common stock, and purchases of investment securities, as applicable.

During the year ended December 31, 2021, Webster Bank paid the Holding Company $200.0 million in dividends. There are certain restrictions on Webster Bank's payment of dividends to the Holding Company. Additional Information regarding dividend restrictions can be found under the section captioned "Supervision and Regulation" in Part I - Item 1. Business and within Note 15: Regulatory Capital and Restrictions in the Notes to the Consolidated Financial Statements contained in Part II - Item 8. Financial Statements and Supplementary Data. At December 31, 2021, there were $508.0 million of retained earnings available for the payment of dividends by Webster Bank to the Holding Company.

The quarterly cash dividend to common shareholders remained at $0.40 per common share during 2021. On January 18, 2022, Webster Financial Corporation’s Board of Directors declared a quarterly cash dividend of $0.40 per share. Webster continues to monitor economic forecasts, anticipated earnings, and its capital position in the determination of its dividend payments.

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Webster has a common stock repurchase program authorized by the Board of Directors with a remaining repurchase authority of $123.4 million at December 31, 2021. Due to the effects of the COVID-19 pandemic on the economic environment, Webster had temporarily suspended repurchases of its common stock under the program in 2020. Further, as part of the Company's executed merger agreement with Sterling dated as of April 18, 2021, Webster was restricted from repurchasing any shares under the program through the close of the transaction. Now that the transaction has closed effective January 31, 2022, the Company has resumed its common stock repurchase program subject to prevailing market conditions. In addition, the Company will periodically acquire common shares outside of the repurchase program related to stock compensation plan activity. During the year ended December 31, 2021, a total of 79,242 shares were repurchased at a market value of $4.4 million for this purpose.

Webster Bank Liquidity. Webster Bank's primary source of funding is core deposits. Including time deposits, Webster Bank had a loan to total deposit ratio of 74.6% and 79.2% at December 31, 2021 and 2020, respectively. The 4.6% point decrease is attributed to deposit growth exceeding loan growth in the current period.

Webster Bank is required by OCC regulations to maintain a sufficient level of liquidity to ensure safe and sound operations. The adequacy of liquidity, as assessed by the OCC, depends on factors such as overall asset and liability structure, market conditions, competition, and the nature of the institution’s deposit and loan customers. At December 31, 2021, Webster Bank exceeded all regulatory liquidity requirements. Webster has designed a detailed contingency plan in order to respond to any liquidity concerns in a prompt and comprehensive manner, including early detection of potential problems and corrective action to address liquidity stress scenarios.

Capital Requirements. Webster Financial Corporation and Webster Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory actions by regulators that 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 pursuant to regulatory directives. Capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by the Basel III Capital Rules to ensure capital adequacy require the Company to maintain minimum ratios of CET1 capital, Tier 1 capital, Total capital to risk-weighted assets, and Tier 1 capital to average tangible assets (as defined in the regulations). At December 31, 2021, both Webster Financial Corporation and Webster Bank were classified as well-capitalized. Management believes that no events or changes have occurred subsequent to year-end that would change this designation.

In accordance with regulatory capital rules, Webster elected an option to delay the estimated impact of the adoption of CECL on its regulatory capital over a two-year deferral ending on January 1, 2022, and subsequent three-year transition period ending on December 31, 2024. Therefore, capital ratios and amounts reported 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. At December 31, 2021, this resulted in a 25, 25, 0, and 16 basis point benefit to Webster Financial Corporation's and Webster Bank's CET1 capital to total risk-weighted assets (CET1 risk-based capital), Tier 1 capital to total risk-weighted assets (Tier 1 risk-based capital), Total capital to total risk-weighted assets (Total risk-based capital), and Tier 1 capital to average tangible assets (Tier 1 leverage capital), respectively. Both Webster Financial Corporation's and Webster Bank's ratios remain in excess of being well-capitalized, even without the benefit of the delayed CECL adoption impact.

Additional information regarding the required capital levels and ratios applicable to Webster Financial Corporation and Webster Bank can be found within Note 15: Regulatory Capital and Restrictions in the Notes to Consolidated Financial Statements contained in Part II - Item 8. Financial Statements and Supplementary Data.

Sources and Uses of Funds

Sources of Funds. The primary source of cash flows for Webster Bank’s use in its lending activities and general operational needs is deposits. Operating activities, such as loan and securities repayments, proceeds from loans and securities held for sale, and maturities also provide cash inflows. While scheduled loan and securities repayments are a relatively stable source of funds, prepayments and other deposit inflows are influenced by economic conditions and prevailing interest rates, the timing of which is inherently uncertain. Additional sources of funds are provided by both short-term and long-term borrowings, and to a lesser extent, dividends received as part of the Bank's membership with the FHLB of Boston and FRB of Boston.

Deposits. Webster Bank offers a wide variety of checking and savings deposit products designed to meet the transactional and investment needs of both its consumer and business customers. The Bank’s deposit services include, but are not limited to, ATM and debit card use, direct deposit, ACH payments, mobile banking, internet-based banking, banking by mail, account transfers, and overdraft protection, among others. The Bank manages the flow of funds in its deposit accounts and interest rates consistent with FDIC regulations. Both Webster Bank’s Retail Pricing Committee and its Commercial and Institutional Liability Pricing Committee meet regularly to determine pricing and marketing initiatives.

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Total deposits were $29.8 billion and $27.3 billion at December 31, 2021 and 2020, respectively. The $2.5 billion increase was primarily attributed to excess customer liquidity as a result of government stimulus and reduced customer spending, and reflected increases across all of deposit categories except for time deposits, as customers with maturing higher cost time deposits opted to migrate to more liquid products. The aggregate amount of time deposits accounts that exceeded the FDIC limit of $250,000 represented 0.9% and 1.8% of total deposits at December 31, 2021 and 2020, respectively.

The following table summarizes daily average balances of deposits by type and the weighted-average rates paid thereon:

The following table summarizes total uninsured deposits:

(1)A portion of Webster’s total uninsured deposits are estimated based on the same methodologies and assumptions used for regulatory reporting requirements.

The following table summarizes the portion of U.S. time deposits in excess of the FDIC insurance limit and time deposits otherwise uninsured by contractual maturity:

(1)Includes $124.8 million of Eurodollar deposits due within 3 months or less.

Additional information regarding period-end deposit balances and rates can be found within Note 11: Deposits in the Notes to Consolidated Financial Statements contained in Part II - Item 8. Financial Statements and Supplementary Data.

Borrowings. Webster Bank’s borrowing sources include securities sold under agreements to repurchase, advances from the FHLB of Boston, and long-term debt. The Bank may also purchase term and overnight federal funds to meet its short-term liquidity needs. Total borrowed funds were $1.2 billion and $1.7 billion at December 31, 2021 and 2020, respectively, and represented 3.6% and 5.2% of total assets, respectively. The $0.5 billion decrease from 2020 to 2021 is primarily attributed to federal funds of $526.0 million maturing in the first quarter of 2021, coupled with the strategic decision to not purchase any additional federal funds during the remainder of the period.

Webster Bank had additional borrowing capacity from the FHLB of Boston of $5.1 billion and $4.7 billion at December 31, 2021 and 2020, respectively. The Bank also had additional borrowing capacity from the FRB of Boston of $1.5 billion and $1.3 billion at December 31, 2021 and 2020, respectively. Unpledged investment securities of $5.3 billion at December 31, 2021 could have been used for collateral on borrowings or to increase borrowing capacity by $5.1 billion with the FHLB or $5.2 billion with the FRB.

Securities sold under agreements to repurchase are generally a form of short-term funding for the Bank in which it sells securities to counterparties with an agreement to buy them back in the future at a fixed price. Securities sold under agreements to repurchase totaled $0.7 billion and $0.5 billion at December 31, 2021 and 2020, respectively. The $0.2 billion increase from 2020 to 2021 is primarily attributed to current period borrowings mix and the timing of additional short-term securities sold under agreements to repurchase at period end.

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FHLB advances are not only utilized as a source of funding, but also for interest rate risk management purposes. FHLB advances totaled $11.0 million and $133.2 million at December 31, 2021 and 2020, respectively. The $122.2 million decrease from 2020 to 2021 is primarily attributed to the aforementioned $102.2 million prepayment during the fourth quarter of 2021.

Long-term debt consists of senior fixed-rate notes maturing in 2024 and 2029, and floating-rate junior subordinated notes maturing in 2033. Long-term debt totaled $562.9 million and $567.7 million at December 31, 2021 and 2020, respectively.

The following table summarizes daily average balances of borrowings by type and the weighted-average rates paid thereon:

Additional information regarding period-end borrowings balances and rates can be found within Note 12: Borrowings in the Notes to Consolidated Financial Statements contained in Part II - Item 8. Financial Statements and Supplementary Data.

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 of which is subject to the supervision and regulation of the Federal Housing Finance Agency. An activity-based capital stock investment in the FHLB is required in order for Webster Bank to maintain is membership and access advances and other extensions of credit for sources of funds and liquidity purposes. The FHLB capital stock investment is restricted as there is no market for it, and it can only be redeemed by the FHLB. Webster Bank held FHLB capital stock of $11.3 million and $17.5 million at December 31, 2021 and 2020, respectively. During the year ended December 31, 2021, Webster Bank received $0.3 million in dividends from the FHLB Boston. The most recent FHLB quarterly cash dividend was paid on November 2, 2021 in an amount equal to an annual yield of 2.05%.

Webster Bank is also required to hold FRB 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. Similar to FHLB stock, the FRB capital stock investment is restricted as there is no market for it, and it can only be redeemed by the FRB. Webster Bank held FRB capital stock of $60.5 million and $60.1 million at December 31, 2021 and 2020, respectively. During the year ended December 31, 2021, Webster Bank received $0.9 million in dividends from the FRB of Boston. The most recent FRB semi-annual cash dividend was paid on December 31, 2021 in an amount equal to an annual yield of 1.52%.

Uses of Funds. Webster enters into various contractual obligations in the normal course of business that require future cash payments and could impact the Company's short-term and long-term liquidity and capital resource needs. The following table summarizes significant fixed and determinable contractual obligations at December 31, 2021. The actual timing and amounts of future cash payments may differ from the amounts presented. Based on Webster's current liquidity position, it is expected that our sources of funds will be sufficient to fulfill these obligations when they come due.

(1)Interest payments on borrowings have been excluded.

(2)Purchase obligations represent agreements to purchase goods or services of $1.0 million or more that are enforceable and legally binding and specify all significant terms.

In addition, in the normal course of business, Webster offers financial instruments with off-balance sheet risk to meet the financing needs of its customers. These transactions include commitments to extend credit, and commercial and standby letters of credit, which involve to a varying degree, elements of credit risk. Since many of these commitments are expected to expire unused or be only partially funded, the total commitment amount of $7.2 billion at December 31, 2021 does not necessarily reflect future cash payments.

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Webster also enters into commitments to invest in venture capital and private equity funds, as well as low income housing tax credit investments to assist the Bank in meeting its responsibilities under the CRA. The total unfunded commitment for these alternative investments was $45.5 million at December 31, 2021. However, the timing of capital calls cannot be reasonably estimated, and depending on the nature of the contract, the entirety of the capital committed by Webster may not be called.

Pension obligations are funded by the Company, as needed, to provide for participant benefit payments as it relates to Webster's frozen, non-contributory, qualified defined benefit pension plan. Decisions to contribute to the defined benefit pension plan are made based upon pension funding requirements under the Pension Protection Act, the maximum amount deductible under the Internal Revenue Code, the actual performance of plan assets, and trends in the regulatory environment. Webster did not contribute to its defined benefit pension plan in 2021, and management does not currently anticipate that it will make a contribution in 2022. Webster's non-qualified supplemental executive retirement plan and other post employment benefit plan are unfunded. Expected future net benefit payments related to Webster's defined benefit pension and other postretirement benefit plans include $10.4 million in less than one year, $21.8 million in one to three years, $23.4 million in three to five years, and $63.6 million after five years.

At December 31, 2021, Webster's consolidated balance sheet reflects a liability for uncertain tax positions of $4.2 million and $1.9 million of accrued interest and penalties. The ultimate timing and amount of any related future cash settlements cannot be predicted with reasonable certainty.

Additional information regarding credit-related financial instruments, alternative investments, defined benefit pension and other postretirement benefit plans, and income taxes can be found within Note 23: Commitments and Contingencies, Note 2: Variable Interest Entities, Note 19: Retirement Benefit Plans, and Note 10: Income Taxes, respectively, in the Notes to the Consolidated Financial Statements contained in Part II - Item 8. Financial Statements and Supplementary Data.

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Asset/Liability Management and Market Risk

An effective asset/liability process must balance the risks and rewards from both short-term and long-term interest rate risks when determining management's strategy and action. To facilitate this, interest rate sensitivity is monitored on an ongoing basis by ALCO. The primary goal of ALCO is to manage interest rate risk and to maximize net income and net economic value over time in changing interest rate environments (subject to limits approved by the Board of Directors). The Board of Directors sets policy limits for earnings at risk for parallel ramps in interest rates over twelve months of +/- 100, 200, and 300 basis points, as well as interest rate curve twist shocks of +/- 50 and 100 basis points. Limits for economic value, or equity at risk, are set for parallel shocks in interest rates of +/- 100, 200, and 300 basis points.

Due to the federal funds rate target range being 0 to 0.25% at December 31, 2021 and 2020, the declining interest rate scenarios for both earnings at risk and equity at risk of minus 100 and 200 basis points or more were not run per ALCO's policy. Instead, scenarios were run with short-term and long-term interest rates declining to zero, but not below. In 2019, ALCO implemented a balance sheet repositioning strategy with the goal of reducing asset sensitivity to falling interest rates, which resulted in the purchase of interest rate floors. ALCO also regularly reviews earnings at risk scenarios for non-parallel changes in interest rates, as well as long-term scenarios of up to four years in the future.

Management measures interest rate risk using simulation analysis to calculate Webster's earnings at risk and equity at risk. These risk measures are quantified using simulation software. Key assumptions relate to the behavior of interest rates and spreads, prepayment speeds, and the run-off of deposits. From such simulations, interest rate risk is quantified, and appropriate strategies are formulated and implemented.

Earnings at risk is defined as the change in earnings due to changes in interest rates, excluding the provision for credit losses and income tax expense. Interest rates are assumed to change up or down in a parallel fashion, and earnings results are compared to a flat rate scenario as a base, which holds the period end yield curve constant over the twelve month forecast horizon. At both December 31, 2021 and 2020, the flat rate scenario assumed a federal funds rate of 0.25%. Earnings simulation analysis incorporates assumptions about balance sheet changes, such as product mix, growth, and loan and deposit pricing. It is a measure of short-term interest rate risk.

Equity at risk is defined as the change in the net economic value of financial assets and financial liabilities due to changes in interest rates compared to a base net economic value. Equity at risk analyzes sensitivity in the present value of cash flows over the expected life of existing financial assets, financial liabilities, and off-balance sheet financial instruments. It is a measure of the long-term interest rate risk to future earnings streams embedded in the current balance sheet.

Asset sensitivity is defined as earnings or net economic value increasing when interest rates rise and decreasing when interest rates fall, as compared to a base scenario. In other words, financial assets are more sensitive to changing interest rates than liabilities, and therefore, re-price faster. Likewise, liability sensitivity is defined as earnings or net economic value decreasing when interest rates rise and increasing when interest rates fall, as compared to a base scenario.

Key assumptions underlying the present value of cash flows include the behavior of interest rates and spreads, asset prepayment speeds, and attrition rates on deposits. Cash flow projections from the model are compared to market expectations for similar collateral types and adjusted based on experience with Webster Bank's own portfolio. The model's valuation results are compared to observable market prices for similar instruments whenever possible. The behavior of deposit and loan customers is studied using historical time series analysis to model future customer behavior under varying interest rate environments.

The equity at risk simulation process uses multiple interest rate paths generated by an arbitrage-free trinomial lattice term structure model. The Base Case rate scenario, against which all others are compared, uses the month-end LIBOR/swap yield curve as a starting point to derive forward rates for future months. Using interest rate swap option volatilities as inputs, the model creates multiple rate paths for this scenario with forward rates as the mean. In shock scenarios, the starting yield curve is shocked up or down in a parallel fashion. Future rate paths are then constructed in a similar manner to the Base Case scenario.

Cash flows for all financial instruments are generated using product specific prepayment models and account specific system data for properties such as maturity date, amortization type, coupon rate, repricing frequency, and repricing date. The asset/liability simulation software is enhanced with a mortgage prepayment model and a collateralized mortgage obligation database. Financial instruments with explicit options, such as caps, floors, puts, calls, and implicit options, such as prepayment and early withdrawal abilities, require such modeling approach to more accurately quantify value and risk.

On the asset side, risk is impacted the most by residential mortgage loans and mortgage-backed securities, which can typically prepay at any time without penalty and may have embedded caps and floors. In the loan portfolio, floors are a benefit to interest income in low interest rate environments. Floating-rate loans at floors pay a higher interest rate than a loan at a fully indexed rate without a floor, as with a floor, there is a limit on how low the interest rate can fall. As market rates rise, however, the interest rate paid on these loans does not rise until the fully indexed rate rises through the contractual floor.

On the liability side, there is a large concentration of customers with indeterminate maturity deposits who have options to add or withdraw funds from their accounts at any time. Implicit floors on deposits, based on historical data, are modeled. Webster Bank also has the option to change the interest rate paid on these deposits at any time.

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Webster's earnings at risk model incorporates net interest income and non-interest income and expense items, some of which vary with interest rates. These items include mortgage banking income, mortgage servicing rights, cash management fees, and derivative mark-to-market adjustments.

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.

ALCO meets at least monthly to make decisions on the investment and funding portfolios based on the economic outlook, the Committee's interest rate expectations, the risk position, and other factors. ALCO delegates pricing and product design responsibilities to individuals and sub-committees, but continuously monitors and influences their actions on a regular basis.

Various interest rate contracts, including futures, options, swaps, caps, and floors can be used to manage interest rate risk. These contracts involve, to varying degrees, levels of credit and interest rate risk. The notional amount of the derivative instrument, or the amount from which interest and other payments are derived, is not exchanged, and therefore, should not be used as a measure of credit risk.

In addition, certain derivative instruments, such as forward sales of mortgage-backed securities, are used by Webster Bank to manage the risk of loss associated with its mortgage banking activities. Generally, prior to closing and funds disbursement, an interest-rate lock commitment is extended to the borrower. During this time, Webster Bank is subject to the risk that market interest rates may change, which could impact pricing on loan sales. In an effort to mitigate this risk, Webster Bank establishes forward delivery sales commitments, thereby setting the sales price.

Webster will also hold futures, options, and forward foreign currency contracts to minimize the price volatility of certain financial assets and financial liabilities. Changes in the market value of these derivative positions are recognized in earnings. Additional information regarding derivatives can be found within Note 17: Derivative Financial Instruments in the Notes to Consolidated Financial Statements contained in Part II - Item 8. Financial Statements and Supplementary Data.

The following table summarizes the estimated impact that gradual parallel changes in interest rates of 100 and 200 basis points might have on Webster’s net interest income over a twelve month period starting at December 31, 2021 and 2020, as compared to actual net interest income and assuming no changes in interest rates:

The following table summarizes the estimated impact that gradual parallel changes in interest rates of 100 and 200 basis points might have on Webster’s PPNR over a twelve month period starting at December 31, 2021 and 2020, as compared to actual PPNR and assuming no changes in interest rates:

Asset sensitivity for both net interest income and PPNR increased at December 31, 2021 as compared to December 31, 2020, primarily due to changes in deposit beta assumptions, which were approved by ALCO and are reflective of management's current deposit strategy and balance sheet composition. Loans at floors have increased $1.1 billion from $3.4 billion at December 31, 2020 to $4.5 billion at December 31, 2021, lowering overall asset sensitivity, and which is being partially offset by increased cash held at the FRB as a result of elevated deposits. When interest rates start to rise, not all of these loans will immediately lift off of their floors. Due to the lower interest rate environment at both December 31, 2021 and 2020, management did not run standard scenarios with negative interest rate assumptions to model the down rate scenarios that were previously modeled when market rates were higher.

The following table summarizes the estimated impact that yield curve twists or immediate non-parallel changes in interest rates might have on Webster’s net interest income for the subsequent twelve month period starting at December 31, 2021 and 2020:

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The following table summarizes the estimated impact that yield curve twists or immediate non-parallel changes in interest rates might have on Webster’s PPNR for the subsequent twelve month period starting at December 31, 2021 and 2020:

These non-parallel scenarios are modeled with the short-end of the yield curve moving up or down 50 and 100 basis points, while the long-end of the yield curve remains unchanged (and vice versa). The short-end of the yield curve is defined as terms of less than eighteen months and the long-end of the yield curve is defined as terms greater than eighteen months. The results reflect the annualized impact of immediate interest rate changes.

Sensitivity to the short-end of the yield curve for both net interest income and PPNR increased at December 31, 2021 as compared to December 31, 2020, primarily due to changes in deposit beta assumptions, which were approved by ALCO and are reflective of management's current deposit strategy and balance sheet composition, and excess cash held at the FRB. As interest rates rise, this cash can be deployed into higher yielding financial assets. Net interest income and PPNR were less sensitive to changes in the long-end of the yield curve at December 31, 2021 as compared to December 31, 2020, primarily due to slower forecasted prepayment speeds as a result of increases in the long-end of the yield-curve, which in turn, extends the duration for mortgage-backed securities and residential mortgage loans. Again, due to the lower interest rate environment at both December 31, 2021 and 2020, management did not run standard scenarios with negative interest rate assumptions to model the down rate scenarios that were previously modeled when market rates were higher.

The following table summarizes the estimated economic value of financial assets, financial liabilities, and off-balance sheet financial instruments and the corresponding estimated change in economic value if interest rates were to instantaneously increase or decrease by 100 basis points at December 31, 2021 and 2020:

Changes in economic value can best be described through duration, which is a measure of the price sensitivity of financial instruments due to changes in interest rates. For fixed-rate financial instruments, it can be thought of as the weighted-average expected time to receive future cash flows, whereas for floating-rate financial instruments, it can be thought of as the weighted-average expected time until the next rate reset. Overall, the longer the duration, the greater the price sensitivity due to changes in interest rates. Generally, increases in interest rates reduce the economic value of fixed-rate financial assets as future discounted cash flows are worth less at higher interest rates. In a rising interest rate environment, the economic value of financial liabilities decreases for the same reason. A reduction in the economic value of financial liabilities is a benefit to Webster. Floating-rate financial instruments may have durations as short as one day, and therefore, may have very little price sensitivity due to changes in interest rates.

Duration gap represents the difference between the duration of financial assets and financial liabilities. A duration gap at or near zero would imply that the balance sheet is matched, and therefore, would exhibit no change in estimated economic value for changes in interest rates. At December 31, 2021 and 2020, Webster's duration gap was negative 1.8 years and negative 1.9 years, respectively. A negative duration gap implies that the duration of financial liabilities is longer than duration of financial assets, and therefore, are more price sensitive and will reset their interest rates more slowly. 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 financial liabilities would more than offset the decreased value of financial 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 decrease when interest rates fall over the long term, absent the effects of any new business booked in the future. At December 31, 2021, long-term rates have risen by 65 basis points as compared to December 31, 2020. This higher starting point extends financial asset duration by decreasing residential mortgage loans and mortgage-backed securities prepayment speeds.

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The aforementioned earnings and economic values estimates are subject to factors that could cause actual results to differ, and also assume that management does not take any additional action to mitigate any positive or negative effects from changing interest rates. Management believes that the Company's interest rate risk position at December 31, 2021 represents a reasonable level of risk given the current interest rate outlook. Management is prepared to take additional action in the event that interest rates do change rapidly.

Critical Accounting Estimates

The preparation of Webster's Consolidated Financial Statements and accompanying Notes thereto 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, expenses, and the disclosure of contingent assets and liabilities. While management's estimates are made based on historical experience, available current information, and other factors that are deemed to be relevant, actual results could significantly differ from those estimates.

Accounting estimates are necessary in the application of certain accounting policies and can be susceptible to significant change in the near term. Critical accounting accounting estimates are those estimates made in accordance with GAAP that involve a significant level of estimation uncertainty and have had, or are reasonably likely to have, a material impact on Webster's financial condition or results of operations. Management has identified that Webster's most critical accounting estimate is its ACL on loans and leases. This critical accounting policy, including its underlying estimates, is discussed directly with the Audit Committee of the Board of Directors.

Allowance for Credit Losses on Loans and Leases

The ACL on loans and leases is a reserve established through a provision for credit losses charged to expense, which represents management’s best estimate of expected lifetime credit losses within Webster's loan and lease portfolios at the balance sheet date. The calculation of expected credit losses is determined using predictive methods and models that follow a PD and LGD framework, and include consideration of past events, current conditions, macroeconomic variables (such as unemployment, gross domestic product, retail sales, and interest rate spreads), and reasonable and supportable economic forecasts that affect the collectability of the reported amounts. Changes to the ACL on loans and leases, and therefore, to the related provision for credit losses, can materially affect financial results.

The determination of the appropriate level of ACL on loans and leases inherently involves a high degree of subjectivity and requires Webster to make significant estimates of current credit risks and trends using existing qualitative and quantitative information and reasonable supportable forecasts of future economic conditions, all of which may undergo frequent and material changes. Changes in economic conditions affecting borrowers and macroeconomic variables that Webster is more susceptible to, unforeseen events such as natural disasters and pandemics, along with new information regarding existing loans, identification of additional problems loans, the fair value of underlying collateral, and other factors, both within and outside the Company's control, may indicate the need for an increase or decrease in the ACL on loans and leases.

It is difficult to estimate the sensitivity of how potential changes in any one economic factor or input might affect the overall reserve because a wide variety of factors and inputs are considered in estimating the ACL and changes in those factors and inputs considered may not occur at the same rate and may not be consistent across all product types. Further, changes in factors and inputs may also be directionally inconsistent, such that improvement in one factor may offset deterioration in others.

Executive management reviews and advises on the adequacy of the ACL on loans and leases on a quarterly basis. Although the overall balance is determined based on specific portfolio segments and individually assessed assets, the entire balance is available to absorb credit losses for any of the loan and lease portfolios.

Additional information regarding the determination of the ACL on loans and leases, including Webster's valuation methodology, can be found in Part II under the section captioned "Allowance for Credit Losses" contained elsewhere in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and within Note 1: Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements contained in Item 8. Financial Statements and Supplementary Data.