WEBSTER FINANCIAL CORPORATION Introduction
This discussion and analysis provides information that management believes is necessary to understandWebster's financial condition, changes in financial condition, results of operations, and cash flows for the three and nine months endedSeptember 30, 2022 , as compared to 2021. The following should be read in conjunction with the Company's Consolidated Financial Statements, and accompanying Notes thereto, for the year endedDecember 31, 2021 , included inWebster Financial Corporation's Annual Report on Form 10-K filed with theUnited States Securities and Exchange Commission (SEC) onFebruary 25, 2022 , and in conjunction with the Condensed Consolidated Financial Statements, and accompanying Notes thereto, included in Part I - Item 1. Financial Statements of this report. The results of operations for the three and nine months endedSeptember 30, 2022 , are not necessarily indicative of the future results that may be attained for the entire year or other interim periods.
Executive Summary
Nature of Operations
Webster Financial Corporation (the Holding Company) is a bank holding company and financial holding company under the Bank Holding Company Act of 1956, as amended (BHC Act), incorporated under the laws ofDelaware in 1986, and headquartered inStamford, Connecticut .Webster Bank, National Association (Webster Bank ) is the principal consolidated subsidiary ofWebster Financial Corporation .Webster Bank , and itsHSA Bank division (HSA Bank ), deliver a wide range of banking, investment, and financial services to individuals, families, and businesses.Webster Bank serves consumer and business customers with mortgage lending, financial planning, trust, and investment services through a distribution network consisting of banking centers, ATMs, a customer care center, and a full range of web and mobile-based banking services throughout the northeasternU.S. fromNew York toMassachusetts , with certain businesses operating in extended geographies.Webster Bank also offers equipment financing, warehouse lending, commercial real estate lending, asset-based lending, and treasury management solutions.HSA Bank is a leading provider of health savings accounts (HSAs), and delivers health reimbursement arrangements and flexible spending and commuter benefit account administration services to employers and individuals in all 50 states.
Business Developments
OnJanuary 31, 2022 ,Webster completed its previously announced merger withSterling in an all-stock transaction valued at$5.2 billion . The merger expandedWebster's geographic footprint and combined two complementary organizations to create one of the largest commercial banks in the northeasternU.S. AtSeptember 30, 2022 , the combined company had$69.1 billion in assets,$47.8 billion in loans and leases, and$54.0 billion in deposits, and operated 201 banking centers throughout southernNew England and metro and suburbanNew York . In addition, onFebruary 18, 2022 ,Webster acquired 100% of the equity interests ofBend Financial, Inc. (Bend), a cloud-based platform solution provider for HSAs, in exchange for cash. The Bend acquisition acceleratedWebster's efforts underway to deliver enhanced user experiences atHSA Bank . Financial results for historical reporting periods reflect only the results ofWebster's operations prior to the corresponding merger or acquisition. The successful integration ofWebster's andSterling's operations depends on the Company's ability to successfully consolidate business operations, management teams, corporate cultures, operating systems, and controls procedures, and eliminate costs and redundancies. Noteworthy accomplishments as ofSeptember 30, 2022 , include the rebranding of branches and digital assets, the coordination of credit policies and procedures, the selection of certain key operating systems, the consolidation of commercial credit risk management systems and commercial client pricing tools, as well as mortgage servicing, payroll, and treasury platforms, the finalization of governance and executive management structures, the establishment of a corporate responsibility office to oversee community engagement, philanthropy, and sustainability, and the participation of senior Company leaders and managers at culture-shaping workshops, with plans for Company-wide participation in such workshops to be completed during the fourth quarter of 2022. Other key operating systems and process integration activities are ongoing, andWebster remains well-positioned to successfully execute its core conversion targeted for mid-2023. In addition,Webster developed and launched a corporate real estate consolidation strategy during the second quarter of 2022 in which the Company arranged to close 14 locations, primarily throughoutNew York andConnecticut , in order to reduce its corporate facility square footage by approximately 45% by the end of the year. As of the nine months endedSeptember 30, 2022 ,Webster has recognized$23.1 million in right-of-use (ROU) asset impairment charges and a combined$12.0 million in related exit costs and accelerated depreciation on property and equipment related to this corporate real estate consolidation strategy. 1 -------------------------------------------------------------------------------- Furthermore, in connection with theSterling merger,Webster re-evaluated its strategic priorities as a combined organization, which resulted in modifications to the Company's strategic initiatives that were announced inDecember 2020 . As a result, the Company released$4.1 million from its previously recorded severance accrual during the nine months endedSeptember 30, 2022 , with a corresponding adjustment to earnings. Additional information regardingWebster's mergers and acquisitions and related integration initiatives can be found within Note 2: Mergers and Acquisitions in the Notes to Condensed Consolidated Financial Statements contained in Part I - Item 1. Financial Statements.
Results of Operations
The following table summarizes selected financial highlights and key performance
indicators:
At or for the three months ended At or for the nine months ended
September 30, September 30,
(In thousands, except per share and ratio data) 2022 2021 2022 2021
Income and performance ratios:
Net income $ 233,968 $ 95,713 $ 399,532 $ 297,826
Net income available to common shareholders 229,806 93,745 387,776 291,920
Earnings per diluted common share 1.31 1.03 2.32 3.22
Return on average assets (annualized) 1.38 % 1.10 % 0.85 % 1.17 %
Return on average tangible common shareholders'
equity (annualized) (non-GAAP) 18.62 14.16 11.10 15.05
Return on average common shareholders' equity 11.78 11.61 7.01 12.28
(annualized)
Non-interest income / total revenue 17.10 26.73 19.12 25.70 Asset quality: Allowance for credit losses on loans and leases$ 574,325 $ 314,922 $ 574,325 $ 314,922 Non-performing assets (1) 211,627 104,209 211,627 104,209 Allowance for credit losses on loans and leases / 1.20 % 1.46 % 1.20 % 1.46 % total loans and leases Net charge-offs (recoveries) / average loans and 0.25 0.02 0.15 0.03 leases (annualized) Non-performing loans and leases / total loans and 0.44 0.47 0.44 0.47 leases (1) Non-performing assets / total loans and leases plus 0.44 0.48 0.44 0.48 OREO (1) Allowance for credit losses on loans and leases / non-performing loans and leases (1) 274.12 309.44 274.12 309.44
Other ratios:
Tangible common equity (non-GAAP) 7.27 7.71 7.27 7.71 Tier 1 risk-based capital 11.35 12.39 11.35 12.39 Total risk-based capital 13.38 13.79 13.38 13.79 CET1 risk-based capital 10.80 11.77 10.80 11.77 Shareholders' equity / total assets 11.33 9.57 11.33 9.57 Net interest margin 3.54 2.80 3.35 2.85 Efficiency ratio (non-GAAP) 41.17 54.84 44.68 56.62 Equity and share related: Common equity$ 7,542,431 $ 3,241,152 $ 7,542,431 $ 3,241,152 Book value per common share 43.32 35.78 43.32 35.78 Tangible book value per common share (non-GAAP) 27.69 29.63 27.69 29.63 Common stock closing price 45.20 54.46 45.20 54.46 Dividends and equivalents declared per common share 0.40 0.40 1.20 1.20 Common shares outstanding 174,116 90,588 174,116 90,588
Weighted-average common shares outstanding - basic 173,868
90,038 165,743 89,960
Weighted-average common shares outstanding - diluted 173,944
90,232 165,813 90,186
(1)Non-performing asset balances and related asset quality ratios exclude the impact of net unamortized (discounts)/premiums and net unamortized deferred (fees)/costs on loans and leases.
Non-GAAP Financial Measures
The non-GAAP financial measures identified in the preceding table provide both management and investors with information useful in understandingWebster's financial position, results of operations, 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 that this presentation, together with the accompanying reconciliations, provides a complete understanding of the factors and trends affectingWebster's business and allows investors to view its performance in a similar manner. 2 -------------------------------------------------------------------------------- Tangible book value per common share represents shareholders' equity less preferred stock and goodwill and other intangible assets (tangible common equity) divided by common shares outstanding at the end of the reporting period. The tangible common equity ratio represents tangible common equity divided by total assets less goodwill and other intangible assets (tangible assets). Both of these measures are used by management to evaluateWebster's capital position. The annualized return on average tangible common shareholders' equity is calculated using net income available to common shareholders, adjusted for the annualized tax-effected amortization of intangible assets, as a percentage of average tangible common equity. This measure is used by management to assessWebster'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 wellWebster 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. 3 --------------------------------------------------------------------------------
The following tables reconcile non-GAAP financial measures to the most comparable financial measures defined by GAAP:
At September 30,
(Dollars and shares in thousands, except per share data) 2022 2021
Tangible book value per common share:
Shareholders' equity $ 7,826,410 $ 3,386,189
Less: Preferred stock 283,979 145,037
Goodwill and other intangible assets 2,721,040 557,360
Tangible common shareholders' equity $ 4,821,391 $ 2,683,792
Common shares outstanding 174,116 90,588
Tangible book value per common share $
27.69
Tangible common equity ratio: Tangible common shareholders' equity$ 4,821,391 $ 2,683,792 Total assets 69,052,566 35,374,258 Less: Goodwill and other intangible assets 2,721,040 557,360 Tangible assets$ 66,331,526 $ 34,816,898 Tangible common equity ratio 7.27 % 7.71 % Three months ended September 30, Nine months ended September 30, (Dollars in thousands) 2022 2021 2022 2021 Return on average tangible common shareholders' equity: Net income$ 233,968 $ 95,713 $ 399,532 $ 297,826 Less: Preferred stock dividends 4,162 1,968 11,756 5,906 Add: Intangible assets amortization, 6,724 888 18,723 2,682
tax-effected
Adjusted income$ 236,530 $ 94,633 $ 406,499 $ 294,602 Adjusted income (annualized)$ 946,120 $ 378,532 $ 541,999 $ 392,803 Average shareholders' equity$ 8,090,044 $ 3,375,401 $ 7,640,807 $ 3,314,114 Less: Average preferred stock 283,979 145,037 268,202 145,037 Average goodwill and other intangible 2,725,200 557,902 2,491,394 559,027
assets
Average tangible common shareholders' equity$ 5,080,865 $ 2,672,462 $ 4,881,211 $ 2,610,050 Return on average tangible common 18.62 % 14.16 % 11.10 % 15.05 % shareholders' equity Efficiency ratio: Non-interest expense$ 330,071 $ 180,237 $ 1,048,083 $ 555,247 Less: Foreclosed property activity (393) (142) (826) (188) Intangible assets amortization 8,511 1,124 23,700 3,395 Operating lease depreciation 2,115 - 6,172 - Merger-related expenses 25,536 9,847 200,671 26,894 Common stock contribution to charitable 10,500 - 10,500 - foundation Other expense (1) 1,117 (4,011) (3,175) 6,568 Non-interest expense$ 282,685 $ 173,419 $ 811,041 $ 518,578 Net interest income$ 551,003 $ 229,691 $ 1,431,911 $ 674,307 Add: Tax-equivalent adjustment 13,247 2,434 33,137 7,416 Non-interest income 113,636 83,775 338,604 233,234 Other income (2) 11,186 327 18,073 913 Less: Operating lease depreciation 2,115 - 6,172 - (Loss) on sale of investment (2,234) - (2,234) -
securities, net
Gain on extinguishment of borrowings 2,548 - 2,548 - Income$ 686,643 $ 316,227 $ 1,815,239 $ 915,870 Efficiency ratio 41.17 % 54.84 % 44.68 % 56.62 %
(1)Other expense (non-GAAP) includes the net charges associated with the
strategic initiatives announced in
(2)Other income (non-GAAP) includes the taxable equivalent of net income generated from low income housing tax-credit (LIHTC) investments.
4
--------------------------------------------------------------------------------Net Interest Income
Net interest income isWebster's primary source of revenue, representing 82.9% and 80.9% of total revenue for the three and nine months endedSeptember 30, 2022 , respectively, and 73.3% and 74.3% of total revenue for the three and nine months endedSeptember 30, 2021 , respectively. Net interest income is the difference between interest income on interest-earning assets, such as loans and leases and investment securities, and interest expense on interest-bearing liabilities, such as deposits and borrowings, which are used to fund interest-earning 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 impacts monetary policies, competition for loans and deposits, as well as the extent of interest lost on non-performing assets.
Comparison to Prior
Net interest income increased$321.3 million , or 139.9%, from$229.7 million for the three months endedSeptember 30, 2021 , to$551.0 million for the three months endedSeptember 30, 2022 . On a fully tax-equivalent basis, net interest income increased$332.1 million . Net interest margin increased 74 basis points from 2.80% for the three months endedSeptember 30, 2021 , to 3.54% for the three months endedSeptember 30, 2022 . The increase, which includes net purchase accounting accretion from acquired loans and leases, investment securities, and interest-bearing liabilities, is primarily attributed to the merger withSterling , along with the rising interest rate environment. Average interest-earning assets increased$29.3 billion , or 89.2%, from$32.9 billion for the three months endedSeptember 30, 2021 , to$62.2 billion for the three months endedSeptember 30, 2022 , primarily due to increases of$24.7 billion and$6.1 billion in average loans and leases and average total investment securities, respectively, which were partially offset by a$1.7 billion decrease in average interest-bearing deposits held at theFederal Reserve Bank (FRB). The average yield on interest-earning assets increased 104 basis points from 2.92% for the three months endedSeptember 30, 2021 , to 3.96% for the three months endedSeptember 30, 2022 . The increase in interest-earning assets and the increase in average yield were both impacted by theSterling merger, as well as higher market rates. Average loans and leases increased$24.7 billion , or 114.6%, from$21.5 billion for the three months endedSeptember 30, 2021 , to$46.2 billion for the three months endedSeptember 30, 2022 , which was primarily due to the merger withSterling , as well as loan growth across the commercial non-mortgage and commercial real estate categories. This growth was partially offset by lower Paycheck Protection Program (PPP) loan balances and commercial portfolio loan sales. AtSeptember 30, 2022 , and 2021, the loan and lease portfolio comprised 74.3% and 65.5% of total average interest-earning assets, respectively. The average yield on loans and leases increased 92 basis points from 3.60% for the three months endedSeptember 30, 2021 , to 4.52% for the three months endedSeptember 30, 2022 , primarily due to a higher yield on the acquiredSterling loans and leases, net purchase accounting accretion, and higher market rates. Average total investment securities increased$6.1 billion , or 68.8%, from$8.9 billion for the three months endedSeptember 30, 2021 , to$15.0 billion for the three months endedSeptember 30, 2022 , primarily due to the merger withSterling . AtSeptember 30, 2022 , and 2021, the investment securities portfolio comprised 24.2% and 27.1% of total average interest-earning assets, respectively. The average yield on investment securities increased 39 basis points from 2.01% for the three months endedSeptember 30, 2021 , to 2.40% for the three months endedSeptember 30, 2022 . The increase was primarily due to the reinvestment of maturing securities at higher yields and a higher yield on the acquiredSterling investment securities portfolio net of purchase premium amortization. Average interest-bearing deposits held at the FRB decreased$1.7 billion , or 74.9%, from$2.3 billion for the three months endedSeptember 30, 2021 , to$0.6 billion for the three months endedSeptember 30, 2022 , primarily due to excess customer liquidity in the prior period as a result of government stimulus and reduced spending. AtSeptember 30, 2022 , and 2021, interest-bearing deposits held at the FRB comprised 0.9% and 7.1% of total average interest-earning assets, respectively. The average yield on interest-bearing deposits held at the FRB increased 204 basis points from 0.15% for the three months endedSeptember 30, 2021 , to 2.19% for the three months endedSeptember 30, 2022 , primarily due to higher market rates. Average interest-bearing liabilities increased$27.7 billion , or 89.2%, from$31.1 billion for the three months endedSeptember 30, 2021 , to$58.8 billion for the three months endedSeptember 30, 2022 , primarily due to increases of$24.1 billion ,$0.9 billion ,$2.3 billion , and$0.5 billion , in average total deposits, average federal funds purchased, averageFederal Home Loan Bank (FHLB) advances, and average long-term debt, respectively. The average rate on interest-bearing liabilities increased 32 basis points from 0.13% for the three months endedSeptember 30, 2021 , to 0.45% for the three months endedSeptember 30, 2022 , primarily due to the purchase of higher yielding federal funds and FHLB advances, and the subordinated debt assumed fromSterling in the merger. 5 -------------------------------------------------------------------------------- Average total deposits increased$24.2 billion , or 80.8%, from$29.8 billion for the three months endedSeptember 30, 2021 , to$54.0 billion for the three months endedSeptember 30, 2022 , reflecting increases of$6.4 billion and$17.7 billion in non-interest-bearing deposits and interest-bearing deposits, respectively. The overall increase in deposits was primarily due to the merger withSterling , as well as the strong liquidity position of both commercial and consumer customers, and HSA growth. AtSeptember 30, 2022 , and 2021, deposits comprised 91.8% and 96.0% of total average interest-bearing liabilities, respectively. The average rate on deposits increased 22 basis points from 0.06% for the three months endedSeptember 30, 2021 , to 0.28% for the three months endedSeptember 30, 2022 , primarily due to the rising interest rate environment. Time deposits as a percentage of total interest-bearing deposits decreased from 8.6% for the three months endedSeptember 30, 2021 , to 6.7% for the three months endedSeptember 30, 2022 , primarily due to customer preferences to hold more liquid deposit products.
Average federal funds purchased were
Average FHLB advances increased$2.3 billion , from$0.1 billion for the three months endedSeptember 30, 2021 to$2.4 billion for the three months endedSeptember 30, 2022 , primarily due to short-term funding needs. AtSeptember 30, 2022 , and 2021, FHLB advances comprised 4.09% and 0.39% of total average interest-bearing liabilities, respectively. The average rate on FHLB advances increased 66 basis points from 1.59% for the three months endedSeptember 30, 2021 , to 2.25% for the three months endedSeptember 30, 2022 , primarily due to higher market rates on new short-term borrowings. Average long-term debt increased$0.5 billion , or 90.5%, from$0.6 billion for the three months endedSeptember 30, 2021 , to$1.1 billion for the three months endedSeptember 30, 2022 , primarily due to the merger withSterling . At bothSeptember 30, 2022 , and 2021, long-term debt comprised 1.8% of total average interest-bearing liabilities. The average rate on long-term debt increased 25 basis points from 3.22% for the three months endedSeptember 30, 2021 , to 3.47% for the three months endedSeptember 30, 2022 , primarily due to the subordinated debt assumed fromSterling in the merger.
Comparison to Prior Year to Date
Net interest income increased$757.6 million , or 112.4%, from$674.3 million for the nine months endedSeptember 30, 2021 , to$1.4 billion for the nine months endedSeptember 30, 2022 . On a fully tax-equivalent basis, net interest income increased$783.3 million . Net interest margin increased 50 basis points from 2.85% for the nine months endedSeptember 30, 2021 , to 3.35% for the nine months endedSeptember 30, 2022 . The increase which includes net purchase accounting accretion from acquired loans and leases, investment securities, and interest-bearing liabilities, is primarily attributed to the merger withSterling , along with the rising interest rate environment. Average interest-earning assets increased$25.7 billion , or 80.6%, from$31.9 billion for the nine months endedSeptember 30, 2021 , to$57.6 billion for the nine months endedSeptember 30, 2022 , primarily due to increases of$20.6 billion and$5.6 billion in average loans and leases and average total investment securities, respectively, which were partially offset by a$810.7 million decrease in interest-bearing deposits held at the FRB. The average yield on interest-earning assets increased 62 basis points from 2.98% for the nine months endedSeptember 30, 2021 , to 3.60% for the nine months endedSeptember 30, 2022 . The increase in interest-earning assets and the increase in average yield were both impacted by theSterling merger, as well as higher market rates. Average loans and leases increased$20.6 billion , or 96.1%, from$21.5 billion for the nine months endedSeptember 30, 2021 , to$42.1 billion for the nine months endedSeptember 30, 2022 , which was primarily due to the merger withSterling , as well as loan growth across the commercial non-mortgage and commercial real estate categories. This growth was partially offset by lower PPP loan balances and commercial portfolio loan sales. AtSeptember 30, 2022 , and 2021, the loan and lease portfolio comprised 73.2% and 67.4% of total average interest-earning assets, respectively. The average yield on loans and leases increased 60 basis points from 3.54% for the nine months endedSeptember 30, 2021 , to 4.14% for the nine months endedSeptember 30, 2022 , primarily due to a higher yield on the acquiredSterling loans and leases, net purchase accounting accretion, and higher market rates. Average total investment securities increased$5.6 billion , or 63.9%, from$8.9 billion for the nine months endedSeptember 30, 2021 , to$14.5 billion for the nine months endedSeptember 30, 2022 , primarily due to the merger withSterling , as well as the deployment of excess liquidity. AtSeptember 30, 2022 , and 2021, the investment securities portfolio comprised 25.3% and 27.9% of total average interest-earning assets, respectively. The average yield on investment securities increased 13 basis points from 2.09% for the nine months endedSeptember 30, 2021 , to 2.22% for the nine months endedSeptember 30, 2022 . This was primarily due to the reinvestment of maturing securities at higher yields. 6 -------------------------------------------------------------------------------- Average interest-bearing deposits held at the FRB decreased$810.7 million , or 56.5% from$1.4 billion for the nine months endedSeptember 30, 2021 , to$623.9 million for the nine months endedSeptember 30, 2022 , primarily due to excess customer liquidity in the prior period as a result of government stimulus and reduced spending. AtSeptember 30, 2022 , and 2021, interest-bearing deposits held at the FRB comprised 1.08% and 4.50% of total average interest-earnings assets, respectively. The average yield on interest-bearing deposits held at the FRB increased 87 basis points from 0.13% for the nine months endedSeptember 30, 2021 to 1.00% for the nine months endedSeptember 30, 2022 , primarily due to higher market rates. Average interest-bearing liabilities increased$24.1 billion , or 80.1%, from$30.2 billion for the nine months endedSeptember 30, 2021 , to$54.3 billion for the nine months endedSeptember 30, 2022 , primarily due to increases of$22.2 billion ,$0.5 billion ,$1.1 billion , and$0.4 billion in average total deposits, average federal funds purchased, average FHLB advances, and average long-term debt, respectively. The average rate on interest-bearing liabilities increased 13 basis points from 0.14% for the nine months endedSeptember 30, 2021 , to 0.27% for the nine months endedSeptember 30, 2022 , primarily due to higher market rates and the mix of funding sources. Average total deposits increased$22.2 billion , or 76.6%, from$28.9 billion for the nine months endedSeptember 30, 2021 , to$51.1 billion for the nine months endedSeptember 30, 2022 , reflecting increases of$6.0 billion and$16.2 billion in non-interest-bearing deposits and interest-bearing deposits, respectively. The overall increase in deposits was primarily due to the merger withSterling , as well as the strong liquidity position of retail and commercial customers, and HSA growth. AtSeptember 30, 2022 , and 2021, deposits comprised 94.1% and 96.0% of total average interest-bearing liabilities, respectively. The average rate on deposits increased 8 basis points from 0.07% for the nine months endedSeptember 30, 2021 , to 0.15% for the nine months endedSeptember 30, 2022 , primarily due to the rising interest rate environment, which was partially offset by the run-off of time deposits. Time deposits as a percentage of total interest-bearing deposits decreased from 9.7% for the nine months endedSeptember 30, 2021 , to 6.9% for the nine months endedSeptember 30, 2022 , primarily due to customer preferences to hold more liquid deposit products. Average federal funds purchased increased$456.6 million , from$21.4 million for the nine months endedSeptember 30, 2021 , to$478.0 million for the nine months endedSeptember 30, 2022 , primarily due to short-term funding needs. AtSeptember 30, 2022 , and 2021, federal funds purchased comprised 0.9% and 0.1% of total average interest-bearing liabilities, respectively. The average rate on federal funds purchased increased 167 basis points from 0.08% for the nine months endedSeptember 30, 2021 , to 1.75% for the nine months endedSeptember 30, 2022 , primarily due to higher market rates. Average FHLB advances increased$1.1 billion , or 810.9%, from$0.1 billion for the nine months endedSeptember 30, 2021 , to$1.2 billion for the nine months endedSeptember 30, 2022 , primarily due to short-term funding needs. AtSeptember 30, 2022 , and 2021, FHLB advances comprised 2.2% and 0.4% of total average interest-bearing liabilities, respectively. The average rate on FHLB advances increased 33 basis points from 1.54% for the nine months endedSeptember 30, 2021 , to 1.87% for the nine months endedSeptember 30, 2022 , primarily due to higher market rates on new short-term borrowings. Average long-term debt increased$0.4 billion , or 79.7%, from$0.6 billion for the nine months endedSeptember 30, 2021 , to$1.0 billion for the nine months endedSeptember 30, 2022 , primarily due to the merger withSterling . At bothSeptember 30, 2022 , and 2021, long-term debt comprised 1.9% of total average interest-bearing liabilities. The average rate on long-term debt increased 18 basis points from 3.22% for the nine months endedSeptember 30, 2021 , to 3.40% for the nine months endedSeptember 30, 2022 , primarily due to the subordinated debt assumed fromSterling in the merger. 7 --------------------------------------------------------------------------------
The following tables present daily average balances, interest, yield/rate, and net interest margin on a fully tax-equivalent basis:
Three months ended September 30,
2022 2021
Average Interest Average Interest
(Dollars in thousands) Balance Income/Expense Average Yield/Rate Balance Income/Expense Average Yield/Rate
Assets Interest-earning assets: Loans and leases (1)$ 46,229,678 $ 532,062 4.52 %$ 21,538,513 $ 197,015 3.60 % Investment securities: (2) Taxable 12,336,926 79,562 2.47 8,199,640 38,714 1.93 Non-taxable 2,702,584 13,999 2.07 711,651 5,154 2.90 Total investment securities 15,039,510 93,561 2.40 8,911,291 43,868 2.01 FHLB and FRB stock 326,860 1,875 2.28 76,212 290 1.51 Interest-bearing deposits (3) 585,807 3,278 2.19 2,334,986 896 0.15 Loans held for sale 580 40 27.73 11,328 57 2.03 Total interest-earning assets 62,182,435$ 630,816 3.96 % 32,872,330$ 242,126 2.92 % Non-interest-earning assets 5,823,755 2,021,962 Total assets$ 68,006,190 $ 34,894,292 Liabilities and Shareholders' Equity Interest-bearing liabilities: Demand deposits$ 13,590,667 $ - - %$ 7,182,116 $ - - % Health savings accounts 7,854,425 1,146 0.06 7,346,239 1,463 0.08
Interest-bearing checking, money market and savings 29,798,562
33,808 0.45 13,363,703 1,794 0.05
Time deposits 2,716,885 2,538 0.37 1,957,286 1,314 0.27
Total deposits 53,960,539 37,492 0.28 29,849,344 4,571 0.06
Securities sold under agreements to repurchase 479,308 1,158 0.95 544,311 721 0.52
Federal funds purchased 889,818 5,084 2.24 - - -
FHLB advances 2,402,596 13,814 2.25 120,714 492 1.59
Long-term debt (2) 1,075,683 9,018 3.47 564,692 4,217 3.22
Total borrowings 4,847,405 29,074 2.38 1,229,717 5,430 1.82
Total interest-bearing liabilities 58,807,944 $ 66,566 0.45 % 31,079,061 $ 10,001 0.13 %
Non-interest-bearing liabilities 1,108,202 439,830
Total liabilities 59,916,146 31,518,891
Preferred stock 283,979 145,037
Common shareholders' equity 7,806,065 3,230,364
Total shareholders' equity 8,090,044 3,375,401
Total liabilities and shareholders' equity $ 68,006,190 $ 34,894,292
Tax-equivalent net interest income $ 564,250 $ 232,125
Less: Tax-equivalent adjustments (13,247) (2,434) Net interest income$ 551,003 $ 229,691 Net interest margin (4) 3.54 % 2.80 %
(1)Non-accrual loans have been included in the computation of average balances.
(2)For the purposes of our average yield/rate and margin computations, unsettled trades on investment securities and unrealized gain (loss) balances on securities available-for-sale and de-designated senior fixed-rate notes hedges are excluded. (3)Interest-bearing deposits are a component of cash and cash equivalents on the Condensed Consolidated Statements of Cash Flows included in Part I - Item 1. Financial Statements.
(4)Tax-equivalent net interest margin was 3.63% and 2.82% for the three months
ended
8
--------------------------------------------------------------------------------
Nine months ended September 30,
2022 2021
Average Interest Average Interest
(Dollars in thousands) Balance Income/Expense Average Yield/Rate Balance Income/Expense Average Yield/Rate
Assets Interest-earning assets: Loans and leases (1)$ 42,125,526 $ 1,317,941 4.14 %$ 21,477,967 $ 574,984 3.54 % Investment securities: (2) Taxable 12,127,249 210,323 2.26 8,153,074 120,957 2.01 Non-taxable 2,420,867 36,465 2.01 725,746 15,770 2.90 Total investment securities 14,548,116 246,788 2.22 8,878,820 136,727 2.09 FHLB and FRB stock 252,559 4,768 2.52 77,040 909 1.58 Interest-bearing deposits (3) 623,866 4,711 1.00 1,434,552 1,419 0.13 Loans held for sale 12,160 73 0.80 11,515 201 2.33 Total interest-earning assets 57,562,227$ 1,574,281 3.60 % 31,879,894$ 714,240 2.98 % Non-interest-earning assets 5,448,419 1,968,707 Total assets$ 63,010,646 $ 33,848,601 Liabilities and Shareholders' Equity Interest-bearing liabilities: Demand deposits$ 12,758,489 $ - - %$ 6,800,456 $ - - % Health savings accounts 7,809,082 3,358 0.06 7,414,332 4,720 0.09
Interest-bearing checking, money market and savings 27,887,362
48,992 0.23 12,579,762 5,117 0.05
Time deposits 2,649,328 5,000 0.25 2,146,218 6,267 0.39
Total deposits 51,104,261 57,350 0.15 28,940,768 16,104 0.07
Securities sold under agreements to repurchase 528,353 3,537 0.88 501,198 2,203 0.58
Federal funds purchased 478,038 6,338 1.75 21,440 13 0.08
Other borrowings - 1 - - - -
FHLB advances 1,198,754 17,034 1.87 131,606 1,539 1.54
Long-term debt (2) 1,017,120 24,973 3.40 565,866 12,658 3.22
Total borrowings 3,222,265 51,883 2.16 1,220,110 16,413 1.85
Total interest-bearing liabilities 54,326,526 $ 109,233 0.27 % 30,160,878 $ 32,517 0.14 %
Non-interest-bearing liabilities 1,043,313 373,609
Total liabilities 55,369,839 30,534,487
Preferred stock 268,202 145,037
Common shareholders' equity 7,372,605 3,169,077
Total shareholders' equity 7,640,807 3,314,114
Total liabilities and shareholders' equity $ 63,010,646 $ 33,848,601
Tax-equivalent net interest income $ 1,465,048 $ 681,723
Less: Tax-equivalent adjustments (33,137) (7,416) Net interest income$ 1,431,911 $ 674,307 Net interest margin (4) 3.35 % 2.85 %
(1)Non-accrual loans have been included in the computation of average balances.
(2)For the purposes of our average yield/rate and margin computations, unsettled trades on investment securities and unrealized gain (loss) balances on securities available-for-sale and de-designated senior fixed-rate notes hedges are excluded. (3)Interest-bearing deposits are a component of cash and cash equivalents on the Condensed Consolidated Statements of Cash Flows included in Part I - Item 1. Financial Statements.
(4)Tax-equivalent net interest margin was 3.39% and 2.85% for the nine months
ended
9
--------------------------------------------------------------------------------
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:
Three months ended September 30, Nine months ended September 30,
2022 vs. 2021 2022 vs. 2021
Increase (decrease) due to Increase (decrease) due to
(In thousands) Rate (1) Volume Total Rate (1) Volume Total
Interest on interest-earning assets:
Loans and leases $ 152,744 $ 182,304 $ 335,048 $ 312,980 $ 429,978 $ 742,958
Investment securities 22,221 27,472 49,693 31,046 79,015 110,061
FHLB and FRB stock 628 957 1,585 1,786 2,072 3,858
Interest bearing-deposits 3,053 (671) 2,382 4,094 (802) 3,292
Loans held for sale 38 (56) (18) 50 (178) (128)
Total interest income $ 178,684 $ 210,006 $ 388,690 $ 349,956 $ 510,085 $ 860,041
Interest on interest-bearing
liabilities:
Health savings accounts $ (418) $ 101 $
(317)
32,126 (113) 32,013 43,613 262 43,875
market, and savings
Time deposits 1,542 (318) 1,224 277 (1,544) (1,267)
Securities sold under agreements to 523 (86) 437 1,215 119 1,334
repurchase
Federal funds purchased 5,083 - 5,083 6,049 276 6,325
Other borrowings - - - 1 - 1
FHLB advances 4,027 9,295 13,322 3,019 12,476 15,495
Long-term debt 690 4,113 4,803 1,410 10,906 12,316
Total interest expense $ 43,573 $ 12,992 $
56,565
(1)The change attributable to mix, a combined impact of rate and volume, is included with the change due to rate.
Provision for Credit Losses
Comparison to Prior
The provision for credit losses increased$28.7 million , or 371.4%, from$7.8 million for the three months endedSeptember 30, 2021 , to$36.5 million for the three months endedSeptember 30, 2022 . The increase is primarily attributed to the release of reserves in the prior period as a result of improvements in the forecasted economic outlook and favorable credit trends as the COVID-19 pandemic receded, as well as organic loan growth and commercial portfolio optimization initiatives. During the three months endedSeptember 30, 2022 , and 2021, total net charge-offs were$28.5 million and$0.9 million , respectively. The$27.6 million increase is primarily attributed to commercial portfolio optimization initiatives, as well as favorable credit performance in 2021 as the economy benefited from the support of federal stimulus programs.
Comparison to Prior Year to Date
The provision for credit losses increased$277.1 million , or 701.6%, from a benefit of$39.5 million for the nine months endedSeptember 30, 2021 , to an expense of$237.6 million for the nine months endedSeptember 30, 2022 . The increase is primarily attributed to the establishment of the initial ACL of$175.1 million for non-purchased credit deteriorated (PCD) loans and leases that were acquired fromSterling , as well as organic loan growth and commercial portfolio optimization initiatives. During the nine months endedSeptember 30, 2022 , and 2021, total net charge-offs were$47.1 million and$5.1 million , respectively. The$42.0 million increase is primarily attributed to commercial portfolio optimization initiatives, as well as favorable credit performance in 2021 as the economy benefited from the support of federal stimulus programs.
Additional information regarding the Company's provision for credit losses and ACL can be found under the sections captioned "Loans and Leases" through "Allowance for Credit Losses" contained elsewhere in Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
10
--------------------------------------------------------------------------------Non-Interest Income
Three months ended September Nine months ended
30, September 30,
(Dollars in thousands) 2022 2021 2022 2021
Deposit service fees $ 50,807 $ 40,258 $ 150,019 $ 122,166
Loan and lease related fees 26,769 10,881 77,355 27,056
Wealth and investment services 11,419 9,985 33,260 29,475
Mortgage banking activities 86 1,525 616 5,486
Increase in cash surrender value of life 7,718 3,666 22,694 10,802
insurance policies
(Loss) on sale of investment securities, net (2,234) - (2,234) -
Other income 19,071 17,460 56,894 38,249
Total non-interest income $ 113,636 $ 83,775 $ 338,604 $ 233,234 Comparison to Prior
Total non-interest income increased$29.8 million , or 35.6%, from$83.8 million for the three months endedSeptember 30, 2021 to$113.6 million for the three months endedSeptember 30, 2022 , due to increases in deposit service fees, loan and lease related fees, wealth and investment services, the cash surrender value of life insurance policies, and other income, the majority of which were primarily driven by the merger withSterling , partially offset by a decrease in mortgage banking activities and a net loss on sale of investment securities. Deposit service fees increased$10.5 million , or 26.2%, from$40.3 million for the three months endedSeptember 30, 2021 to$50.8 million for the three months endedSeptember 30, 2022 , primarily due to the merger withSterling , particularly as it relates to cash management fees, overdraft fees, and account service charges, as well as higher interchange revenue. Loan and lease related fees increased$15.9 million , or 146.0%, from$10.9 million for the three months endedSeptember 30, 2021 to$26.8 million for the three months endedSeptember 30, 2022 , primarily due to the merger withSterling , which included$2.7 million of operating lease income, and an increase in loan servicing fees net of mortgage servicing amortization. Wealth and investment services increased$1.4 million , or 14.4%, from$10.0 million for the three months endedSeptember 30, 2021 to$11.4 million for the three months endedSeptember 30, 2022 , primarily due to the merger withSterling . Mortgage banking activities decreased$1.4 million , or 94.4%, from$1.5 million for the three months endedSeptember 30, 2021 to$0.1 million for the three months endedSeptember 30, 2022 , primarily due to lower originations for sale, as the Company continues to execute on its strategic decision to originate residential mortgage loans for investment rather than for sale. The cash surrender value of life insurance policies increased$4.0 million , or 110.5%, from$3.7 million for the three months endedSeptember 30, 2021 to$7.7 million for the three months endedSeptember 30, 2022 , primarily due to the additional bank-owned life insurance policies acquired in the merger withSterling . Net loss on sale of investment securities, totaled$2.2 million for the three months endedSeptember 30, 2022 , asWebster sold$67.5 million of Municipal bonds and notes classified as available-for-sale for proceeds of$65.3 million . There were no sales of investment securities during the three months endedSeptember 30, 2021 . Other income increased$1.6 million , or 9.2%, from$17.5 million for the three months endedSeptember 30, 2021 to$19.1 million for the three months endedSeptember 30, 2022 , primarily due to an overall increase in other income due to the impact of the merger withSterling , higher income from client interest rate derivative activities, and a$2.5 million net gain on the extinguishment of borrowings, partially offset by a decrease in direct investment income.
Comparison to Prior Year to Date
Total non-interest income increased$105.4 million , or 45.2%, from$233.2 million for the nine months endedSeptember 30, 2021 to$338.6 million for the nine months endedSeptember 30, 2022 , due to increases in deposit service fees, loan and lease related fees, wealth and investment services, the cash surrender value of life insurance policies, and other income, the majority of which were primarily driven by the merger withSterling , partially offset by a decrease in mortgage banking activities and a net loss on sale of investment securities. Deposit service fees increased$27.8 million , or 22.8%, from$122.2 million for the nine months endedSeptember 30, 2021 to$150.0 million for the nine months endedSeptember 30, 2022 , primarily due to the merger withSterling , particularly as it relates to cash management fees, overdraft fees, and account service charges, as well as higher interchange revenue. 11 -------------------------------------------------------------------------------- Loan and lease related fees increased$50.3 million , or 185.9%, from$27.1 million for the nine months endedSeptember 30, 2021 to$77.4 million for the nine months endedSeptember 30, 2022 , primarily due to the merger withSterling , which included$8.0 million of operating lease income, as well as increases in loan servicing fees net of mortgage servicing amortization, prepayment penalties, and syndication fees.
Wealth and investment services increased
Mortgage banking activities decreased$4.9 million , or 88.8%, from$5.5 million for the nine months endedSeptember 30, 2021 to$0.6 million for the nine months endedSeptember 30, 2022 , primarily due to lower originations for sale, as the Company continues to execute on its strategic decision to originate residential mortgage loans for investment rather than for sale. The cash surrender value of life insurance policies increased$11.9 million , or 110.1%, from$10.8 million for the nine months endedSeptember 30, 2021 to$22.7 million for the nine months endedSeptember 30, 2022 , primarily due to the additional bank-owned life insurance policies acquired in the merger withSterling . Net loss on sale of investment securities, totaled$2.2 million for the nine months endedSeptember 30, 2022 , asWebster sold$67.5 million of Municipal bonds and notes classified as available-for-sale for proceeds of$65.3 million . There were no sales of investment securities during the nine months endedSeptember 30, 2021 . Other income increased$18.7 million , or 48.7%, from$38.2 million for the nine months endedSeptember 30, 2021 to$56.9 million for the nine months endedSeptember 30, 2022 , primarily due to an overall increase in other income due to the impact of the merger withSterling , higher income from client interest rate derivative activities, gains on sale of commercial loans not originated for sale, and a$2.5 million net gain on the extinguishment of borrowings, partially offset by a decrease in direct investment income.
Non-Interest Expense
Nine months ended
Three months ended September 30, September 30,
(Dollars in thousands) 2022 2021 2022 2021
Compensation and benefits $ 173,983 $ 105,352 $ 545,641 $ 310,706
Occupancy 23,517 12,430 93,725 42,090
Technology and equipment 45,283 28,441 142,182 84,081
Intangible assets amortization 8,511 1,124 23,700 3,395
Marketing 3,918 3,721 10,868 9,452
Professional and outside services 21,618 7,074 91,041 37,875
Deposit insurance 8,026 3,855 19,996 11,560
Other expense 45,215 18,240 120,930 56,088
Total non-interest expense $ 330,071 $ 180,237 $ 1,048,083 $ 555,247 Comparison to Prior
Total non-interest expense increased$149.9 million , or 83.1%, from$180.2 million for the three months endedSeptember 30, 2021 to$330.1 million for the three months endedSeptember 30, 2022 , primarily due to increases in compensation and benefits, occupancy, technology and equipment, intangible assets amortization, professional and outside services, deposit insurance, and other expense, all of which were primarily driven by the merger withSterling . Compensation and benefits increased$68.6 million , or 65.1%, from$105.4 million for the three months endedSeptember 30, 2021 to$174.0 million for the three months endedSeptember 30, 2022 , primarily due to incremental salaries and incentives related to the increase in employees as a result of the merger withSterling , and the$3.9 million reversal of severance in the prior period due to changes in retention assumptions associated with the Company's strategic initiatives announced inDecember 2020 , partially offset by a$2.0 million decrease in merger-related expenses. Occupancy increased$11.1 million , or 89.2%, from$12.4 million for the three months endedSeptember 30, 2021 to$23.5 million for the three months endedSeptember 30, 2022 , primarily due to the Company's consolidation plan to reduce its corporate facility square footage, which resulted in a combined$4.3 million in related exit costs and accelerated depreciation on property and equipment, in addition to incremental operating lease costs and depreciation related to the acquiredSterling banking centers and corporate offices. Technology and equipment increased$16.9 million , or 59.2%, from$28.4 million for the three months endedSeptember 30, 2021 to$45.3 million for the three months endedSeptember 30, 2022 , primarily due to an overall increase in technology and equipment due to the impact of the merger withSterling . 12 -------------------------------------------------------------------------------- Intangible assets amortization increased$7.4 million , or 657.2%, from$1.1 million for the three months endedSeptember 30, 2021 to$8.5 million for the three months endedSeptember 30, 2022 , due to the additional amortization expense related to the core deposit and customer relationship intangible assets acquired in connection with theSterling merger and Bend acquisition. Professional and outside services increased$14.5 million , or 205.6%, from$7.1 million for the three months endedSeptember 30, 2021 to$21.6 million for the three months endedSeptember 30, 2022 , primarily due to an$8.8 million increase in merger-related expenses, particularly as it relates to advisory, legal, and consulting fees, and an increase in other professional service costs due to the impact of the merger withSterling . Deposit insurance increased$4.1 million , or 108.2%, from$3.9 million for the three months endedSeptember 30, 2021 to$8.0 million for the three months endedSeptember 30, 2022 , primarily due to an increase in the Company's deposit insurance assessment base resulting from the merger withSterling . Other expense increased$27.0 million , or 147.9%, from$18.2 million for the three months endedSeptember 30, 2021 to$45.2 million for the three months endedSeptember 30, 2022 , primarily due to an overall increase in other expenses due to the impact of the merger withSterling , which includes$2.1 million of operating lease depreciation, as well as a$10.5 million common stock contribution to theWebster Bank Charitable Foundation , and a$3.0 million increase in merger-related expenses, particularly as it relates to disposals of property and equipment.
Comparison to Prior Year to Date
Total non-interest expense increased$492.8 million , or 88.8%, from$555.2 million for the nine months endedSeptember 30, 2021 to$1.0 billion for the nine months endedSeptember 30, 2022 , primarily due to increases in compensation and benefits, occupancy, technology and equipment, intangible assets amortization, professional and outside services, deposit insurance, and other expense, all of which were primarily driven by the merger withSterling . Compensation and benefits increased$234.9 million , or 75.6%, from$310.7 million for the nine months endedSeptember 30, 2021 to$545.6 million for the nine months endedSeptember 30, 2022 , primarily due to incremental salaries and incentives related to the increase in employees as a result of the merger withSterling , and a$63.3 million increase in merger-related expenses, particularly as it relates to severance, retention, and restricted stock awards. Occupancy increased$51.6 million , or 122.7%, from$42.1 million for the nine months endedSeptember 30, 2021 to$93.7 million for the nine months endedSeptember 30, 2022 , primarily due to the Company's consolidation plan to reduce its corporate facility square footage, which resulted in$23.1 million ROU asset impairment charges and a combined$12.0 million in related exit costs and accelerated depreciation on property and equipment, as well as additional operating lease costs and depreciation related to the acquiredSterling banking centers and corporate offices. These increases were partially offset by a decrease in strategic initiatives charges. Technology and equipment increased$58.1 million , or 69.1%, from$84.1 million for the nine months endedSeptember 30, 2021 to$142.2 million for the nine months endedSeptember 30, 2022 , primarily due to a$21.3 million increase in merger-related expenses, particularly as it relates to contract termination costs, and an overall increase in technology and equipment due to the impact of the merger withSterling . Intangible assets amortization increased$20.3 million , or 598.1%, from$3.4 million for the nine months endedSeptember 30, 2021 to$23.7 million for the nine months endedSeptember 30, 2022 , due to the additional amortization expense related to the core deposit and customer relationship intangible assets acquired in connection with theSterling merger and Bend acquisition. Professional and outside services increased$53.1 million , or 140.4%, from$37.9 million for the nine months endedSeptember 30, 2021 to$91.0 million for the nine months endedSeptember 30, 2022 , primarily due to a$40.8 million increase in merger-related expenses, particularly as it relates to advisory, legal, and consulting fees, and an increase in other professional service costs due to the impact of the merger withSterling , partially offset by a decrease in strategic initiative charges. Deposit insurance increased$8.4 million , or 73.0%, from$11.6 million for the nine months endedSeptember 30, 2021 to$20.0 million for the nine months endedSeptember 30, 2022 , primarily due to an increase in the Company's deposit insurance assessment base resulting from the merger withSterling . Other expense increased$64.8 million , or 115.6%, from$56.1 million for the nine months endedSeptember 30, 2021 to$120.9 million for the nine months endedSeptember 30, 2022 , primarily due to an overall increase in other expenses due to the impact of the merger withSterling , which includes$6.2 million of operating lease depreciation, along with a$12.5 million increase in merger-related expenses, particularly as it relates to disposals of property and equipment, and a$10.5 million common stock contribution to theWebster Bank Charitable Foundation . 13 --------------------------------------------------------------------------------
Income Taxes
Comparison to Prior
The increase in income tax expense is due to a higher level of pre-tax income recognized during the three months endedSeptember 30, 2022 , resulting from the impact of the Company's merger withSterling . The decrease in the effective tax rate primarily reflects increased tax-exempt income and net benefits from tax credits in 2022 as compared to 2021 (including increases in the amounts estimated for the full year 2022 inWebster's estimated annual effective tax rate computation atSeptember 30, 2022 ), resulting from the merger withSterling . These factors were partially offset by the effects of a higher level of pre-tax income and rate of state and local tax (SALT) in 2022 as compared to 2021, and a$2.9 million deferred SALT expense recognized during the three months endedSeptember 30, 2022 , each also resulting from the merger withSterling .
Comparison to Prior Year to Date
The decrease in both income tax expense and the effective tax rate primarily reflects the one-time charges incurred by the Company during the nine months endedSeptember 30, 2022 , as a result of the merger withSterling , along with a$10.9 million net deferred SALT benefit recognized during the nine months endedSeptember 30, 2022 , associated with the merger withSterling , which includes a$9.9 million benefit recognized during the three months endedMarch 31, 2022 , related to a change in management's estimate about the realizability of its SALT deferred tax assets (DTAs) due to an estimated increase in future taxable income. AtSeptember 30, 2022 , andDecember 31, 2021 ,Webster recorded a valuation allowance on its DTAs of$29.2 million and$37.4 million , respectively. The$29.2 million atSeptember 30, 2022 , reflects a reduction of$9.9 million for the change in estimate discussed above, and includes a$1.7 million valuation allowance related to the Bend acquisition. AtSeptember 30, 2022 , andDecember 31, 2021 ,Webster's gross DTAs included$67.1 million and$64.4 million , respectively, applicable to SALT net operating loss carryforwards that are available to offset future taxable income. The$67.1 million atSeptember 30, 2022 , includes$5.6 million related to theSterling merger and$1.1 million related to the Bend acquisition.Webster's total gross DTAs atSeptember 30, 2022 , also included$5.6 million and$0.5 million , respectively, of federal net operating loss and credit carryforwards related to theSterling merger and Bend acquisition, which are subject to annual limitations on utilization. The ultimate realization of 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, atSeptember 30, 2022 . However, it is possible that some or all ofWebster's net operating loss and credit carryforwards could expire unused, or that more net operating loss and credit carryforwards could be utilized than estimated, either as a result of changes in future forecasted levels of taxable income 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. OnAugust 16, 2022 , the Inflation Reduction Act (IRA) was signed into law. The IRA includes various tax provisions, which are generally effective for tax years beginning on or afterJanuary 1, 2023 . WhileWebster is still evaluating these tax law changes, it does not expect them to have a material impact on the Company's consolidated financial statements. Additional information regardingWebster's income taxes, including its 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 of the Company's Annual Report on Form 10-K for the year endedDecember 31, 2021 . 14 --------------------------------------------------------------------------------
Segment Reporting
Webster's operations are organized into three reportable segments that represent its primary businesses: Commercial Banking,HSA Bank , and Consumer 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). CertainTreasury 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 can be found within Note 16: Segment Reporting in the Notes to Condensed Consolidated Financial Statements contained in Part I - Item 1. Financial Statements. EffectiveJanuary 1, 2022 ,Webster realigned its investment services operations from Commercial Banking to Consumer Banking to better serve its customers and deliver operational efficiencies. Under this realignment,$125.4 million of deposits and$4.3 billion of assets under administration (off-balance sheet) were reassigned from Commercial Banking to Consumer Banking. There was no goodwill reallocation nor goodwill impairment as a result of the reorganization. In addition, the non-interest expense allocation methodology was modified to exclude certain overhead and merger-related costs that are not directly related to segment performance. Prior period results of operations have been recast accordingly to reflect the realignment.
The following is a description of
Commercial Banking serves corporate customers with more than$2 million of revenues through itsCommercial Real Estate , Business Banking, Capital Finance, Middle Market, Public Sector Finance, Sponsor and Specialty Finance, Mortgage Warehouse Lending, Private Banking, and Treasury Management components.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. Consumer Banking serves individual customers and small businesses with less than$2 million of revenues by offering consumer deposits, residential mortgages, home equity lines, secured and unsecured loans, debit and credit card products, and investment services. Consumer Banking operates a distribution network consisting of 201 banking centers and 354 ATMs, a customer care center, and a full range of web and mobile-based banking services, primarily throughout southernNew England and theNew York Metro and Suburban markets. Management anticipates that the presentation of Consumer Banking's operating results in the fourth quarter of 2022 will be impacted by a restructuring of the process by which the Company offers brokerage, investment advisory, and certain insurance-related services to customers. The staff providing these services, which had previously been employees ofWebster Bank atSeptember 30, 2022 , will now be employees of a third-party service provider. As a result,Webster will recognize income from this program on a net basis, which will reduce gross reported non-interest income and corresponding compensation non-interest expense. This restructuring is not expected to have a significant net impact on PPNR. 15 --------------------------------------------------------------------------------
Commercial Banking
Operating Results:
Three months ended September 30, Nine months ended September 30,
(In thousands) 2022 2021 2022 2021
Net interest income $ 333,554 $ 152,012 $ 954,044 $ 434,087
Non-interest income 40,497 22,782 128,670 59,536
Non-interest expense 102,415 50,244 294,375 142,803
Pre-tax, pre-provision net revenue $ 271,636 $
124,550
Comparison to Prior
Commercial Banking's PPNR increased$147.1 million , or 118.1%, for the three months endedSeptember 30, 2022 , as compared to the three months endedSeptember 30, 2021 , due to increases in both net interest income and non-interest income, partially offset by an increase in non-interest expense, all of which were primarily driven by the merger withSterling . The$181.6 million increase in net interest income is primarily attributed to incremental loan and deposit balances acquired fromSterling , loan and deposit growth, and higher interest rates. The$17.7 million increase in non-interest income is primarily attributed to incremental fee income due to the merger, partially offset by lower direct investment income. The$52.2 million increase in non-interest expense is primarily attributed to incremental expenses incurred related to the acquiredSterling commercial business, and costs to support growth within the loan and deposit portfolios.
Comparison to Prior Year to Date
Commercial Banking's PPNR increased$437.5 million , or 124.7%, for the nine months endedSeptember 30, 2022 as compared to the nine months endedSeptember 30, 2021 , due to increases in both net interest income and non-interest income, partially offset by an increase in non-interest expense, all of which were primarily driven by the merger withSterling . The$520.0 million increase in net interest income is primarily attributed to incremental loan and deposit balances acquired fromSterling , loan and deposit growth, and higher interest rates. The$69.1 million increase in non-interest income is primarily attributed to incremental fee income due to the merger, as well as increased client hedging activity and loan and lease related fees, partially offset by lower direct investment income. The$151.6 million increase in non-interest expense is primarily attributed to incremental expenses incurred related to the acquiredSterling commercial business, and costs to support growth within the loan and deposit portfolios.
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